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Corporate Governance

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In the modern times, companies are increasingly becoming more conscious of the need for effective corporate governance. As regulations continue to tighten corporate governance to operate it becomes more difficult for most managers (Miller and Cross, 2012). For instance, with the new regulations, it is impossible to exploit workers since they know their rights and can easily sue the company in case of breach, which in turn would negatively highlight the company for the publicity In addition, changes in the financial markets make it difficult for companies to harm their investors and shareholders. A mismanaged company runs the risk of closing down or being bought by another company, thus the management strives to treat the investors extremely good.

One of the main reasons why the congress set up the Sarbanes-Oxley Act of 2002, was to restore the confidence of the investors and the public in the nation’s financial sector. There were the  requirements for the for publicly such as to make improvements in their internal controls, to couch for external auditors’ independence, and to take responsibility for financial statements’ accuracy, the act would boost the integrity of the financial statements, which in turn would improve the reliability of financial reporting. This would then boost the confidence of the investors and increase the chances of gaining investment funds (Stanton, 2012). However, this Act was criticized for its high costs of compliance. A survey by the Financial Executives International (FEI) found that average cost of compliance was $1.7billion for companies with an average of $4.7billion revenues annually. However, these costs are much higher for small businesses, which coincidentally are the ones that need to boost investor confidence to be able to access investment funds. The first argument is stronger than the second one, since the improving of the investor’s confidence would provide the company with the chance to attain funds in the long run. Though the initial cost of compliance is very high, the benefits will eventually overpower the costs.

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