Corporate Governance Principles - Assignment Example

Corporate Governance & Social Responsibility PART A QUESTION Corporate governance principles recommended to the Board based on the OECD (2004), Sarbanes Oxley Act (2002), Combined Code (2003) and the Australian Securities Exchange (2007) I would recommend the following specific principles: i. Every company should be headed by an effective Board which is entirely in fully focused on the performance and success of the company. (FRC, 2003). This is because for the extractive industry, the board will provide leadership both entrepreneurial and managerial, establish the corporate strategic aims, facilitate human and financial resources and look into performances in terms of management. The board should be able to draw company values, standards ensuring that company obligations to shareholders are met as well as understood. ii. At the head of the company, there should be a distinct division of responsibilities between the executive arm running the company business and the running of the board. None among the management should have the ultimate power during the decision-making process (FRC, 2003) This is because when this happens, the company will have a chairman who will be the leader to the board making sure it is effective in its roles and sets the board’s agenda. He will make sure the directors have accurate, clear and timely information. iii. Ensuring the Basis for an Effective Corporate Governance Framework. Since no governance structure exists, this principle will help to promote efficient and transparent markets, ensuring the consistency with the law and articulating clearly separation of responsibility among the management. This must be achieved by: Consistent, enforceable and transparent regulatory and legal requirements affecting governance should be provided. The framework should be developed to generally impact integrity of market, economic performance and promote participation (OECD, 2004). iv. The Rights of Shareholders and Key Ownership Functions. According to OECD (2004), the corporate governance is expected to safeguard and facilitate the expression of shareholders’ rights and so by applying this principle, the extractive industry will be aiming to put in place structures in order to achieve the following: Firstly, it gives the shareholders their basic rights which include but not limited to; obtaining a means of ownership by registration, be able to transfer shares, be able to obtain information regarding the corporate regularly and on time, obtain participation and voting regularly on AGMs, having a say in electing and voting office bearers serving on the board and finally be able to share the profits of the corporate. Secondly, it ensures that shareholders have the rights for participation and information on key decisions affecting the corporate which could include; proposals to amend the statutes, incorporation articles or any other relevant administration documents of the company, proposals to authorize additional shares and in any decisions to undertake significantly extra ordinary transactions (OECD, 2004). Thirdly, it gives shareholders a right to effectively participate and vote in AGMs well informed of the rules, procedures for voting in such meetings. Depending on the level of equity, it discloses to shareholders the required effort to secure control of any degree. Furthermore, it transparently makes the corporate function and in an efficient manner with every available facility facilitates ownership rights of the shareholders. In order to prevents abuse, they will be aiming to allow consultation between each other on issues pertaining to their rights (Zucker, 1977). v. Corporate responsibility during the company’s annual financial reporting. Sarbanes-Oxley Act of 2002 I would highly recommend this section of the act for the extractive industry and a complete compliance of the act since with respect to financial reporting, corporate managers, directors and auditors will be affected as far as financial reporting is concerned. It will also boost the confidence of investors when we talk of the financial reports presented. vi. Recognize and manage risk I could recommend that the company puts systems in place for risk assessment and management by enacting policies that will cater for risk assessment and management. Furthermore, the policies should disclosed in time to allow for the board to follow up on the implementation of risk assessment designs. QUESTION 2 Corporate social responsibility initiatives that would adopted by the Board Corporate social responsibility is a way by which corporations self- regulates themselves ensuring they comply with ethical standards, law, and international ways of doing business. The idea is to adopt responsibility in executing company’s actions in the process impacting positively on environment, communities, employees and consumers. The corporate social responsibility initiatives that the company can adopt may either be ‘internal’ aimed at offering incentives to the employees or ‘external’, extended to the suppliers or customers and the immediate environment (Warhurst, 2000). Therefore, for this extractive industry, I would suggest the following corporate social responsibilities: i. In order to be environmentally conscious, the company should have, like other companies, a responsibility on the community whose environment is directly affected by their extractive activities, a responsibility on the state, on the civil societies and they should also have a responsibility on the staff whose health could be affected by their economic activities. ii. Management of resources sustainably, which include shareholders, employees and company finances. This should be done bearing in mind that the management of these resources unsustainably will adversely undermine future activities of the company in terms of production, value added as well as employment. iii. Enacting practices geared toward gender- equality. Having in mind that corporate responsibility applies to all stakeholders and business, ensuring gender balance is fundamental for the continued growth. iv. Adopting stiff policies against bribery since unacceptable practices affect stakeholders and business. Bribery is not only unethical but also illegal and runs against the spirit of stakeholder values, presents risks which could include financial and criminal sanctions, pose threats to business sustainability, lower morale of employees and impair human rights. Rhetoric And Realities: Analysing Corporate Social Responsibility in Europe v. Adopting a community-based development approach. In this approach, the industry will be seeking to work with the local community to better themselves. They could set up a facility in which the community’s children could be educated and developing useful skills for the adults. vi. By applying the principle of philanthropy, which could include donation in monetary terms and giving aid to local organizations as well as needy members of the society vii. Incorporate the strategy of Corporate Social Responsibility directly into the business by participating in fair trade. viii. Since corporate success is interdependent with social welfare, this company will need an educated and healthy workforce by creating a shared value. For the thriving of the society, a competitive and profitable business should be developed. PART B QUESTION 3 The 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). Unethical activities among boards of directors are, according to ASX principle 2, 2007, are the relationships and interests who affects their independence and these could be: i. Being a majority shareholder or being associated with substantial shareholders within the company. This is likely to escalate into conflicting interests in the event that some crucial decisions regarding the company or the sister company are to be made. As a result, the stakeholder will be compromised and likely to make a decision that follows a predetermined pattern or in favor of an unpopular persons hence unethical ii. If a current director was previously employed in an executive position, both within the parent company or in a sister company, and prior to the move or elevation to the board, was not allowed a three-year recess period. This will pose questions of credibility on the director and serious questions will have to be answered regarding why he all over sudden wants to be a director. iii. If within the last three years, he has been fundamentally involved in the service provided by the company or sister company as a professional advisor, consultant or on any other principal capacities. The director is expected to be able to deliver independent judgment that is free of any resumption. This will materially affect this judgment. iv. If the director is a supplier, a customer or has any links with a supplier, customer of the company or sister company. Being a supplier or a customer or having relationship with a supplier or a customer will materially affect the independency of a director. Questions regarding conflicts of interests will have to be posed. v. If the director has other contractual engagements other than that of a director with the company or sister company. The directors are expected to enhance performance of the company but this will limit his performance as a director QUESTION 6 Application of principal-agent theory to corporate governance and the associated issues The principal agent theory may be defined as a situation whereby a representative has been appointed (agent) as a professional in a particular field implying that the principal can never have a complete monitoring of the agents performance. The variation in the agent-principal objectives regarding a particular task renders the delegation of this task by the principal to the agent very problematic if not impossible .in cases where the agent has different objective function but no private information it is in order for the principal to propose a contract which perfectly controls the agent hence inducing the actions to be what he would have liked them to be if he were to carry out the task himself (Corporate Governance, 2007). Another scenario occurs when the principal has to delegate a task to an agent with private information. The delegated information can either be a moral hazard (hidden action) or adverse selection (hidden knowledge). The former allows for the agent to proceed with the action without the principal’s permission, and the latter whereby the principal is ignorant of the private information on the valuation or the cost that the agent has/uses. It is therefore the issue of conflicting objectives and decentralized information which render the principal agent theory less popular in the corporate governance. In this theory, the economic agents focus some of their attention toward their private interests at the expense of the company interests. This essentially influences the company market behavior as well as the stock turnover. The implication is therefore limited sales and minimum profits. This theory proposes that the company maintains a major assumption in the analysis of corporate governance, few upcoming markets and any associated universal decision. This assumption has its own limits in that the Social behavior of particular small groups is more complex. In addition the norms of cultural behavior play a large role in shaping societies and their preferences. Nonetheless, it would be unreasonable to ignore the role of private incentives in motivating behavior just because of these cultural behaviors and norms. Another problem associated with the principal agent theory in corporate governance is the case of non-verifiability where the principal and the agent share the same information but no third party and, specifically, no Court of Justice can access this information in cases where evidence is required. Incidentally, it is discovered that, these informational problems prevent society from benefiting through the very best allocation of resources which could otherwise be possible considering most information has become common knowledge. These additional costs which must be incurred due to the unique operation of privately informed economic agents can be viewed as an example of the transaction costs emphasized by Wilson (1977). Further, another issue associated with principal-agent theory is Auctions which are mechanisms by which principals limit the information rents meant for their contracting agent by taking advantage of the intra-competition and rivalry among agents. The strategy requires structuring of the competition between agents/bidders operating with limited information about the auctioned contract by focusing on the rival agents’ information. An additional source of imperfection arises when either the principal or the agent may breach the contract and thus renege on his previous contractual obligation. Taking for instance the case of the principal reneging a contract. Thus, once an principal-agent relationship has been established and the agent has made a choice of the principal’s preferred contract, the principal having deduced the agent’s position may decide to propose the complete information contract which extracts all rents without inducing any allocation efficiency. However, agents throughout their years of operation have discovered such breaches and have had their initial truthfulness compromised as a precaution. Similarly, an agent might be tempted to renege a contract that offers him a negative ex post utility level (Jean-Jacques & David, 2001). Bibliography Corporate Governance 2004, A Guide for Fund Managers and Corporations – Blue Book, 5th edition, Investment and Financial Services Association. Corporate Governance 2007, Principles and Recommendations, 2nd Edition, ASX, Corporate Governance council FRC 2003, The Combined Code on Corporate Governance July 2003, London: Financial Reporting Council. Jean-Jacques, L & David, M 2001, The theory of incentives 1: The principal-agent model. New York: Jean-Jacques Laront & David Martimort OECD 2004, OECD Principles of Corporate Governance, Business Sector Advisory Group on Corporate Governance, Ira Millstein Chairman, Paris: OECD Publishing. Warhurst, A 2000, Corporate Citizenship and Corporate Social Investment: Drivers of Tri-Sectoral Partnerships, Journal of Corporate Citizenship Vol. 1. Wilson, R 1977, A Bidding Model for Perfect Competition," Review of Economic Studies. Zeckhauser, R. 1970, Medical Insurance: A Case Study of the Trade-O® Between Risk Spreading and Appropriate Incentives," Journal of Economic Theory.” Zucker, L 1977, The Role of Institutionalization in Cultural Persistence. American sociological Review Vol. 4. Read More