Issues of Corporate Governance - Coursework Example

Company law corporate governance: The “question is whether company law should serve the interests only of those who contribute capital to companiesor whether the activities of companies need to be controlled in the public interest”. Critically discuss this statement in view of issues of corporate governance. How well a business corporation performs in financial terms is significant for a broad group of people that includes potential/existing investors, creditors, employees or managers. With differing information needs and purposes, each category of stakeholders should be provided with data that is comprehensive, relevant and reliable, so as to allow an informed opinion to be reached on the corporations financial performance. However, all too often, the general public is left out of this equation. A corporations operations have direct and indirect effect on the general public, who dont have a "stake" in the company in the conventional use of the term. Yet, business corporations are purely economic structures, whose sole purpose is profits and whose foresight stops with the next quarter. This essay tries to discuss the existing norms of accountability, its deficiencies and areas that need improvement. The only document that a company in the UK is required to release in the public domain is its Annual Report. Corporations whose shares are traded publicly issue an Annual Report at the end of each financial year for the perusal of its shareholders and other stakeholders. The stakeholders could be potential investors, creditors, employees, regulating agencies and competitors. In other words, Annual Reports indicate the financial health of a corporation to all concerned. It contains such information as financial statements, the Chairmans statement, and the managements assessment of prospects in the following years. The reports comprise a mix of charts, graphics and their descriptions. Some landmark events such as acquisitions or additional issue of stocks also find a place in these reports. Company law in the UK does not mandate the publishers of annual reports to explicate their company’s overall performance in relation to the welfare of general public and environment, which is seen as an evasion of responsibility by some ethicists (Wheeler, p.22). A closer look at the constituent elements of corporate annual reports indicates whose interests they serve. There are three important financial components to annual reports. They are the Income Statement, Balance Sheet and the Cash Flow Statement. Apart from these major financial components, other information of interest is also included. For example, the Chairmans Address to the Shareholders, Highlighting of major achievements over the year, Managements assessment of the year, an auditors note and a summary of all financial information. Having said this, there is no universally accepted format for annual reports within the UK. This gives opportunity for companies to show an impressive set of numbers, the reality of which can be deciphered only by reading the fine print. In this case, even the so called ‘stake-holders’ and capital contributors are at risk of being deceived, which makes a strong case for introducing stricter regulations for monitoring and reporting of the activities of a company. The resultant transparency would then empower the general public to see to it that their genuine interests are not jeopardized by the company’s activities (Chandler, p.45). Moreover, financial reports have other limitations. While they can accurately evaluate the values of tangible assets, more often than not the measure of intangible consequences of the companys operations are not accounted. For example, let us take a company that manufactures cosmetics. The manufacturing and packaging of the companys products involves chemical processes, the residues of which are purged into a nearby river stream or sea. The discharged residual matter is highly toxic and hence harmful for the aquatic life in the waters. This leads to the diminishing in numbers of many species. Those that survive this hazard and land in fishing nets are consumed by human beings. So, now the citizenry of the area surrounding the companys processing unit get affected. The affectation could be of varying degrees and can manifest slowly over a long period of time. These are all costs alright, but not for the corporation. These "externalities" are not accounted for by them (Wheeler, p.22). So who pays for the "externalities"? Well, let us say the sickened citizenry are hospitalized for treatment. The treatment costs could be imposed on the patients themselves (in a highly privatised economy) or by the government (if a public health-care system is in place). Either way, the corporation that was the culprit in this case goes scot-free. This is just one externality. There are others such as "contribution to global warming", "contribution to the erosion of ozone layer", "depleting fertile soils by industrial production policies", "contribution to air and noise pollution", etc (White, p.177). The economic structures of many countries (including the advanced ones like the United Kingdom) are not designed to make business corporations pay for the damages induced by them. This blatant unfairness had gained better awareness over the last decade or so - mainly through the persistent efforts of activists and intellectuals. The efforts of devoted activists are finally having an impact on the regulatory and legislative branches of governments to improve existing standards of accountability. While those contributing capital are not affected in a major way as a result of this degradation to the environment, the dependent wildlife and the unsuspecting general population bear the brunt of the consequences. Hence, it is not sufficient if company law serves the interests of those who contribute capital to companies, they should control the activities of the companies in the interests of the general public (White, p.177). The United Kingdom is no closer to a comprehensive legal regulatory framework than other advanced nations. Let us overview the measures already adopted and those in the pipeline in United Kingdom and their implications. The UK governments Corporate Social Responsibility (CSR) website proclaims, "We have an ambitious vision for UK businesses to consider the economic, social and environmental impacts of their activities, wherever they operate in the world" (www.csr.gov.uk). Consistent with its mission statement, the CSR engages in advocacy activities so that business corporations will adopt a sustainable model of growth and development. To help businesses with this transition, the CSR offers policies and institutional frameworks that encourage companies to adhere to the highest ethical standards. The CSR also provides substantial incentives for those companies that accept and adopt newer (and more just) regulations. The framework of CSR is very broad and it includes environmental protection, health and safety and workplace rights. The founding of an organization such as the CSR is in itself recognition of the fact that the responsibilities of business corporations need be extended to include public interests. Since CSR is not a government department in itself, it collaborates with other existing government institutions for policy initiatives. For example, in association with the Department of Environment, Food and Rural Affairs the CSR has initiated a handful of projects for sustainable commerce and environmental protection. In association with the Department for Business, Enterprise and Regulatory Reform a programme called "The business case for CSR" has been initiated. The programme is aimed at corporate decision makers and attempts to convince them through rational argument. In total, the CSR works with 14 government departments and has initiated nearly a 100 projects and programmes so far. The success of these programmes and projects is very crucial. Upon it lies the economic and social welfare of the future generations of people in the UK. (White, p.175) The environment and corporate social responsibility movement has already had an impact on legislations in the UK. For instance, the Pensions Act (amended in 2001), "requires trustees of occupational pension schemes to state their policy regarding the extent to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments" (Ferran, p.124). The Companies Act (enacted in 2006) requires corporations to comply by the proposed regulatory framework and drives home the point "that directors will be more likely to achieve long term sustainable success for the benefit of their shareholders if their companies pay appropriate regard to wider matters such as the environment and their employees" (Ferran, p.124). When Global Reporters Survey published its findings in 2006, the results showed companies in UK in a kinder light. The UK business community as a whole were placed in third place for their consistency and accuracy in reporting "all costs and benefits" of their business activities. This shows that the spirit of Corporate Social Responsibility is catching up fast and that business corporations are able to see their operations from a broader perspective. This trend needs to continue in the future too, so that the true implications of business activities do not get buried under an impressive facade of profits. Even a few defaulting companies can negate all other positive developments. In other words, the collective conscience of corporate decision makers has to change unanimously (Ferran, p.124). Apart from the legislative measures, companies in the UK are also voluntarily adopting a set Code of Ethics, which reflects its approach to business. These sets of self-imposed rules originate from the corporate social responsibility of business corporations. It also defines the values and standards by which the company conducts its business. It provides all stakeholders with a clear understanding of the procedures and processes at various levels of the organization. In other words it acts as the road map or set of guidelines to help the firm in acting and conducting itself in a socially and commercially acceptable manner. A well designed code of ethics will help highlight the resources available to achieve various goals set at the personal and corporate levels. A good code of ethics document will inspire confidence in all business associates – like suppliers, clients and employees. More importantly, it will also win the trust of the general public. (Shiner, p.10) Here, the importance of “liaising with regulators” is made note of, which is an often overlooked aspect of business conduct. It is understood that a regulatory atmosphere conducive to fair and competitive business can help raise ethical standards of all businesses involved. For example, far too often, when some “potentially illegal or unethical business conduct” (Shiner, p.10) does not affect an individual directly, then it is likely to go unreported and unaddressed. Keeping this in mind, the drafters of the code of ethics have included strict policies so that associates and employees can freely report their concerns about suspected breaches in the ethical code without fear of negative consequences. By making it a violation of employment agreement to not report such breaches and violations, the firm gives a clear message to its employees as to how important business standards are. Those who violate the company’s ethical standards, irrespective of designation or tenure, may be subject to legal disciplinary action that can lead to termination of employment (for employees) and contract annulment (for other associates) (Shearer, p.551) There are other companies in the UK which implement more novel enforcement measures that includes a central ethics committee who will make sure that the code of ethics is followed in letter as well as in spirit. Stakeholders involved in violating the code are subject to stringent disciplinary action that could lead to termination of employment contract. Even contributing indirectly to the violation of these rules can have negative consequences to the party. Failing to report known violations is deemed a punishable offence. In addition to that, disrupting or undermining the internal ethics committee investigations will amount to the same level of punishable offence. Finally, any retaliatory measures on part of the guilty party will attract even severe punishments. Hence, the accounting firm leaves no loop holes for its employees to digress from its commitment to the highest ethical standards (Shearer, p.551). In conclusion, it is quite clear that it is not enough for companies to cater to the needs of those who have staked their capital. The company’s responsibilities have now been extended to public accountability. Not only have newer legislations been enacted, but some companies have also voluntarily adopted ethical standards for their operations. Yet, one should exercise caution in reading these apparently positive developments. These days "environmental stewardship" and "corporate social responsibility" have become catch phrases in the business world. This is an acknowledgement of the fact that consumers (who are part of a larger public) nowadays expect high ethical standards from corporations. Partly to cater to this demand and partly to indulge in a Public Relations exercise, some multinational corporations in the UK have over the last few years issued reports covering these concepts. But these reports have to be read by keeping in mind the motivation behind all corporate action - Boosting the Bottom-line. Works Cited: Cheffins, Brian R. Company Law: Theory, Structure, and Operation. Oxford: Clarendon Press, 1997. Ferran, Eilís Ma. Company Law and Corporate Finance. Oxford: Oxford University Press, 1999. Roger A. Shiner., Accounting ethics: the general part, Business & Professional Ethics Journal 13.n1-2 (Spring-Summer 1994): p.p9(15).  Teri Shearer.,  Ethics and accountability: from the for-itself to the for-the-other., Accounting, Organizations and Society 27.6 (August 2002): p.541(33). Chandler, R., Bartlett, S.A., The Corporate Report And The Private Shareholder, The British Accounting Review, 1997 Jones, Clifford A. Private Enforcement of Antitrust Law in the EU, UK, and USA. Oxford: Oxford University Press, 1999. White, Allen L. "Why We Need Global Standards for Corporate Disclosure." Law and Contemporary Problems 69.3 (2006): 167+. Wheeler, D., Elkington, J., The end of the corporate environmental report?, Or the advent of cybernetic sustainability reporting, Business Strategy and the Environment, 2001. Corporate Social Responsibility in the United Kingdom http://www.csr.gov.uk/ukpolicy.shtml, retrieved on 23rd October, 2007. Department for Business, Enterprise and Regulatory Reform www.berr.gov.uk, retrieved on 23rd October, 2007. Department of Environment, Food and Rural Affairs (DEFRA) www.defra.gov.uk, retrieved on 23rd October, 2007. Read More