Corporate Governance - Article Example

Review of Corporate Governance Article Review of Corporate Governance Article 0 Summary and critical review of article The article, Responsible Corporate Governance: Towards a Stakeholder boards of Directors? Deals on the organization of composition of boards to ensure responsible corporate governance from two perspectives that of corporate social responsibility and the secondly a good governance perspective. Different theoretical perspectives are given in the order as a means of reaching this goal of linking board composition to CSR and financial of a firm. The article begins with the analysis of the increase in attention and need for corporate social responsibility and CSR is defined as “the design of institutions that induce or force management to internalize the welfare of stakeholders” (Ayuso, & Argandona, July 2007). The paper stipulated that corporate governance problem came from separation of ownership and control in public corporations and was aimed at mitigating the occurrence of opportunistic behavior by managers (Berle and Means, 1932). However, there are other stakeholder needs that have to be met by an organization including the needs of the employees, suppliers, local community, customers, environment, local community, and society. This leads to the need to the need for a shift from the traditional perspective and the article relates this shift by ensuring the board composition impact positively on CSR. This is due to the influence of the board on firm strategy, incentives, and control systems making it the most responsible for CSR. Shareholder approach to corporate governance theory suggests focusing the corporate strategies of a firm towards satisfying the interests of the stakeholders. The stakeholders are the individuals or groups affected by the actions of the organization or affect the purpose of the organization. There are two reasons for this approach where there is a benefit to the organization intrinsically and on profitability on performance of CSR on stakeholder’s perspective. The aim of corporate governance therefore is lead to distribution of value to stakeholders with shareholders compensated on investment on capital, employees on marginal productivity, and suppliers as fair contracts. The dimension and composition of boards can reflect stakeholder concern is having stakeholder representatives as board members, appointing oversight board committees, and forming a committee mainly composed of stakeholders dedicated to CSR. The article also deals with the relation of board composition of financial performance and this is seen through ensuring accountability of boards to stakeholders and augmenting their effectiveness. Board composition is then evaluate in the article on its influence on CSR and the recommendations given for increased CSR and financial performance is increasing the number of independent directors in boards as backed by agency theory. Agency theory views the action of boards as monitoring management functions on behalf of the stakeholders and this will be augmented when the independence of the board to the CEO or management is high achieved through augmenting independent director numbers. Resource dependence theory posits that dependent directors are more resourceful through providing advice, communication channels to external environment, legitimacy, and commitment preference but empirical studies have shown that there is no direct relation between dependence and financial performance. The conclusion is for inclusion of independent directors on boards on CSR as they relate the changing needs of directors and is sensitive to society needs; provide more resources and legitimacy to the board. Inclusion of female and minority directors on boards advocating have increased with the reasoning based on equity and fairness, reflect racial, and gender diversity of employees, customers, and other stake holders. Agency theory suggests the inclusion of minority and female directors that board diversity augments independence increasing ability to monitor management. Resource dependence theory supports the inclusion of female and minority directors on the basis that it increases resources brought by each board members and augments access to external resources. Both agency and resource dependence theory and other theories are in favor of female and minority directors increasing CSR. Inclusion of stakeholder directors is advocated by resource dependence theory and not touched on by agency theory with the reasoning being employee directors increase board efficiency by incorporating company information. Stakeholder director inclusion leads to recognition of stakeholder issues; hence CSR. Stakeholder directors increase board capital in terms of expertise, knowledge, experience, and reputation and skills (Hillman & Dalziel, 2003). Stakeholders that ought to be included should add value, posse’s strategic information, and assume unique risks. The study is well organized and has its set plans on corporate governance well in terms of the need to include stakeholders into the board of directors. The paper uses different theoretical perspectives well in coming to the conclusion for the need to have stakeholder inclusion in boards. The research also uses diverse academic literature to base the arguments in the paper and make recommendations for future corporate governance. However, the needs of suppliers as part of the stakeholders are not analyzed in the paper forming a shortcoming that the paper could have addressed in the analysis of stakeholder contribution to corporate governance. 2.0 Evaluation Criteria The evaluation criteria selected on how the organization can develop a business strategy, which will provide more representation of stakeholders on key management boards is hierarchy evaluation and this will entail the analysis of board composition in terms of employee inclusion on board, community representation, female and minority inclusion, and supplier’s representative. 3.0 Apply to organization Starbucks board of directors is composed of 12 independent directors who are selected based on precious experience at management positions in the government or other public corporations, skills, qualifications and success. The board of directors at Starbucks consists of 11 independent directors and the chairperson of the board and CEO of Starbucks since 1985, Howards Schultz. The other 11 directors are Kevin Johnson, Mellody Hobson, Javier Teruel, Olden Lee, William Bradley, Joshua Ramo, Myron Ullman, James Shennan, Craig Weatherup, Clara Shih, and Robert Gates. There is an inclusion of minority and female directors in the Starbucks board. Two of the 12 directors at Starbucks are females who include Mellody Hobson who has been an independent director at Starbucks since 2005 and she is 44 years. The other female director at Starbucks is Clara Shih who is 32 years and has been an independent director since December 2011. There is no representative of the directors on the board of directors at Starbucks and the views of the directors are met through ensuring the company buys from firms that promote ethics and participate in CSR. Community representation on board of directors at Starbucks is absent as all the directors consists of executives who served different positions in businesses and government institutions currently retired or working in other firms or their own firms. This shows that none of the directors is employed at Starbucks except for the Chairman who cannot represent employees since he is part of the management. Therefore, there is no employee inclusion on board at Starbucks. Suppliers do not have a representative as director in the Starbucks board as none of the members the board is involved in the supply to the company and 11 of the directors are independent directors. Therefore, there is no Stakeholder director in the Starbucks board. 3.0 Current Advantage and disadvantage The advantage of the current position of the firm is that there are different skills, qualifications, and experience brought in by the high caliber of directors at the company. The other advantage is that the inclusion of females in the board of directors increases the diversity and inclusivity in decision making at the company (Duplessis et al., 2005). The main disadvantage of the current board of directors at Starbucks is that the resources, skills, participation, and needs of the stakeholders are not incorporated in decision-making in the Starbucks board. This reduces the ability of the company to meet stakeholder needs and reduces the efficiency of the firm. The other disadvantage of the current position is that the diversity in decision-making is lost owing to the lack of enough diversity among the board members in terms of racial and gender diversity. 4.0 Develop strategic future The strategic future for the composition of the board of directors for effective corporate governance at Starbucks should have the following characteristics. The board of directors should make a point of having at least one director to represent the views of the employees (Euromoney institutional investor plc, 1996). The director will augment the efficiency of the board by bringing essential company information to benefit in making decisions relating to the needs of employees and strategy formulation of the company. The other recommendation is the inclusion of a director to represent the suppliers to the company. This will aid in better decision-making in relation to supply chain management and incorporation of supplier recommendation and views. Since the actions of Starbucks have, an effect on the community there should be a community representative director and will champion the needs for corporate social responsibility and community development efforts in the board meetings. On the inclusion of female and minority members to the board the strategic future of Starbucks should be an inclusion of more females and races to the board to at least a quarter of the total directors. This will allow Starbucks to promote gender and diversity as reflected by the employees, customers, and suppliers to the company as well as the communities where the Starbucks shops are situated. 5.0 Future Advantage and disadvantage The main advantage in the future will be efficiency and effectiveness in decision making in running the operations of Starbucks due to the inclusivity, diversity, skills, experience, stake holder consideration, and consideration gender and racial needs of the board of directors. The other advantage is that having employee representative on board will augment employee motivation and satisfaction at the company, as they will feel respected and part of the organization increasing productivity. The main disadvantage is that meeting the needs o9f the different stakeholders by the board will pose a problem and may hamper the ability to make quick decisions by the board. 6.0 Conclusion and justified opinion In conclusion, stakeholder inclusion on board aids in better decision-making as advocated by agency and resource development theory as explained by the article and applied in relation to Starbucks. My opinion is that stakeholder inclusion in boards augments decision-making and that there is need for the maintenance of independence in the board of directors of a firm. This is justified by agency theory, stakeholder theory, and resource dependence that call for stakeholder inclusion and independence as well as inclusion of minority and females in boards. I recommend the steps taken at Starbucks on ensuring independence of the board of directors. a References AYUSO, S. & ARGANDONA, A., (July, 2007), Responsible Corporate Governance: Towards a Stakeholder boards of Directors?, IESE Business School: University of Navarra. BERLE, A. & MEANS, G. (1932), The Modern Corporation and Private Property, Macmillan: New York. HILLMAN, J. & DALZIEL, T. (2003), “Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives”, Academy of Management Review 28, 3, pp. 383 - 396. DU PLESSIS, J. J., MCCONVILL, J., & BAGARIC, M. (2005). Principles of contemporary corporate governance. Cambridge [England], Cambridge University Press. EUROMONEY INSTITUTIONAL INVESTOR PLC. (1996). Corporate governance. London, Euromoney Publications. Read More