Finance

International Monetary Fund (IMF) is an international organization that is mainly concerned with the financial systems of the whole world with regard to the macroeconomic policies of the member countries (Takagi  Hicklin 2007 89). It is an organization that was formed by many different states with different economic systems with the main objective of making the international exchange rates stable. The other core objective of the IMF was to facilitate development by enforcing the existing liberal economic policies. It has its headquarters in Washington D.C. in the United States. It was created in July 1944 with only 45 member countries. From the time of its creation, it was purposely meant to help member countries with loans to correct their payment imbalances. As of present, the IMF has a total membership of 182 states who work together to promote cooperation of monetary policies between member countries and to promote trade (International Monetary Fund 2006). All the member states are represented by 24-member Executive Board where five directors are appointed by five member countries with the largest quotas (Cftech.com 2004). The other 19 executive directors are appointed by the remaining member countries (International Monetary Fund 2006). Further still, each member country appoints a governor who represents the state in the board of governors in the IMF.

   The IMF was created during the United Nations Monetary and Financial Conference where 45 representatives of different states met in Mount Washington Hotel in New Hampshire, United States (International Monetary Fund 2006). The delegates came to an agreement for an international economic framework. There were only 29 member countries that first signed the articles of agreement (International Monetary Fund 2006). The real purposes of the IMF are still the same as they were outlined during its formation. Despite the challenges the IMF faces in conducting its services to the member countries, it has still managed to function as it was stipulated to do during its formation. There are clearly outlined terms of conditions that a country must fulfill in order to be a full member of the IMF. The state willing to be a member must take the necessary legal steps that are required in its own law to enable it into signing the Articles of Agreement. The IMF has a staff of approximately 2,600 from 110 states (International Monetary Fund 2006). The current managing director is Michel Camdessus who was appointed in 1987. Generally, the IMF is managed and governed by its interim committee, the Board of Governors and the Executive Board.

    The IMF shares in common a number of features with the Bretton Woods institution that was formed mainly to prevent the re-occurrence of confusion that happened in the events of world war period. These events were marked by inflation, high speculations in the market of foreign exchange, restrictions on trade and payments that were international, too much fluctuating rates of exchange and sharp drops in economic activities among others. The founders of the IMF wanted a global financial system to be stable and a good gold exchange standard (Cftech.com 2004). The gold-standard exchange was meant to be automatic in its operations and to maintain economic stability. It is evident that it failed to do so. One of the reasons that led to the creation of the IMF is the fact that during the world war period, many states all over the globe invented economic policies that later led to international economic war. The only way the world could evade this was to create an organization that would manage the worldwide economic system.

    Another reason that led to the formation of the IMF was the debts that existed in the whole world. It is evident that at the end of the world war, many of the countries  infrastructures were damaged and the economic systems of many states were ruined due to far-fetched economic policies stipulated by the particular states (Cftech.com 2004). These countries went ahead and started borrowing immensely from the rich countries. Further still, these poor countries were not able to repay these debts and most of these rich countries cancelled these debts. To curb this incapacitation of debt repayment, there was a dire need for a creation of an organization that would manage and supervise how governments use their funds. In this regard, the IMF mainly became a duo-role institution playing important parts both as a financier and supervisor (International Monetary Fund 2006).IMF as a Financier

    One of the roles of the IMF has been the establishment of Par Values that are adjustable to the currencies of member countries (Takagi  Hicklin 2007 89). The charter of the IMF during its formation set up a system of exchange rates that were fixed with the intention of curbing the challenges brought by the inter-war period to member states. To deter the same from happening again, the IMF set up fixed exchange rates of the entire world to enable different states exchange their rates on fair deals. It was evident that most people would migrate, travel, trade or do any other activity that would need an exchange of currency from one state to another (International Monetary Fund 1997). The IMF managed to create a fixed currency exchange between member countries in relation to the cost of the dollar. However, there was a challenge to this in the 1960s as there was a financial and economic turbulence that was seen in the whole world. This significantly led to the collapse of  the fixed exchange rate. The IMF further outlined a system where the exchange rates are floating and governed by the market forces of demand and supply (International Monetary Fund 1997).

    While another important role of the IMF is the lending function, there was an increasing need for the IMF to manage how the finances were used in member states. It is a fact that a country cannot really manage its internal finances on its own, at one point or another it needs an external help from an organization or another country (Cftech.com 2004). It happened that at the end of the world war, many countries needed financial help from the rich super powers that were there by then. It also happened that most of the countries that borrowed money were unable to pay back. These rich super powers were forced to call off the debts. To deter this from happening again, the IMF was created and it has been able to provide the lending function to all member states as they can now borrow money from the IMF and return it when they are capable (International Monetary Fund 1997). One of the uses of this money borrowed from the IMF is meant to clear balances of payments of the member states. One may ask where the IMF gets its money from. The primary source of money of the IMF is through the member s quota subscriptions. Every member of the IMF is required to submit some money during its entry into the membership. Quota subscription is given in terms of the size of the economy of the member country. The larger the size of the economy, the greater amount of subscription quota a state is to give to the IMF during its entry into the organization. Further still, the stronger the currency of an economy, the less the subscription quota (International Monetary Fund 1997). Quotas are very important when it comes to some aspects in the IMF. The voting power, for instance, is controlled by the amount of quotas a member has in the IMF. Therefore, it is clear that a wealthy member of the IMF will always have the first priority when it comes to voting. Quotas also determine the allocation of Special Drawing Rights and each country s access to the resources of the IMF. Special Drawing Rights is more like an international asset created by the IMF that belongs to each member state but is held by the IMF (International Monetary Fund 1997).

    Many tend to think that when a country gets help from the IMF, it has taken a loan or just borrowed. The actual thing that happens is purchase of Special Drawings Rights (SDRs) or even other currencies from the IMF in exchange for its own currency which it agrees to sell back or repurchase later in the future (International Monetary Fund 1997). Since each member is often charged for this transaction, the purchase can now look like a loan to the member state which is merely a transaction. All the money of the member states that is obtained from the IMF lies within the powers of the financial system of the member country. Therefore, the country can decide to do with it any purpose that most likely relates to the support of balance of payments, for instance, restoring the reserves in the central bank of each state. This can be done by selling the acquired currency in the foreign exchange markets with the aim of stabilizing its own exchange rates. Something the IMF takes into account is to limit the borrowing procedures of the member countries. Without this, the member countries can go ahead and borrow without considering their capacity to pay back (International Monetary Fund 1997). Therefore, the IMF has safeguarded its resources and developments in the liquidity fund.IMF and Supervisory Roles    Supervising is another role the IMF does over the exchange rates of member countries. With the collapse of the system of fixed exchange rates of Britton Woods, the charter of the IMF was amended in that all the member countries could choose an exchange rate of their own. In order to promote a stable exchange system, there was a need for all the member countries to come together and ensure orderly exchange arrangements. Article IV of the IMF charter gives it powers to supervise the policies of the exchange rates of member countries. The same article gives the IMF authority to implement principles that will control the exchange rate system with regard to those principles. The IMF supervision can be of two ways, bilateral and multilateral. Bilateral supervision includes the activities that the IMF watches in the member states, for instance, governance issues, social, environmental, industrial and labor market among others, that all have an impact on the economic management of the state (International Monetary Fund 2006). All the IMF representatives of the member states take time to follow up the activities that the IMF funds do in their member countries. On the other hand, multilateral supervision focuses on the policy and economic spillovers between states. The IMF has taken time to supervise policies that are regional based, for instance, on the Central African Monetary and Economic Union or any other national policies that have regional impacts (International Monetary Fund 2006).    The role of the IMF in the financial sector and the supervision sector has been seen through its encouragement of the member countries to make their currencies more exchangeable for foreign currency (Bordo, Mody  Oomes 2004 6). This is to say that each member state is advised to make its currency more convertible with other member states. One of the main purposes of the IMF is to promote and foster the expansion of trade and its growth among the member states. The only way it does this is by the establishment of a multilateral system of payments through trade and transactions. Currency convertibility is very necessary in a successful international trade. In the pre-colonial period, all international trade transactions were done in dollars and all exporters and importers had dollar accounts mainly for the purposes of trade. The IMF has well-outlined regulations on the currencies of member states, for instance, a state should have only one agreed currency that is convertible (International Monetary Fund 2006).

     The IMF as an organization has its own means and ways of ensuring all the member countries comply with the rules and regulations that have been set out. In doing this, the IMF has managed to supervise the implementation of its objectives and purposes. To assure compliance to its policies and regulations, the IMF has several ways to punish the members if they cannot keep up with the policies of the organization. Many have always thought that the IMF has no real power over the member states  compliance with the policies (International Monetary Fund 2006). However, the IMF has the authority to command leverage among the member states. States that fail to act as per the guidelines of the IMF policies will not be sued by the IMF or any other person, but will be in one way or another punished. One of the ways the IMF can deal with a state that violates its policies is by shutting it out of the capital markets that are known internationally (Bordo, Mody  Oomes 2004 6). It can also withhold the funds of that country and stop any further lending to that particular member state. Further still, the IMF can stop the state from ever using the General Resource Account however needy it may seen to be. But from the look of things, many nations who are member states of the IMF have been seen violating the IMF policies.

    The IMF as an organization has always offered financial technical assistance to all its member states. Immediately after the Second World War, most ex-colonies needed help in terms of setting up financial institutions and finance ministries. The IMF has always supported the member states in institution building, fiscal policies, and financial legislation among others. Even though the help might not be financially oriented, the IMF has often helped in the development of infrastructures and any other form of technical support. This is evidently seen as many banks or central banks are being set up in every member state of the IMF to help in the supervision of its policies all over the member states (International Monetary Fund 2006). Different infrastructures and facilities have been set up not necessarily in the economic sector, but the facility has always been linked to the economic sector (Bordo, Mody  Oomes 2004 6). These investments remain to be an asset of the member state s economy.

    The roles of the IMF have been linked with good governance in the member states. All along, as the membership of the IMF keeps on increasing each year, the governance in the member states improves each day. Good governance is really concerned with the approaches to the macroeconomic problems of a particular country. These include the transparency of the accounts of the government, the efficiency of the public resources and their management, the stability and transparency of the economic and regulatory scenario for sectors that are private. With proper handling of these sections in any government, there are great chances of that government running smoothly as required (International Monetary Fund 2006).

     The IMF has all along been providing technical assistance and advice to its member states, helping improve the governance of the member states and fostering accountability and transparency in the public sectors of the member countries. During its formation, the main purpose of the IMF was to give encouragement to the member states in the correction of  imbalances in the macroeconomic sectors, reduce inflation rates, ensure fair and free trade and stabilize its exchange rate. Among other things, the IMF was to improve efficiency through supporting the states in sustaining their economic growth. It is a fact that the IMF has kept its word in ensuring its objectives up to date (International Monetary Fund 2006).

     Further still, the IMF has realized a wider range of reforms in the institutions that are wanted to purposely maintain and establish confidence in the private sector which is the foundation of a growth that is sustained. For most economies to prosper, they must win the confidence of the public sectors within their boundaries and tolerate zero corruption levels. Among other things, the states are to improve accountability and efficiency as elements that are essential in the prosperity of their economies.

     The IMF has outlined guidelines to mainly help in the government issues of fostering a stable economy. It is evident that in the recent years most of the IMF staff has really supported the activities of the IMF in promoting good governance among the member states. Most of the guidelines that were outlined are purposely meant to foster more concentration to the issues of governance by the IMF. A treatment that is more compressive in the situation of the IMF supported programs and the Article IV consultations of those issues of governance that are within the mandate of the IMF and its expertise are some of the guidelines that were outlined by the IMF in promoting good governance among the member states (Cftech.com 2004).

     The IMF plays a role in the good governance of member states in several ways. In one way, it has helped its member states a great deal by creating systems that in all possible ways try to limit the objectives of all economic decision making. The IMF further plays a role in promoting preferential treatment of organization and even individuals by the government. In most countries, all companies are controlled by the government, even the private sector companies governments played a great role in their success. But with the IMF, it has played a vital role in giving such companies a dependent lifestyle which they have adopted and they have always ensured success in all they do with the encouragement of the IMF for a liberal currency exchange, price systems, and even the elimination of credit allocations that are direct (Cftech.com 2004). Further still, the IMF has played a role in enhancing the capacity of member states in implementing and designing their economic policies, taking their public sector and accountability to a higher level and creating policy making institutions that are effective within the boundaries of the member countries. With these provisions, the role of the IMF in promoting development in member countries is clearly seen and its efforts of achieving its objective in the creation of good governance have been met. The technical assistance provided by the organization has helped reduce so many wrangles in many states as who should do what responsibility and who should not do (Cftech.com 2004).

     The IMF has enhanced transparency in all the financial and economic decisions that are made in the member states. It has been seen to have supervised and taken a keen look at the budgets of all governments of the member states to ensure that there is transparency and proper financial transactions as outlined in the budget. It does this through the state representatives of all the member states. The IMF staff in all the member states focuses on the commitment and willingness of the national authorities in addressing the issues of the governments (Cftech.com 2004). The IMF statistical, auditing and accounting systems in all the member states have greatly improved the governance of the member states by exposing the faults of poor governance and limiting corruption opportunities. With the help of its staff and the support of some government officials willing to improve the governance, the efforts of the IMF have always been successful in many states. Wherever there is a need for correction in the government, the IMF staff representatives in member states always help in giving the correct decisions in the government.

In summary, the IMF as an organization has really achieved a lot since its creation. It has brought a lot of positive changes to the member states and as the number of the member states increases, the roles and objectives of the IMF are seen to be achieved even more. The IMF organization was purposely created to help the member countries to ensure balanced financial and economic governments in all the member states. Moreover, the IMF has gone further and adopted other responsibilities that in all ways seem beneficial to the member states. Some of the reasons that led to the creation of the IMF include the focus on all the technical issues related to the affairs of international monetary. There was also a need to deter some of the financial and economic activities of member countries from happening again as was seen after the world war. The IMF has taken the financial roles and the supervision roles in the member states. One financial role that it has provided is the establishment of Par Values of currencies of the member states that are adjustable. This has greatly enabled the member states have a currency that has a value equivalent to that of the dollar. As the fixed exchange rate in the Bretton Woods institution collapsed, the IMF introduced exchange rates that are floating and governed by the forces of demand and supply. Another important role the IMF has assumed is the lending function. The IMF has really helped in the creation of  good government in all its member states.

IMF is the central organization to the world which provides monetary cooperation. Almost all countries across the globe work together in the organization to achieve a common goal. IMF was envisioned in Bretton Woods, northeastern United States in the year 1994. The primary motive behind setting up the institution was to avert any disastrous economic mistakes in the future that could cause a crisis as big as the Great Depression again. Providing loans to member countries to rebuild reserves, stabilize currencies, continue trade and restore economic health are among the primary role for IMF. The three main functions of IMF are surveillance or monitoring economic development and provide advice on policies, lending money and providing technical assistance. A country can borrow from IMF if the balance of payment need arises. So the loan provides a cushion so that economic reforms and corrective measures can be taken and a growth oriented economy can be built. The IMF has 186 member countries which contribute operating funds. They get voting rights depending on the amount of international trade, global reserve holdings and national income. IMF has no obligatory right over member countries, however if a country does not adhere with its policies, it may deny to provide loans to them or leave the organization. Critics however argue that the stern measures and rules of the organization make it difficult for borrowing countries to grow, and make it even more difficult for poor countries to deal with crises. The amount of loan provided has fluctuated greatly from 1970s to 21st century. The 1970 oil shock, debt crisis of 1980 and the transition phase in Central and Eastern Europe of 1990s led to an increase in demand for loans. Latin America crises kept the volume high in the early 2000s but these loans were repaid when the economic condition improved. 2005 onwards again saw a rise in need for loans as the real estate bubble burst setting a ripple effect across the globe starting in the US. So a change in trend of the IMF has been monitored in the years that have passed.

IMFHistory of establishment Cooperation and reconstruction (194471)
Countries in an attempt to revive their economies during the great depression, 1930, started heaving barriers to foreign trade and exchange they devalued local currency to increase their participation in the export market. However these efforts showed a negative result rather than presenting positive outcomes. The world trade was found to decline, the employment levels also plunged down this lead to the foundation of IMF to oversee international monetary system. The entity was formed to establish stability in the exchange rates and to encourage countries to participate in trade.

The Bretton Woods agreement
July 1994 representatives of 45 countries met together conceived IMF in Bretton Woods, New Hampshire (United States). They agreed that a structure for economic cooperation between member(s) countries would be formulated post the Second World War. The framework was formed to help avoid reoccurrence of any economic disaster of the past. In December 1945, IMF came into existence when 29 countries signed the Article of Agreement. The operations began on March 1, 1947 and France was the first country to take IMF s help. 1950 to 1960 saw a large number of countries applying for membership however the Cold War put limits on membership issued.
The countries that had joined the IMF from its inception to 1971, made an agreement to peg its exchange rates such that it can be adjusted. The measure ensured that any fundamental disequilibrium if created in the balance of payments could be adjusted by the IMF when required. This system also known as the Bretton Woods system existed till 1971, when finally the US system stopped the convertibility of dollar into gold.

The end of the Bretton Woods System (197281)
Fixing of U.S. dollar value against gold, an rise in expenditure on President Lyndon Johnsons Great Society programs and the increased spending on military expenses for the Vietnam War overvalued the dollar greatly this lead to the end of the Bretton Woods System between 1968 and 1973 when major currencies started to float against one another. Post the fall of the Bretton Woods System, member countries could chose any exchange arrangements they wanted to. They could peg their currency to others or a bouquet of currencies, adopt someones currency, form monetary union or partake in a currency bloc. With the fall of the Bretton Woods System many expected the high period growth to slow down, however, floating rates served to be beneficial as countries found it easier to adjust to the rise in oil prices in October 1973. The external shocks were dealt with more smoothly due to the change in system. IMF helped during the oil shock phase of 1970s by providing lending instruments. Mid 1970 onwards, IMF tried to help and solve balance of payment problems faced by many poor countries by financing them at concessional rates via a fund called Trust Fund. A concessional loan program was set up by IMF in March 1986 which was later succeeded by Enhanced Structural Adjustment Facility (end 1987)

Debt and painful reforms (198289)
The oil shock had led to a global debt crisis. Commercial banks had lent recycled petrodollars, by acquiring deposits from oil exporting countries and lending to oil importing and developing ones. When the rate of interest rose in 1979, it was found that the floating rate of interest on loans also rose. During 1978-81, the interest payment was against the loans was expected to be 22 billion. Also with the recession setting in he price of commodities from developing countries dropped. Expansionary fiscal policies and exchange rate overvaluation were adopted to help deal with such states. During the crisis in Mexico in 1982, IMF synchronized a comprehensive response with all its members and commercial banks, as a fall of most economies would lead to a global disaster. A lot of economic reforms and global movements had to be taken to help improve the condition.

Societal Change for Eastern Europe and Asian Upheaval (1990-2004)
IMF was a global institution with the fall of the Berlin Wall in 1989 and closure of Soviet Union (1991).  Membership was found to increase speedily from 152 to 172 countries. In an attempt to meet the additional responsibilities the staff had to be increased by close to thirty percent in six years. The board of directors was increased to 24 seats and the constituencies under directors also expanded. IMF played a crucial role in the transition phase of Soviet bloc to become a market driven economy. The economic transition was rather dynamic and never attempted before. The countries worked directly with IMF taking note of its financial advice, guidance and support. Most of the countries went through great reforms and later joined the European Union (2004). In 1997 East Asia was faced by great crisis, almost all the countries asked IMF for assistance (financially and to formulate economic policies). Because of difference of opinions in ways to deal with the wide spread crisis, IMF came under serious criticism. IMF learned from the Asian Financial Crisis and ensured that in future they paid attention to a countrys banking sector. IMF later in 1999, along wth World Bank, initiated a program called the Financial Sector Assessment Program and assessed various macroeconomic elements of a nation on a voluntary basis. A re-evaluation of fiscal policies during the time of crisis and limitation of financial resources were also analyzed again. IMF and World Bank worked together during the 1990s to help ease the burdens of under developed or poor countries. In 1996 an initiative was launched so that these economies would not face debt burden.
Globalization and the Crisis (2005 - present)

IMF has been among the primary institutions to lend to countries to help enhance global economy. The global crisis which began in 2007 with the mortgage lending, had a global impact on all countries. This lead to large imbalances in capital flows internationally. The capital flows totaled to 7.2 trillion in 2006. The crisis showed weakness in the financial markets, so IMF was appealed by many to formulate a stand by agreement and provide mechanisms of financial and reform related support. With support from creditor countries the lending power of IMF rose significantly to 750 billion. To help greater countries IMF included flexible credit line, it also started keeping a track of economic fundamentals of all countries. They also initiated various programs to help the low income and developing economies. Reforms were created to help IMF provide borrowings in a more efficient and quick manner. (IMF official website, 2010)

IMF Objectives and functions
The functions of IMF are wide spread but a concise summary of these functions are mentioned below
Surveillance over Member Economic Policies

The members of IMF have to follow economic reforms and policies which are in consensus with the objectives and goals of IMF. The Article of Agreement signed in the very threshold gives IMF the responsibility and legal authority to oversee that the countries that are members with the organization are following the common policies.

Financing temporary balance of payment requirements
The member countries can lend funds required to meet their balance of payment needs. The funds are provided on a temporary basis so that the countries can take the required corrective measures to set the problem right. It also helps evade unorganized adjustment of the imbalance. The lending is mostly under the economic adjustment program which is executed by borrowing countries. So the resources given by IMF are safe as these are given against corrective measures being adopted by countries. IMF also helps members mobilize external financing for similar needs.

Combating Poverty
In low income countries IMF provides concessional loans to help these countries grow so that they can eliminate poverty. They are closely affiliated with the World Bank and other development partners who help them support such cause. It also helps members mobilize external financing and donor support to help meet development needs of low income countries. IMF also partakes in two global initiatives, Heavily Indebted Poor Countries and Multilateral Debt Relief Initiative.

Mobilizing External Financing
Since IMF endorses the policies of a country so they often help mobilize funds through lenders and donors. The donors or lenders need lend their resources to a country or grant a debt relief, when IMF endorses the countries economic policies or a IMF supported economic program. Assessment and recommendations by IMF also help investors to predict the likely economic future of a country which helps the market confidence. (Blanco Sandra, Enrique Carrasco, 2007)

Building Capacity
The core areas of IMF expertise are well trained through technical assistance and training. This helps them build capabilities to design and structure better economic policies and management capabilities. This also reduces the risk of failure of the policies adopted and makes the country more capable of confronting a sudden economic shock. Such functions are really beneficial for developing countries as they have less resources and their structure is no built strong enough by then.

Strengthening IMF
IMF consults and collaborates with its members on various monetary and financial issues it also works closely with several multilateral institutions. To ensure that it is able to prevent and resolve economic issues on time, IMF s primary objective is to build its strength and capabilities.

Increase Global supply of International Reserves
IMF can issue Special Drawing Rights, which are international reserve assets, provided there is a need to enhance the reserve assets that are existent. The SDR s can be exchanged for convertible currencies and they cannot be claimed by the IMF as they are component of the net international reserves of all the member countries.

Dissemination Of research and information
IMF provides economic analysis and reports of countries and their economic policies. Various data and statistical information can be accessed through IMF reports and research. Specialized publication and economic reports are generated from time to time. Research related to IMF mandates and operations are also conducted. The research work helps the company guide and support the countries better in formulating economic policies and reforms. These results and findings are disseminated through various sources such as working papers, journals, internet, books etc. (IMF Handbook, 2007)

IMF Areas of financial assistance
IMF provides financial assistance to its member countries in various forms. Concessional loans are generally approved for countries which have a low income. The allotments are done through the Poverty Reduction and Growth Facility (PRGF). Non concessional loans are given by five mechanisms, namely Standby Arrangement (SBA), Extended Fund Facility (EFF), Supplemental Reserve Facility (SRF), Contingent Credit Lines (CCL) and Compensatory Financing Facility (CCF). All the non concessional loans are generally have a market based interest rate attached to it. A member country facing issue in the balance of payment can withdraw from its quota (gold convertible currency). The limit for the withdrawal is set at 25 percent. Beyond this, if the country still needs further resources it can lend up to thrice the total paid in quota it holds. (Bretton Woods Projects, 2005)

Standby Arrangement and Extended Fund Facility are among the two most used mechanisms implemented by IMF. When the countries which are members of IMF are allowed to lend money for a period of one or two years the funds are used to sustain macro economic stabilization programs. The loans are subject to interest payments and the funds are to be returned within three to five years. This mechanism is called the Standby Arrangement. The Extended Fund Facility allow the member countries to borrow for three to four years, however the repayment period is longer than in standby arrangements. The repayments are generally not outstanding before five to ten years. IMF also provides short term financing at non concessional rates to its member countries. The Supplemental Reserve Facility gives very short term loans to merging and developing economies. These funds are generally created by a sudden loss of confidence in the market due to great outflow of capital. The IMF provides large scale funds for such situations, so that the market sentiments can be revived and maintained. Under the Contingent Credit Lines IMF provides financing for national economic policies. These policies are formulated to prevent any economic crisis which arises due to a crisis situation arising in any other country in the world. Both Supplemental Reserve Facility and Contingent Credit Lines need the loans to be repaid within a one or two, and they have a surcharge applicable on it. Compensatory Financing Facility is loans provided to help a country during phases where there is an unexpected shortfall in export income. The reasons could be any unanticipated circumstance such as famine or natural disaster which has affected the harvest in a negative manner. The repayments of the loans are due within quarter to five years. Both compensatory and contingent financing are for unpredictable problems which arise in any economy. (IMF Official website, 2010)
IMF Countries being helped for the last 5 years

IMF has helped many countries over the years from its foundation till now. Over 186 countries have seeked the guidance and support of the institution in the last five years to develop and maintain its economic conditions. A list of all the countries who are and have been assisted by IMF in the last five years and even presently are stated below in an alphabetical manner
A Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Armenia, Aruba, Australia, Austria, Azerbaijan
BBahamas,Bahrain,Bangladesh,Barbados,Belarus,Belgium,Belize,Benin,Bhutan,Bolivia,Bosnia,Botswana,Brazil,Brunei Darussalam, Bulgaria, Burkina Faso, Burundi
C Cambodia, Cameroon, Canada, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Congo, Costa Rica, Croatia, Cyprus, Czech Republic
D Denmark, Djibouti, Dominica, Dominican Republic
E Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia
F Fiji, Finland, France
G Gabon, Gambia, Georgia, Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guinea- Bissau, Guyana
H Haiti, Honduras, Hong Kong, Hungary
I Iceland, India, Indonesia, Iran, Iraq, Israel, Italy
J Jamaica, Japan, Jordan
K Kazakhstan, Kenya, Kiribati, Korea, Kosovo, Kuwait, Kyrgyz republic
L Lao peoples democratic republic, Latvia, Lebanon, Lesotho, Liberia, Libyan Arab Jamahiriya, Lithuania, Luxemborg
M Macao ,Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Malta, Marshall Islands, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Mongolia, Montenegro, morocco, Mozambique, Myanmar
N Namibia, Nepal, Netherlands, Netherlands Antilles, New Zealand, Nicaragua, Niger, Nigeria, Norway
O Oman
P Pakistan, Palau, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal
Q Qatar
R Romania, Russian federation, Rwanda
S Samoa, San Marino, Sao Tome and Principe, Saudi Arabia, Senegal, Serbia, Seychelles, sierra Leone, Singapore, Slovak republic, Slovenia, Solomon, Somalia, south Africa, Spain, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the grenadines, Sudan, Suriname, Swaziland, Sweden, Switzerland, Syrian Arab republic.
T Tajikistan, Tanzania, Thailand, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, turkey, Turkmenistan, Tuvalu
U Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan
V Vanuatu, Venezuela, Vietnam
Y Yemen
Z Zambia, Zimbabwe (IMF Official website, 2010)


IMF Problems and challenges of IMF
The primary objective of IMF is to promote financial stability to all its member countries. Over the years the international market has broadened greatly which have posed as a challenge for IMF, the number of members has also grown sharply so the responsibilities have grown as well. Globalization has also intensified over the years and cross border flows have also been high, so the role of IMF broadened. With the sub prime crisis the last few years have seen great amounts of anti crisis and multilateral policies which have been formulated and applied which have helped most economies. The economic data and financial performance show optimistic growth prospects. (Fischer Stanley, 2003) With the economic downturn setting in U.S. and other economies have taken major economic measures to deal with the crisis and avert it from reaching historical levels of failure. Layoffs and cutbacks in investment have been witnessed as global measures taken up. However the years to come would have to be cautious phase as the economies are still in the reviving stage. High level of unemployment and limited consumption gains have leaded to lower household spending prospects. The financial conditions are found to improve however the normal levels are still to be achieved. Credit losses are still high in many sectors, especially real estate. With gap in the outputs and moderate economic recovery, means that IMF cannot withdraw their support. The three key areas where IMF needs to render its help to member countries are surveillance, financial support provisions and technical assistance. Few of the key challenges which the IMF may face are specified below
IMF needs to safeguard the recovery of economies by supporting and ensuring global economic policies which support expansion and growth. Especially in developed and advanced economy the economic reforms should be implemented properly. Moving ahead of a medium term of limited spending and debt the global economies would set into a higher growth pattern. The responsibility of formulating required policies to ensure a sustainable balance growth is thereby a primary challenge which the IMF will face.  The mutual assessment of G-20 countries at Pittsburgh Leaders Summit looks at the same. IMF will support by providing analytical and innovative approach and provide multilateral assistance. The other challenge would be to defend and help the vulnerable economies survive the downturn and prosper. The IMF challenge is to make contribution to the growth of low income companies. The resources should help the countries increase their present level of unemployment and standard of living. To identify emerging vulnerabilities by providing research and economic analysis which may help the countries detect any imbalances before hand. IMF has to continually provide data and analysis on all its member countries.

The surveillance by IMF must focus on correct issues. With the wide range of fiscal, exchange rate issues and monetary policies there are a lot of issues that are to be overviewed by IMF. The structural and financial strength, external vulnerability and institutional issues all have a force on economic conditions, so IMF must make the right choice between the issues to concentrate on. Correct surveillance would help IMF identify risks and help formulate policies better. The integration of multilateral, bilateral and global surveillance also poses as a problem for IMF. The countries need to take surveillance more seriously. Most companies have domestic technical expertise so to help them realize how the resources and potential cost for IMF resources poses a difficulty for the fund at times.  So a strategic management of surveillance programs should be initiated. (IMF official website, 2010)

The implementation of more systematic common framework for assessment of public and debt sustainability is also a continuous process. IMF also needs to consider authorities priorities keeping in mind that no vulnerability is not avoided.

The IMF also faces a challenge in balancing its act as a confidential advisor and a market analyst which help provide lenders and creditors to help market sentiments.

The IMF also needs to analyze whether the availability of funds would indeed help an economy to overcome dilemma so it is important to analyze whether the problem can be credibly overcome by financial resources. (Truman Edwin, 2009)

Role of IMF for stabilizing the international financial system
IMF has 186 member countries and they together work towards creating a global monetary cooperation. The objective is to stabilize the financial system through well designed and planned economic policies that will enhance international trade, promote employment, support growth and reduce poverty. The primary functions are to stabilize the exchange rate for currencies, finance short term deficits, and provide advice and technical assistance to countries. (Global Financial Reports, 2010)

Under the gold standard system, the value of each currency declared its value against the US dollar and the US dollar was tied to gold, which they agreed to trade at 35 per ounce. The exchange rate could vary only by 1 percent, any movement greater than 1 percent was allowed to countries with a fundamental balance-of-payments disequilibrium after approval of the IMF was seeked. This system was planned to stabilize the entire global system, however in 1971 Richard Nixon ended this system. Post these countries were allowed to choose their own method to determine exchange rate. Post the fall of this system to regulate exchange rates, IMF started focusing on providing loans to developing countries. (Britannica Website, 2010)

To help improve the objective of stabilizing international monetary system, the system was changed greatly since its time of inception. Beyond providing loans and monitoring macroeconomic policies, IMF has incorporated various microeconomic elements as well. It realized that to realize the goal it needed to focus on second generation reforms such as institutional and structural reforms and policies. Also the amount of funds has been raised with a rise of funds first initiated in October 1998. With more countries joining the fund it has created greater responsibilities on the IMF. (IMF Official website, 2010)

Operating capital of a business is the most important of its entire components and hence a managers possession of the required knowledge on how to manage this capital is equally important for the general success of that business.

According to Lesonsky (1998), business working capital refers to the difference between its current assets and current liabilities. In a simple business language, it is the amount of cash needed to run the activities of the business effectively. As the most important business asset, cash will provide the management of Watree Lodge with liquidity and buying power. To achieve this, the management of Watree Lodge should be able to control the cash flow. This can be done through preparation of cash budgets that will enable them to manage cash inflows and outflows. When prepared well and in time, the cash budget will help the management know whether the business has enough cash to meet its financial obligations. i.e. the objective of cash forecast is to alert the management about possible shortfall in cash or surpluses. This will in turn help the management make informed decisions on whether to invest or to borrow in advance.  In order to realize this, the management should consult with all stakeholders including business managers as well as possible suppliers.  

Greenville Restaurant operates two bank accounts where one earns an interest while the other does not earn interest. Evidently, the management is losing a lot of revenue due to their poor banking options, for example, it takes too long for payments to be processed from clients since half of all orders are paid via mail. The management of Greenville Restaurant should therefore employ the special services offered by various banks to help it manage the business cash more effectively. The best service in point here is lockbox bank processing that allows a client with a huge number of receivable accounts to collect and process payments quickly i.e. this service will enable the bank to directly receive mail payments payable to Greenville Restaurant, a process which saves on time while enhancing efficiency.  

     As Greenville opens new restaurants it can reduce its administrative costs by employing account reconciliation bank service that allows the bank to create summary account reports that are then sent via internet to the business for easy cash analysis. This service will also help the business to guard itself against bank related fraud. The business will also benefit from bank sweep account services that will allow Greenville chain of restaurants to save and at the same time invest in overnight investments done by the bank on behalf of Greenville. Finally, because Greenville will own numerous bank accounts, it can also benefit from zero balance account service that allows the businesss numerous accounts to be consolidated so that individual accounts need not maintain minimum operating balances while at the same time exempting the account holders from paying certain charges.

In order to be able to manage their credit card payments effectively, the Greenlees should ensure that their progressive point-of-sale is PCIDSS compliant. As if that is not enough, the Greenlees need to make sure that their internet service is secure so that customers electronic data is kept confidential. Greenlees should use VISA and MasterCard since they normally charge the credit card fees at a lower rate. However, efforts should be put to increase credit card sales as this will considerably lower the rate of charges since the more the sale volume, the lower the transaction charges.

Simply viewed, purchasing is ultimately purchasing. Procurement specialists in the two sectors and even from the third sector of charitable, non-profit, and volunteer groups order their purchases from the same suppliers. Both the private and the public sectors pursue value for money. Towards this end, they plan responsible efficient and flexible procurement systems.  However, few differences draw the distinction between the two sectors. This is reflected in the radically different dynamics in the two sectors operations. As the paper unfolds, it emerges that there is a lot which the public sector can learn from the private sector if it is to achieve the same level of success enjoyed by the former (Barrett and Hill, 2004). 

The volume or size reflects on one of the commonly touted differences in the procurement sectors (Braczyk, Cooke and Heidenreich, 1998). However, it is inevitable to examine differences in reporting, competition, trade agreements, accountability, corporate culture, tendering processing, awarding tenders, and performance. It is also important to look into professionalism across the two sectors. The commonality or difference in skills is critical also. Ethical considerations across the two sectors are equalled examined with a view to raising valuable information whether the public sector has something to learn from the private sector or not.

The public sector management environment is heavily regulated by policy, legislation, and specific processes while on the other hand, the private sector remains more receptive to enterprising and entrepreneurial dynamics as exhibited by their differences in corporate culture (Braczyk, Cooke and Heidenreich, 1998). It is true that the private sector is also subject to certain rules and regulations but the difference rests on the nature of the regulations. The entrepreneurial dynamics are apparently an absent phenomenon in the public sector apart from few instances. This entrepreneurial focus is an area where the public procurement sector needs to learn and improve on based on the private procurement sector model. However, the sector may be impeded by the political influence, as the partisan nature of political processes is influential.  

The professionals who work in the public sector procurement need significantly more than the regular amount of diplomacy, patience, communication skills, and political intelligence if it is to prevail (Barrett and Hill, 2004). On the other hand, private sector procurement operates in more advanced challenges in the form of bigger risks, more recognition, among other issues. It is on this premise that the view that private sector pays more recognition to competence as key towards success in comparison to the public sector is held. The public procurement sector should minimise the diplomacy and political leanings and focus on competency just as the private procurement sector. Such focus should ensure bigger and attractive returns.   

Accountability and transparency present other areas of concern in reference to procurement (Barrett and Hill, 2004). This is influenced by the fact that the stakeholders in the public sector procurement come from diverse circles and do not stand a meaningful chance in influencing it. The stakeholders largely composed of taxpayers, clients, elected officials, and in other instances vendors, underscore this realization. On the converse, the private procurement sector employs up-to date mechanisms to ensure accountability ad transparency in engagements. Most private procurement entities also focus on specific markets, an aspect that the public procurement sector can only attain through the establishment of specialised separate units to address the various aspects of procurement demands.
It is thus not surprising that before procurement decisions are made, it is preferred that consensus is struck. Public organizations thus focus on consensus building rather than working competitively (Braczyk, Cooke and Heidenreich, 1998).  Public procurement officers are as a result under an obligation to work cooperatively as opposed to doing so competitively. This is further under-lied by the idea that public enterprises engage in the sharing of some information, as it is a requirement in most public organisations. Ontario Public Buyers Association offers an example of organisations, which operate under these conditions. Consensus building is desirable towards appeasing contending stakeholders but this holds limited economic sense. This holds true since consensus building does not factor in the essence of time and other factors, which influence business in a positive manner.    As proposed earlier, public procurement should be split into specialised units to deal with specific issues in procurement as it happens in the private sector.

The freedom and flexibility to conduct business is absent in the public sector (Earl, 2002). On the converse, the private sector enjoys the presence of these attributes, which constitute the dream pursuits of every buyer. Flexibility is examined in reference to the kind of red tape associated with the public sector procurement. The procedural rules negatively influence the procurement process as the lengthening of the exercise proves an unattractive proposition. The red tape as a result puts constraints and unnecessary demands on the process of procurement. Red tape was intended to ensure observance of set rules ad regulations, but this s no longer congruent with emerging trends in business.    As a result, doing away with the unnecessary procedural demands is desirable if the public procurement sector is to make progress.

The absence of purposeful negotiations, discussions, leniency measures further compounds the shortcomings associated with public sector procurement. It is notable that public enterprises do not take their time in responding to issues like requests for proposals. Precision and detail must be presented to every relevant department before a decision is arrived at. On the converse, in the private sector procurement, the clients issues are keenly attended to as required. In the entrepreneurship spirit, private sector procurement allows for the negotiation of deals on the basis of fees and terms of work which appeal to both parties, as a result, growth in private procurement in tandem with quality of work (Earl, 2004). The focus is on building a good and long lasting working relationship between customers and private organizations.  In the private sector procurement, if a company or client secures a satisfactory engagement, when similar projects emerge, the need to go through the same sieving exercises are not considered. The basis upon which tenders are given rests o the previous records of accomplishment.   

The solid ethical and moral aspects, which governmental organizations lean on, account for some unnecessary engagements. Public sector procurement demands that adherence to rules and procedures are unquestionable (Edquist, 1997). The formal protocol on responsibility, liability, accountability, and the need to protect government information constrains public procurement. On the other hand, the private sector procurement extends freedom on contractual engagements. The private sector clients focus on the market share, competitiveness, and visibility, fees, and contracts act as a measure towards achieving these goals. The moment corporate professionalism is established with a private sector client, the credibility set is useful in determining fruitful future engagements.  

Of late, governments are embracing e-Procurement this embracement is based on the realization made concerning the beneficial attributes arising from both administrative and cost reductions associated with such in the private sector (Malerba, 2002). Tendering platforms, desktop purchasing systems, and e-marketplaces, features common in private sector procurement have been adopted in the public sector procurement. This is a positive step, which should pave way for similar improvements towards the promotion of efficiency and effectiveness. 

The nature of public sector procurement goes through rigorous bureaucratic procedures based on institutional demands (Miles, 2004). The regulation process of public procurement, which witnesses different roles played by international, national, and regional authorities, implies that this type of procurement faces a number of hurdles to overcome. This regulation is meant to ensure competition and transparency in the procurement exercise. To cite an example, public procurement in the UK has to be consistent wit the European Union procurement guidelines, which offer a framework of rules on the issue. These rules and regulations deter EU member countries from distorting competition in public procurement on the basis of geographical or national basis. The creation of the European market provides an avenue for getting value for money in the procurement sector. Apart from adhering to the European Union policy on public procurement, the public institutions must also comply with the requirements imposed by the government as reflected by the Value for Money policy. This policy demands that procurement choices should be premised on whole life cost assessment as opposed to lowest price only.

On the basis of this synopsis, it is clear that government procurement is diverse in respect to what it has to cover. This extension and complexity implies that achieving efficiency and lower costs is hard to make operational. Reducing the complexity characterising public sector procurement is thus a challenge.

The tendering process is designed in a way that ensures that work done by the government is given out fairy. The government considers the pricing and the nature of the entity offering the required services. The aim is to ensure that tender processing is fairly done based on governmental policies. Though important, pricing is not the major focus in public procurement (Malone, 2001).

On the other hand, private sector tendering focuses on fairness and effectiveness in reference to competition. This is based on the drive towards achieving the most cost-effective outcomes in the tendering process. The primary focus is the cost effect, an attribute the government needs to learn from the private sector tendering (Malone, 2001). 

The political elite holds a lot of power when it comes to public tendering. This is partly due to the fact that the political class hold executive powers in country leaderships.  On the other hand, in the private sector, key officials of companies who hold the required expertise holds the power of making decisions on the tendering processes (Malone, 2001). The public sector should learn from the private sector by fully authorising the bureaucratic experts to control the tendering process.

If the public sector is to be in a position to operate competitively, it needs to posses buyer power. As in the case of the private buyer power, the public purchasing power may rise from the size of demand in reference to the public sector against the total market demand or due to strategic importance (Cohen and Levinthal, 2006). The size of the market however big, it may be affected by the uncoordinated and fragmented approach by the public procurement sector.  This uncoordinated approach lowers the purchasing power of the public procurement sector.  This presents one area the public sector needs to learn from the private sector. Towards this end, the public procurement sector should learn how to coordinate its activities properly in order to take advantage of its aces to big markets. 

The public procurement sector is fraught with unnecessary restrictions on participation (Cohen and Levinthal, 2006). The sector is also characterised with cost escalation. This especially affects small bidders. Such represent the level of discrimination in the sector. Large firms who are at a sound financial standing are thus the ones favoured in the public procurement sector.  Towards reducing the chances of participation from the procurement process, the nature of restricted communication as reflected in the limited publication of contracting opportunities, this coupled with the narrow based qualification criteria place too much focus on firm size and experience. There are both benefits associated with increasing the number of bidders. However, the question of whether the government attains the balance between increased costs due to the higher number of participants and the expected drop in the prices as a result of the fierce competition both within the short term and the long-term. The pursuit of value for money should ensure the correct trade off is made, however, this may never be the case. This is attributable to the fact that the administrative costs are more visible as compared to the cost savings obtained from intense competition. Further, afield, risk aversion may lead to favouritism in which case, well-established companies and incumbents take the opportunities ahead of new entrants. Incumbency may limit participation. This is possible if minor suppliers believe that the public procurement sector is friendly to senior suppliers. This implies that some suppliers may boycott the bidding exercises, as they fear their success chances are limited. Such boycotts may in turn trigger price increases due to lowered competition (Cohen and Levinthal, 2006). 

Openness and publicness pass as challenges on the public procurement sector.  Everything, which is done by public procurement, is subject to scrutiny from the public.  The public purchases are normally orchestrated through invitations for bids. This opens the process to public bidding. In public procurement, public bid tabulations, which are posted on government websites.  This implies that everybody understands what is going on.

Overall, the private sector procurement focuses on profit, which is achievable through fierce competition. In practice, there is great variation in the way in which private managers go about establishing links with the customers. This is captured by the pursuit of firms attempts to lock opponents out of the market (Malone, 2001). Some firms operate in unstable environments, others like do like monopolies, while others operate in relatively protected niches where entrants find it difficult to make inroads, this under-lies the kind of challenges facing private businesses. Some sectors and businesses adopt methods, which are technologically advanced than others, further compounding the challenges (Egeberg, 1995). On the other hand, the public sector passes as a more homogeneous entity operating in a placid environment.  Bureaucratic organisations are in most cases long establishments, which act, as monopolistic suppliers. The supply is to the society as opposed to the market, further to this, the pursuit of profits do not take precedence ahead of the provision of services to the citizens.

The assumption that the public sector has been lacking in innovation is often advanced. However, Tan, (2004) notes that the spur of competition lacks in public procurement, a stark contrast with the private sector procurement. The public procurement sector should embrace new technological innovations like e-Procurement if it is to gain from benefits associated with such advancements, as is the case in private procurement (Fagerberg, Mowery and Nelson, 2000). 

The drive towards introducing private-like procurement style into the public procurement sector is a plausible effort as this in the end translates into a number of benefits desirable to the needs of the clients its serves. Such adoption is bound to increase efficiency thorough cost reductions and improvement on service provision. The social responsibility is the major bottleneck affecting the public sector procurement.

The public institutions remain accused of being irresponsive to the needs of the people they serve. However, all public organisations exist in a global setting, which heavily bears on how operations are conducted.  This co-existence between public and the other sectors imply that there is a lot to be passed or transferred through learning.  The continued nature of existence of the public sector also indicates that learning through experience is a possibility since the various governments institutions are in a position to determine what works and the others which fail. The role of competition however desirable it is may prove inapplicable to the public sector procurement. This is the case in reference to when the public institutions are bidding for example, weaponry and other sensitive products.  The public sector is also charged with diverse responsibilities, which are not based on economic terms but rather on the social responsibility aspect.  Despite this, the public sector should learn from the public sector on how to become competitive on various fronts.

On the basis of the above realisation, it is hypothetically presented that adopting measures to delink the public procurement sector from the diplomatic and political machinations presents a way out in the area. The sector should also encourage more competition in terms of recruiting skilful personnel and in allowing a level playground when it comes to the tendering process. The sector is equally expected to alter the procedural requirements, which mire the biding and tendering exercises. Such a move should lead to a flexible system, which paves way for the achievement of efficiency and effectiveness in the sector.

    Corporate governance is the concept underlying the manner that leaders manage organisations (Solomon 2007). As such, corporate governance can take a number of forms. The form of corporate governance depends on the organisational context. The particular conditions of the organisation justify the form of corporate governance. The type of corporate governance implemented in an organisation should align with its context to be effective. Corporate governance applied in an organisation has widespread implications via the outcomes of the decisions made and implemented.
There is no singular or commonly accepted definition of corporate governance. The rationale could be the contextual nature of this concept that limits an absolute definition. In studying corporate governance of organisations, it is important to know the specific definition of corporate governance utilised by the organisation to understand decisions made and the outcomes. The definition of corporate governance adopted by firms could be narrow or broad. 

A narrow definition of corporate governance is the internal control over the assets and liabilities of the firm by considering shareholders benefit (Monks  Minow 2003). The scope of internal management only covers the financial area of operations. This narrow definition refers to the decisions and actions pertaining to the investment and use of company assets as well as the control of liabilities to achieve outcomes that address the interests of shareholders. Corporate governance means the management of the organisation in a manner that upholds the outcomes expected by shareholders, who also comprise stakeholders of the firm. Management works to make the best use of assets and control liabilities to ensure that shareholders receive optimal returns (Solomon 2007). By achieving this, the firm keeps its shareholders and shareholders investments as well as maintains a good investment standing in the market.

Another narrow definition of corporate governance is the management of the interrelationships existing in the firm among the board, managers and supervisors, employees, suppliers, creditors, and consumers (Monks  Minow 2003). This is a narrow definition because of the focus on relationships, which comprise an important aspect of corporate governance. Corporate governance is relationship management of all the people involved in the organisation. The development of a relationship conducive to the achievement of organisational goals to the benefit of all interested parties is the target of corporate governance. This operates based on the premise that the management of organisational processes and outcomes depends on the relationship of the people making the decisions, those that implement decisions, and other parties whose participation is necessary to the success of the organisation.

    The broad definition of corporate governance widens the areas of management covered to consider not only the interests of shareholders but also the concerns of all stakeholders. The broader definition of corporate governance relates to its social responsibility in considering the interests of shareholders, managers and employees, and consumers (Colley et al. 2005).

One broad definition of corporate governance is management of the firm in a manner that supports business growth and success as well as accountability (Tirole 2001). This broad definition involves two goals, which is achievable in an optimum manner by finding the appropriate balance between both goals. Corporate governance that achieves the optimum balance between two goals is able to boost business growth in a manner that supports accountability. This means sufficient auditing should accompany financial and business outcomes. Business growth reflects the methods employed in obtaining this outcome. Accountability provides legitimacy to the methods used in ushering business growth and the business outcome itself. The combination of business growth and accountability fosters the objectives of corporate governance.

    Another broad definition of corporate governance is the exercise of authoritative direction towards the organisation by applying the basic tenets of accountability, honesty, integrity, responsibility and trustworthiness (Tirole 2001 Colley et al. 2005). This definition focuses on the quality of management and leadership as well as the traits of managers and leaders. Corporate governance involves management and leadership that operate based on standards of practice. The standards ensure the exercise of authority within a position of trust, as part of obligation to the organisation, and with recognition of attribution of outcomes to the position and oneself. In this sense, corporate governance serves as a system of checks and balance (Tirole 2001). The system checks the actions of those in authority as well as temper authority with standards of practice to prevent negative outcomes.

Principles of Corporate Governance
    The definitions give rise to three key principles of corporate governance. The application or presence of these principles in the organisation determines the decision-making and policy development process as well as the concurrent outcomes.

    The first principle is organisational architecture. This refers to the framework or system providing guidance and directing the actualisation of the core qualities contained by the vision set by the organisation (Monks  Minow 2003 Colley et al. 2005). The system covers the values adhered to by the executives and managers of the organisation in maximising the wealth of shareholders. The existence of a framework and the type framework implemented determines how well corporate governance follows these values. A poor framework would likely result to unscrupulous decisions and actions and the lack of means to check or punish any wrongdoing. Organisational architecture has two components. One is the provision of a framework to guide decision-making and action. The other is the existence of a system to ensure compliance, prevent non-compliance, and commence procedures in response to non-compliance.

    The second principle is operational architecture.  This pertains to the process and system of managing information on the different business activities and the way of managing information on these business activities (Monks  Minow 2003). Information management is a core aspect of corporate governance. Information supports decision-making and responsiveness to situations. Informed decision-making is a sound corporate governance practice. Information and access to it also explains and reports on decisions and actions that led to a particular outcome. A good information management system fosters decisions and actions sufficiently based on information as well as provide appropriate access to support accountability. Having an independent audit or audit team in covering the financial records of the company is a good information management practice. Weak information management creates opportunities for information manipulation and suppression and unchecked decisions or actions that are likely to result to negative outcomes.

    The third principle is maximisation of the wealth of shareholders. This is the process of increasing the value in the market of common stock prices (Monks  Minow 2003). Corporate governance means having a policy on the maximisation of shareholder wealth. Shareholders are valuable stakeholders in the company and maximisation of stock prices is a means of furthering the interests of shareholders. The practice of maximising shareholders wealth is a balancing act. In the case of institutional stockholders, there should be effective management of interests. Institutional stockholders have a significant impact on corporate governance by influencing areas of investment and other related decisions. Institutional stockholders have a significant share in the firm and actions done by these stockholders communicate messages to other stockholders and the market. The influence of institutional stockholders can have positive or negative outcomes. The maximisation of shareholders wealth requires the careful management of institutional stockholders through good organisational and operational architecture (Monks  Minow 2003). Executive compensation is also another concern in the maximisation of shareholders wealth. On one hand, the compensation of executives serves as incentive to do a good job in corporate governance. Executives receive high compensation because of the rigours of the job as well as to motivate effective exercise of authority. On the other hand, an insufficient or excessive compensation can lead to poor performance and negative outcomes for the firm. In managing reasonable compensation, the justification is standard practice and the limit based on the situation of the firm. Compensation based on firm performance alone can lead to manipulation of share price. A more reasonable justification for the value of compensation is service rendered (Monks  Minow 2003).

Corporate Governance in Listed Companies
    Listed companies refer to the business organisations that have registered their shares in the stock exchange for purposes of trading publicly (Hansmann 1996). By trading their shares publicly, listed companies are able to draw capital from investors, who in turn entrust capital to the company based on expectations of prudent investment management decisions and returns. On the part of listed companies, they create organisational or business conditions that reflect their ability for prudent management. Corporate governance determines how well companies can create these conditions. On the part of investors, they consider the best company with impeccable management standards and market reputation. The corporate governance of a company is one way of determining the best firm to invest in.

    Agency is a concept that describes the relationship that emerges between the company and stakeholders (Jenson  Meckling 1976). By being in an agency relationship, there exists a contract or agreement between the parties in interest. Agency involves a relationship based on trust between the parties. The principal is the investor who entrusts capital, via the purchase of share, for the agent or the company to invest. The fiduciary relationship involves obligations and liabilities in case of failure to comply.

Two specific agency relationships are pertinent to the study of corporate governance. One relationship is what emerges between executives and managers of the company and shareholders (Jenson  Meckling 1976). Executives and managers of the company are agents with responsibility over decision-making on the manner of using and investing capital received through share offerings. Shareholders are the principal by trusting the executives and managers with the use and investment of their money.

The other is the agency relationship between bondholders and shareholders (Jenson  Meckling 1976). These two parties in interest have varying involvement and stakes in the company. Shareholders invest in the company based on the current and expected value of shares. Bondholders are creditors by lending a certain amount to the firm in exchange for the return of the principal amount plus an interest or value depending on the agreement with the firm. The decision to lend depends on assessments of risk and expected changes in risk levels. The higher the risk in the operations of the firm, the less likely that bondholders will lend or the higher the interest.

While shareholders influence investment decisions based on the impact of share value and are willing to take greater risks, bondholders are not as inclined to support risky investments. Shareholders can influence corporate decisions that could adversely affect the bondholders. Shareholders exercise influence through executive or management decisions. In case the investment succeeds, bondholders do not gain additional benefit because returns are of a fixed value. The benefit is only to the extent of ensuring the return of the principal amount and the agreed upon interest. If the investment fails, bondholders also share in any loss because this affects the ability of the firm to return the principal and any additional returns. Shareholders can also decide not to support financially sound investments by refusing to infuse capital for funding. The investment plan may benefit bondholders more by increasing the security of the claims of these creditors. Bondholders have first claim over the assets of the firm in case of losses or failure. (Bowie  Freeman 1992)

The difference in perspective can lead to conflicts that directly affect corporate governance. The relationship between bondholders and shareholders reflect on the effectiveness of corporate governance via decision-making. Decisions can operate to the benefit of either or both shareholders and bondholders depending on the type of decision made and the outcome. The decisions also have an impact on the furtherance of relationship between the firm and its stakeholders. Shareholders can refuse to continue dealings with the firm based on the trend of decisions made by the company. Bondholders can refuse to lend more or increase demands in exchange for loans in the future. (Bowie  Freeman 1992) Concurrently, a balanced and equitable relationship between bondholders and shareholders reflect good corporate governance by preventing conflict while addressing the interests of the stakeholders.

Capital Structure Decision in Listed Companies
Corporate governance in listed companies involves capital structure decisions. The capital structure of companies is the combination and composition of financial liabilities (Marks et al. 2005). There is no certainty over the financial capital of firms because this depends on sources. As such, the sources of financial capital exercise a certain level of control over firms. Firms can have two types of financial liability. One is debt and the other is equity. (Godfred et al. 2009) The sources of these two types of financial capital represent two of the primary investors in companies. Incurring any of these liabilities involves varying benefits, degree of control, and risks as shown in Table 1 below.
Table 1 Distinction between Debt and Equity Capital Structure

Source (Kochhar 1997)

The parties providing debt-based capital to firms gain a fixed value added to the return of the premium. The relationship is contractual and debt holders experience protection based on the terms of the agreement. Debt holders exercise a limited degree of control over decision-making in the firm with influence pertaining mostly to compliance with contractual obligations. The parties providing equity to the firm hold a residual claim to the firms financial condition and incur greater risk in investment decisions made by the firm. As such, equity holders exercise greater control over decision-making. (Marks et al. 2005 Godfred et al. 2009)

Financial management involves the decision on the capital structure of the firm with implications on the utilisation and management of the finances of the firm. Firms transact with providers of capital financing to generate funds. The share in the cash flow from the investment of capital obtained depends on the extent of capital sourced through debt or equity. The debt-to-equity ratio is the measure of the cash flow share of debt and equity holders. A debt-based capital structure means creditors as the primary source of capital and that the share of the debt holders depends on contractual provision. The duration of share of debt holders could also be short or long-term but this has a definite period as indicated in the contract. An equity-based capital structure means that shareholders are the primary source of funding and the share of equity holders depends on the shifts in share value. Equity holders have residual claims to cash flow, which means the share extends in the long-term. (Marks et al. 2005 Godfred et al. 2009)

If corporate governance were to maximise the wealth of shareholders, then the debt-to-equity ratio covers a lesser proportion shared by debt holders. Nevertheless, there are costs associated with having a debt-based or equity-based capital structure. The decision over the particular capital structure of the firm should then consider benefits as well as costs. Sound decision-making over capital structure indicates the need to target optimal debt-to-equity ratio, which depends on the firms strategic assets (Marks et al. 2005). On one hand, the firms that are able to establish successfully an efficient capital structure are likely to realise the optimum value of its strategic assets. On the other hand, firms that are unable to establish an efficient capital structure will likely experience downturn in performance. An efficient capital structure, which aligns capital sources with resources, ushers firm benefits (Godfred et al. 2009).

Board of Directors and the Capital Structure Decision
Financial decisions over capital structure form part of the decisions of the board of directors of a listed company. The board of directors plays an important role in the corporate governance of firms, particularly pertaining to decisions over debt versus equity. The composition and size of the board of directors of listed companies determine the decision over capital structure.

Size of the Board and Capital Structure Decision-Making
    Earlier studies showed that decision-making in larger groups is more difficult. The explanation is greater diversity of perspectives accompanied by the difficulty and longer time it takes to come up with an agreement. In larger groups, the decision-making process involves many compromises (Kogan  Wallach 1966). The result is a decision that is not radical when compared to decisions made in smaller groups (Moscovici  Zavalloni 1969).

In latter studies, there is also preference for small board size. The explanation for preferring lesser number of board members is technology and organisational change. The onset of information and communications technology has enabled better access and sharing of information (Jensen 1993). This means that the rationale of having a large board to prevent unscrupulous decisions may no longer be as strong. In addition, the shift towards efficiency has directed preference for cost cutting through downsizing and streamlining (Lipton  Lorch 1992).

Another explanation in preferring smaller board size is effectiveness, with large groups being less effective than small groups (Hermalin  Weisbach 2003). By having many members, challenges in the agency function arises. Some of the board members may become free riders depending on the influence of the other members and the expected benefits of deciding one way or the other. Having a large group of decision-makers weakens responsibility over contributions to decision-making.
Discussion is also difficult in a large group. Obtaining all ideas from many people takes too much time and there is no certainty of uniformity in perspective. Large groups are not very cohesive as a body (Lipton  Lorch 1992). The difficulty of coordinating variances weighs more than the benefits of having many members in the board (Jensen 1993). A large board carries the benefit of enabling diversity in terms ideas and advice to cover all perspectives needed to support informed and objective decision-making (Dalton  Dalton 2005). When the board is very large, its role shifts to becoming merely symbolic instead of assuming a role in management (Hermalin  Weisbach 2003).

However, there are also downsides to having very small board membership. The board members may not be sufficiently diverse in terms of skills and experience to provide expert advice and make good decisions (Dalton  Dalton 2005). The very small number of board members would also likely lead to preoccupation with making decisions and neglect of their role in monitoring the activities of the firm (Jensen 1993).

In terms of the decision-making and monitoring role, there is divergence in opinion over the better size. One opinion considers small boards as more appropriate when the primary role of the board is monitoring because of the lower cost of coordination and better outcomes (Yermack 1996 Eisenberg et al. 1998). Another opinion considers a large board as better in the monitoring function, especially in firms with complex operations such as by having a number of business units (Mak  Li 2001).
The difference in opinion implies that the optimal number of board members depends on the characteristics of the company and the directors (Raheja 2005). A small board can work for some listed companies while a large board can also work for other companies. While the size of the board depends on the circumstances of the company, a recommended size is 7 to 8 members (Lipton  Lorch 1992). Having a smaller or larger number creates problems to prevent optimal fulfilment of board functions. Decision-making over capital structure involves challenges when the size of the board is too small or too large. The management of the size of the board affects decisions on the capital structure of the firm. The impact on the preference towards one capital structure or the other also depends on board composition.

Composition of the Board and Capital Structure Decision-Making

    The board of directors of listed companies comprise of internal and external or independent directors. The internal and external directors share some functions. There are functions that exclusively emerge from the situation of these directors.

Internal directors exercise two management roles. One is to contribute to corporate governance by protecting the interest of shareholders and the other is ensuring compliance with the contractual relations of the company and its board (Williamson 1985). Internal directors also assume the monitoring role in providing other directors with first-hand data on operations (Boumosleh  Reeb 2005). The rationale for internal directors as direct sources of information is their involvement in decision-making over operations and investment activities of the company. External directors do not experience the same position. As such, outside directors likely pose questions that internal directors should be able to address (Anderson  Reeb 2004). Part of the monitoring role of internal directors is towards the CEO. While the monitoring function over the decisions and actions of the CEO could be indirect since the CEO also exercise a monitoring role over internal directors, the latter can perform this function by providing information to external directors in case of observed remiss by the CEO (Boumosleh  Reeb 2005). By sharing information, internal directors significantly contribute to effective monitoring.

However, in actual corporate practice, internal directors are likely to side with the CEO. As the top executive, the CEO holds the power over the appointment of executives. It is common for CEOs to appoint directors that would likely be loyal. The loyalty to the CEO of directors can work both ways. On one hand, loyal CEO proves beneficial in supporting sound decisions that target the maximisation of shareholder wealth and pursuing performance goals. On the other hand, loyalty can also carry the downside of poor monitoring in case of untoward actions of the CEO. (Sirmans et al. 2006)

    External directors share the monitoring role with internal directors. As external directors, they exercise independent judgment. External directors balance the monitoring of executive decisions and company operations. Part of the monitoring function is to evaluate management practices and manager actions. External director should also be able to contribute to building firm strategy. They should also exercise vigilance in ensuring the accuracy of financial information shared by the company and check on the risk management practices of the company. (Klein 2002) By being in a position of independence, external directors are necessary to effective corporate governance.

    Board composition should have both internal and external directors. Internal directors hold direct information that external director do not have. External directors bring in an outside perspective to balance the oversight functions of the board. By lacking bias, external directors can strengthen corporate governance. Boards with more independent directors are likely to prevent or minimise fraud. The ratio of internal and external directors in the board ranges from one-third to half depending on the jurisdiction. (Beasly 1996 Klein 2002)

    Studies on the size of independent directors in the board of listed companies cites positive results from increasing the number of independent directors, including greater returns in stock price and higher profitability (Rosenstein  Wyatt 1990 Denis  Sarin 1997) as well as accurate financial reporting and lesser earnings management (Peasnell et al. 2005 Osma  Belen 2007). The implication of this is that the shift in the composition of the board by increasing or decreasing internal and external directors affects the factors considered by shareholders as favourable. Increasing the number of external directors has association with obtaining more equity-based capital from greater shareholder investment.

    Other studies show a different outcome in other aspects. Performance declines when substituting internal with external directors as shown by the negative relationship between the number of external directors and Tobins Q index, which determines prospects for growth relative to cost in replacing assets (Agrawal  Knoeber 1996). Past profitability is also low in having a greater number of external directors in the board (Bhagat  Black 1997 Klein 1998). Slow growth and profitability create risk. The implication is that the composition of the board affects decisions on capital structure. A greater number of independent directors in the board appear to create a less desirable condition in obtaining more debt-based capital because of risk.   

OECD Corporate Governance Principles and Listed Companies
    Listed companies have the leeway to determine their own corporate governance practices and system depending on their particular situation. However, there are guides to effective corporate governance. Countries that are members of the Organisation for Economic Co-operation and Development (OECD) can adopt the Principles of Corporate Governance issued by OECD in 1999. These principles are encompassing by providing guidance to all stakeholders in both public and private companies. Since its original introduction, the principles have undergone revision to reflect developments.

    The principles cover six areas of corporate governance, which are 1) establishment of the basis for a framework of good corporate governance 2) rights of shareholders 3) equitable treatment of shareholders 4) role of stakeholders in corporate governance 5) disclosure and transparency and 6) role of the board. The last section on the role of the board covers the provision of strategic direction to the company, monitoring of company management, and ensuring accountability of the board to the both the firm and its shareholders. (OECD 2004)

The OECD Principles of Corporate Governance does not provide an exact size or composition that comprises an effective board for companies. The principles comprise the consideration in managing board size and structure. The impact of the management of board size and structure on the capital structure decision on companies depends on the context of the company as well as the manner of adopting the principles into its corporate governance practices.     Saudi Arabia is not a member of the OECD. However, the OECD corporate governance principles have become an international standard as a corporate governance framework. The corporate governance system in Saudi Arabia covering listed and other types of companies apply the principles.  

Corporate Governance of Saudi Arabian Listed Companies
    Corporate governance as a formal framework for companies is in its early stage. Prior to the establishment of the law focusing on corporate governance, regulation of business practice in Saudi Arabia is through the Company Law of 1965, which adopted British law. The Company Law set the legal framework for business aspects including business establishment, company registration, capitalisation, partnership, audit, accounts, and number of directors.

A major change occurred in 2003 with the establishment of the Saudi Arabia Capital Market Authority (SACMA) tasked to monitor the stock exchange. SACMA took the role of drafting the Corporate Governance Regulation (CGR), the first law focusing solely on corporate governance. In 2006, the CGR underwent a major reform with the intention of improving corporate governance of companies in Saudi Arabia. Part of the reform was providing guidelines for corporate governance in listed companies. (Ramady 2005) The implementation of the CGR was in three stages. The first stage is the publication of the CGR to make companies aware of the existing legal framework for corporate governance in Saudi Arabia. The second stage is more directed education of companies to motivate adoption of the CGR. The third stage is the reform of the CGR together with widespread implementation. At present, listed companies fall under staggered phases with some companies in the more advanced stage relative to other companies. (World Bank 2009)

With the presence of a formal legal framework on corporate governance, albeit this remains in its development stage and will likely be subject to reforms, listed companies are encouraged to utilise the principles and provisions in developing their respective corporate governance system. Part of the motivation to comply is the responsibility of listed companies to report to SACMA on their compliance. The report covers matters on the functions and obligations of the board of directors, the formation of the board, the committees established as part of corporate governance including the nomination and audit committees, the meetings held by the board, and the system of remuneration for members of the board.

An effective corporate governance framework plays an important role in supporting effective financial decisions, such as on capital structure, of listed companies in Saudi Arabia. With a developing corporate governance framework for listed companies, investigating the impact of board size and composition on capital structure decisions contributes to the assessment of the regulations as guidance and the implementation by listed companies of the framework.

Q1. Internalization
The business model used by Tiffany Company is the distribution model which involves a chain of intermediaries like distributors and retailers. The distribution channels used by this company include U.S Retail, Direct Marketing and International Retail. It is also evident that the company had segmented its market into market niche so as to reach all the customers together with increasing its sales.  Tiffany Company used also used internalization as a method of trading its securities.

Exchange rates fluctuations and political and social issues are some of the risks which emerge from business internalization. A fluctuation in exchange rates is an economic risk and results to a cyclical pattern in the economic growth. Brokers who trade securities during these periods are subject to risks of losses. Instability in the economic growth leads to inflation which increased prices and hence low demand for the securities. Political and social issues have a great impact on the economy and especially when it comes to buying of securities. Politicians have a great influence on security trading since most of they are the law makers.

The society also has an influence in security trading since they decide on where and how to purchase the securities. The companys internalization progressed well with the company shares being held by shareholders and this made the company to be profitable where it grew and was able to generate funds internally. As a result the company offered its security stock to the market for sale. The process of internalization by Tiffany Company led to reduction of company risks. The fact that the stock of Tiffany Company was held by shareholders made the company profitable in that it was able to open 16 stores which accounted for 50 of the total sales.

This made the company be profitable in such a way that they were able to generate a 100 million non-collateralized revolving credit facility available at interest rates based upon Eurodollar rates, certificate of deposit or money market rates. It also maintained a relatively moderate level of cash dividend so that it may be able to retain majority of its earnings. By doing this the company was able to escape some risks associated with fluctuations in exchange rates.

Q4. Risk Management instruments
Foreign exchange option is a financial instrument where the owner is given the right to exchange money into another currency at the pre-agreed rate of exchange and at a specific date. Future contracts on the other hand is a unvarying contract which is signed by two parties to either buy or sell a certain asset of a given quantity and quality at a specified date and a specified price. They are not direct securities like bonds and stocks but a type of derivative contract. Foreign exchange rate is an instrument used to manage commodity risks while future contracts are instruments used to manage price risks.

The advantages of future contract include the price is determined by forces of demand and supply, it gives the asset holder a duty to make the delivery depending on the asset terms and it does not give the buyer any responsibility to establish a position which was previously held by the seller. The disadvantages of future contracts include The disadvantages of future contracts include its a legal obligation, some standardized features may be impossible to obtain and one must pay a deposit before engaging in future contracts.

The advantages of foreign exchange include the trading is done through an electronic media, it the most liquid market option, its capable of trading volumes of commodities and the trader has the right to exchange one currency into another. Its disadvantages include products traded using this instrument carry high chances of risk, the investor have a limited liability, one currency can dominate the other and the owner does not have an obligation to exchange one currency into the other.

Tiffany Company should use foreign exchange rate to manage exchange-rate risk. By using this instrument the company will be in a position to exchange its currency at an agreed period and agreed rate of exchange. The right to agree on the rate of exchange could have helped the company to manage risks which result from fluctuations in exchange rates. That is the company will only be able to exchange its currencies only when the rates are favorable for them hence reducing exchange-rate risks.