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Corporate Governance in Developing Economies

Since developing countries do not have a strong, long established financial institution infrastructure to deal with issues related to corporate governance, corporate governance issues are especially important. Corporate governance has become important is the past couple of years. Because good corporate governance can amass many benefits, many directors, owners and managers have become increasingly aware of this. Good corporate governance makes it easier to obtain capital and helps increase share price. If a company does not follow good corporate governance principles, foreign investors become hesitant to invest their money.

It is important to have transparency, a separate audit committee and independent directors. Several organizations have emerged to adopt and implement good corporate governance principles. The OECD, World Bank, the International Finance Corporation, U.S commerce and state departments and other organizations in the European continent have adopted good corporate governance principles. Some of the main characteristics of good corporate governance as listed by the Centre for International Private Enterprise (2002) are:

  • Reduction of risk
  • Demonstration of transparency and accountability
  • Stimulation of performance
  • Improved access to market capitals
  • Improved leadership and
  • Enhancement of marketability of goods and services

 

All the countries whether they are developed or developing face the same problems when it comes to corporate governance. Because the corporate boards lack the institutional memory and experience, traditional economies face many hurdles. They also face a number of challenges that developed economies do not face:

  • Establishing a rule based system of governance
  • Combating vested interests
  • Dismantling pyramid ownership structures that allow insiders to control and, at times, siphon off assets from publicly owned firms based on very little direct equity ownership and thus few consequences.
  • Severing links such as cross shareholdings between banks and corporations.
  • Establishing property rights systems that clearly and easily identify true  owners even if the state is the owner
  • Depoliticizing decision making and establishing firewalls between the government and the management in corporatized companies where the state is a dominant shareholder
  • Protecting and enforcing minority shareholder rights
  • Preventing asset stripping after mass privatization
  • Finding active owners and skilled managers among diffuse ownership structures and
  • Cultivating technical and professional know how (CIPE,2002)

References

  • Corporate Governance in Developing Economies: Country Studies of Africa, Asia and Latin America By Robert W. McGee, Springer Science, 2009

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