Corporate Governance in Large Corporations and Family Businesses - Coursework Example

Corporate governance in large corporations and family businesses University Student Id Course Date Introduction I agree that corporate governance is important to the success of family businesses and large corporations. It is through corporate governance that family businesses and large corporations can be in a position to improve their performance. In this context, corporate governance can be defined as the process through which the relations of corporations are taken control of and also directed. Besides, the corporate governance comprises of the processes through which a given corporation sets its objectives within the framework of the regulatory, market and the social environment (Enriques and Volpin, 2007). Some of the governance mechanisms that are used by the corporations involve monitoring of policies, practices, actions and also its decisions. This paper is trying to compare and contrast the characteristics of the family business and large corporations and the benefits of corporate governance. Corporate governance in family businesses and large corporations The practices of the corporate governance are usually affected by the attempts which are made in aligning the stakeholders` interests. The corporate scandals which are of different forms have sustained both public interests and also political interests in the process of regulating the corporate governance. In the business corporations which are contemporary, the major external stakeholder members include trade creditors, debt holders and the societies that are affected by the activities of the corporation. The internal stakeholders of a corporation usually comprise of the executives, board of directors and other workers. The majority of the contemporary interests of the corporate governance is mostly focused on mitigating the conflicts of the stakeholders` interests (Miller, et al., 2007). For the case of the big firms, the aspect of ownership is always separated from the management and therefore the shareholders are not controlled. Moreover, there are various ways through which conflicts of interests can be mitigated, and they include; processes, policies, customs, and laws. Besides, the most significant theme concerning governance is the extent as well as the nature of the corporate accountability. Furthermore, all the parties in the corporate governance always have either direct interest or indirect interest concerning the financial performance of a given corporation. The directors and also the employees in the corporate governance usually receive wages and other benefits whereas the investors obtain financial returns. Customers in business are only concerned with the provision of both goods and services which are of the right quality. However, the main factor that a party should put into consideration when deciding to take part in a corporation is the aspect of confidence that the expected outcomes of the party will be delivered by the corporation. Corporate governance is also used to refer to the system of law through which corporations take control over the external and also the internal corporate structures with the aim of monitoring the management actions (Morck, Wolfenzon, and Yeung, 2005). Both ownership and the control structures are usually part of the composition of the shareholders in the large corporations. However, in some nations ownership may not necessarily be equal to the aspect of control because of the existence of the voting coalitions, ownership pyramids and also the dual-class shares. The term ownership is defined as the possession of the cash flow rights while the term control gets defined as the possession of the voting rights. The engagement in a corporate with the shareholders and stakeholders can be varied between the control structures and the ownership structures. The interests of the family usually dominate the control structures in some of the corporations, and therefore it has been suggested that a corporation that is controlled by a family tends to be more superior as compared to the one controlled by institutional investors. For instance, according to the current study which was conducted by Credit Suisse found that those companies which were controlled by families enjoyed high performance. The mechanisms, as well as the controls of the corporate governance, are usually designed to reduce the ineffectiveness that is caused by the adverse selection. Therefore, both the internal and the external monitoring systems are used in controlling corporate governance (Villalonga and Amit, 2006). The internal monitoring can be carried out by a group of shareholders or even a firm which belongs to a certain business group. Also, various board mechanisms can also be used to provide internal monitoring. The external monitoring takes place when a third party which is independent approves the correctness of certain information that is provided to the investors by the management of a given corporation. Moreover, the stock analysts or even the debt holders can also provide external monitoring. However, a control system which is ideal should regulate the aspects of motivation and the ability, and at the same time provide incentive alignment to achieve the set objectives of the corporation. The responsibility of reporting both internal and external financial information is usually given to the board of directors. The chief executive officer is always the main participant in the process of financial reporting, and the board of directors in most cases relies on them to obtain accounting information. Moreover, the accounting systems mostly depend on the internal auditors and also the accountants of the corporation. The recent rules which have been enacted by the International Accounting Standards allow the managers to choose a criterion of recognizing various elements of the financial reporting (Uhlaner, Wright, and Huse, 2007). However, the fraud of financial reporting such as the failure to disclose certain information or even deliberate falsification of information makes the user face various risks. Therefore, to eliminate these risks, the financial reports are required to be audited by an external auditor who is independent. Corporate governance characteristics in the family businesses The Small businesses which are owned by a family are sometimes operated with some informality which is natural and also efficient. Moreover, the corporate governance usually encompasses a broad scope, whereby a good corporate governance involves regular meetings that are held by the board of directors. Also, the corporate governance always keeps close supervision of the financial statements that are related to the business. The corporate governance in most cases encourages the attitude of openness in a situation where the members of the board of directors are differing in their perspectives. The corporate governance may also adopt various policies such as the privacy policies, diversity policies, interest policies and also investment policies (Haniffa and Hudaib, 2006). However, some of the family owners of the businesses may have a belief that paying attention to the corporate governance is not necessary since there is always a general agreement concerning the business operation. But due to various circumstances such as the family disputes, the corporate governance is therefore of great significance in the family owned business. Besides, the family businesses which are great are usually established on strategy, values, execution and also vision. Besides, the corporate governance plays a significant role in making a family business to grow and still confronts the critical questions concerning its future direction. However, the growth of a family owned business always depends on the balance between the business needs and the family expectations. Therefore, an effective governance of the family owned business can assist in improving the performance of a company and also satisfying the expectations of the members of the family (Young, et al., 2008). Moreover, the framework of the corporate governance should provide strategic guidance to the company and also monitor the management of the board of directors effectively. The importance of the board of directors in a family owned business is that they assist in generating new ideas of innovation and assisting the family members in making tough decisions. The businesses that are owned by families usually play significant roles in the economy of a given country even though such kind of businesses in most cases they tend to face unique challenges that are based on the organizational structure. For instance, one of the factors which interfere with the growth of family businesses includes personal interests which result into the unwillingness of the family members to take part in risk activities such as venturing into new businesses. Moreover, according to the statistics, more than 70% of the business enterprises are usually owned and also controlled by the family members (Enriques and Volpin, 2007). Therefore, this shows that the family owned businesses plays a significant role in the development of a country`s economy. However, differences in visions and also objectives among the family members can result in conflicts thus compromising the governance of the family owned businesses. However, the majority of the family-owned businesses are always characterized by various aspects such as the; poor transparency, lack of fairness and accountability and also an abuse of the rights of the minority shareholders. The family owned businesses are usually classified as companies, whereby all the shareholders have strong connections with the family. Therefore, when selecting the members of the board of directors, a lot of attention should be taken to appoint directors who are independent. This is always viewed to be important since an independent director is mostly considered to be the best practice even though has little impact in real terms. Moreover, it is quite necessary for the family businesses to have independent directors so as to facilitate the evaluation of the performance of the business and also avoid the aspect of interest conflicts among the family members. Besides, the family members who are on the board of directors should allow their executive actions to be scrutinized to create transparency as well as accountability in the business. Some of the reasons as to why it is necessary to have independent directors in a family owned company include; to bring diverse knowledge in the business, to provide advice to the family members concerning financial matters. Also to bring an external perspective concerning the management of the business (Abor and Biekpe, 2007). The ownership, as well as the exercise of the shareholders' rights with the inclusive of those of the minority shareholders, are supposed to be respected through the establishment of a functional family council. Therefore, the protection of the rights of the shareholders is quite essential in ensuring that a company thrives well and functions properly. However, the family council can protect the rights of the shareholders in the company in a situation whereby the family members hold the shares of the company. Good corporate governance clarifies and improves activities of a family firm while enhancing its competitiveness (Peng and Jiang, 2010). The interests of owners, stakeholders and Whole Company is to enhance proper functioning and openness of responsibilities and roles of all organs of the firm. Family firms feature nurturing and active ownership. Owners in this case fight for continuity and long-term growth and development of the company. It is essential to make clear, define and approve roles and responsibilities of different owners and other operative executives of the company. They also utilize organs of corporate governance in that practices are jointly agreed to act as tangible tools in developing and controlling activities. The owners of a firm need to be aware ownership roles and influence and also clearly define the roles and responsibilities of the board of directors to enhance success in the business activities undertaken. Clearly defined family firms corporate governance create an added value to external stakeholders’ activities. The goal of the directors is to make ready independent recommendations that assist family firm to develop own well-functioning corporate governance actively. The success of the family business is highly dependent on their owners. Uncertainties controversies and diverse expectations of the owners of a family firm weaken and dissociate the family business and ownership (Young, et al., 2008). Good corporate governance makes clear, tangible aspect of committing stakeholders and ensure they are held responsible for their activities. Corporate governance characteristics in large corporations Companies need to design and put into actions those practices that are legally accepted. The board of directors may engage in the following practices to benefit the company. Directors need to be knowledge and be qualified, expert and competent and possess strong integrity and ethics, be sufficient to commit to their duties on time be of skill sets and from a diverse background. This is built by; point out gaps in the present director ideal qualities, characteristics and complements, making the majority of directors’ independent, developing a board where directors are highly engaged in management and educate them (Neubauer and Lank, 2016). In educating them, they are made familiar and oriented to their duties and boards expectations. Finally assessing that directors fulfill their duties by doing regular reviews of board mandates. Large corporations have clear responsibilities among the management, executive officers, CEO, chair and the entire board. This can be done by setting out written duties and responsibilities of the board and every committee, delegating some responsibilities to relieve off too many duties to every member of the board, developing written descriptions of CEO, Board Chair, executive officers and board committee positions. (Peng and Jiang, 2010). The directors need to have general cultures of ethics and integrity in dealing with the compliance to policies and laws having no fear of recrimination. The cultures are created and cultivated through approving a conflict of interest state and making someone responsible for omissions and directing and controlling of the policies and procedures. The large corporations that have the objective of achieving organizational success involve the key stakeholders. The board of directors in the large corporations usually determine directors’ fees to bring more suitable candidates on board with the aim of creating a conflict of directors’ independence and delivery of his or her duties. It also needs to come up with a measurable performance goal of the executive officers and evaluate and assess their performance regularly. Coming up with compensation committee made up of independent directors to oversee and develop compensation plans of the executive. A company needs to regularly assess and identify risks that they are capable of facing and how to solve them out (Huse, 2005). This assessment by the board need to; establish the tolerance of the company in case of any risk and develop a clear framework and accountabilities to managing the risk. Lastly, directors to comprehend emerging and current long term and short term risk that large corporations are capable of facing and their implications on performance. The major role of the stakeholders in the large corporations revolves around the management of the workers in a company, whereby the successfulness of a company in most cases depends on the effectiveness of the management team. Therefore, the employees of a certain company should be treated with a lot of fairness and also should be rewarded because of their high performance. Moreover, the company should recognize the roles which are played by the stakeholders of the company (Neubauer and Lank, 2016). The large corporations that adhere to the principles of corporate governance ensure that they are ethically acceptable and also transparent. The majority of the failures which are usually experienced by many business enterprises in most cases results from poor disclosure about the financial statements. Therefore, the board of directors in charge of a company is required to appreciate the role played by the workers in making the company in making the company successful. Similarities between the corporate characteristics in large corporations and family businesses In both large corporations and family businesses, corporate governance is taken as the collection of practices, processes and rules in which a company is controlled and directed. It involves balancing interests of many stakeholders in the business. The stakeholders include the community, the government, suppliers, customers, financiers, shareholders and the management of the company. Once again it also provides an insight towards attaining the company’s objectives. Practically in corporate governance, every level of management from planning actions, doing controls internally to measure performance and corporate disclosure is highly involved (Lee, 2006). The board of directors enhances the corporate governance by ensuring all the stakeholders in the company work with harmony. Besides, in the large corporations and family businesses, the direct stakeholders have high influence in the management of business operations. The directors of a company are chosen by shareholders or appointed by board members to represent the shareholders. They are entitled to making significant decisions, for example, appointing a corporate officer, dividend policy making, and executive compensation. The board of directors consists of internal and independent members. The internal members are the executive, founders, and shareholders while independent members are elected due to their management experience or directing experience in other larger companies (Berrone, et al., 2010). They are highly considered of help to governance since they dilute power concentration of internal members and aid align interests of the shareholder with internal members of the board of directors. In the large corporations and family businesses, bad corporate governance can pose mistrust to company’s integrity, reliability or shareholders obligation. As a result of supporting or tolerating illegal activities can lead to the damage of the reputation of the business operations. Not cooperating sufficiently with auditors or not selecting auditors with the appropriate know-how can give out un-genuine or unrealistic financial results. For instance, bad compensation packages to executive fail to create the best rewards for the corporate officers (Filatotchev, Lien, and Piesse, 2005). Also, the family business ad large corporations that have bad governance leads to lose customers and bankruptcy due to the failure to ensure proper engagement with the key stakeholders. Conclusion Corporate governance is important to both the family businesses and large corporations. Ensuring good corporate governance makes set of transparent rules and controls where officers, directors, and shareholders possess aligned incentives. Many businesses work hard to attain the highest level of governance by considering shareholders perception of displaying good corporate citizenship via environmental awareness practicing sound corporate governance and ensuring ethical behavior. The researchers usually measure the aspect of control and the ownership structures in the large corporations and family businesses through observable measures. 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