What does the concept of governance mean in economic institutions?
Governance has become a concept that has been frequently mentioned recently in various administrative sectors. Its application in companies and economic entities has become a necessity after it was adopted by many economic institutions and called for by many government agencies.
Historical overview:
The study of governance, its elements, and components dates back to the nineteenth century, as a result of the emergence of public joint-stock companies and the accompanying emergence of numerous accounting and administrative problems resulting from the separation of ownership from management, known as the agency problem. This required numerous arrangements, procedures, and rules obligating companies to respect the rights of stakeholders and shareholders, in addition to the responsibilities of the board of directors, its members, and the audit committees that represent the elements and principles of governance. Governance principles were subsequently approved and implemented after the concept developed and its elements crystallized clearly worldwide.
The accounting and administrative methods and approaches followed by companies have failed to address any financial problems or shocks that may be encountered in financial markets, including those experienced by major companies on global stock exchanges in 2008, as occurred in the United States of America, which led to numerous financial collapses and turmoil in stock markets, proving the failure of traditional procedures in confronting financial collapses and financial and administrative corruption.
What is governance?
There is no unified definition of corporate governance globally among economists, analysts, and legal experts, given the concept’s overlap with numerous economic, financial, regulatory, and social issues affecting businesses, impacting the economy and society as a whole. However, many professional and academic institutions have focused on defining corporate governance as…
Governance is defined as the structure through which the behavior of corporate executives is monitored and directed in various areas, such as the financial unit implemented by the board of directors and investors. The impact of corporate governance can also extend to various administrative aspects of the company.
The International Finance Corporation (IFC) defines it as: “The process by which companies are directed and controlled.” It explains that good governance helps companies operate more efficiently, improves access to financing, reduces risk, protects against mismanagement, makes companies more accountable and transparent to investors, and provides them with the tools necessary to respond to stakeholder concerns.
The importance of governance:
The importance of governance has increased recently, with the aim of achieving several economic objectives. This is evident in:
- Preserving the rights of stakeholders, especially small shareholders, and ensuring the sound financial performance of financial and non-financial investment instruments that generate an appropriate return on their investments.
- Increasing and maximizing the market value of the company’s assets and utilized resources, and activating competition between companies in global financial markets through the development of modern methods, tools, and mechanisms.
- Supporting the implementation of privatization programs and guiding companies toward optimal use to prevent any associated corruption.
- Working to provide local and international funding sources for institutions, whether through the banking system or capital markets, in light of the increasing speed of capital flows.
- Avoiding accounting and financial problems, achieving support and stability for the activities of economic institutions, and working to prevent collapses or financial shocks in financial and banking institutions to achieve economic stability.