Corporate Governance - Essay Example

Name: Tutor: Course: Date: Corporate Governance Corporate governance refers to the way an organization or a corporate entity is governed. There are sets policies that direct an organization or business body. The policies administered, facilitate the smooth running of the organization. ABC Company is one such entity and the policies are geared towards enabling the company attain the set goals. The guidelines apply to both the external and internal stakeholders who are affiliated to the institution. Stakeholders in this case include ABC’s: shareholders, debtors, creditors, suppliers, customers and affected individuals that are staff. Bodies that play a critical role in corporate governance include: the government agencies, stock exchange and board of directors. Different nations create corporate governance principles and issued from responsible bodies with the government assistance (McConnell 27). The situation ABC Company in the recent had an incident of corporate governance. It is one of the biggest companies in UAE with its branch located in Abu Dhabi. ABC deals with gas and oil fields in the UAE region. Engineering works done to the company was budgeted to be $270 million. This was aimed at developing and erecting the oil and gas fields. Principle engineering works started about half a decade ago. Through this affiliate companies were awarded with tenders. The companies afterwards were still retained after finishing the previous tenders. Retained companies were chosen because of their demanding services that were still needed. Many projects finished and some projects still ongoing. Companies chosen offered quality services and were popular within UAE. These companies had to abide by the ABC specifications and needs i.e. affordable prices, convenient services though costly. During this duration the commercial Manager (of ABC) has always chose companies for various tasks. Services offered include: drafting for drawings different types of drawings, scanning various sizes of documents and sketches for thousands of projects. These companies were mainly specialized in using special software programs such as AutoCAD, GTX Raster and 3D modeling. This provided quality and excellent works. It was widely known that the company forbids any employee to use their own companies to serve the ABC Company under any circumstances. This is not fair because it shows incidents of being unethical. Other companies are thus denied the chance to win tenders because of the biasness that will be involved. The commercial department always issue out tenders to the public. Such tenders involve services such as scanning and drafting. The best bidder then wins the tender that is offer best prices and quality services. The previous year SYS Company for auditing joined ABC Company as one of its shareholders. The auditing committee worked on the past records. It thus led to identification of instances of unethical behavior. This syndicate had been making massive profits for the commercial department due to the favors from one of the senior personnel. Projects had covered heavy capital expenditures which were supposedly not to have. It was thus evident that prices quoted were double the normal price hence making two times more the proposed price. After winning the tenders prices were being inflated every now and then. It was as a result of quality software introduction, addition of specialized personnel and having additional consultants. It therefore discovered that the AZA Company was actually owned by a female lady related to one of the employees within the premises. The company dealt with oil and gas fields services. For the past decade the company had been chosen severally, raising eyebrows. Thus why this company? More auditing was carried out on AZA engineering company. Through auditing of personal documents it was concluded that she was a wife to the commercial manager. It was also discovered that the lady had no information what so ever about AZA Company. AZA Company had so far made $2 million from ABC through the services it offered. More issues were rooted out such as projects were budgeted for about $200,000,000 annually. Under normal circumstances projects consumed about $170,000,000 and $30,000,000 was hence unaccounted for. The accounted money ran to a span of three years summing up to $60,000,000. The stakeholders ABC has various stake holders who play a very critical role in enhancing its processes. The stakeholders are thus affected in one way or another due to company’s activity i.e. wrong decision making impacts into losses and the converse is also true. The stakeholders of ABC include: shareholders, debtors, creditors, suppliers, customers and the staff. In this event staff involved decisions lead to the emergence of the unfair tender issuance which led to massive losses. The company’s emphasis is to put the satisfaction of their clients in the first position. For more than a decade this has been so. Stakeholder relationship should be kept professional at all times to keep a business friendly atmosphere. AZA as one of the stakeholders thus brought tremendous losses to ABC. Other stakeholders such as the consumers were also faced with inclined prices causing them to run a viable solution. Stakeholders’ involvement Through stakeholders meetings involving the legal department manager, general manager, acting-general manager and the auditors tried to come up with a viable solution. The reputation of the company was not soiled hence he was retained at the company but transferred to another department/ branch but under observation. It was so concluded that he would be relinquished off duties for a year and afterwards assigned for a particular role. During this off duty time he was not to do anything associated with ABC. This was made clear after signing legal documents that he would not request for any end of service retirement. AZA was banned from any business association with ABC and refund half of all the stolen cash. The cash amounts two year’s stolen money. Corporate governance implications Corporate governance has brought critical changes in some companies which employ its policies. Thus due to stakeholders involvement it has caused severe imbalance in the running of the company’s business activities. For instance the involvement of the one of the staff in the recent scandal has caused the company to face tough challenges and also to make very critical decisions. It is thus necessary to some of the codes on corporate governance need to be cross examined to address such problems if they recur. The share price performance highly depends on the corporate governance of ABC. The standards if modified for the betterment of the company would see the smooth running of the firm. Cross checking of equity, assets and profitability hence ensures a better future. Assessment of the situation A measure of the situation was done by various auditing companies. The company had in this event faced tremendous losses associated with the issue. This was done through offering tenders to ghost companies operated within the ABC premises. Most of the project was budgeted for $200,000,000 annually. However, it was relayed that projects consumed about $170,000,000 and $30,000,000 was unaccounted for. The accounted money ran to a span of three years summing up to $60,000,000. This shows a high instance of unaccountability which led to the issue. Using the right policies and legal procedures the company can withstand such incidents. Committees established should be vetted well before any commencement of their jobs ensuring quality service delivery. Views on what should be done Corporate governance has affects firms in both negative and positive ways. This majorly targets the performance and financial state of the company. It will thus solve the conflict of interest between the stakeholders and the management. Hence it will create a dividing line between the two groups through roles delegated to them. The performance of the firm will sky rocket to admirable status. Minimization of the board should be done and reduce expenditures on non-profitable ventures. It is observed that when the firm’s performance deteriorates dispatching the directors recovers its performance. The converse is also true. A board with many directors affects the firm negatively. Decisions made in the firm face a large opposition and eventually be less efficient. However, apart from decision making the board would also not be manageable by the CEO (Yermack 185-211). Corporate governance is a positive factor to stakeholders. This is because it enhances the smooth running of the organization. The stakeholders are persons who contribute both positively and negatively to the well being of the organization they are both beneficiaries and risk takers, in this case include the employees, shareholders, suppliers and customers. Incompetence and dishonesty could be a negative impact though it can be reduced with effective policies implemented (Hoffmann, 2007). Theories have thus been developed to explain the implication of stakeholders to corporate governance. The theory stakeholders’ theory thus has both normative and instrumental implications. The normative view emphasizes that the views of the stakeholders should be given the first consideration in the decision making of the organization. Hence the interests of the stakeholders are vital. Therefore the board is hence controlled by the stakeholders say. The board would in this event have a stakeholder’s representative. The representatives know the interest of the stakeholders. Through this the firm creates an influence between external and internal environment. It is thus observed that stakeholders have both a negative and positive impact on the organization (Charles 172-184). Through the various challenges faced by corporate bodies, it raises the need for improved corporate governance. It was in this event observed that prominent companies collapsed leading to more critical look into corporate issues. With the changing trends firms have sought to borrow loans from other organizations and increase openness and governance. It has also been noted that separation of roles has made a breakthrough. The CEO and the chairman have been separated to have a dual structure which over sees the betterment of future income (karel 677-9). A firm’s image is seen from the executive board that is good chair. A very executive chair might hinder the effective performance of independent members. Hence this contradicts the influential manager. Independent board members bring a sense of trust among the owners of the firm. Issues of responsibility should remain accounted for at any given time. These will involve establishing compliancy and Ethics rules of governance to help reduce risks within the firm. This will equally safeguard the interests of the shareholder (Vishny 783). Clear strategies involving planning, risk identification, proper execution of duties by the involved management and all the concern attests to the accuracy of information given to the relevant investors. An ideal control system should be put in practice to easily regulate both motivation and ability to efficiently increase performance. Decision making normally will remain key. This can only actualized if clear financial records and other supporting market statistical records are well analyzed and interpreted for better decision making. Works Cited Blattberg, Charles. Welfare: Towards the patriotic corporation. New York: Oxford university press, (2004). McConnel, David. "International corporate Governance." Journal of Financial and Quantitative (2003): 38 (1): 1- 36. Yermack, David. "Higher Market Valuation of Companies with Small Board of Directors." Journal of financial Economics (1996): (40) 185-211. Hoffmann, Michael. Implication of Stakeholders and the Sharehlders. New York: GRIN, 2007. Shleifer, Vishny. "A survey of corporate Governance ." Journal of Finance (1997): 737-783. Karel, Williams. "Corporate Governance and Disppointment review of International Political Economy." (2004): 11(4) 677-713. Read More