Corporate Governance Practices - Essay Example

Corporate Governance Practices Name: Lecturer: Course name: Course code: Date: Corporate Governance practices of an organisation The objective of this essay is to determine the corporate governance practices of an organization that have been emphasized as a significant area to lessen the danger of corporate collapse. It will give definitions of terms applicable to corporate governance and also state and explain a theory that has been accredited in support of corporate governance (Albrecht 2010). This essay will also give real life examples in relation to corporate governance practices in organizations around the world. Corporate governance is now a very pertinent subject, and it has been given attention in the policy of governments, press and also in the academic cycles. Many reasons that explain the current prevalence in what many people call technical and secretive topic. The rampant financial disgrace that is affecting most firms in the world for example Enron WorldCom which is American companies has been involved in financial scandals. The financial scandals have made investors lose millions of money and the prospective investors have lost confidence in the stock market. These have led to decrease in prices of shares and substantial financial losses (Cecilia 2007). The primary cause of these scandals has been identified by experts and the investing public to be failed corporate governance. Many people around the world own stocks either directly or indirectly, therefore making corporate governance be a heated debate. For example in USA corporate governance has been highly charged political issue and they have even passed legislation that governs listed companies (Markenzie 2011). Countries of the world are on toes in examining their corporate governance systems with an objective of preventing financial scandals. European countries have formulated commissions because they understand the economic challenges posed by corporate governance hence they have formulated recommendations on appropriate practices and structures of governance. Corporate governance definition according to economists and social scientists is defined generally as the ‘organizations that control how business entities apportion resources and profits’ and ‘the corporations and policy that have an effect on the prospect about the application of management of resources in businesses.’ Economists have also defined governance as ‘an institutional structure in which the uprightness of the transaction is determined.’ The focus of these definitions is drawn to prescribed rules and corporate governance institutions and also focuses on the unofficial practices that develop around in the lack or fault of prescribed rules. It extends also to include interior arrangement of the corporation and its outside environment encompassing labour and capital markets, systems of bankruptcy and competition policies established by the government. The first key area of concern in corporate governance is transparency. There should be increased meaningful transparency evolving around the decisions of the board members, putting in place base for constructive oversight of the management (Walton 2006), more significant and superior information to facilitate the decisions made by the shareholders, and comprehensive responsibility of the members of the board and management. The board can improve transparency by improving on the shareholder communications by being proactive. They can also improve transparency by engaging on modern technology in communications with shareholders for instance by during annual general meetings and by use of elaborate business reporting language and extensive disclosures about the processes of the board. Successful implementation of these methods will rely on safe laws that provide lawful protection. The second area of concern is executive compensation (Sllsn 2010). The boards of companies have the ability to construct compensation systems for executives that reveal the craving for risk and the organization outline. Boards of companies should adopt a compensation plan to assist in guiding their activities, guarantee the independence of the board and the committee in charge of compensation, attempt to achieve fair compensation packages that are in line internationally and externally. The board should come up with compensation packages that promote long term value of shareholder, they should also ensure that pay in related to performance, and they should also be in the fore front in promoting transparency internally and externally. The company board can progress executive compensation by implementing better metrics of performance, stern oversight of development of human capital, having the independence of the compensation committee increased, engage the services of independent compensation advisors, and improve on proactive shareholder communications. Third area of concern is corporate strategy. The major responsibility of the board of a company is to collaborate with the management in developing an efficient and effective corporate strategy. It is recommended that the board and management join forces of in the establishing a unified procedure that the company will use in developing corporate strategy, evaluating the current strategy by monitoring the implantation process and recommending changes where necessary, and by formulating objectives of executive compensation and metrics that bind long term strategic goals (Markenzie 2011). Boards can better their ability to balance risk and plan with better strategic information, greater and earlier group effort with the management in formulating and purifying strategy, closer alignment of the reward of the board with the strategy, and better alignment of objectives in long, medium and short term. The final area of concern and which is very important is the risk oversight. There is demand for boards to exercise risk oversight as incompetent governance that did not adequately maintain against excessive risk taking contributed to the existing economic disaster. The laid down recommendations to promote the plan of governance structures and practices to support the board in analyzing its own main concerns, outline and information requirements, and to aid the board in the spotlight of risk and strategy (Lee 2012). One of the recommendations is that a risk plans should aid lessen the risks in implementing a plan and can contribute to it through creating an environment by clearly communicating expectations to employees and shareholders. Boards are supposed to be vigorous in reviewing the sum of total risk that the organization is willing to bear, bearing in mind a broad examination of risk from the viewpoint of all stakeholders (James 2009). Boards should also be familiar that the strategic objectives may perhaps need to transform with changes in exposure to risk. It is the requirement of the board to aid in identification of possible risks and persistently examines risks, and the superiority, reliability, and timelines of information are vital to boards being capable to execute these functions. It is also the responsibility of the board to guarantee sound response to the crisis. Resource dependency theory is used to explain corporate governance (Earl 2007). The basic proposition of this theory is the requirement for environmental connections between the company and the outside resources. In this line, directors serve to connect the company with external factors by co-opting the herewith needed to survive (Pfeffer and Salancik, 1978). Boards are vital means for attracting critical elements of environmental uncertainty into the company. Environmental linkage or network governance could lead to reduction of transaction costs that are arising as a result of environmental interdependency. The company’s demand for resources leads to the creation of exchange relationships or governance of dependency networks between companies. The intensity of the interdependence is determined by the relative inadequacy of resources and the extent of concentration of resources in the environment. Directors serve to connect resources that are available in the external environment with the company to overcome uncertainties; this is because controlling effectively with uncertainty is vital for the survival of the organization. In accordance to resource dependency rule, resources such as information, buyers, suppliers, public policy decision makers, skills and social groups and legitimacy that will reduce risk are brought by directors (Ayeir 2011). The potential outcomes of integrating the company with external environmental factors and minimizing risks reduce cost of transaction that is related with external association. Resource dependency theory is in support of the engagement of directors to various boards because of their opportunities to assemble information and network in various ways. In conclusion, corporate governance became a vital matter following the 2002 implementation of the Sarbanes-Oxley Act in the U.S., which was introduced to rebuild public assurance in organizations and markets following massive financial fraud that led blue chip companies such as Enron and WorldCom to collapse (Cecilia 2007). Most companies endeavor to have a high level of corporate governance by ensuring proper executive compensation plans, upholding transparency, comprehensive corporate strategy and the existence of risk oversight. It is not adequate for a company to just make profits; it also needs to show good corporate citizenship all the way through environmental responsiveness, principled behavior and quality corporate governance practices. Reference List Ayeir, Nicholas. "Accounting: General Corpoate Standards." Cengage Learning, 2011. Cecilia, Dagwell. "Corporate Accounting in Austalia." 639. UNSW Press, 2007. Earl, Clerke. "The international handbook ofCorporate reporting." 32. Cengage Learning EMEA, 2007. James, Earl. "Corporate Accounting: Concepts & Application." 402. Cengage Learning, 2009. Lee, Funnell. "Public Sector Accounting and Accountability in Australia." 314. UNSW Press, 2012. Markenzie, Loren A &. "International Accounting Information for Corporate Decisions." 287-298. Cengage Learning, 2011. Sllsn, Crumbey. Code of Ethics for Corporate Accounting Supersedes Code of Ethics for Professional Accountants. Cengage Learning, 2010. Wrecht, Steve. "Financial Accounting." 417. Cengage Learning, 2010. Walton, Peter J. "Global Financial Accounting And Reporting: Principles And Analysis." 146. Cengage Learning EMEA,, 2006. Read More