Corporate Governance - Assignment Example

CORPORATE GOVERNANCE Name Professor (Tutor) University Course City and State Date CORPORATE GOVERNANCE Question 1 Managers of chairpersons acting dishonestly are not a new phenomenon, as many have been found guilty. The corporate watchdog has warned that failure to perform legal duties can lead to hefty penalties for the directors. The warning from the watchdog came after Andrew Sigalla, former chairperson of TZ Ltd a Sydney based technological firm was jailed. Based on the agency theory, directors have a tendency to act to satisfy their own interests without considering the interests of the company at large including shareholders, board, and other employees. The Agency theory main assumption is that different parties often have interests that differ. In the theory, the owners are known as principals while the managers are the agents and there are always issues between the agents and the principals (L’Huillier, 2014). Most managers do run the companies in the best interest of all shareholders who are mainly the investors as required of them by the owners. Nevertheless, the ownership and control are often separated and this propels some managers to act dishonestly in a criminal manner. Some of the dishonest ways include embezzlement of funds and excess expenditure. For example in the case of Andrew Sigalla who was hired as a chairperson at a technological, company TZ Ltd. Andrew embezzled over $9 million to pay off a gambling debt and mortgage as was stated in the court. It is clear from the case that, Mr. Sigalla acted dishonestly and criminally to satisfy his personal needs at the expense of the shareholders. To solve such issues the agency solution should be used where the directors and owners should have the mandate to control and manage the company. The dishonest managers have to be investigated without any favors but the question is what is to be done to them if found guilty. Sigalla was handed a sentence of 10 years jail term with a six-year non-parole term. However, through his lawyer, Sigalla stated that he did not believe he had conducted any wrongdoing which begs many to ask if he was actually right. Through the agency theory, many argue that since managers have been given complete control over the company assets, then they have the right to act to their best-known interests (Bendickson et al., 2015). However, others believe that the interests of the owners which is also that of the shareholders should come first and therefore if managers are found guilty of dishonest practices then they need to pay hefty penalties as in the case of Sigalla. In summary, I believe that those managers that embezzle shareholder holder funds or use the funds excessively in an uncontrolled manner should be investigated. The investigation is key since it provides evidence, which links the managers to the crime. If found guilty, the managers should suffer penalties that are sufficient to their actions. The Andrew Sigalla case was a warning to all company owners and directors about the irresponsible behavior of some of the managers. This should prompt the owners to have control over the managers as the control and separation of ownership is the major issue that encourages the managers to be dishonest (Bendickson et al., 2015). Question 2 Abraham Gutnick accused Joseph Gutnick his own brother of hiding assets from his future creditors as Joseph termed the allegations as absurd and ridiculous. This case creates an issue of board diversity and it indeed it is important in any way. Boards present a central corporate governance mechanism to companies. These are the people appointed by shareholders to monitor the company and take part in major business decisions for the company. Stewardship theory comes in as an important theory when it comes to analyzing the issue of board diversity and its importance. Theory Y of the Stewardship theory presents a case where directors and managers get motivation in the decision-making the process that affect the organization by factors such as image, market forces, image, and pride. All these factors are believed to affect all board members regardless of any diverse characteristics such as age, gender, race, and sexual orientation. This creates an important aspect where many believe that merit should be considered at first. Nevertheless, Michelman (2016) argues that through board diversity there will be an advantage concerning solving company problems and making important decisions because of the wide knowledge, skill, and experience gap. A diverse board can lead to avoiding scandals such as the Gutnick’s family. The stakeholder theory is based on ethics and moral values in organizational management. Some of the characteristics of a good board include meeting frequently, ethical with integrity, effective communication, maintains balance of power, and high trust levels. The ethical with integrity characteristic is an essential issue in the Stakeholder Theory. Diversification of the board is not necessary if merit is considered and there are clear positive ethical and moral values within the board. However, those that support board diversity still argue that a diverse board has the probability to me more ethical compared to a board that is not diverse (Michelman, 2016). The reason they support their argument with is that having different people in the board widens the probability of good moral and ethical conduct. I believe that it is not necessary to diversify the board since based on merit good directors with the required characteristics can be found. Without diversification, the requirement of the Stakeholder Theory, which is ethics and morality, can be reached since merit puts morally upright directors who also have the required ethical values. The Stewardship Theory also creates the need to employ directors who can act as stewards, in that they can take care of the stakeholder resources without being dishonest. Merit is an important aspect and should be the main consideration for companies when appointing directors. It merit brings forth diversification of the board; it then becomes an advantage to the company. Diversification should not be put first when appointing directors as it can derail the ethical requirements of the Stakeholder theory. Question 3 In the case concerning Joseph Gutnick, who was accused of hiding assets from his future creditors by his own brother Abraham Gutnick raises many issues concerning companies that have families as shareholders. Abraham’s lawyers made these allegations after he was o an eviction notice from new owners of a property he had rented from his brother Joseph. The case raises an issue of whether the companies that are being run by family members have different rules regarding cooperate governance. Stewardship theory is founded on taking care of company resources as entrusted to one by the shareholders. The shareholders have to be given management roles such as directors and managers to maximize their own interests. Do the operations of family companies be able to benefit family members or not is the main issue of concern. Major shareholders in the family businesses are family members and therefore the interest of these shareholders comes first and they are the ones that should benefit from the business. A good example of companies that are run by one family is the Korean Chaebols. These businesses have a huge influence on the Korean economy and political platforms. Samsung Company is an example of a Chaebol and the success of the company is a clear indication that family businesses operate to benefit the family members who are the major shareholders. However, there can be a problem concerning the family run businesses as in the case of Gutnick’s family Hoydu Family Trust, which had a huge debt of about $42 million. The money was spent on daily expenses such as cash handouts to members that visited the Gutnick home, donation politicians, payment of family members’ bills such as his brother’s rent and car registration, and his son’s friends. It can be a disadvantage to the company if family members’ interests are satisfied as in Gutnick’s family case. Resource dependence theory is based on the influence of external resources on the organizational behavior. Joseph Gutnick’s case is a good example that shows how the external resources had a great influence on the family’s business. The stakeholders who are family members entrusted their resources on Joseph and this influenced the family companies in terms of decision making from him as the manager. Based on this theory there is a clear indication that family business has different corporate governance rules. To conclude, I believe that just like any other company, the interests of shareholders is essential. However, in fulfilling these interests the rules guiding corporate governance is different between family companies and non-family companies (Bendickson et al., 2015). I believe that the family owned companies should be able to benefit family members through its operations but it is important to put into consideration the interest of all company aspects also. The Samsung Company case in Korea presents a good example of how family companies have different corporate governance rules that allow family members who are the main shareholders to benefit from the company operations. However, care should be taken not to focus on family members interests and forget the company goals as in the case of how Joseph Gutnick run the family companies. Question 4 The activism from shareholders is on the rise. A good example is the case of First Super, which decided to review its $100 million private equity portfolio relating to wage concerns. Investors do not tolerate fraud scandals related to wages and pay and this is the main reason that has led to the rise in activism from them (Ndzi, 2015). Superannuation funds are types of investors that focus on institutions, which are mainly business based (Ndzi, 2015). Over the last few decades, institutional investors in Australia and the world at large has grown in terms of aggregate shareholding. Superannuation funds account for about 20% of the total institutional investors. This increase means that there has been a rise in shareholding concentration, which is from a range of 3 to 10% as compared to private investors who find it hard to go past the 1% mark. When it comes to matters of decisions making and management, many companies, shareholders do not have power. However, the last decade has seen this change with more institutional investors playing a major role in corporate governance. I believe this is an advantage and should be the way forward for pension funds that are shareholders in the companies. The mere fact that pension funds have shares in a certain company provides them with the right and responsibility to ensure that there is good corporate governance to the companies. In Australia, the Australian Council of Superannuation Investors (ACSI) stated that there is a clear link between good management and the long-term sustainability of companies through ESG issues. Superannuation funds as institutional investors can have the responsibility of carrying out evaluations of disclosures relating to governance in the companies. Through taking into consideration the many factors when deciding on governance arrangements on the structure and composition of the board. Since they are shareholders in the companies, pension funds should ensure that they carry out evaluations in an effective manner and to the best of their abilities by putting into consideration their interests as shareholders. Through ensuring that companies are socially responsible which is an important measure of good corporate governance, the superannuation funds show their power in influencing company decisions. Another important role and responsibility needed from the pension funds as institutional shareholders are having a dialogue with the companies in which they hold the shares. Through one on one meetings pension funds are able to discuss on decision-making and problem-solving strategies. However, these dialogues are based on the mutual understanding between the two parties. The superannuation funds have the right to have their views heard and the objectives they have for the company fulfilled. The dialogue and meetings are important on regular basis to ensure that the company is run in a socially responsible manner. Through dialogue and mutual agreements, the pension funds fulfill their responsibility of ensuring good governance as shareholders. Another responsibility that superannuation funds have in ensuring good corporate governance is through shareholder voting. The decision and effective use of their votes will often ensure action in socially responsible manner. The right to vote by the pension funds is a basic right concerning share ownership in many companies. In the modern corporative world, shareholder voting is essential due to issues of control and division of power and ownership. To ensure good corporate governance, the pension funds have the responsibility of voting in people to carry out governance in a responsible manner. In conclusion, through different ways, superannuation funds can influence responsible social behavior in organizations. The important ways that are discussed above are voting evaluations and disclosures, and dialogue (Ndzi, 2015). The fact that these pension funds are shareholders provides them with rights, roles, and responsibilities to ensure good corporate governance in companies that they hold shares. References L’Huillier, Barbara, M., 2014. ‘What does “corporate governance ”actually mean,?’ Corporate Governance, Vol. 14, No. 3, pp. 300-319. Bendickson, J., Muldoon, J., Liguori E., & Davis E. P., 2015. ‘Agency theory: the times, they are a-changin,’ Vol. 54, no. 1, pp. 174-193. Bendickson, J., Muldoon, J., Liguori E., & Cowden J. B., 2015. ‘Why Small Firms Are Different: Addressing Varying Needs from Boards of Directors,’ Journal of Small Business Strategy, Vol. 25, No. 2, pp. 41-57. Michelman, P., 2016. ‘In Boardrooms, the Same Is a Shame,’ MIT Sloan Management Review, Vol. 57, No. 4, pp. 1. Ndzi, E., 2015. ‘Remuneration consultants: benchmarking and its effect on pay,’ Remuneration consultants, Vol. 56, No. 6, pp. 637-648. Read More