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Dear friends,
let us take the concept of corporate governance in more broder concept, though the whole worlds scenario. entering in global aspect we have to discuss on follwing important terms as : -

Corporate concentration

In recent decades the increased presence of multinational corporations in the global economy and the enhancement of their economic power have arguably brought to light some of the largest inequalities of our times. The scale of the concentration of economic power is illustrated by the statistics: of the world's hundred largest economic entities, are multinational companies and 49 are nation states.
The statistics are also revealing when we compare the economic concentration with the actual employment generated by large corporations. The global economic trend is towards greater concentration of control of markets and productive assets by a relatively small number of corporations that make a limited contribution to global employment.
Other issues linked to the impact of multinational corporations are related to the fact that they develop global policies with a view of maximising profits in a centralised manner. In so doing there is a tendency to remit profits to their country of origin and, arguably, fail to benefit the communities where they are based. In this respect, empirical studies examined by Borschier and Stamm appear to show that penetration by transnational companies adds to overall economic growth in the short term but reduces growth performance in the long term.
The presence of large corporations in the market, operating on a global basis, tends to push more corporations to grow and merge and to operate in a similar way. As a cycle, the more corporations concentrate the greater is the necessity for existing corporations to grow and merge in order to be able to operate effectively in such a competitive market that has few boundaries. Competition is, in effect, one of the driving forces for corporate concentration.

Negative externalities and the operations of multinational corporations

In pursuing the maximisation of profits in such a highly competitive global market, corporations often produce what Herman classifies as "negative externalities," which he considers to be "unintended impacts of production or consumption on others, effects that are actually not internalised and taken into account through market processes". Such effects have increased, with:
"... growing numbers of people, greater economic interdependence, and an outpouring of chemicals and industrial products of uncertain environment effect; workers absorbing new chemicals in work place; the general public affected by waste residues interacting with one another in the environment".
Large corporations may also contribute more directly to negative externalities as a result of their size, geographic dispersion and mobility, which give them greater freedom to select technologies and business strategies that add to their internal efficiency, but that may involve an unfavourable trade-off between costs and benefits to society. Multinational corporations tend to make use of different jurisdictions in order to maximise efficiency and profits. In this regard, the lack of international regulatory mechanisms and mechanisms of control may allow multinational corporations to operate in a predatory manner, essentially exporting their negative externalities to countries that often have limited power to regulate them, because such countries tend to develop policies that welcome inward investment to the detriment of other factors such as labour, human rights, and environmental protection among others.

Corporate social responsibility

Issues such as the creation of negative externalities stress the importance of regulation to promote corporate social responsibility. The increase of corporate power, and the subsequent increase of social responsibility, has been considered since Keynes. He stressed the importance of corporate social responsibility, identifying the "tendency of big business to socialise itself", with shareholders "almost totally dissociated from the management" and managements more concerned with "the general stability and reputation of institution" than with any maximising of power profits. He continued: "The shareholders must be satisfied by conventionally adequate dividends, but once this is secured, the direct interest of the management often consists in avoiding criticism." In Keynes' view large organisations became more vulnerable to public opinion due to their large size and semi-monopolistic position.
As Keynes envisaged, it is a fact that large corporations, with their considerable concentration of private power, participate in a form of democratic process whereby they are increasingly subject to the vigilance of public opinion and consumers' force. However, it is also arguable that large corporations' management responds more frequently by trying to alter opinion rather than trying to modify their policies.

Corporate control and issues of corporate governance

The larger corporations get and the more corporations and economies are interacting, the more significant the impact can be for economies around the world in the event of a management failure. As world markets become more complex and pressures in terms of competitiveness and corporate social responsibility increase, corporate control and regulation need to be addressed.
Traditional theories maintain that the "owners" control the corporation, directly or through their representatives on the board of directors. Traditionally, the board and the senior managers were either the owners themselves or controlled agents and fiduciaries obligated by law to serve the stockholders' interest.
The rise of large corporations operating on a global basis has been associated with diffusion of the ownership interest and an enlargement in the power and discretion of professional managers. As Herman points out, there has been a "managerial revolution" during the 20th century, characterised by a fundamental change in the control of the corporation moving from the owners to non-owning managers.
The relationship between the objectives of large corporations and their internal mechanisms concerning the division of power is important in analysing how large corporations may respond to actual and potential external demands and social controls. Corporate governance principles are aimed at addressing such demands.

Transparency and the necessity of international standards of corporate governance

Given their economic nature and limited liability, corporations have (since their inception) been required to disclose general information to the public in most jurisdictions in the world. As economies and markets become increasingly complex, the amount and type of information required to be disclosed has increased in complexity too. In contemporary times, the disclosure of more specific financial information became an important instrument in world markets. Financial data is necessary information for potential investors and creditors and even in certain corporate transactions. In addition, a transparent corporate environment promotes the prevention of fraudulent activities.
The accountability of companies to the general public is a consequence of the social and economic power wielded by the corporate sector in modern times. This accountability is playing a key role in creating legitimacy for corporate power present in societies. Macmillan compares accountability of corporations with democratic elections, observing:
"Accountability in this context is to act as a device for legitimising corporate power (in much the same way as democratic elections and the principles of administrative law make government accountable for its power and therefore legitimise that power)." Given the power multinational corporations possess in world societies, it is important to ensure that rigorous international mechanisms of disclosure are in place in order to legitimate such a degree of private power.

Published by

C S Alok Singh
(Company Secretary)
Category Corporate Law   Report

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