U.S. Companies as Motivators for Global Expansion - Term Paper Example

Running Head: CORPORATE GOVERNANCE CORPORATE GOVERNANCE CORPORATE GOVERNANCE Introduction Poor corporate governance has serious implications for global business and international trade. The United States (U.S.) economy is a benchmark for global growth and therefore corporate failures within this economy creates international concern. It is unfair to direct ill feeling solely at U.S. companies when other market based economies have had their share of failures during the self fed greed period of the last five years. U.S. companies as motivators for global expansion must however be ambassadorial in corporate governance approach. An excessive number of “icon” company capitalist economy corporate collapses are causing various stakeholders significant concern. Personal angst, in the form of financial losses endured, will either reduce the supply of venture capital (both locally and FDI based) available thereby slowing corporate and technological advancement or increase the cost of funds by requiring increased return on investment. Collectively, the loss of trust in capitalism as a stable and sustainable model of resource allocation provides non-capitalist economies a solid argument to complicate or delay opening their economies. This slows global market expansion and reduces efficiencies created through the utilisation of comparative advantage. Ethical corporate governance, without the requirement for legal intervention which increases the costs to all businesses, is critical to continued globalisation of markets and corporations. Divergent political, legal and cultural principles throughout the world require that balancing the dimensions of people, planet, profit and posterity must be a core responsibility of all corporate leaders. If these principles are not core business values, developing nations and third world countries will continue to view capitalist corporations with caution. The changes required are systemic meaning that shareholder groups, consumers, governments and all other stakeholders must hold corporations and individuals within them to account for their decisions and actions on pain of public vilification or through the power of purchase. Much of this activity is increasing and becoming global in scope with the Internet becoming a tool enabling information dissemination instantaneously. Investors must realise that immediate returns are not always possible. Investing in a company is a long-term joint venture that must be advantageous to the company, the individual and society as a whole; more in line with Islamic banking principles. “Although the current wave of globalization is the result of unprecedented scientific and technological advances, through history, movements of an international nature have been, to a large extent, about the spread of political and economic ideas across borders.” (Rayman-Bacchus, Lez., 2003) THE NATURE AND SCOPE OF CORPORATE GOVERNANCE A governance structure is the system which governs the relationships among a firm’s managers, shareholders, employees, customers and suppliers, playing an important role in providing both incentives and controls of managerial behaviour (Mallin, 2003). It can be defined as ‘an institutional framework in which the integrity of a transaction, or related set of transactions, is decided’ (Roe, 2005). The efficiency of a governance structure, that is, its ability to reduce transaction costs, is judged by its ability to economize on bounded rationality and to safeguard against the hazards of opportunism. Corporate governance is a term used when the focus of attention is on the governance structure of modern corporations that is on the system by which companies are directed and controlled. It refers to the set of activities which constitute the internal regulation of a corporation, including the relationship between owners and managers. (Barca, 2002) The essential element of the agency problem is the separation of management and finance, and of control and ownership. In many modern corporations, managers act as the agents of owners who have their right of internal monitoring and control to top management. The managerial corporations are controlled mainly by professional managers and most of their shareholders are too small and numerous to have a say. In these firms control was effectively separated from ownership. However, the conflict of interest clearly arises whenever an outside investor wishes to exercise control differently from the manager in charge of the firm. A small outside shareholder would like management to maximize the value of the firm. For example, by making acquisitions, that are unprofitable on average, top managers can increase both the size of the firm and their own compensation. Given the very unpredictable nature of merger outcomes, it is difficult for outsiders to be sure that managers are not simple looking for economies of scale or distribution or some other expected but elusive synergy.(Clarke, 2007) Corporate governance has been thought of as ‘a question of performance accountability’ (Barca, 2002), a question of how to induce managers to run the firm so as to maximize shareholder wealth. In the UK’s Cadbury report (1992), it suggests that managers must be free to drive their companies forward but exercise freedom within a framework of effective accountability. Therefore, the fundamental issue concerning governance by shareholders today seems to be how to regulate large shareholders so as to obtain the right balance between managerial discretion and small shareholder protection. Corporations need a system that can provide effective protection for shareholders and creditors, so that they can assure themselves of getting a proper return on investment. It should also help to create an environment conductive to the efficient and sustainable growth of the corporate sector. (Wearing, 2005) In recent times, there have been a number of high profile corporate failures. In many cases, Directors and Senior Managers have been held personally responsible. Often, these failures can be attributed to poor corporate governance and as such, corporate governance has been placed under intense scrutiny. BACKGROUND The collapses of ENRON, WorldCom, Tyco and HIH and the accounting practices of Xerox and Harris Scarfe highlight that all is not well in the boardrooms and executive chain of highly regarded companies. The argument that the set of circumstances that created an environment for collapse is new is to forget the events leading to “Black Friday” in October 1987. The same underlying factors of capitalising expenses to provide a solid balance sheet, greed and self-interest of Directors and key Executives, ignorance and conflict of interest situations were evident during both the latest global growth phase and that of the 1980’s. Corporate failures destroy shareholder wealth, confidence in the management and accounting practices of major corporations, their supposedly independent reviewers and the legislated framework developed to protect the rights of investors. In the global environment where international superannuation funds invest billions internationally, people everywhere willare lose when corporations go bankrupt. The deterioration in investor relationships decreases both local and foreign direct investment for corporations with globally acceptable moral and ethical principles. Investors are “more accepting” of investment losses if, ceteris paribus, there appears to be a sense of fair play, honesty and integrity in the decision making process of the corporate executives while attempting to increase shareholder value. Corporate America has a far greater responsibility to international markets and the global economy, because the modern form of Capitalism was born there. The U.S. is seen as the benchmark against which to compare all capitalist economies and therefore must be aware that other countries evaluate the roles, principles and values of capitalism based on their interaction with U.S. companies. The spate of scandals, failures and decision making for short-term financial gain defies belief. LARGE CORPORATE / CAPITALISM Apart from a direct financial relationship with the ENRONS et al, there will be a period of declining trust in the market place towards large global corporations. This is a purely natural and spontaneous human reaction depicting gross indignities at the outsider’s viewpoint towards self-indulgent largess, contempt and cavalier attitude to generating corporate and personal wealth at any cost and with any amount of risk. International reaction to the high profile corporate failures will be for collective-based nations, culturally opposed to the capitalistic and free market approach to global trading, to slow down the transition in restructuring their economies to a more market based structure and be considerably more critical in their evaluation of FDI. Nations like China, North Korea, Cuba, Iran and smaller less stable states with dictatorial incumbents, like Zimbabwe, now have arguments to espouse the righteousness of having strong state control over their markets and not incorporating free markets in their economy. SELF INTEREST INCENTIVES Individual Kaplan [1994b] finds that while the three economic systems (German, Japanese, U.S) are similar in many respects, there is one substantial difference - U.S. managers hold much larger stock and option positions. The differences between the U.S. and other systems almost certainly have increased because the wealth of U.S. CEO’s have become increasingly sensitive to the performance of their companies stock which has never been more evident than during the stock market Internet bubble period. Stock prices are affected by the return on their investment, both in terms of capital and income, which encourage delays to immediate consumption thereby providing capital for markets. As most corporate executive roles are short-term tenure positions, to achieve the maximum value from tenure, it may be in an executive’s personal interest to over promote the successes, ignore failures and make reckless high risk decisions. Corporate (Phraya, 2003) Arthur Anderson was considered a pillar of strength, a brand reflecting stability, respect, and synonymous with the good things about US business culture but it failed to return the trust of investors and the man in the street in US and Western business as a whole. The mutual relationships between auditing firms, their consulting arms and businesses lead to “conflict of interest situations” for growing auditing firms when, as publicly listed organisations; they were evaluated solely on their financial performance. Large investment banks make recommendations on companies whilst simultaneously deriving income via large corporate capital raisings. Again, there is a breakdown in “arms length transactions” as considerable payments flow to the underwriter from the capital raising process. Poor recommendations towards companies for which funds have been raised for two reasons being (a) not being asked to raise capital in the future thereby reducing financial stability and (b) the inability to offload stock (and therefore risk) if the organisation for which the raising is being completed is downgraded as an investment option. As capitalist market companies all feed off each other and personal living standards of those employed at intertwined organisations are directly affected, the dissemination of accurate performance information will not always be forthcoming. Independence needs addressing! LEGISLATIVE AMENDMENTS The legislative framework in the U.S. (and other economies) exists to protect providers of capital by ensuring the availability of accurate and timely information enabling sensible investment decisions. The Sarbanes-Oxley Act (2002) attempted to lawfully regulate business processes. This immediate U.S. government reaction to the latest tranche of corporate failures was to introduce more legislation dictating reporting standards. The Act was a knee jerk reaction by legislatures (reacting to indignation felt by shareholders) who wanted to be seen as protecting their constituents. (Zandstra, Gerald:2002) After ENRON, President George W Bush announced a plan to increase corporate responsibility based on three key principles being: Access to quarterly information; CEO’s personally vouching for truth, timeliness and fairness of information; Changes to audit regulations ensuring investors had complete confidence in the reporting process. Introducing regulations, laws and processes into the market is detrimental to the very foundation and self-actuating forces balancing the free market economy pendulum. Imposing restrictions on free market trade will engender corporate decision making towards ensuring processes are followed that reduce the risk of personal penalties imposed by the courts rather than reducing the risk of making poor business decisions. Regulation changes do not address the role of the Board to investigate the strategy, ensure its reasonableness and oversee the implementation with vigour. It must be remembered that standards have been in place for years and the legal system has proven, thought numerous failed class actions that Boards can still operate legally whilst not acting in the best long term interest of the company and its stakeholders. BOARDROOM RESPONSIBILITIES Considerable detrimental effects are created to international business and trade by poor corporate governance, location dependent accounting principles and the supporting infrastructure for information dissemination. A Board of Directors is responsible for correct governance by overseeing corporate activities, evaluating strategies and keeping pace with the changing world. Time conflicts resulting from Directorship appointments on multiple corporations limit the span of attention available to individual Directorship roles. Some corporate Directors are too busy keeping the peace (engaging in groupthink to retain their positions) within the boardroom instead of actively investigating strategy and operational decisions to ensure that personal responsibilities and long-term organisation viability is maintained. Corporate governance standards are being formalised however these will not improve the moral or ethical values of the individuals in positions of power. Investors need to determine a methodology for incorporating a value of the Board of Directors when evaluating investment decisions. Only when this occurs (and possibly increases in tenure) will Board members have to make decisions that balance immediate and long-term trade-offs. ECONOMIC EFFECTS Large corporate failures, especially when caused by poor internal morals standards, undermine the general level of confidence in all organisations in the affected region. The economic effects of this can be dire as seen previously with the Asian corporate crisis where exchange rates where battered by foreign exchange withdrawals and stock markets tumbled. Additionally there was a negative impact on FDI transactions as offshore investors were not confident in the corporate management. Underlying consumer and investor sentiment about the stability of local and global economic conditions can hinder capital raisings thereby stifling economic and technological development and leading to reduce levels of corporate growth. INTERNATIONAL PERSPECTIVE (Phraya, Chao:2003) “It was only 4 years ago that Western critics went on a warpath of criticism of public and corporate governance in Asia to explain and vent their frustration at the bursting of the Asian bubble economies. Yet yesterdays WorldCom bombshell is the latest evidence that quality of corporate governance is not an "Asian problem" - it’s an international problem - cantered on the glamour companies of the USAs late 1990s new economy”. Diversified cultures react differently to the assortment of methods available to conduct their business. It is argued that these international and culturally diverse firms may even be commenting that failures are an indictment on the perceived and predominantly American business aggressiveness used by US firms when going about conducting their trade. Their long-term reaction would be to learn from these mistakes and to ensure it would not happen to them. There has been a different view to the American problem by most of the International market. The overuse of legalistic remedies and penalisation in the US psych to control, punish and litigate by using the courts is by far indelibly forced into the American culture. The problems with these firms and what could be argued as a primary cause of failure was in the control of the corporation by the controllers of the companies. A vast majority of firms are either the targets of takeovers, are sold or go bankrupt and they are in these positions because the controlling body has exposed their companies to their competitors either recklessly or through bad business decisions, investments or underestimating the market. The international perspective could be argued that this is a hiccup in the business world and free market forces will automatically correct the situation. They don’t believe there is an overarching need for government intervention required to repair this problem. Given correct information on the dimensions of people, planet, profit and posterity, corporate and individual investors will punish the less vigilant and reckless corporations. CONCLUSION Global pockets of negative sentiments exist towards the U.S. for a variety of reasons including the perception that they have hidden agendas and continual self-serving interests. This historical negativity, in conjunction with the fact that the U.S. is the lead advocate of a capitalist economy, means the U.S. (above all other nations) has a critical role to play and must ensure that governance of it’s organisations are based on the highest moral and ethical principles. Corporate hardship, and possibly collapse, caused by massive technological shifts or factors not reasonably predictable are all part of company renewal and rejuvenation. Corporate failure due to Director and Senior Management complacency, misappropriation of funds, conflict of interest situations or self interest are unacceptable and undermine national economic stability along with the values and ethics held and enacted by the majority of corporations operating in the nation in which the failure occurs. Corporate failure affects the economic platform of nations due to implications on the levels of foreign direct investments, exchange rates and the distrust of global partners, suppliers and customers. Implications of recent corporate collapses are easily visible in metrics like stock market values and sentiment towards economic indicators. However with time, like the October 1987 crash, the success stories will be remembered and the failures will seem a distant past. Kakabadse, Nada, K., & Kakabadse, Andrew., 2003, provide a positive way to look at contemporary market economy corporate failures in their article by saying that ’Collapses of large corporations provide critical events for elites to look beyond their privileged life. Like Buddha, they are presented with four signs of awakening; the destructive value system they are leaving the next generation (posterity), increasing greed and poverty and the divide between ‘‘haves’’ and ‘‘have-nots,’’ the increased speed of planet destruction (decreased bio-diversity), as well as reflexivity’. If corporations and individuals alike do not learn from the most recent spate of avoidable collapses, considerably more is lost than investment capital and dignities of those who caused it. References Boyd, David P., 2003, “Chicanery in the corporate culture: WorldCom or world con?”, Corporate Governance, VOL. 3 NO. 1 2003, pp. 83-85. Barca, F. and Becht, M, 2002, “The Control of Corporate Europe”, Oxford University Press. Roe, Mark J. 2003, “Political Determinants of Corporate Governance: Political Context, Corporate Impact”. Oxford: Oxford University Press Wearing, R.T., 2005, “Cases in Corporate Governance”, London: Sage Publications Clarke T. 2007, “International Corporate Governance: A Comparative Perspective, Palgrave Macmillan. Kakabadse, Nada, K., & Kakabadse, Andrew., 2003, “Polylogue as a platform for governance: integrating people, the planet. profit and posperity”, Corporate Governance, Volume 3, Number 1 2003, pp 5 – 38 Phraya, Chao., 2002, “WorldCom: What Corporate Governance? US business beats us at our own game”, Asia Finance, http://www.apmforum.com Rayman-Bacchus, Lez., 2003, “Contextualising corporate governance”, Managerial Auditing Journal, 18/3 [2003], pp 180-192, London, U.K. Mallin, C. 2003, “Corporate Governance”, Oxford University Press Zandstra, Gerald., 2002, “Enron, Board governance and moral failings”, “Corporate Governance, 2-2, 2002; pp16-19 BIBLIOGRAPHY Elloumi, Fathi., & Gueyie, Jean-Pierre, 2001, “Financial Distress and Corporate Governance: An Empirical Analysis”, Corporate Governance, Volume 1, Number 1, pp 15-23 Kaplan, Steven N., 1997, “The Evolution of U.S. Corporate Governance: We Are All Henry Kravis Now”, US Corporate Governance. Heracleous, Loizos and Luh, Lan Luh, 2002, “Who wants to be a competent director? An evaluation tool of directors’ knowledge of governance principles and legal duties”, Corporate Governance, Volume 2, Number 4, pp 17-23 Mehta, S.N. (2001), ‘‘Can Bernie bounce back?’’, Fortune, Vol. 143 No. 2, pp. 84-90. Parker, Susan., Peters, Gary F., and Turetsky, Howard F., 2003, “Corporate governance and corporate failure: a survival analysis”, Corporate Governance, Volume 2, Number 2, 2002; pp 4-11 Vinten, Gerald., 2002, “The corporate governance lessons of Enron”, Corporate Governance, Volume 2, Number 4, 2002; pp 4-9 Read More