11 May 2014

The hypothetical variables in forming practices of corporate governance

There is no right or wrong answer on corporate governance, obviously. Yet, there should be, in a specific condition, appropriate answers, which are hypothetically subject to following factors that are largely interlinked and thus work in a complementary manner:

  • Firm and industry level
    • Volatility of future cash flows (not NPV), which should be affected by
      • Product/service market volatility and uncertainty both in customer acceptance and technological proof
      • Maturity of enterprise organisation and management (e.g. startup v.s. multinationals)
    • Capital intensiveness of business (e.g. Internet v.s. infrastructure)
    • Existing capital structure and 'average' industry standard of D/E ratio
  • Industry and country level:
    • Legal and normative institutions related to corporate architecture
    • Market orientation of human capital resources specific to industries (in-house training v.s. market price mechanism)
    • Culture of social groups and associations
The lower items in the list might be less addressable in the short term, but changeable in the long run. I presume that practices of corporate governance should evolve through firm's adaptation to those conditions.

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