September 15, 2022


Corporate governance is concerned with the resolution of collective action problems amongst dispersed investors and the reconciliation of conflicts of interest between various corporate claim holders (Marco Becht et al. ‘Corporate Law and Governance (, accessed 14 – 09 – 2022)). The alternative mechanisms that may mitigate it are (i) partial concentration of ownership and control in the hands of one or a few investors, (ii) voting rights, which concentrate ownership and/or voting power temporarily when needed, (iii) delegation and concentration of control in the board of directors, (iv) alignment of managerial interests with investors through executive compensation contracts, and (v) defined fiduciary duties for management.

An alternative approach to mitigating the collective action problem of shareholders is to have a semi-concentrated ownership structure with at least one large shareholder, who has an interest in monitoring management and the power to implement management changes (Marco Becht et al. (op cit)). Managerial ownership aligns the interests of the managers with those of shareholders by providing directors with incentives to maximise the firm value. The greater their share of direct ownership, the greater share of the cost of undertaking non-value maximising actions is borne by managers. Either low or high levels of ownership increase the alignment effect of interests and has a positive relationship with firm value (Khaldoun Abd Allh Mahmoud Alwshah ‘The Impact of Corporate Governance and Ownership Structure on Performance and Financial Decisions of Firms: Evidence from Jordan; (July 2009 ) (, accessed 14 – 09 – 2022)). Intermediate levels of ownership increase entrenchment and enable managers to exercise more controlling power to the detriment of other shareholders.

The practice of corporate governance is strongly influenced by the parties involved in the management system of a company such as shareholders, investors, creditors, employees and the government (Zahroh Naimah and Hamidah ‘The Role of Corporate Governance in Firm Performance’ (, accessed 14 – 09 – 2022)). In a concentrated ownership structure, the main conflict is between internal controllers and minority outside shareholders. Some form of concentration of ownership or control is the form of corporate governance arrangement (Marco Becht et al (op cit)). Shareholders have a significant ability to influence decision-making in companies using their shareholding power (Khaldoun Abd Allh Mahmoud Alwshah (op cit.)).

The role of the shareholders in governance is to appoint directors and ensure that management has run the appropriate governance structure (Zahroh Naimah and Hamidah (op cit)). The management of a company is responsible for the implementation of corporate governance. The management and its constituencies have the responsibility of setting objectives and monitoring and controlling the firm’s activities, which is central to decision-making within the firm (Fama and Jensen, 1983). The board structure tends to reflect the firm’s industry, the need for monitoring of activities and the transparency of the firm’s earnings (Philip Brown et al. ‘Corporate governance, accounting and finance: a review’ (, accessed 14 – 09 – 2022)).

Corporate governance mechanisms include institutional ownership in the company (Zahroh Naimah and Hamidah (op cit)). Foreign equity investors have a positive effect on firm performance (Aydin et al; 2007), and foreign ownership has a better monitoring ability (Hanousek et al., 2004). They complement organisations as external governance agents by providing incentives for shareholders to monitor managerial performance and act in a manner that enhances firm value. External monitoring of firm management improves corporate performance (Shleifer and Vishny, 1997). Corporate governance is a dynamic process in which corporate governance practices are revised and enhanced contingent on new corporate realities (Philip Brown et al. (op cit)).

Corporate governance is a framework for effective monitoring, regulation and control of firms which permits alternative internal and external mechanisms for achieving the proposed company’s objectives (Tolossa Fufa Guluma ‘The impact of corporate governance measures on firm performance: the influences of managerial overconfidence’; Guluma Future Business Journal 2021 7(1):50 (, accessed 17 – 09 – 2022)). Internal characteristics are those that result from decisions and actions of the shareholders and the board and external characteristics include monitoring by outside parties, e.g. regulators. External governance characteristics are beyond the control of the shareholders and management (Philip Brown et al. (op cit)). They complement internal governance characteristics and influence the overall outcomes. Actions taken by external parties help to address agency costs that can arise when the firm’s ‘controllers’ pursue their own interests to the disadvantage of others with legitimate claims.

Insiders interested in raising equity capital are expected to have better corporate governance to establish a reputation of favourable treatment of minority shareholders. Corporate governance enhances the firm value by reducing the cost of equity capital. The firm’s internal control system is important to ensure the integrity of financial reporting and to check that systems are appropriate to monitor and manage risk. Firms that make fewer disclosures have a higher cost of equity (Ashbaugh-Skacfe et al., 2004). Strong corporate governance reduces the implied cost of equity capital (Attig et al., 2008). In poor protection environments, investors can block corporate decisions or seek compensation.

Corporate governance also helps firms to acquire critical resources, which is a resource-dependence function (Dr Diksha Kakkar ‘Linking Corporate Governance Reforms and Company Performance: A Review’ (, accessed 14 – 09 – 2022)). It focuses on the composition of the board by including outside directors and enforcement of government rules and regulations. It aligns the goals of managers and organisations under human resources management (Buchholtz et al., 2003) and provides strategic leadership. A particular rate of change in the firm’s corporate governance may help it improve its performance. The accountability of management, proactive shareholders and quality reporting will lead to wealth creation. Non-executive directors bring an independent judgement to bear on issues of strategy, performance, and resources, including key appointments, and standards of conduct.

Good corporate governance principles are transparency, accountability, responsibility, independence and fairness (Zahroh Naimah and Hamidah (op cit)). The main objective of the implementation of good corporate governance is to optimize value for shareholders and the long-term sustainability of the company. Companies that are managed better are more sustainable and have better operational performance. Effective corporate governance reduces the ‘right to control’ given to managers. Firms can reduce agency costs by bonding to a more credible governance system or higher disclosure standards and accounting rules (Philip Brown et al. (op cit)). Transparent and qualitative reporting leads to better firm performance (Dr Diksha Kakkar (op cit)).

Efficient corporate governance rules would minimise the costs of capital and maximise the value of service to clients. Mandatory governance rules are required to overcome the collective action problem to ensure that the interests of all constituencies are represented (Marco Becht et al. (op cit)). Regulatory responses should be targeted more directly at the selection process of directors and their financial incentives. The issuance of Codes is prompted more by legitimacy reasons than by efficiency reasons (Philip Brown et al.  (op cit)). Promulgating governance standards and making them mandatory is insufficient to ensure compliance (Coffee, 1999); monitoring and enforcement are also required.

Corporate governance has a positive influence on disclosure levels, even when disclosures are mandatory (Marco Becht et al. (op cit)). The main argument in support of mandatory rules is that even if the founder of the firm or the shareholders can design and implement any corporate charter they like, they will tend to write inefficient rules since they cannot feasibly involve all the parties concerned in a comprehensive bargain. By pursuing their interests over those of parties missing from the bargaining table, they are likely to write inefficient rules. Another argument in support of mandatory rules is that, even if firms initially have the right incentives to design efficient rules, they may want to break or alter them later.

Governance codes encourage compliance and disclosure of compliance in the annual reports (Philip Brown et al. (op cit)). Good corporate governance requires law enforcement institutions capable of protecting shareholders’ property rights, i.e. protecting shareholders from expropriation by insiders. Law enforcement institutions improve firm performance. Corporate governance may help alleviate the existence of information asymmetry. The firm’s disclosure policy may substitute for inadequate governance practices. Firms with concentrated ownership are expected to be associated with lower levels of transparency. Firms with higher disclosure levels tend to have better corporate governance characteristics.

Regulation has a positive impact on the quality of the firm’s disclosures (Philip Brown et al. (op cit)). Firms with less indemnity insurance cover for their managers have greater levels of reporting conservatism. Monitoring by other external parties such as external auditors can also have an impact on accounting reporting choices, resulting in conservative policies. The role of corporate governance is to monitor conservatism. Lower levels of managerial ownership result in greater agency problems and increased demand for conservatism. Improved governance leads to conservatism. The level of managerial ownership may also influence the informativeness of disclosure. Controlling shareholders are involved in overseeing the financial reporting process; this may include actions to prevent information flows and also to make earnings less transparent.

There is less informative financial reporting when concentrated ownership is common (Fan and Wong, 2002). Controlling shareholders expropriate shareholders’ interests and limit the quantity of information disclosed (Philip Brown et al. (op cit). The earnings of firms with controlling shareholders are less informative. Audit quality as a means of monitoring corporate governance from outside can improve the performance of the firm.

External governance affects the intensity of managerial discipline. The favoured mechanism for resolving collective action problems among shareholders appears to be partial ownership and control concentration. Shareholder protection requires some form of concentrated ownership or regulatory intervention to overcome the collective action problem among dispersed shareholders. Mandatory governance rules are necessary. Regulatory intervention should be targeted more directly at monitoring management.

The main objective of the implementation of good corporate governance is to optimize value for shareholders. The dominant shareholder could increase firm value by appointing an independent board, especially in environments with weak shareholder protection.  The separation of decision management and decision control functions within a firm reduces agency costs and enhances firm performance.

The likelihood of financial statements manipulation decreases when outside director ownership increases. Corporate governance moves around a principal-agent relationship where protecting the interests of shareholders (principal) is the main objective of the directors (agent). Shareholders’ rights include secure ownership of their shares, voting rights, their right to full disclosure of information etcetera. Corporate governance is beyond the codes and its objectives are to ensure shareholders’ value (Dr Diksha Kakkar (op cit)). The board should bring integrity and transparency through voluntary practices. The shareholders want an accountable board and auditors with transparent fair reporting. Transparent and qualitative reporting leads to better firm performance. Corporate accountability and quality of corporate disclosure have an impact on companies and are essential for corporate growth.

Increased disclosure is associated with liquidity, reduced cost of capital and greater overall transparency (Philip Brown et al. (op cit)). Regulation has a positive effect on corporate governance. Firms which fail to meet the levels mandated by regulation suffer losses while those which quickly respond earn gains (Dr Diksha Kakkar (op cit)). Better governed firms have more profitability in terms of return on equity and shareholder value (Brown and Caylor, 2004). Codes and legislation improve governance practices and firms themselves need to take voluntary initiatives. Corporate governance reforms have an impact on the internal as well as external environment of the organisations. The board of directors and internal control system have to play a crucial role in the development of a good corporate governance structure of the organisation.

Firm-level corporate governance and shareholder protection may be substitutes in reducing the cost of equity. The firm’s disclosure policy may be a substitute for inadequate governance practices. Corporate governance quality and disclosure are substitutes. Compliance with governance codes may be influenced by a system for compliance monitoring and enforcement (Philip Brown et al. (op cit)). A move by the firm towards better corporate governance causes firm’s performance to improve. If it is performed well, it can improve firm performance. Good corporate governance is expected to increase the performance of the firm and more policies need to be in place to protect minority rights. Well-managed corporate governance mechanisms play an important role in providing corporate performance (Tolossa Fufa Guluma (op cit)).


Please note that our blog posts are informal commentaries on developments in the law at the time of publication and not legal advice.


About the author 

Sipho Nkosi

Sipho Nkosi is an experienced Legal Professional with a demonstrated history of working in the legal services industry. A strong legal professional with a B Proc degree focused in Law from the University of Natal (Howard College), with a keen interest in corporate governance and a profound insight into Compliance Risk Management. Skilled in litigation and procedural law, and an affiliate member of the Compliance Institute Southern Africa.

Leave a Reply
{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}