Ownership and administrative control over the facility’s resources. In the modern concept of the facility, we find that shareholders may have a simple role (or have no active role) in managing the company. Instead, shareholders usually hire technical managers to operate the company in a manner consistent with the shareholders ’interest. However, giving managers the opportunity to fully control the company’s resources may have negative impacts on whether the company’s resources are used for their own interests, regardless of the impact that this has on the equity of the company. For example, managers may travel on private planes, they may request private dining rooms, they may ask for special pension deals, and they may demand personal and home security, and these costs are borne by the company.
The separation of ownership and management activities, and the presence of discrepancies in information, may cause conflicts of interest. For example, a manager’s personal interest may lead to misuse of financial resources by investing in risky projects at the expense of the stakeholders who paid the capital. Therefore, to control conflicts of interest and reduce agency costs, and various internal and external instruments, the concept of corporate governance has been proposed. For example, a board of directors was established as a solution to these conflicts. The board of directors is considered the most powerful internal control body for senior management because the board of directors has the ability to recruit, dismiss and compensate senior management.
Another solution to conflict of interest management is to link compensation to managers with the company’s performance. However, when an effective board of directors exists to provide the required information, senior management compensation is seldom based on the company’s performance. When there is a strong corporate governance system it will contribute to removing or at least contributing to reducing conflicts of interest between shareholders and management. Therefore, the efficiency of the corporate governance system is likely to be strengthened if the board’s role as a control and oversight tool is emphasized.
Three important issues that invited researchers to write in the corporate governance system, as follows:
First: Conflicts of interest may occur between stakeholders such as managers, shareholders and creditors, because business decisions that increase the welfare of one of these groups – usually often – reduce the welfare of other groups.
Second: Varied information may give managers freedom to act, and this in turn may lead to opportunism in behavior. So that the administration may seek to achieve its own goals by using the funds for their personal benefit, investment and financing ineffectively so that this behavior will reduce the profitability of the company. The existence of such a conflict of interest between shareholders and managers may affect the quality of profits, and therefore this conflict may affect the performance of the company.
Third: Another reason behind the study of corporate governance is the financial scandals of some companies that occurred at the beginning of the twenty-first century, such as: Enron, Arthur Anderson, WorldCom, and Adelphia.
For these three reasons mentioned above, the study of the corporate governance system has become – in abundance – an urgent need for many researchers.
The ERIYADA BOARD system for corporate governance provides an integrated solution that enables boards and committees to plan, organize, and manage information and operations of leadership functions for any facility. For more information, please visit the following link: