Literature Review:

Corporate governance covers various different but related economic issues or variables in its definition. According to Shleifer and Vishny (1997) in The Journal of Finance, “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” The variables are guide line or code how a company is directed, controlled which are processes, customs, policies, laws. According to Mathiesen (2002) corporate governance often investigate and has interest in helping efficient management as a result shareholders interest served like company’s financial matters, rate of return. Corporate governance offers efficient institutional and policy framework, various incentives, privatization, contracts, market exit, legislation, insolvency. Those are known as incentive mechanisms and strategy. Corporate governance is about transparency, fairness and accountably of a institute. “Corporate Governance looks at the institutional and policy framework for corporations – from their very beginnings, in entrepreneurship, through their governance structures, company law, privatization, to market exit and insolvency. The integrity of corporations, financial institutions and markets is particularly central to the health of our economies and their stability.” (www.oecd.org)

Corporate governance major function is to enhance the operating performances of the firm and also in the fraud prevention (Yeh, Lee, and Ko, 2002). Black, Jang, and Kan (2002) identify that the better the corporate governance of a firm the better they perform in the market then the companies which have poor corporate governance structure. This result is also supported by the Jensen and Meckling, (1976) and Fama and Jensen, (1983). Corporate governance mechanisms give commanding position to the owners to manage corporate insiders and managers.

The Corporate Governance is a wide and important subject that covers a range of issues from accountability and transparency and the relationship between the board of directors, management and shareholders to help in determining the path and performance of the corporation (Hunger & Wheelen, 2007, p. 18). In brief, corporate governance is the system of controls to ensure that investors can assure themselves that they will get their investment back.

Depending on laws, policies and other standard it might vary, but generally Board of Director describes as below:

• They make the business strategy.
• They recruit and sack top management if required.
• They monitor management.
• They work for shareholder’s interest
• They workout with companies resources

According to Fama and Jensen (1983) the corporate boards of directors are playing the major role in the corporate governance systems. According to Mizruchi (1983, P, 433) The companies ultimate control is lies to the board of directors. Walsh and Seward (1990) divide the control mechanism in two ways both internal and external. The internal control is based on the board governance, ownership of equity, compensation etc. And the external control groups are the institutional investors, legal protections and also the individual investors who actively participate in the capital markets.

The variables selected for internal control mechanism are CEO as board chairman, Outsider ratio in the board, Board size, and number of board meetings held. Ownership pattern is also considered as a governance factors towards the performance of the firm. According to Berla and Means (1932) they identify a relationship between the firms performances and ownership. The find out from their study that firms performances is increased as the management being separated from the ownership of the firm. Jensen and Meckling (1976) introduced the agent conflict that explained issues between the ownership and management of the firm. Fama and Jensen (1983) find out that the agency problem can be resolved by systematic dispersion.

Corporate governance now familiar word to many people because of recent credit crunch and economical changes. But corporate governance came into topic in mid 80’s. American companies find themselves in globalisation. Chief executives became more powerful and reckless in making decision, board directors became administrative puppet. Critics call for larger independence for board members so that they can monitor high management and served shareholders interest.

Corporate governance first face criticism by the bankruptcy of ENRON in 2001. Famous magazine FORTUNE labelled ENRON USA’s most Innovative Company of the year, six years in a row since 1996. Corporate body had been blamed for taking high risk, not taking into consider of inappropriate conflict of interest, big compensation, and unpublished off-the-books activity.

Depending on dominance on board this paper found mainly three different kind of corporate governance model around the world. They all have their distinguish styles, for example Management control U.S. policy, UK policy differentiate governance and draw a line with management and separate them. This paper did not found any thing that separate governance from management in European model.

UK Corporate Governance Policy or Model

U.S. Corporate Governance Policy or Model

European Corporate Governance