Corporate Governance as a Metaphor for the Economy

In previous articles, we discussed how effective corporate governance is a prerequisite for a well functioning economy. In this article, we take the point further by highlighting the need for good corporate governance as a metaphor for how well the economy is functioning.

In other words, unless firms in an economy are effectively governed, the economy itself cannot be well regulated and act in ways that upholds the principle of social justice.

For instance, with the recent revelations about large scale malfeasance in the corporate sector in the United States, the economy is low on confidence and investors and shareholders along with the citizenry have lost faith in what the business leaders and the government says.

In other words, because of the corporate governance scandals involving Wall Street banks, the public has no longer the faith and trust required to keep the economy running in the interests of the people.

The point here is that as long as the elites keep enriching themselves at the expense of ordinary investors and the public at large, economies crash since confidence and faith in the system is what keeps an economy running. This was the case with the Asian financial crisis of 1997 where entire economies were bankrupted because the oligarchies and the people running the industries and companies benefited at the expense of the people. And when the music stopped, it was the people who were left stranded without any source of support.

The crucial aspect here is that any economy can function effectively only when its firms and companies are being managed and run well and hence, effective corporate governance is almost like a metaphor for a well functioning economy.

The other aspect about good corporate governance is that regulators ought to perform their roles in an effective manner and unless they do their job well, the corporate governance of companies and firms can go awry because the people running these enterprises would have the belief that they can get away with anything. This was what happened in the case of Argentina and the Russia where there was no effective supervision of the companies leading to crony capitalism and enrichment of tiny elite at the expense of the majority.

Further, even in India, the recent Reebok and Adidas scandal along with the Satyam scandal have made the point elaborately clear that unless companies are governed well, the economy at large suffers.

The way this happens is in the form of lost taxes, lost profits and a general sense of lawlessness which is not good for any economy. And once the rot sets in, it is difficult to stem the tide and hence, it is always better to nip the problem in the bud. This is the unmistakable conclusion that many experts have reached wherein they stress the need for good corporate governance to take precedence before anything else.

In conclusion, any economy needs the firms and companies and vice versa and hence this symbiotic relationship can exist and perform its role well only when there is mutual trust and confidence in the fact that each side is sticking to the rules of the game. When that trust is eroded, the economy at large suffers leading to all round misery.

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Corporate Governance