Corporate Governance - Essay Example

Corporate Governance Tunneling ‘Tunneling’ is a term which describes the resource transfers away from the firms to ensure the benefit of the shareholder of the company who are in control. ‘Tunneling of firm value’ has become a crucial factor in the recent corporate activities and extensive concentration is provided in this regard. ‘Tunneling of firm value’ which is performed primarily by ‘controlling shareholders’ includes the actions varying from complete theft and guarantee of loans to selling of goods or assets at lower market value or price.

Tunneling produces severe problems regarding power between minority as well as controlling shareholders. Tunneling motivates to determine the objective to examine the degree of relation of the firm value with the controlling shareholder’s incentives. In certain firms where the controlling shareholders possess the intense ownership, they can obtain their personal interests or benefits due to their controlling authority through ‘self-dealing’ process or private transactions like, selling goods and services at lower market price and selling assets to various companies at lower price and these activities come under tunneling.

Tunneling can be prevented by certain rules and regulations to control the financial situation of a firm (Rad & Ingley, 2010). In a paper published by Atanasov & et. al. (2008) regarding tunneling in the emerging market of Bulgaria, it was found that the country has gone through a huge privatization in the year 1998, followed by the widespread ‘post-privatization’ tunneling. In the year 2002, Bulgaria implemented certain law changes and security measures to save the collapsing market. These changes resulted in the restriction of tunneling.

With these initiated measures the minority shareholders also took part in the ‘secondary equity offers’, where previously they have suffered from severe dilution and seldom participated in the activity of equity offer. Once the legal actions were taken the valuation measures (i.e. price/sales, price/earnings) turned into double in the high risk tunneling firms than the lower risk firms (Atanasov & et. al., 2008). Minority Shareholders Minority shareholders are the equity holders of a firm who has no control over the voting process.

Minority shareholders have less advantage compared to the controlling shareholders, so that the minority shareholders have to work very hard to preserve their rights of being shareholders. In certain cases the minority shareholders are pressurized to sell their shares privately and the pressure comes from the controlling shareholders to merge with the other corporations. The minority shareholders frequently face problems regarding their rights as a corporation is controlled by the major or controlling shareholders.

The minority shareholders should be aware of the legal measures to preserve their rights. At times, the minority shareholders fail to defend their rights as they often find that the investment made by them becomes liquid and the other rights of a shareholder are being oppressed. The minority shareholders cannot even go for a negotiation of a satisfactory outcome of their investment in a closely held enterprise (Lobet, 2010). In Kenya, there was a large dispute related to shareholders. Two of the controlling shareholders of an organization went to the court and solved their issues with the help of Companies Act whereas the minority shareholder did not get the advantage of moving to the court and taking actions, as they were not invited by the majority shareholders.

It describes the real position of the minority shareholders (Mputhia, 2012). References Atanasov, V. & et. al., 2008. How Does Law Affect Finance? An Examination of Financial Tunneling in an Emerging Market. Abstract. [Online] Available at: http://www.ecgi.org/competitions/rof/files/ABCG_20080125_ECGI.pdf [Accessed January 12, 2012]. Lobet, J. M., 2010. Protecting Minority Shareholders To Boost Investment. Media. [Online] Available at: http://www.doingbusiness.org/~/media/fpdkm/doing%20business/documents/reforms/case-studies/2008/db08-cs-vietnam.

pdf [Accessed January 12, 2012]. Mputhia, C., 2012. Why Minority Shareholders Have Little Say In Firms. Home. [Online] Available at: http://www.businessdailyafrica.com/Why+minority+shareholders+have+little+say+in+firms++/-/539444/1301940/-/jp8cbdz/-/[Accessed January 12, 2012]. Rad, A. T. & Ingley, C., 2010. Handbook on Emerging Issues in Corporate Governance. World Scientific.