Corporate Governance & Social Responsibility - Essay Example

? CORPORATE GOVERNANCE & SOCIAL RESPONSIBILITY Part A Question Recommended Corporate Governance Principlesfor Adoption in Line with OECD (2004) Corporate Governance Principles, Sarbanes Oxley Act (2002), Combined Code (2003) and the Australian Securities Exchange (2007) For any company wishing to be listed on a stock exchange, it is important that it define its corporate governance policy. Corporate governance is described as a system where companies are managed and directed. Clark (2004) asserts that, corporate governance influences how particular company objectives are achieved and set, how risk is assessed and monitored as well as how performance is optimized. It is quite observable that good structures of corporate governance encourages employees and general companies to create value , control system in relation to risks involved and provide accountability. There is need for this International Extractive Company to adapt specific corporate governance principles in dealing with actability, disclosure to shareholders, fiduciary duty, and mechanism of control and auditing (Clark 2004). It is very important for this International Extractive Company to understand the right of shareholders and key ownership functions. It is essential for international extractive Company to adapt corporate governance that protect and facilitate shareholders rights. OECD (2004) asserts that, shareholders rights need to include; safe and secure methods of ownership registration, transfer or conveying of shares, timely receive relevant information about the company, allowed to participate in voting during shareholder meeting and finally, be free to either elect or remove member of the board. By so doing, it is evident that shareholders will be able to follow company’s performance in an efficient and transparent manner. The other principle that needs to be adapted is building on corporate governance which recognizes the rights of the stakeholders which should be established through mutual agreements and law as well as encouraging active co-operation between stakeholders and the corporation in creation of jobs, wealth and sustainability of the company financially stable enterprises(OECD 2004). By so doing, it is quite evident that stakeholder’s interest is protected. Further, adaptation of this principle ensures that performance-enhancing mechanisms are adopted through the creation of a proper and efficient employee engagement. If these two principles namely; role of shareholders in corporate governance and rights of shareholders and key ownership function are adopted by this company, the company will be able to perform well within the stock exchange and it will enhance efficiency in its corporate governance(Clark 2004). Question 2: Recommended Corporate Social Responsibility Initiatives that the Board the Board Should Adopt In addition to adapting the above mentioned corporate governance principles, it is important for International Extractive Industry to engage in various corporate social responsibility initiatives. According to Lee (2008), corporate social responsibility is a type of corporate self-regulation normally integrated into a business model. Engaging in corporate social responsibilities will enable this company to have a commitment towards the contribution of sustainable development through working with employees, their families and the general community (Strike et al 2006). It is important for the company to accept various duties presented to it such as sponsoring national and international sporting team. Here, social responsibility will widely be manifested in its legal, corporate, and economic systematic action in recognition on a particular communal responsibility and its attempt to meet the designed social need. There are various key drivers for CSR namely; social investment, transparency and trust, enlighten self-interest and increased public expectations. Enlighten self-interests is important in creating a synergy of ethics which ensures that a cohesive society is constructed for a sustainable global economy. Social investment is essential in contributing to social capital, which is a key factor in enhancing CSR initiatives (Lee 2008). Strike et al (2006) maintain that, with increased globalization, the company can adapt a CSR initiative with focus on environmental issues such as reduction of carbon dioxide emission and energy saving activities. Here, CSR provide the firm with consideration at an operational level, which does not only involve the company but also the larger community. Evidently, these CSR initiatives ensure there are a good working conditions and environments, which promote security, stability, and efficiency within the workforce and general public environment. Further, risk and cost reductions ultimately achieved in engaging in this CRS initiative, which is usually directed at the natural environment. Clearly, being proactive on environmental issues can lower cost involved in complying with both the present and future environmental regulation (Vogel 2005). CSR initiatives directed at managing various community relations also reduce risks and costs. For instance, creating positive community relationships may contribute to the company attaining tax advantages, which are usually offered by government as a way of furthering local investment. According to Vogel (2005), strong community relationships ensure that there is decrease in the number of regulations imposed on a company as this same company is perceived to be a sanction member of society. It is very important for International Extractive Company to engage in CSR initiative, as this will enable the organization gain a competitive advantage over its competitors. Part B Question 3: Key Causes of Unethical Activity among Boards of Directors In Light Of the Australian Stock Exchange (ASX) Principle that Companies Should “Structure the Board To Add Value” (ASX Principle 2, 2007) Corporate governance involves a framework of relationships, rules, processes and relationships by which and through which and by which the authority is controlled and exercised in the corporations. This involves the mechanisms that ensure that the corporations, companies and the persons in control are held accountable. The corporate governance is to influence the manner in which the objectives and strategies of a company are to be formulated and achieved. The methodologies and strategies by which the activities of the company are to be monitored and evaluated as well as how to optimize performance is to be embedded in corporate governance (Daily 2003). If the set principles of governance are not adhered to, unethical activities may arise and may eventually cause the firm to fail in attaining the formulated objectives. To begin with, the failure of the corporate structure to clearly establish the roles and functions of the senior executives and the board will result in to the lack of balancing of the available skills. Secondly, the unethical behavior among the boards of directors could be because of lack of the basic need for the senior management to have positive influence on the financial performances and the strategy of the company. This results in to ill decision-makings that are to negatively impact on the functions of the company, which is to take into account the stakeholders interests and the legal obligations (Clarke 2004). Despite the efforts for the company and its employees, the lack in meeting the informational needs may result in unethical behavior, as the investment community will lack the trust in the firm thus it will not be able to attract the required capital. Moreover, the same would occur if the procedures that is to be utilized in the presentation of the non-financial and financial positions of a company (Aguilera 2003). This requires a specific procedure that will help in the safeguarding the internal and external as well as the reporting procedures of the company. This will be in line with the fourth principle of corporate governance that requires a company to provide balanced and timely of all the material matters. The making of sound decisions is of prime importance to the corporate governance, which includes the board of directors, as this will enable the firm to carry out risks that they are able to manage (Sundaramurthy, 2003). Question 6: Problems Arising From the Application of Principal-Agent Theory to Corporate Governance The principle agency theory, which views a firm as a contrast nexus between the resource holders, raises fundamental problems in organizations if applied because of self-interested behavior. The managers of the corporation may have goals that are personal which compete are in competition with the goals of the owner that are aimed at maximizing the wealth of the shareholder. A potential conflict may arise involving the two groups as the managers are authorized by the shareholders to oversee the assets of the firm. The managers will seek to maximize their utilities while not serving the interests of the shareholders as they have the ability to do so due to the asymmetric information and uncertainty. This is because the managers are at a better chance to know if they will be able to meet the shareholders’ objectives or not (Krishnan 2005). Secondly, the application of the principle agency theory could result in a conflict in the management of the costs of the shareholder. This is because of the inappropriateness in the managerial actions because of the shareholder not being able to alter managerial behavior. Agency costs are expected to be excessive only if the shareholders attempt to make sure that the managerial actions are in conformity to the interests of the shareholder. The application of the theory also makes the corporation prone to other moral hazards, which include the seizing and shrinking of wealth, which is at the expense of the principle. To lay an assumption on diverging interests on the premises could result in the preparation of contracts that are complex and thus the need for the implementation of stronger mechanisms for monitoring. This will imply that the agencies will experience higher costs and other effects that are negative (Arthur 2003). Arthur and Busenitz (2003) cite the possibility of the occurrence of the Type I error because of principle objectives that are different from those of the agent that will be able to consider the agents perception. As a result, the agent would not conform to the agency regulatory premises theory or unable to give an explanation to their behavior, which will eventually lead to wrong result specifications (Wright et al 2001 Bibliography Aguilera, R, and Jackson, G 2003, The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28: 447-465. 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