Contemporary corporate governance issues - Essay Example

?Running head: Contemporary Corporate Governance Issues Contemporary Corporate Governance Issues Insert Insert Grade Insert 26 March 2012 Contemporary Corporate Governance Issues Introduction Corporate governance has emerged as new buzzword in the modern world as far as the world of business is concerned (Ali and Gregoriou, 2011). Generally, corporate governance is concerned with activities aimed at directing and controlling the activities of an organization, and this is done through establishment of structures, rules, and procedures that are critical in decision-making process (Baker and Anderson, 2010). The rise and development of corporate governance has brought into perspective the role, position, and importance of different stakeholders of a company. In most cases, the function, capability, and continuity of a company are attached to the behavior and relationships of different stakeholders (Baker and Anderson, 2010). The company has different stakeholders who, in one way or the other, contribute to the success and performance of the company. Major stakeholders of a company include board of governors, chief executive officer, management team, employees, customers, suppliers, society, and shareholders (Davies, 2006). However, in recent times, there has been emerging debate with regard to the role and level of importance of different stakeholders of a company. There are those who view shareholders given their role as proprietors of capital to be the most important stakeholders and whose needs the company has to serve (McTaggart and Kontes 1993). On the other hand, there are those who think that, although shareholders have played a key role in providing capital and other critical investments, their possession without responsibility translates to nothing, and as a result, they have to give equal importance to other stakeholders such as employees and customers (Mallin, 2007). Still, there is another group that believes that a balance can be created so that there is no particular favor of one stakeholder, and that all stakeholders have to be considered equal and their needs satisfied equally without sabotaging the needs of others (Brink, 2011). Therefore, it may take time before perfect and meaningful consensus is reached. However, this is likely not to bring to stop the continued debate on the role and level of importance of different stakeholders. More debates, suggestions, criticisms, and all kinds of discussions are likely to come up in an attempt to divulge more information and understanding on these new emerging issues in corporate governance. Motivated by these aspects, the aim of this paper is to concisely make an argument with regard to the extent a company exists for the benefit of its shareholders. In doing so, attempt is made to discuss agency theory and the potential problems likely to emerge when such theories are put into practice. Shareholders Shareholders in any organization are viewed to be the suppliers of capital, and in return, they are likely to demand for corporate efficiency, honesty, productivity, and profitability (Freeman, Harrison, Wicks, Parmar, and De Colle, 2010). In this way, shareholders are perceived to possess and execute certain powers that directly show the ability to control the functions. In doing so, the shareholders are motivated by their investments in the company, which they want or demand to bring positive returns and profits (Bain and Barker, 2010). For a long time, theories such as agency theory have tried to evaluate the role and position of shareholders and subsequently, justified why there is need to maintain and enhance shareholders value as a paramount thing in the organization and throughout its lifetime (Mallin, 2007). Shareholders, as the prime investors in the organization, are perceived to be the owners of the company and their interests are likely to supersede all other interests. Once they have invested in the company, shareholders are likely to manifest different motives, behaviors, and even ambitions. All these activities are likely to influence how the company operates, and strategically place itself in the wider environment of the business. Given the role they play, shareholders have largely been considered critical actors in the organization success and function, and whose interests the organization has to serve. This is purely because they ‘possess’ the company, and in that possession, they control its lifeline and as a result, they are in a position to direct and guide the company on its operations. Although in most cases they are not directly involved in the daily running of the company, shareholders are seen to have an indirect control of the company and its activities through the board of directors, which acts as representative of the shareholders. Subsequently, board of directors has become responsible in establishing strategies, policies, and all other relevant regulatory frameworks to guide the behavior of the company. Despite an almost clear common knowledge as to who owns the company, the modern world of corporations has been bombarded by very interesting scenarios, activities and experiences, have in turn led to emergence of diverging debates about the true essence and meaning of ownership of corporations. The Divergent Debates It has been argued that there exist divergent and competing claims for preference in the allocation of the resources available in the company. These differences in preferences have in turn led to emergence of distinct points of view with regard to what actually should constitute the governing objectives of the corporation or any business entity. In this way, there has emerged a school of thought that believes that best managed companies and corporations are those that consistently make every attempt to resolve existing trade-offs in particular ways that create maximum possible value for shareholders (McTaggart and Kontes, 1993). This is a position that is vividly associated with CEO at a corporation known as Indian Head Mills. According to the postulation of the CEO, corporations exist to purposeful serve the intrinsic common value of shareholders that is to increase their overall common stock in the company (McTaggart and Kontes 1993). In this manner, the CEO refutes the long-held notion that, shareholders are in business to serve interests of stakeholders. Accordingly, the author clearly states that, shareholders invest in corporations not with an idea or intention to grow big and increase in size, or become more diversified, or to make best from their activities and what they do, or have in place sophisticated machines and equipment, or even have the most satisfied and happy customers. However, the sole role of corporation is to ensure the improvement of the inherent value of common shareholder’s equity in the company or corporation (McTaggart and Kontes 1993). Furthermore, the CEO contends that, corporation do not necessarily exist to constantly create and provide jobs, or to be the best leaders in product development, or to achieve any status as far as business is concerned, but exist to make best of economic value and benefit from all these activities. As a result, it will be pointless and an act of absurdity if organizations were to pursue all these activities in absence of economic maximization motive or benefit (McTaggart and Kontes 1993). Therefore, although all these activities may be witnessed in the lifetime of a corporation, the concerned people have to know that such activities only come about just as means to the objective of shareholders in such cases; people have to refrain from confusing the means and ends. This is to say, shareholders are more concerned and more inclined towards the ends than the means to the ends, which of course constitute maximization of economic motives. There is also the second group or school of thought who tends to deviate from the thinking and postulation of the first school of thought. According to this second group, stakeholder, and not shareholder should be the paramount and basic management objective of the organization (McTaggart and Kontes, 1993). According to this school of thought, stakeholders such as employees and society should have their interest valued most than the interests of shareholders and people like customers. The basis of this argument is that, corporations have to endeavor themselves in increasing customer satisfaction, which in turn can be the source of growth and increase in value to other areas. The proponents of this position goes ahead to argue that, although the legal understanding and justification of corporation’s existence is to increase shareholder’s value, the philosophical and conceptualization of this is wrong especially in a society that has diverse stakeholders. The argument presented is that, corporations do not exist to benefit investors alone, nor should corporations be built on such principle, but rather, there is need to see and regard corporation as entities that meet and satisfy the needs of its customers and not shareholders (McTaggart and Kontes 1993). Satisfying customer needs is seen to be the perfect avenue or road to achieving the market share of the organization, which in turn enable the organization to increase its share value on assets for the benefit of shareholders. As a result, customers are seen to be the key to realization of market share, which in turn has the potential and capacity to enable the corporation realize increased share value on the investments. The third group consists of school of thought that advocates for creation and realization of balance among stakeholders and their varied interests. The understanding of this group is that, corporations and to extent, shareholders do not act in vacuum or isolation, but depend on numerous stakeholders. It is from the combined effort of different stakeholders that an organization is likely to succeed and increase its share value. Given that it is hard to satisfy needs and desires involving different stakeholders, there is perception that, by acting in balancing and making every effort to put the interests of stakeholders on an equal share, the corporation is best placed to realize profound positives such as increase in share value of the organization (McTaggart and Kontes 1993). In this regard, it is expressed that that corporations should exist and function based on broad mission and vision of serving all stakeholders equally and not shareholders only. Using evidence of published report about the ranking with regard to importance of stakeholders of an organization, proponents of this school observe that, according to findings, customers and government are the most important stakeholders in an organization, followed by shareholders, then employees and finally society (McTaggart and Kontes 1993). Does a company exist for the benefit of shareholders? Despite the rise of above different schools of thought regarding the stakeholders and shareholders with regard to management objectives, what is clear is that, the debate is likely not to come to a conclusion any time soon. There is likelihood that different and divergent position will continue to exist among different scholars and business people. In an interview, Suzy Welch, a business journalist and Jack Welch, once a CEO, make it clear that corporations exist to benefit shareholders (Welch and Welch, 2006). According to the authors, although there is varied perception as to whether the company belongs to shareholders, or employees, or even customers, it has to be known that, companies function and operate as entities owned and directed by shareholders. In this manner, the authors postulate that, interests of the shareholders in the company at whatever cost have to supersede the interests of other people or players. The authors goes ahead to note that, the current debate as to who exactly ‘owns’ the company is nothing but mere attempts of some people in the civil society, government and worker unions to gain ‘voice’ in terms of being part and parcel of company policy formulation. The observation made by the authors is that, the company shareholders do realize that, they operate and impact on many people in the society and are likely to respond to ‘voices’ of different civil societies, government and labor unions in principle (Welch and Welch, 2006). However, even when the shareholders are willing to negotiate and talk with these stakeholders, there is always level of mistrust and hidden agendas, which in turn make shareholders fiercely assert their position in the company in order to ensure it continues with existence. In asserting their role, the shareholders are likely to be more guided by their own interests, which to them, constitute the basis to the survival and continuity of the company. As a result, shareholders become wary of these stakeholders and their hidden agendas, which in most cases demand for more powers and say in the running of the company, which shareholders are not willing to let go easily (Welch and Welch, 2006). Guided by the principles of capitalism, companies in the modern world are perceived to be largely profit-oriented based on maximum utilization of resources. In this situation, owners of capital and investments in the company are out to do business, and do business to the maximum. In doing business to the maximum, the owners in terms of assets and investment are largely motivated by large profits and quick returns and every effort is made to exploit the resources in order to increase profit margins. In capitalism, the essence of social or responsibility is minimal and where it is applicable, it only operates within checked goals. As such, shareholders, who in no doubt are capitalists, are therefore, involved in all moves and strategies that are aimed at increasing profits and ensuring continuity of the company. In doing so, shareholders (capitalists) are likely to minimize participation or involvement of other stakeholders in the management of the company or in delegating more powers to other stakeholders. At the same time, the shareholders are likely to reduce the level of social participation in the running of the company since such attempts may just be destructive and distraction in nature to the realization of profit motives and objectives of the company. As a result, shareholders in modern organizations make every attempt to control the companies and reduce the influence of stakeholders. In doing so, the shareholders are more concerned at protecting the company from external forces that may act as barrier to profit maximization strategies and goals in the organization (Welch and Welch 2006). Therefore, it can be noted that, companies exist to serve the interests of those people who take part in electing the board of directors, which in turn is responsible in selecting the management team, which of course has to advance the interests of shareholders, and in this way, the company is seen to belong to shareholders as its ‘real’ owners. Corporate governance theories Agency theory has been widely used in corporate governance and the theory postulate that, relationship in corporation is characterized with motivation and controlling cooperation. The primary and basic goal of this cooperation is to see the share value of shareholders increase through motivation incentives (McColgan 2001). The theory originated in the economics background and the convectional interpretation of the theory is that, shareholders, are principals in business entities and that the goal of the company is to increase and maximize profits for these principals (Lehman 2005). This is a position that was reinforced by Milton Friedman, who argued that, the social obligation and responsibility of any company should be to maximize profits for its principles as the primary objective (Kim and Kim 2006). Shareholders are seen to be principals in the organization and as a result, they are likely to use incentives and motivations to induce managers (agents) to advance their goals and objectives in the organization in the most profit-maximizing manner (Lower 2010). Hence, managers are motivated through incentives to carry certain functions in the organization that benefit shareholders and raise the value of equity (Clarke 2004). Moreover, agency theory postulates that, interests of the principals (shareholders) need protection and such protection can come about when there is separation of roles between the board of directors and executive management (Clarke, 2004). On its part, stakeholder theory postulate that, company is made up of numerous stakeholders and the management objective need to be of pursuing and satisfying interests and needs of all stakeholders in the company (Idowu and Louche, 2010). As it was seen earlier, stakeholders include employees, customers, government, society, and many more. The basic argument of the theory is that, those with managerial responsibilities in the organization have responsibilities to other parties other than shareholders and that, any fiduciary obligations owed to shareholders to maximize profits might be subject to the constraint of respecting obligations owed to such stakeholders (Fernando 2009). The stakeholder theory goes ahead to argue that, unlike in agency theory, shareholder is not the principal stakeholder in the organization but rather, is part of a larger group of stakeholders in the company. As such, when it comes to critical matters touching the company, interests of shareholders may have to be shelved for the interest of other stakeholders or the company (Chew and Gillan, 2009). The basis of these two theories is that, attempt is to be made in showing how business entity in modern world cannot operate in isolation of shareholder and other stakeholders but there is need for cooperation and responsibilities guided by strong check mechanisms. The claim by agency theory that primary goal of companies should be to create wealth and maximize profit for shareholders forgets one aspect that, creating wealth, which ultimately increase profits come from customers. The company cannot make wealth without having a concrete base of loyal customers (Phillips, 2011). As a result, creating loyal customer base require the company to have in place greater consideration for consumers and his or her needs have to be catered for appropriately. In similar manner, the company cannot thrive in an environment of de-motivated employees. Employees act as the bridge to realization of greater profits and their concerns and issues are likely to affect realization of profits. As such, organizations have to ensure its employees are managed and motivated in the most appropriate way. All these, apply to other stakeholders such as the society, which has to give the company legitimacy and social approval, the suppliers have to be connected well to the company top ensure its activities with production are not disrupted. More so, to the government as another key stakeholder which has to regulate the activities of the company? (Yocam and Choi, 2008) On the other hand, emphasis and responsibility on stakeholders should not isolate or demean the shareholder, since his or her investments and capital are still required and important to see the progress of the community and other stakeholders. Therefore, as more emphasis is directed at addressing the needs of stakeholders in the best way, efforts have to be made to ensure shareholders remain motivated, confident, and satisfied. As a result, there is need for an act of balancing between the agency theory and stakeholders’ theory. Observation made is that, organizations cannot claim to be possessed with profit motive (agency) and abrogate the responsibility part (stakeholder) (Mayo, 2001). This has been made more complex by the rise and emphasis for corporate social responsibility that corporations have to adhere to. Corporate social responsibility advocate for sound profit making within tenets of humanity, responsibility and ethical. As a result, the various stakeholders in the unit cannot subdue the other, lest the entire system is rendered dysfunctional. Conclusion The extent to which a company can benefit the shareholder only in disregard of other stakeholders is rendered impossible and almost impossible in modern world. The impossibility come from the fact that, realizing profit maximization through mere claim of ownership is not practical as diverse stakeholders influence and sometimes defines the direction and performance of the organization. There is likely to be interdependency in the organization, and this factor is likely to see a lot of cooperation in achieving any set goal. At the same time, by claiming that organization only fulfills goals of profit maximization without a blink of responsibility, is almost an attempt in futility. Today, organizations apart from profit motives have responsibilities both social and economic, which they have to perform and achieve during interdependent cooperatives. Reference List Bain, N & Barker, R 2010, The Effective Board: Building Individual and Board Success, Kogan Page Publishers, London. Baker, H K & Anderson, R 2010, Corporate Governance: A Synthesis of Theory, Research, and Practice, John Wiley and Sons, MA. 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