Growing Convergence of Corporate Governance - Coursework Example

Memorandum for Corporate Governance Memorandum Ahmad December 22, Growing Convergence of Corporate Governance Corporategovernance is considered as one of the major determinant of the success of a company. Good corporate governance aims to create value for the stakeholders and improve the brand image of the company. It is viewed as the structure of a corporate hierarchy and the relationship among its members, which determines the company’s performance and direction. The board of directors (BOD) holds the central position of the corporate governance system of a firm (ASX, 2014). The relationship between the board of directors and other members like the management and the stakeholders plays a vital role in the success of the firm. Apart from the governance framework it also includes the legal, institutional, ethical and regulatory framework of the community. Corporate governance is also responsible for the accountability to capital providers. It deals with the conflicts between the management and the investors. In a broad perspective, corporate governance is defined as the ways in which an organization is administered, controlled and directed (Corpgov, 2012). Growing Convergence of Corporate Governance The corporate governance norms have shown a trend towards a growing convergence. Growth of globalization boosted by technological advancement has allowed the stakeholders to maintain a close relation and connectivity with the company (Carati and Rad, 2000). The advent of internet connectivity has made the global business market an open platform, where the stakeholders can easily compare between different governance norms followed in different organizations. Most of the firms operate in perspective of multi- national stakeholders, where the investors of a particular company belong to different cultures. As a result the firms needed to adopt a commonly accepted and globally used corporate governance system. The convergence of the corporate governance is to make sure that all the stakeholders, employees, and the management work in a convergent way so as to create value to the organization and all associated individual (Strandberg, 2005). Previously, the governance process was only focused on the firm’s compliance to set rules and regulations. Eventually the process has evolved from box-ticking approach to a behavioural transformation, which allows the organization to not only make sure that it is moving in the right direction but also it ensures value addition for the stakeholders. The importance of stakeholders has become a major concern for the firms, as they represent the primary determinant of the organizational success (Vogt, 2007). Among the stake holders the employees act as the driving force of the organization, thus improving the employee motivation factor is also an important reason behind the organizational sucess. The reputation of an organization as a good employer is responsible for high employee retention, which as a result leads to higher and efficient organizational output. This reputation helps the firm to attract high quality work force to the firm. But establishing a reputation of a fair employer requires a firm to maintain its corporate policies in such a way that their employees are treated in a fair manner with proper respect and pay scale. Monitoring the work place environment is also important for employees’ job satisfaction. Due to highly competitive market scenario, the organization often focuses only on the short term financial benefits which as a result affect the overall efficiency of the workforce. Approaches like reducing salaries and increasing work load causes unrest among the workers which results in long term effect to the organization. The proper governance structure in the organization will lead to higher motivation level among the employees; which in turn will allow them to increase their overall productivity. An equitable and fair treatment of the employees will allow the organization to manage its human resources with care and at the same time it will also lead to higher organizational profitability (IFC, 2011). A well designed corporate governance system also allows the firm to manage the involved risks in a more resource efficient manner. Due to the rise in market volatility and highly competitive market environment, the level of uncertainty in the business environment has increased drastically. Managing the organizational risks does not limit to regulation compliance, the organization also needs to address the constantly evolving market scenario. Incorporating a strong governance system in the organization will allow the management to control the internal environment so as to adapt to the external business environment. The role of the stakeholders should be clearly defined so that each of them can have clarity of their goals and required activities. The hierarchy of the organization should be well defined and each members of the hierarchy should focus in their respective roles and duties (Vogt, 2007). This calls for the debate of whether or not the roles of CEO and Chairman should be separated. In traditional practices the roles of CEO and Chairman were used to be consolidated. There were no clear demarcation of their roles and responsibilities. This as a result led to inefficient governance and improper balance of power. The growing trend of splitting the roles of CEO and Chairman has grown in the past decade from 25 % to 40 % (Ferracone, 2014). Dividing the roles of CEO and Chairman has been followed by the European organizations for a long time and this has gained popularity among the American firms as well. The fast adoption of this concept gives a clear idea that separating the roles provides better governance in an organization. Moreover, the combined role often leads to financial instability as the board fails to protect the profitability and long term health of the firm. Splitting the roles allows the firm to have an independent oversight of the entire business operation, and it will also allow the board to stay in close alignment with the shareholders and investors (Charan and Neff, 2010). Reports by IFC (2011) have shown evidence from the Nuqul group that how one man decision making system can hamper the growth of the company. The company was run by Ghassan Nuqul, who realized that he needed to institutionalize the business operations in order to maintain long term sustainability and growth. However, he was stumbled upon by the challenge of having running the business single handed. All the decisions flowed from one person to the subordinates of the subsidiaries. This concept got irrelevant when the company grew in size, and it was not possible for one individual to make all the decisions. Thus Ghassan adopted a decentralized approach to run his business, which as a result streamlined the business activities and increased the efficiency of the firm. Furthermore, he clearly defined different job roles, set accountability measures for the employees and established future business plans along with introducing certain performance indicators. Thus developing a proper corporate governance system with clear distinction in the job roles of the higher authorities has allowed Nuqul group to expand its business successfully (IFC, 2011). Implementing Corporate Governance Family owned firms are mostly common in the Middle East and North Africa (MENA). The private sector of the MENA region is mostly dominated by the family operated firms and other small and medium sized enterprises (SMEs). In these types of business structures the roles the family, BOD and the management are often ambiguous and overlapping. Thus these companies should at first make clear mentioning of roles and responsibilities of these members and also their relationship to each other. In order to implement a proper governance system the firm should start from improving the board of directors. The BOD plays the central role of a firm’s governance. It monitors the management and provides guidance and leadership to the subordinates. In an early stage of the company, the informality and flexibility of the ad hoc decision making of the board can be advantageous, but eventually as the company grows in size this concept becomes irrelevant (Vogt, 2007). With the change in the business stature of the company, the management should also change the governance system accordingly. The implementation should begin with assessing the current roles and accountabilities of the company, followed by the assurance of their allocation in a proper manner. This allows the management to operate the company in the absence of its owner (IFC, 2011). Most of the firms in the MENA region do not follow any written set of rules and procedures stating the governance guidelines. As a result, this increases the room for errors and creates misunderstanding among the subordinates, which in turn leads to added cost for the company. After laying down the governance policies, the management must make sure that all the necessary legal and regulatory activities are implemented in the business operations. It also makes sure that the firm conforms to all social and ethical code of conduct, so as to avoid any internal disputes. The roles and responsibilities of the board, the management and the shareholders should be explicitly defined and they duties must not overlap (Aras and Crowther, 2010). For effective functioning of the board, it should include individuals with sufficient knowledge and experience regarding the business activity and the current market scenario. The board’s decision making process should align to the organizational objective. The election of the chairman should be done keeping in mind that the individual should be able to prove himself to be a good leader, who can guide the board members in making the right decision. The CEO of the company should hold the responsibility of designing the long term strategic planning of the company, by setting the vision and mission of the firm. In most of the cases in the MENA region the owner of the firm plays the role of both CEO and the Chairman. The roles of CEO and chairman should be clearly demarcated. Thus in order to avoid confusion among the stakeholders, particularly among investors and creditors, the clarification of accountability, role and responsibility is necessary. However, one can raise a debate over the splitting of roles of CEO and the chairman, as the combined role sometimes provides a better leadership to the board. On the other hand, one can also argue that an individual who plays the role of a CEO cannot effectively be the chairman. In case of the MENA countries particularly the African countries, a majority of the firms are family owned and in these cases splitting the roles lead to better management of the business operation (IFC, 2011). The example of Nuqul group has given enough evidence that separating the roles will allow the firms to appoint a highly experienced CEO, while still keeping the control on the family’s hands via the board. Irrespective of the structure, a good corporate governance system makes clear distinction of roles and responsibilities of the associated members. The corporate governance system should underline certain rules to evaluate the effectiveness and progress of the board. The evaluation process can be carried out by internal members, external auditors, but the overall process should focus on the following guidelines. The board members must perform their duties following their allocated roles. Their considerations must be balanced between the short term or day-to-day activities and long term strategic decision making. Managing the time invested and utilising them in an appropriate manner is one of the primary functions carried out by the governance body. The time management also reflects the level of engagement of the board with the corporate governance objectives (IFC, 2011). Apart from these, all the activities are being developed considering the validity, reliability and authenticity of the information being provided for decision making process of the corporate governance. This also requires the engagement of internal and external stakeholders of the firm. All the strategic decision should be taken based on a proper balance between the organizational knowledge and the decision making power. The evaluation should not limit only to the overall performance of the board but it should also extend to each members involved. It will help to point out any missing expertise in the board members and how the management can further improve the efficiency of the board (Aras and Crowther, 2010). During the evaluation process if any issues or drawbacks are found, it must be reported to the chairman who will then give proper guidance to the board members so that the problems can be solved. The board should also evaluate the performance of the CEO with the help of the chairman’s guidance. This is one of the advantages of separating the roles of CEO and the Chairman. The independent Chairman is able to review the performance of the CEO, and the final verdict rest on the decision of the board. The changing market scenario demands new approach to a business operation and to its management. The board of directors should consist of more members who are free thinkers and can encourage other board members to think out of the box. As a result this unorthodox approach will lead to innovative decision making and it will also help the firm to cope with the changing market environment. Risk and Control A properly designed corporate governance system can also help to anticipate, identify and mitigate any imminent risks for the organization. The most proactive approach for risk mitigation process is to carry out assessment of the internal control encircling the finance, compliance, operations and the internal risk management system. In case of SMEs, third party professional consultants provide advisory on the necessary internal controls, whereas in the larger firms, the internal audit committee of the board is dedicated to the risk management process (Naciri, 2009). Even though, the risk monitoring is overseen by a dedicated group of individuals or committees, but the board should be involved in the overall risk mitigation process. The governance system should lay down a list of documented risk factors which will assist the board to take necessary actions. The documentation should include the following points, a) identifying the primary risks for the company and its stakeholders, b) identifying the probable impact on the company upon the risk occurrence, c) calculating the level of probability of occurrence, d) designing the activities in case the risk occurs, e) take necessary proactive actions to avert the probable risks (IFC, 2011). Policy Transparency Among the MENA countries, most companies operate by maintaining a high degree of secrecy. They often try to keep their operational and financial information away from general public. The increased opacity of business practices creates a strong barrier to investments from external sources. Moreover, previously these companies were hesitant to allow external investment for the fear of losing control over the business operations. The business managers in the MENA regions must understand that maintaining a good governance policy which will allow the board or the family to have control over the operations and at the same time it will maintain transparency and will attract more external investors. Thus, it should be kept in mind that following a commonly agreed governance system which promotes clear distinction of roles and responsibilities, adding value to the stake holder, rather than just following guidelines and maintaining sufficient transparency will lead to a sustainable business operation (Saidi, 2004). Reference List Aras, G. and Crowther, D., 2010. A handbook of corporate governance and social responsibility. 5th ed. London: Academic Press. ASX, 2014. Corporate Governance Principles and Recommendations. ASX Corporate Governance Council, 3, pp.3-4. Carati, G. and Rad, A.T., 2000. Convergence of corporate governance systems, Managerial Finance, 26 (10), pp. 66 – 73. Charan, R. and Neff, T. J., 2010. Separating the CEO and Chairman Roles. [Available at: [Accessed 22 December 2014] Corpgov, 2012. What is Corporate Governance? [online] Available at: [Accessed 22 December 2014] Ferracone, R., 2014. Combined Chairman/CEO Roles: Easier Than You Think. [online] Available at: [Accessed 22 December 2014] IFC, 2011. Advancing Corporate Governance in the Middle East and North Africa: Stories and Solutions. Center For International Private Enterprise Global Corporate Governance Forum. February, pp.2-72. Naciri, A., 2009. Internal & External Aspects of Corporate Governance.8th ed. New York: Routledge. Saidi, N., 2004. Corporate Governance in MENA countries. Lebanon: The Lebanon Transparency Association. Strandberg, C., 2005. The Convergence of Corporate Governance and Corporate Social Responsibility. Strandberg Consulting, March. pp.4-10. Vogt, H., 2007. Convergence in Corporate Governance in Light of Globalization. Comparative Corporate Governance: Methodology, July, pp.25-28. Read More