All the guarantees offered at the time of sale would not be complied with. . If a large company folds up, their innumerable customers may raise an uproar leading to the intervention of trade associations and the government. . But if it is a small company with the limited liability of the shareholders and few customers, the customer has no wherewithal to protest. .  .The customer is victimized. (Davidmann, Manfred, 2008)
In the case of suppliers, the risk in dealing with companies with the limited liability of the shareholders is greater. Often suppliers supply with a credit. Since in most manufacturing enterprises, cost of materials forms a substantial part of the total cost, the supplier is at great risk, In the event of the company’s closure, suppliers are not likely to be paid and are likely to suffer a huge loss.
At the time of insolvency in such companies, the employees lose the salary, benefits, and severance pay due to them. Most importantly, they lose their jobs, a source of their livelihood. The employees should assess the company with the limited liability of the shareholders before they choose the career with them.
The shareholder’s risk is minimal. In the case of insolvency, the shares held by the shareholders would be nearly worthless. If the company’s share has some residual value in the market, the shareholder can redeem it just before insolvency is declared.
Therefore, effective corporate governance could substantially reduce the risk of the aforesaid stakeholders. A good corporate governance mechanism would recognize impending sickness. This mechanism would promote management discipline, owners’ accountability to the other stakeholders and transparency in transactions. Even the World Bank found it essential for the financial intermediaries to implement effective Corporate Governance in the firms they invest in (Sundararajan, V, 2002). Good corporate governance can effectively bridge the gap between ownership and control. The government of the US addressed this issue and passed the Sarbanes – Oxley Act making it necessary for the corporations to pursue tenets of corporate governance.