Corporate Gorvenance (Essay Sample)

Corporate governance impact on voluntary financial reporting and disclosures
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Introduction
In the recent years, focus on organization turmoil emphasizes the need for examining internal organization behaviours or rather corporate governance aspect. Precisely, past researchers and scholars have shown tremendous interest as a result of the internal reporting shortcomings. Kaplan 2010, articulates that UK financial crisis experienced in early 2007 and recent 2008 was a result of ignored essence of financial reporting and disclosures. Armstrong et al., (2010) also suggests that, though the significance is given to risk management purposes, financial disturbance have shown limitations. The limitations may be due to board agency, ownership and shareholders role in overseeing financial reporting to its customers. In fact, collapse of well-established firms such as WorldCom, Enron and Parmalat amongst others have not only shaken the confidence in financial disclosures, but also have rendered the financial reporting a global issue.
Therefore, financial reporting in the contemporary world is no longer taken as a mere bookkeeping exercise. Instead, it is perceived as a central function with a means of directing an organization under good corporate governance principle. As a result, varied researchers interests on corporate governance alongside regulation frameworks have shown their impacts on voluntary financial reporting and disclosures. Armstrong et al., (2010) research illustrates that information reporting and disclosure entails both voluntary and mandatory frameworks of disclosures. With their reference to corporate governance, they argue that mechanisms such as ownership structures, composition of board and stakeholder influence impacts the internal corporate reporting behaviour. This paper takes into consideration of past theoretical views on impacts of corporate governance and regulation frameworks on financial reporting and disclosures within UK.
Corporate governance
Globally, corporate governance issue has remained the headlines across developed and undeveloped countries. Various studies have been carried out in several countries including US, European Countries and West Asian countries Akhtaruddin et al., (2009) Al-Shammari, B., & Al-Sultan, W. (2010).; Kirkpatrick, (2009). Their empirical studies reveal mixed results on the association between the corporate governance mechanism and voluntary disclosure. However, their vested interests have disclosed the significance of the issue about voluntary information. Tomasz WNUK-PEL, 2010, argues that voluntary financial reporting profoundly enables management to judge opportunities and risks of investment properly. Its relevance, therefore, is essential to the organizations customers and investors. Investors rely on information to access timing and uncertainty of present and future cash flows necessary for them to value the firm and make other rational decision-making investments.
Shah, Malik, & Malik, 2011, study refers corporate governances as adopted rules aimed at giving management direction and performance goals. Hence, it is an indispensable issue necessary for companies to obtain effective market discipline. Accordingly, it entails rules and regulations within an organization that links between an organization’s management, directors and largely to financial reporting systems. A corporate that does not embrace strong culture of independent oversight tends to risk its stability and future health. Monks & Minow, (2001) argues that corporate involves relationship among various participants; organization as a separate entity, its board, shareholders, and other shareholders. They added that; governance also provides ownership structures that facilitate organizations objectives
Armstrong et al., (2010) research on the impact of internal and external governance relates to the US corporate governance restructuring in 1980s. Institutional investors, corporate board, stock exchange regulators and the public since then have gained a sense to examine their roles in a strategic process of decision making of corporation. Similarly, Europe companies in the recent past have voluntarily increased the level of financial reporting. Its adoption have imparted the financial reporting is evidence through more and more attracted investors interests and capital.
Corporate governance mechanism and information disclosures
Director’s board size
A lot of studies reveal similar statement on the credibility of financial reports provided by certain companies (Donaldson, 2009; Klan and Omar (2011). Some of the studies indicate that inconsistent financial disclosures in the accountings of the firms affect public confidence. In essence, the needs of the various categories of users are not fulfilled. The regulatory bodies should, therefore, work hard to ensure that the public confidence in corporate governance restored. According to Shah, Malik, & Malik, 2011, a standard financial report should be capable of providing users with relevant disclosures as well as providing information disclosure to all the participants.
To comprehend the values of the company and reduce uncertainties that might arise from shifting of customers to other companies, providing relevant information is significant. Sound investment decisions are often derived from the financial information reports. In Klan and Omar (2011), it has been argued there is a connection between the mechanism of corporate governance and the financial reports. This indicates that financial information report is an element axiom for the corporate system to function effectively (Chima 2012). A good financial report symbolizes the transparency and adequate information disclosure. This key attributes of corporate governance showcase the present of a good reputation in a firm.
There is a positive association between the board size and financial reporting. The relationship is often based on the outcome of the company in terms of its productivity; the quality of the audit presented and satisfaction of the customers. There are several arguments that vary on the idea of which size of the board has a momentum to perform its functions to the fullest. Though the argument does not provide a correlation between the auditing quality and the size of the board, it’s obvious there are other factors that influence the relationship. An empirical theory such as Resource Dependency argues that companies with a big size of the board are capable of providing the best output than a small size board (Donaldson, 2009).
However, the majority of the previous studies postulate that the independence of a large board is often associated with just, transparency and better utilization of resources. Companies with greater board are expected to be productive due to the higher level of voluntary disclosure. In order to emphasize on the association between the two drivers of corporate governance mechanism, the aspect of performance is a core aspect that organizations should value. In other words, large board size may be viewed to provide the best financial reporting pertaining on their productivity. This is attributed to their potential to manage capital resources of the company as well the present of a variety of knowledge. On the other hand, poor financial reports may be drawn from a company with a large board size (Norman, Mohamed & Chek, 2011). This often arose from the incapability from those on board to execute their function to the standard.
Klan and Omar (2011), argues that the prosperity of a company lies on the hand of those on top management of the company’s affairs. It further states that the size and the qualification of directors and managers are the determinants of the growth and development of a firm. On the hand, Donald (2009) arguments are emphasized on the credibility of the financial report as a contributing factor for a particular firm to contain its customer’s confidence. According to Donaldson, (1990; 2009), small size of the board can provide an outstanding financial report and disclosure. On the contrary, a sub-standard report can also be reported. Previous studies favour small size of the board, on the reasons that, its management is efficient and easy as compare to large big board size which might not be the case.
Directors’ share and voluntary financial reporting and disclosures
There is a correlation between directors’ share and voluntary financial reporting and disclosures (Tomasz WNUK-PEL, 2010). Agency theory, that relates the correlation between director’s share, voluntary financial report and disclosure, provide a theoretical basis for the link between these proxies of corporate governance. The relationship arises due to path dependence in that the financial report is affected by the share a director holds. In particular, previous research shows the inter-dependence that link the disclosure, financial report and shares own by a particular director. The larger the share a director owns the less widespread fraudulence financial reporting and tunnelling (Norwani, Mohamed & Chek, 2011). Hence, the question that arises is whether increasing shares own by directors affects the association between the two characteristics of the corporate.
A high proportion of companies are managed by single or several dominant shareholders. Sitting director, who also own share is vulnerable to making mistakes hence creating agency problems. Under this circumstance, the need to protect minority shareholders comes in. This is because voluntary financial reporting and disclosure facilitate to disseminate the information to the public hence information asymmetric reduction achieved. Independence is a crucial requirement.
Organization ownership...