Question: What are the main issues of Corporate Governance, and how these can be resolved?

Answer: Corporate Governance:

Corporate governance is the system by which companies are directed and controlled, it involves regulatory and market mechanisms, and the roles and relationships between a companys management, its board, its shareholders and other Stakeholder, and the goals for which the corporation is governed.

Main issues of Corporate Governance:

Agency Problem: Agency problem arise between owners and managers where given the decision making discretion, managers could engage in non-value maximizing behavior. This agency problem inherent in the separation of ownership and control of assets. Agency problem arised when managers work for their own interest and conflicts arise due to their this behavior. Agency problem may b arise between shareholders and management, reason may be Conflicts of interest between controlling and minority shareholders. Agency problem may be arise between creditors and shareholders because creditors dont participate in the high profit firms beyond the contractually agreed debt service, but share in losses in case of insolvency.

Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.

Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process. Limited Liability: A limited liability company (LLC) is a flexible form of enterprise that blends elements of partnership and corporate structures. It provides limited liability to its owners. It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form. Typically, LLCs choose to be taxed as a partnership to avoid double taxation, which occurs in corporations. This allows companies to distribute their income among members who then report it on their personal tax returns. Renewal fees may also be higher.The management structure of an LLC may be unfamiliar to many. Unlike corporations, they are not required to have a board of directors or officers. The principals of LLCs use many different titlese.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.

How these issues can be solved:

Incentives: Performance-based incentives are designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

Monitoring: Monitoring is of three types: 1. Internal Monitoring: Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes.

Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations.

Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as sharesand share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

2. External Monitoring: External Monitoring encompass the controls external stakeholders exercise over the organization. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labor market media pressure takeovers 3. Government Agencies: Governmental agencies such as SECP security exchange commission of Pakistan and SBP State Bank Of Pakistan can regulate the corporate sector.