Ethics, Corporate Governance and Social Responsible Investment - Essay Example

? Ethics, Corporate Governance and Social Responsible Investment Section A A mandatory system of governance has strict rules that must be observed by all market players. Any firm that fails to adhere to these rules is fined according to the legal requirements. In an enabling environment however, compliance to any system is not mandatory and firms may either to choose to comply or not. No legal notice bind firms in an enabling environment to comply with certain regulations. The United States applies mandatory corporate governance as its mode of regulation, especially with the enactment of the Sarbanes-Oxley act. A number of other major economies have however embraced the adoption of the enabling mode of governance and rejected the mandatory corporate governance. A number of differences exist between these two systems as outlined by Anand, (2005). Mandatory corporate governance is practiced in major states of the United States, a mandatory system provides guarantee that firms in this system will have to implement any reforms that market regulators put in place. This is contrary to the enabling governance where nothing guarantees a fair play and the enforcement of implementation of any changes. Enabling governance has the ability to ensure that there is compliance to regulatory mechanisms especially when it is implemented together with mandatory disclosure of organizations practices. Mandatory system is also slightly more costly to implement when compared to the enabling governance style (Anand, Milne, and purda, 2006). Mandatory corporate governance is majorly practiced in the United States while the United Kingdom practices the enabling kind of governance. Canada and Australia are other major countries that also practice the enabling kind of governance apart of the United Kingdom. The United States mandatory governance is however a blend of the two systems. In some states, companies are not compelled to adhere to the requirements but are required to make formal disclosure of the rules they have or have not adhered to. Firms that are cross listed in the United States are required according to the Sarbanes-Oxley act to submit their evidence of compliance to the mandatory governance regulation. The SOX regulation has a prohibition for ‘insider loans’ especially among companies listed under this act. Such companies must also ensure that they submit their balance sheets for each financial year (Anand, 2005). The mandatory corporate governance system of the United States also has a requirement for all companies listed under its stock exchange at the NYSE and NASDAQ. They are required to include independent directors in the management board of the firms; the same policies are also practiced in Canada. Firms are required to submit their compliance statuses through proxy to the provincial commissions who are also mandated to ensure that there is strict formulation and administration of the guidelines (McCahery and Vermeulen, 2010). Under the enabling system as practiced in the UK, compliance with corporate guidelines is voluntary. Only companies that are listed in the London stock exchange are obligated by law to submit their compliance in their annual reports. The system as practiced in the United Kingdom has been adopted in Australia with a few modifications on the reporting mechanisms. The UK system also applies incentives that are meant to make firms disclose their compliance information; disclosure of information in the enabling system depends on the sensitivity of the information. In situations where firms feel that their competitors may benefit from exposure, such firms have the right to withhold their compliance (Anand, 2005). Enabling systems is also known as voluntary governance system, this is majorly because of the free atmosphere that it creates for its firms. Firms in this system can either chose to disclose their information or not to be based on their reasons; this is the system which is practiced in the United Kingdom. Enabling method of corporate governance as practiced in the United Kingdom has a number of strengths and weaknesses. An enabling environment provides firms with the option of implementing any regulation as they deem fit. As such, firms in the United Kingdom system of governance can make a preemption of the government policy decision and implement them long before they are enforced. This makes it easier for the government to ensure that its policies go through without any resistance. An example is drawn to environmental policies, which are meant to reduce greenhouse effect. Matters environmental have proved tough when it comes to implementation in mandatory systems like the United States. Such systems ends up with companies either evading or adopting ways to bypass the requirement. This is however different when it comes to the enabling system (OECD, 2006). Mandatory information disclosure as required by the mandatory corporate systems puts most firms at a risk of losing value. This is because the information disclosed may be injurious to a company’s reputation especially before the investors. Enabling system however provides companies with an option to choose whether to disclose information or not. This enables most companies to preserve their reputation before investors. Lack of information on the corporate governance practices of a company provides investors with no opportunity to devalue such a company. This works to the advantage of the company in an enabling environment like in the United Kingdom. Voluntary disclosure however has a number of disadvantages especially to the firms that operate in strictly enabling environment. The lack of clear and strict guidelines on which information is to be disclosed makes it challenging for companies. As a result, most companies hire legal professionals to advise them on what to include and not to include in their report. Such information must also be made available to the company’s shareholders, a process which may be quite costly to the firm. Mandatory laws also ensure high level of compliance to regulations as opposed to enabling environments. Previously employed laws and regulations are also easy for companies to comply with (Anand, Milne and Purda, 2006). This makes mandatory system relatively smooth and easy to run as compared to the enabling or voluntary governance. Enabling governance has no assurance that market players will be willing to accept and adopt changes introduced by the government. This makes it difficult for new regulations to be adopted and adhered to as may have been intended. In a mandatory system however, the legalization of a regulation is all that the government needs to do to ensure that adherence is achieved. Section B Non-listed companies include a wide variety of companies with an array of ownership structure, financing and leadership. The smooth operation of any business entity whether privately or otherwise owned depends on the adoption of good governance practices. This applies to family forms as it improves the competitiveness of the business. The confidence and trust of employees to a firm is important in the success of such a business. Such confidence can however only be achieved if a business especially those owned by families adopt proper governance practices (leino, 2009). Family firms today constitute over 80% of the total amount of revenue that the government collects in both the United States and the European Union. This means that family firms employ a majority of workers in the country. As such, good corporate governance within the family owned and the non-listed companies is ensured. It is evident that family firms play a significant role in the growth of major economies the world. In a family business, the majority voting power and decision belongs to one natural individual, in most situations, the owner (Leino, 2009). Family firms have similar characteristics, ranging from problems, management structures and ownership. Family capital forms the major source of funds for family owned businesses and the structure of governance is majorly made of family members. The principle of continuity applies to family firms; moreover, the incorporation of corporate governance into the practices of a family firm acts as a basis for growth and relevance in the international market. As such, family firms clearly define the roles of the board of directors and those of the council of ownership; this reduces the instances of job collisions between the owners and the employed executive. According to Arcot and Bruno, (2012), two kinds of conflicting scenarios exist in family owned businesses. They vary from those involving the shareholders, in this case the majority shareholder and the minority shareholders. To stem such kind of conflicts, which may stall the cooperation of a business, it is important that family businesses adhere to the corporate code of conduct. Majority shareholders of this kind of businesses have the responsibility of ensuring that information is collected and disseminated. Such an individual acts as the buffer zone between any conflicting groups in the business. Family owned businesses naturally adopt less disclosure principle as compared to listed company. As such, while operating in a mandatory disclosure system, a number of exceptions are available for family owned businesses. Family businesses have a less likelihood that they can comply with the corporate standards. This is highly prevalent in situations where extensive monitoring is factored in to the operations of such businesses (Ito, Managi and Matsuda, 2012). Family firms are not bound by any legal requirement to disclose confidential information on their operations. The governance choices they make are only of major concern to the majority and the minority shareholders. In order to maintain their competitive advantage, family owned firms disclose little and only the information that they may not expose their weaknesses to investors. The majority shareholders therefore determine how much the business can disclose. Most governance practices that family owned businesses adopt are mostly meant to strengthen their board of management (Mahadeo, 2008). Family firms face a number of problems, which are only distinct to them due to their nature of ownership. In such businesses, every operation issue revolves around the family and its stability. Any problem that may arise from the family may affect the business negatively. As a result, the governance issues related to family owned firms are wide and varied depending on the family, area of operation and management structure (Wolfenzon, 2010). One of the major governance tests that face family owned businesses is the succession in the ownership. Any change in the ownership has a number of effects to the business for it interferes with continuity and operational compliance. Cadbury, (2000) highlights family tensions as one of the major problems affecting family owned businesses. The lack of separation of the business from family life is a major source of governance problems to family owned businesses. As much as this is family business, clear separations must exist that can enable the business to isolate family related issues to the running of the business. The exit of founder members of family owned business acts as the major source of problems to many companies. This is because power struggles ensuing derails the governance of the company. A clear ownership structure especially as far succession is concerned should be drafted at the initial stages of family business to ensure smooth running and operations (Fremond and Gorlick, 2002). Family appointments and promotion is also a major source of conflict in most family owned businesses. To ensure continuity, certain members of the family who have shown high competence must be periodically elevated; however, this at times creates a lot of friction among the family members that may halt the operations of the business. Improving the efficiency and operations of a family business at times call for the introduction of outsiders. Such professionals bring with them neutral ideas to the business; however, the decision to incorporate outsiders and make the part of the management board creates a number of problems to most business. Family members may feel that the business maybe moving away from them into the family domain, a fact that may affect their powers and positions. All problems that affect the family owned business affects their choice of compliance and disclosure. A family business that has embraced the best governance practice and it is devoid of family related woes may be more comfortable to release its information into the family domain. This may not however be possible in businesses that are riddled with family related woes and problems. Well-managed businesses will therefore freely adopt voluntary disclosure principle as opposed to those that are not. Section C The choice of investment option and opportunity is important especially if the final monetary outcome is of utmost consideration. Socially responsible investment can be defined as an investment approach that factors in environment, social, government and environmental factors. Socially responsible investment ensures that both financial returns and social benefits are derived. Opportunities exist several socially responsible investments in major economies like the United States. These include stock investments, real estates and other bank related investments. Social investment involves deriving gains from a multifaceted investment. Such investment must incorporate a number of corporate social responsibilities like environmental care (Al-Hawamdeh, 2004). As the, the gains are all-inclusive and ensures that all the factors that affects the operations of the business are taken care of. According to Managi and Matsuda (2012), socially responsible investments include investments into pension funds, community investments and investments in financial instruments. A majority of investment options in the United States today are considered as SRI’s. This means that few investment options do exist for people who chose to invest in areas out of this category (Ferrer, 2009). Socially responsible investment options have better returns as compared to other forms of conventional investments. Conventional investment options are expensive and have little and unwarranted returns as compared to SRI’s. Socially responsible investments have packages, which are readily available to investors to choose from and make investment decisions on. SRI is also a better investment option to retirees and those on social benefits as opposed to conventional options, which are risk prone. The tax regime for investments under this section provides incentives that ensure maximum growth of investments as compared to conventional options (Maynard, 2007). SRI’s also provides an option for investors to weigh the social implications of any investments. This is highly important especially for investors who personal exceptions to social and religious implications of their options. A viable example is a Muslim faithful who may consider the products that company deals on before making any investment engagements with the company. All Muslims have reservations for companies that either deals with alcoholic or pork products. SRI options are therefore quite flexible and enable investors to exercise constraints when making decisions on their engagements (Wolfenzon, 2010). Opponents of conventional approaches of investments argue that it there are large disparities between the long and the short-term returns on these investments. Socially responsible investment moved from the market exposure conventional method to an approach that focuses on the management and illiquid capabilities of the business. The opponents of socially responsible investment options argue that no control mechanisms exist to ensure that the issues that concern the environment and human rights are taken care of. As such, most of these companies are capable of capable of covering up from their inactivity and lack of adherence to the legal requirements of their investment engagements. Emerging marketing economies also offer high returns on conventional investments. This at times endears most investors to conventional investment options at the expense of socially responsible investments (RBC Global, 2012). The diminished investment returns because of adopting socially responsible investment option has for long weighed down the benefits of this investment route. As a result, most investment advisors have advocated for the exclusion of socially responsible investment as it hurts the returns made by the business. For this reason, most scholars have advanced the idea that socially responsible investment is a mere market niche as opposed to being a viable investment option. Such an investment may only sound good for a certain group of individuals who have strong attachment to companies they invest in. such individuals are contented with receiving less wealth from their investments as opposed to growing more rich due to sound investment options. According to RBC Global (2012), socially responsible investment can only prove to be an investment option if can be able to generate more returns than it currently does. The proponents of this option have however insisted that putting environmental, social and governance considerations into an investment plan will automatically result into low investment. This, they argue, reduces the number of investment opportunities as opposed to the traditional methods of investments. However, the benefits of social investments are much more and as a result offset the investment losses that arise from this option. However, this is not accepted by opponents of traditional investment options who believe SRI will always remain a market niche that won’t influence the returns of a company (Aerts, Cormier and Magnan, 2006). A third school of thought however argues that no meaningful impact can be derived from any of the two options. Application of SGI should therefore include a ‘best-of-sector approach’ to enable in reduce haphazard investment of environmental facets that have little return prospects (Berglof, and Claessens, 2004). Adopting the socially responsible route of investment should aim at achieving more that financial benefits. The conservation of the environmental should remain at the core of objective of any organization that appreciates the corporate social responsibility. As in CSR, financial gains are never the driving force and factor, environmental restoration and sanity is given more consideration; moreover, the growth of good governance affects the business environment of every firm. Any investment that ensures the improvement in the governance growth creates a better business operation environment as opposed to those who do not. Therefore, this means that such organizations derive more benefit in the end, which may not just be financial (Brennan, and Solomon, 2008). The decision to adopt socially responsible investment should therefore not be driven by the need to make financial gain. The giving force should the social, governance and environmental sanity that it restores. Companies should therefore feel safe making investments in this area as opposed to the traditional forms of investments, which may ignore the role played by the environment. Corporate social responsibility is a practice that most firms have adopted today as a form of SRI. They make financial steps into other sectors of the economy that affects their immediate environment in order to ensure their operations in a smooth atmosphere. References Anand, A, Milne, F and purda, L. (2006). Voluntary adoption of corporate governance mechanisms. Queens’s economics department working paper, 112. Ontario, Canada. Retrieved from http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1112.pdf Anand, A. (2006) An Analysis of enabling vs. mandatory corporate governance structures post Sarbanes-Oxley. Delaware journal of Corporate Law. 31,229-252. McCahery, J. & Vermeulen, E. (2010) Corporate Governance of non-listed companies. New York: Oxford University Press. Ito, Y., Managi, S., & Matsuda, A. (2012). Performances of Socially Responsible Investment and Environmentally Friendly Funds. Journal of the Operational Research Society18. Anand, A, Milne, F and Purda, L. (2005). Voluntary vs. Mandatory corporate governance regulation: theory and evidence. Retrieved from http://www.law.harvard.edu/faculty/hjackson/pdfs/Voluntary%20vs%20Mandatory%20Corporate%20Governance.pdf Al-Hawamdeh, A. (2004). Learning from complexity: enabling governance frameworks. Birmingham business school, Birmingham. Retrieved from http://www.psych.lse.ac.uk/complexity/Research/ESRCFinalDraftReportv2_161107.pdf Anand, A, Milne, F and Purda, L. (2006). Voluntary adoption of corporate governance mechanisms: the role of domestic and international governance standards. American association of law schools’, Washington DC. Retrieved from http://www.utexas.edu/law/magazine/wp/wpcontent/uploads/centers/clbe/anand_voluntary_adoption_corporate_governance_mechanisms.pdf Mahadeo, J. (2008). Corporate governance and non-listed companies: application of a code of reference. Faculty of law and management, Mauritius. Retrieved from http://www.wbiconpro.com/466-Jyoti.pdf OECD, (2006). Corporate governance of non-listed companies in emerging markets. Paris, France. 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Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment for Mauritius, World Bank. Read More