Transparency in Corporate Governance - Corporate governance Essay Example

Transparency in Corporate Governance



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The concept of transparency to corporate compliance

The degree of compliance with standards and law is ultimately an impressionistic judgment. For example, an international NGO annually releases a Corruption Perception Index based on surveys that document the perceptions of analysts, academics, and business people.  The 2001 profile of ninety one countries ranks Finland first (9.9) 10 is a perfect clean score and Bangladesh last (0.4).

There are many ways to circumvent the disclosure of information. In spite of legal obligations, compliance is essentially measure of good faith. Compliance does not ensure that proffered information is useful. In instances of closed-door policy deliberations for example, “transparency” simply means that meeting minutes, however vague or incomplete are posted. Essentially toothless, disclosure policies are no guarantee that information will reach the public. Both the IMF and the World Bank releases certain information only to their member governments, never directly to citizens. An agency may choose to disclose pedestrian data or to obfuscate information in lengthy documents couched in tortured language. And there are always exemptions. Both the US Freedom of Information Act (1966) and the NAFTA transparency decision against Canada permit governments to withhold information those governments deem vital to national security (McBride, 2003).

An idea spawned from a rich philosophical lineage, transparency states a goal, the freedom actualized by self-governance and the means for achieving it (McBride, 1997), open communication in the public sphere. Utopian transparency, which is impossible to fully measure and achieve, is the pithiest expression of the quest for self-determination and self-legislation. Ultimately, the dissemination of useful information will depend more on providing motives and incentives than the threat of sanctions and uncertain enforcement.

The Concept of Transparency to Corporate Governance

Problems of transparency are linked to problems of accountability. Russian company officials who seek to avoid accountability will take all necessary steps to limit transparency. An offer, who wishes to take advantage of a corporate opportunity, or to arrange favorable terms for a supply contact with his own company, has no desire to expose his deeds to the scrutiny that accompanies transparency. Another problem for transparency is historical. Russian company officials have emerged from a culture in which information was hidden and secrecy abounded. No matter what his background- red director, black marketer, or government bureaucrat-that company official learned the value and reality of secrecy, opacity, and obfuscation very early in his career.

Transparency suffers when insiders rely on techniques other than good leadership and management skills to operate business successfully.

Finally, transparency in corporate governance falls prey to a somewhat unexpected problem. To many Russian company officials, transparency causes more problems than it solves. In today’s Russian, corporate predators abound. Illegal takeover attempts occur more frequently than legal attempts. Manipulation of the courts system, illegal attacks by minority shareholders, and sham transactions followed by equally sham bankruptcies are all threats that Russian companies face. Also, their competitions, particularly those with great resources and influence with the authorities, are often prepared to flout the law to achieve their takeover objectives. They ignore or bypass laws that call for an independent share registry, that require announcements of large dividends, and that mandate the publishing of detailed financial statements, all of which are seemingly routine corporate acts that are consistent with transparency. For a company that is a takeover target, complying with these practices can be fraught with peril in the minds of company officials.

Evaluation of Relationship:  Self-interests of Management and effective corporate governance

Agency theory is concerned with the agency problem exists when there is an agency relationship. In an agency relationship, one party (the principal) delegates decisions and/or work to another (agent). The agency problem occurs when the principal and the agent have different goals. The underlying assumption of the agency theory is that agents are self-interested, risk-adverse, and rational actors. In the agency relationship, two typical problems could arise. The first is the monitoring problem that arises when the principal cannot verify if the agent behaved appropriately. The second is the problem of risk-sharing that arises when the principal and the agent have different attitudes toward risks (Eisenhardt, 1989).

The relationship between firm owners or shareholders (the principal) and the top management (the agent) is a typical principal-agent relationship. Agency theory sheds important light on how to design effective management control of such a relationship. First, agency theory implies that agent’s self-interests can be monitored by information system. Thus, formal information systems, such as budgeting and management reporting, and informal information sources, such as managerial observation and surveillance are important aspects of control. Second, agency theory views control system aspects of compensation and incentive schemes tools for better aligning an agent’s motives with organizational goals. This explains the importance of share options or management ownership in the management control system of a company (McBride, 1994).

Stewardship theory is proposed as an alternative perspective to agency theory. The underlying assumption of the stewardship theory is that managers are good stewards of firms. They are trustworthy and work diligently to train high corporate profits and shareholder’s returns (Donaldson & Davis, 1994). Instead of focusing on goal conflict, stewardship theory proposes that the principal and the steward can cooperate with each other and achieve a goal alignment.

Thus, stewardship theory focuses on developing mutual trust and cooperation between principals and stewards. Indeed, the steward theory proposes that trustworthy and cooperative relationship between principals and stewards are positively correlated with firm performance. This has several important implications for management control systems. First, trust and cooperation can be enhanced by having effective information sharing mechanisms. Under the stewardship theory, information systems are primarily for the principal to share information with and not necessarily to monitor the stewards. Second, arrangements that foster understanding and identification between principals and stewards will increase the degree of trust between them, thereby leading to better film performance.

Stewardship theory differs from agency theory in several key aspects. Instead of relying on the premise that managers (agents) are opportunistic and self-serving, stewardship theory assumes that these managers are trustworthy and cooperative. Instead of emphasizing the need for monitoring and control, stewardship theory directs our attention to trust and relationship-building between principal and stewards. Thus, while agency theory focuses on the independence of different groups (for example, board members, monitoring committee, and management), stewardship theory underlines understanding and identification between them.

The relationship between the agent and the principal is formalized in agency theory, which describes the relation between the company’s decision makes the officers, directors, and management and its owners, and the issues related to potential conflicts of interest between agents and principals. In a small business, the owners and managers are often the same, so there is no potential conflict of interest between the owners and the decision makers. However, in larger business, there is separation of ownership and decision making, and therefore the owners must entrust directors, officers, and managers with the responsibility to make decisions on behalf.

In conclusion, the aim of this paper was to link transparency to economic growth. A growing level of awareness in both the public and the private sector about the necessity of implementing best practices of transparency and corporate governance. Is it encouraging? Yes, it is. Is it adequate? No. A lot more needs to be done in order to lay down the solid foundation for the development of the democratic society, economic prosperity and social wealth. By coordinating efforts of all parties involved, by building a multilateral multinational anti-corruption network, and by setting up clearly defined corporate governance and anti-corruption agenda for each of the nations and companies involved, we will be able to drastically reduce the strain of corruption and make one more step towards a better world.





Davis, P. & Donaldson, J. (1994). Seven Principles for Cooperative Management.


Cooperative Management. A philosophy for business. Chelterham: New Harmony




Eisenhardt, K. M. (1989). Agency theory: an assessment and review. Academy of


Management Review, (Vol. 14, pp.57-74)


McBride, W. L. (1997). Existentialist Politics and Political Theory. Taylor & Francis.


McBride, S. & Griffin, M. (2003). Global Turbulence: Social Activist’s and Response to


Globalization. Ashgate Publishing, Ltd.


McBride, P. (1994). Managing Quality. Boston: Butterworth Heinemann.









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