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Is an effective system of corporate governance more important for banks than for non-financial companies?
Corporate governance basically entails how companies and organizations are organized and controlled for efficiency (Monks & Minow 2004). It involves the relationship that exist among the organization leadership, the management, the board, the shareholders and other players, that all work towards achieving a common goal for the company. It lays the very foundation, and structures for monitoring service delivery. Sound corporate governance provides a good framework that lays the company’s goals and how to deliver the goal. It monitors effective performance for better results. It focuses on attaining a balance between economic goals and social gains (Mallin 2004).
The difference between financial institutions and non-financial institutions is that financial institutions are generally more opaque than non-financial institutions. Financial institutions can easily hide their loan quality than the non-financial firms can. This is because banks can extend loan to those who are unable to service their loans. The transactions of banks involve deposits and withdrawals, a measure that ensures banks have a constant flow of revenue, unlike the non financial institutions like the shoe industry that only rely on the saes they make. Banks are heavily regulated, due to their competitive nature. Banks can easily secure their assets and manage risks than non-financial institutions. Banks are able to hide their financial problems more than non financial institutions, owing to their constant flow of cash. Banks are more regulated than non financial institutions, due to their critical role in the society. Banks are not individual entities; they involve people’s money, shareholders and regulators. Therefore corporate governance in banks is more critical than in non-banking firms. In deed it is against this backdrop that financial regulatory bodies like IMF, BIS, and the World Bank were created to regulate the world economy (Kim & Nofsinger 2007). Banks play a critical role in the economy, as they serve to regulate revenue. Whenever nations go into economic recess, it is the banks that bail them of the economic crises. During the recent word economic recess, banks injected money into industries and the service sectors in a bid to revamp economy. Banks are important for expansion of industries, corporate regulation of firms and allocation of capital for economic growth.
Given this immense economic responsibility of banks, both the internal and external structures of the banking corporate governance must be well monitored. A slight mistake in the leadership could create an economic crisis (Solomon & Solomon 20004). Good corporate governance is required to manage the massive peoples’ savings injected into the banks. Poor corporate governance lead to crippling economies, destabilize governments and intensify poverty. The top 100 international corporations exercise control over at least 20% of the world’s foreign assets.Among some 100 greatest firms in 2009, 44 were corporates (Hilb 2005). Limited liability means reduce chances to incur losses in corporate governance. The advantage of limited liability is that one does not have to worry over many losses within their enterprises.
The recent discovery that supermarkets sell horse meat raises so many questions about the corporate governance of the supermarkets. It shows that the leadership of the supermarkets is in doubt. That this has been going on for some time serves expose the ignorance of the management. Failure of the management to address the issue taints the corporate image of the supermarkets.
In conclusion, and based on the facts above banks, owing to their sensitive role in the economy must emphasize sound corporate governance to safeguard the economy, as well as safeguarding the economic interests of its capital base- the clients (Hirschey,John& Makhija 2004). Non financial institutions on the other hand, have limited responsibility towards the economy, at least in comparison to banks.
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