Abstract

Corporate governance is a system used by the board of directors to control the company. Through
corporate governance, the board expects to provide relevant information to all stakeholders.
However, stakeholders may influence the company in both positive and negative ways.
Stakeholders are believed to be able to discipline the company to do better in the future by having
some regulations, government assisstance, and so on. In contrast, stakeholders are also often
regarded as a problem to some extent that these people can provide irrelevant and incomplete
information to the public. Hence, the corporate managers should find a solution to successfully
solve these issues in order to have the best corporate governance.

Introduction

Corporate governance refers to a system that directs and controls the company (ICAEW, 2018).
This framework is used by the board of directors to make sure that the company is accountable,
fair and transparent in any way to all stakeholders. Many assumptions make it clear that
stakeholders help in improving the efficiency of a company, However, there are still some that are
contrary to this asumption. Hence, the purpose of the essay is to illustrate how stakeholders
discipline the corporate managers and explain that stakeholders may cause problems to corporate
governance.

Alternative Theoretical Framework for Corporate Governance – the Stakeholder Theory

The history of corporate governance began from Adolf Berle and Gardiner Means in 1930s, and
appeared only in 1970s. Previously, the best practices were really hard to achieve because there
was no system of regulation or any policy that mentioned what the company should do to achieve
a successful corporate governance. Due to this problem, Berle and Means came up with an idea
and said that the board should do a basic negotiation theory. This means that they should allow an
approach called give-and-take to increase the quality of corporate governance (Subramanian,
2015).
In general, corporate governance involves many frameworks; such as the processes for proper
control, supervision, and information flow, as well as an implicit and explicit contract between
company and stakeholders with respect to their responsibilities and roles (Dictionary, 2018). The
role that governs the company is in the hands of the board of directors. However, the board of
directors is chosen by the shareholders in order to satisfy themselves on how the company structure
should be governed. Therefore, corporate governance can be explained as how the board of
directors runs the company and establishes the company's value.

Furthermore, there are three alternative frameworks for corporate governance; agency theory,
stakeholder theory, and stewardship theory (Pande, 2011). This essay will focus on the stakeholder
theory. Stakeholder theory is divided into two primary sections, which are the objectives of the
company and the management responsibilities to the stakeholders (Freeman, 1994). Stakeholders
include individuals, groups or organisations that are affected by the outcome of the company. They
can be linked within or outside of the company, with an interest in the success of the company
(Landau, 2017). Stakeholders consist of the creditors, directors, employees, government,
shareholders, suppliers, investors, media, and the community. These stakeholders are divided into
two groups, which are internal and external. Internal stakeholders include the investors, whereas
the external stakeholders are those people who are affected by the business operation.

Stakeholders are seen as the important part of a business because the business is seen as a group
of stakeholders that its purposes are to manage their interest, needs and viewpoints (Charles
Fontaine, 2006).. The stakeholder is considered to be able to discipline the corporate manager such
as the agency costs, fraud problem and others. However, there is a problem too with the
stakeholders. Stakeholders come from a variety of people; hence, this diversity can cause different
interest toward the company. The goal of the company is to increase the shareholders' wealth and
enhance shareholder value. However, there might be a conflict of interest between stakeholders
too.
 Stakeholder Theory Framework

Source: Donaldson, T., Preston, L.E. (1995)

Stakeholders discipline the corporate managers

A company should fully understand the wants and needs of the stakeholder in order to avoid
misunderstanding among parties. One of the stakeholders is the general public. A company is
exposed to some externalities such as the pollution, greenhouse gas emissions, natural resources,
carbon storage and others. These are all naturals, and if they consume it without any consideration
to the future of the world, it will harm the society. Imagine if businesses use all natural resources
just for making money, it destroys the world. Hence, general public comes into play to discipline
the corporate managers that even they use many of the natural resources, they should be able to be
responsible for their actions. These actions have been done through social norms that can curb
managerial self-dealing (Ormazabal, 2017).

Additionally, competition among company has disciplined the corporate managers in many ways.
When there are many competitors within the industry, the investors can refer to many resources to
observe the behavior and disclosures of the companies within the industry (Ormazabal, 2017).
Thus, this causes the corporate managers to disclose anything that is complete and useful to win
the investors' heart. The competitive market also encourages managers not excessively to consume
the resources.

Moreover, the government plays a vital role in shaping the corporate managers. The government
here refers to the group of people who have the control and make decisions for a country, state or
others (Troolin, 2018). The government also refers to a system, place or people that have control
over the country or state. The government usually involves many establishments of corporations.
But, even they do not directly relate or invest in the corporation (by being a shareholder), the
government plays an important role in the corporation. The government includes judges that
should come into play in the corporate governance. For instance, when a country has a legal system
against managerial abuse, then judges should protect the capital providers, and also other
stakeholders (Ormazabal, 2017).

Furthermore, another division of stakeholders that plays a crucial role in disciplining the corporate
managers are the gatekeepers. The gatekeepers refer to the independent professional body such as
the auditors, credit rating agencies, and security analysts. These people help to ensure that the
corporation is doing well and do not have any misconduct behavior. For instance, external auditors
are hired to assess the financial position of a corporation. The auditors provide independent
assurance and evaluate whether the corporate has complied with the accounting standards,
financially stable, have low risk, and others, as it is an important part of governance system
(Ormazabal, 2017).

Issues cause by the stakeholders to the corporate governance

Many problems arise due to stakeholders' interest that differs from the shareholders' interest. One
factor that internally can cause a significant challenge to the company is the employee itself. In
some companies, the employees will have the right to board representation and give their voice in
corporate governance (Ormazabal, 2017). This has increased competition among the employee,
and if other employees feel that it is unfair, it will create jealousy. This result in an unhealthy
company that if it is not handled carefully, it can affect the employees' performance.
Besides, the media has been one of the factors that can give a problem to the company. According
to Ormazabal (2017), the media is used to release information about the company, such as the
corporate social responsibility that the company has. This information usually has the power to set
the citizen's mindset, but this information sometimes could also lead to misunderstanding. The
reason is that the media is not immune against opportunism. Instead, the media can be affected by
lobbying. Many researchers have found that some media engage with some sensationalism. They
have found that the media has a systematic bias in the types of firms and frauds about what article
to publish. The media usually cover an issue that attracts a higher number of readers and increases
their popularity. Besides that, they also report on the situation that costs the cheapest.

Despite the auditors' roles, as an independent assurance, which is to assess the company’s financial
position, the auditors also can cause several problems to corporate governance. This is due to the
criticism after the accounting scandals on the 2000s and 2008. The audit firm is seen as not
sufficient enough in doing their job because they did not notify the public that there was something
wrong going on in 2008. The criticism continues till today, and the issues include the conflict of
interest, disclosure practice and many more. This failure to provide trustworthy information about
the company has changed how others see the auditors. The assessment that the auditors did will
not be fully trusted, thus, causing the trust issues in the market (Ormazabal, 2017).

Not only that, the other stakeholders such as suppliers, customers and partners can also affect the
corporate governance (Ormazabal, 2017). These factors directly link to the corporate governance
because the information about our company, especially among partner, is highly disclosed, and
this can cause a hazard to the company. Once they know about the company's information such as
the financial position, there is a possibility that the partner can learn and eventually start their own
business, then leave the partners.
Conclusion

To conclude, stakeholders play an important role in disciplining the corporate governance, and
also generates certain issues too. The stakeholders have helped in disciplining the corporate
governance through forcing the company to always thinks about the future of the society at large.
On the other hand, the stakeholders also cause several issues such as lobbying, failure in providing
trustworthy information, and many more. However, even many researchers have found that there
are pros and cons of stakeholder in corporate governance, further studies are needed to understand
better about these matters.
References
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