Impact of Corporate Governance and Ethics on the Financial Decisions of Managers - Research Paper Example

? Impact of Corporate Governance & Ethics on the Financial Decisions of Managers  of the Table of Contents INTRODUCTION 3 CRITICAL EVALUATION 4 Responsibility of Corporate Governance 4 Recent Changes in Corporate Governance 5 Use of Technology in Finance 10 CONCLUSION 13 References 14 INTRODUCTION This study aims at discussing the impact ethics and corporate governance on the financial decisions that the managers take in organizations. In the preamble that has been recently published by OECD, they have stated that corporate governance signifies a set of association that lies between the management of the company, its shareholders and its board, which also involves the other stakeholders of the company. It is the structure with the help of which the objectives of the company are developed and means for attaining those goals and objective and ways of monitoring them are determined. In this scenario the role of ethics is well understood. Ethics is the moral philosophy, which involves systematic study of honest obligations, agreements, values and rules (Bloxham, 2011). Ethically carrying out the business operation in organizations is a general norm that prevails since the ancient ages. However, ethical norms or governance in case of financial reporting is a comparatively new concept, which is further transformed due to the challenging global business scenario. The major article that has been selected for this study is “Corporate governance and sustainability: New and old models of thinking”, by Eleanor Bloxham published in 2010. It discusses the traditional as well as latest significance of corporate governance in organizations. Apart from this, the transformations of the financial models with the changing times have been also stated. However, there are other supporting articles that have been utilized in this study in order to present a 360 degree view of corporate governance and its impacts. In this study the discussion would focus towards the present financial reporting environment and the role of managers in such a significant function. The specific corporate governance framework developed by the government for ethical financial management and reporting would be also analyzed to reveal instances of unethical practices of the managers for which their organizations had to suffer. Apart from this, the role and usage of technology in financial record-keeping would be scrutinized, so as discuss the strengths and weakness of the IT based infrastructure in corporate governance. CRITICAL EVALUATION Responsibility of Corporate Governance The responsibility of corporate governance does not lie only on the shoulders of the managers in the organization. Before focusing specifically towards corporate governance in case of financial decisions making, a brief discussion on the stakeholders of the organization that are also responsible for maintaining ethics and governance in the organization would be presented in this section. There are approaches around the world based on which the role of the shareholders in corporate governance has been defined. In countries like UK and US, the corporate governance norms focus on maximizing the wealth of the shareholders through efficient means off course. However, in the primacy approach the shareholders are treated as stakeholders where directors have the legal enforcement to consider the duties of the shareholders. From the economic perspective, shareholders are the risk bearers for the company. While another approach states that shareholder's primacy should be followed and directors are primarily accountable to the shareholders (Hib, 2012). Board of directors holds the major position in case of corporate governance. They are accountable to the stakeholders and primarily to the shareholders of the company. The board also focuses on the performance of the organization and the board. The management is responsible for the sustainability by enhancing the enterprise value of the company and also directs the company towards its corporate objective. It is the duty of the management to perform the duties according to the governance laws. The management decisions are matter of great importance for the company (Hib, 2012). Rightly constituted audit committees play a major role in corporate governance of a company, mainly for monitoring and managing the external auditing processes. This committee has the responsibility to outline the support functions to the auditors. Recent Changes in Corporate Governance The bankruptcy of the Lehman Brothers in 2008 has triggered the scale of the financial crisis. This has linked the inappropriate ways of securitization in the US subprime mortgage segment, which has raised a significant question on the government around the world and their corporate governance infrastructure, which has been developed for the organizations, especially the financial institutions. This incidence is mentioned in the beginning of the analysis in order to reveal the readers the augmenting significance of ethical financial reporting and stricter corporate governance framework in the organizations around the world. The managers handling financial reporting or taking financial decision are now answerable for every step they take. The traditional description of corporate governance was referred in relation with the senior management, shareholders and board of directors of the company. It also included the structure which defined the objectives of the company and means of achieving them. However, in the recent times sue to the interdependencies and nature of the financial system in the organization, various legal instruments are brought into action so that the supervisory authorities can strictly monitor the functions and operations of the organization and prevent them from excessive risk taking. In this backdrop, the role of Sarbanes-Oxley Act and also the responsibilities of Securities Exchange Commission (SEC), New York Stock Exchange (NYSE) and NASDAQ would be also discussed to reveal under which framework the managers in organization take their financial decisions. The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 is an auditing and corporate reform and act for protecting investors. It is also called SOX and considered under the United States Federal Law. This act lays down rigorous procedure related to the reliability and accuracy of the corporate disclosures on the auditors regarding offering non-audit service. The section 409 is tougher and it requires that the companies should disclose all the information on the changes in materials of operation and financial condition of the organization on a current and rapid basis. SOX was introduced to combat the financial corruptions in the companies like WorldCom, Enron, Gobal TelLink, Arthur Andersen and Adelphia. The portfolio introduced by the act became the building blocks for the financial sector and also for the finance departments of organizations for ethical governance in corporate (John Wiley & Sons, Inc., 2013). The guidelines stated by SOX for corporate governance and ethical financial decision-making have been discussed below: Develop an audit team: There should be an audit team or committee in every company which should be consisting of independent directors who would be also having a place in the board. They would be ensuring the integrity of the audit process in the company. Policy paranoia and combat the Section 404 audit chondria: Maintaining governance according to section 404 is the objective of auditors, but they also have to ensure that they function within the allocated budgets, so control and compliance of policies within the business framework is required. Prevent the compliant of the whistle blower from getting converted into lawsuits: Transparency in financial reporting and fully documented financial statements would be the solution from reducing the number of lawsuits related to financial noncompliance (John Wiley & Sons, Inc., 2013). Credible capital raising: Unfair means to raise capital and involving affluent investors without effective financial credibility check would welcome unnecessary risks for the company. SAS 70: SAS 70 report is necessary when a company is serving publicly traded companies, so even when the companies do not follow SOX they should offer SAS 70 documents to its clients. Maintaining code of ethics: The companies must have documented code of ethics in black and white for its stakeholders. This should be informed to every employee and stakeholder in the company and followed. The code of ethics must cover every element associated with corporate governance. However, for the financial department, decision-making process should be supported by significant regulations stated by SOX and other regulatory bodies (John Wiley & Sons, Inc., 2013). SEC, NYSE and NASDAQ. The SEC is the governing body, which control and monitor the functions of the stock exchanges. The role of SEC, NYSE and NASDAQ would be also discussed in this study because companies, especially the listed ones cannot function without the jurisdiction of the stock exchange and their financial decision are majorly based on the fluctuations of the market. SEC in 2003 had approved the rules in relation to corporate governance by NYSE and NASDAQ (NYSE, 2010). This was an initiative to strengthen the standards of corporate governance for the listed companies. These new rules were stricter and detailed explanation related to the majority of members and independence of the directors is stated. Norms in relation to auditing and compensation are also stated. There were ten principles put forward by the two regulating organization and approved by SEC. These principles have been analyzed below in bring, so as to enlighten the readers the new initiatives in the framework of corporate governance. Principle 1: The objective of the board should be to develop long-term and sustainable objectives for the shareholders and the board should be accountable to its shareholder regarding the financial performance of the organization. Principle 2: Commission believes that the critical role of the management is to ensure successful corporate governance in the company and primary responsibility to generate a performance oriented environment (Johnstone, Gramling, & Rittenberg, 2011). Principle 3: The long-term economic interest of the shareholders should be given priority and they should be communicated the financial status of the company from time to time. Principle 4: High-quality corporate governance norms should be also integrated in the business strategy of the company. It should not be view as just general compliance obligation, but separated from the long-term plans as stated in the business prospectus. Principle 5: Agency regulations and legislation is significant for establishing basic stage of corporate governance in the organization (NYSE, 2010). Principle 6: Efficient corporate governance practice must encourage transparency, disclosure of policies and effective communication (Kostiander, & Ikaheimo, 2012). Principle 7: Objectivity and independence should be the major attributes of the board members and in order to strike the accurate balance between independent as well as non-independent directors, appropriate knowledge diversity should be there. Principle 8: The commission also proposed SEC to issue the US Proxy System for releasing the concept that includes comments on regulating the activities of the firms (NYSE, 2010). Principle 9: NYSE, NASDAQ and other exchanges along with SEC should be working towards reducing the pressure of proxy voting and encourage participation of individual investors. Principle 10: The stock exchanges or SEC should be considering range of views for determining the impact of corporate governance and the reforms that has been made in this context over a decade. This will assist them to analyze the improvements and they can plan for long-term growth of companies (Larcker, & Tayan, 2011). Impact on Corporate Behavior and Ethics. Corporate governance committee within the organization has innumerable responsibilities, which also includes honesty in presenting financial statements. The managers generally do not take financial decisions within the organization along, which signifies that the board of directors are also participants in the financial decision making process. The managers are the middle-level or lower level decision makers who mostly have the responsibility of implementation rather than final decision-making also on financial front (Martin, & Gollan, 2012). The regulations states that the since the audit committee includes directors, who serves within the executive team of the company are the once who undertake unethical practice to squeeze money in their pocket and utilize creative accounting methods to reveal a sunny picture in front of the investors. Here the regulations direct the management to check the functions of audit committee and the managers involved in the function of financial decision-making (NYSE, 2010). The basic account theories and practices should be the basis for the financial managers, which assist them to recognize the issues related to revenue recognition. It would be the responsibility of the managers to reveal every debt, expense and earnings in the financial statement and balance sheet of the company to avoid accounting gimmick (Monks, & Minow, 2011). Use of Technology in Finance The decisions that the financial executives take every day are crucial for the organization, so these decisions need to be based on solid data and presented in timely manner. The amount of data that the financial managers handle is huge and manual analysis is not possible, so IT is the only resource which if properly targeted and implemented than necessary information are visible instantly for enhanced decision-making. The IT integrated framework considers the key performance indicators of the company while presenting the analysis from the financial data. Compliance efforts need to be maintained by the financial officers or managers in terms of legal liability, reputation and diverted resources. For tracking all the assets, investments, regulations and revenue at one go, continuous information scanning and elimination of irrelevant data is required (Parker, 2007). Along with maintenance of business ethics in financial functions, the managers also have to access the overall performance of the company, expenses and tally them with the budget allocated, so that misalignment can be traced easily. IT tools offers 360 degree view of the financial status of departments and the organization as a whole. This assist the financial managers to formulate strategies even by squeezing out limited resources, which is also, called cost elimination or cost-cutting. Impact of Change in Information Technology (IT). Various research and analysis conducted by scholars’ state that the change which IT has brought about in organizations is a revolution and towards the betterment of systems in business environment. The simple financial functions have transformed into financial renovation and business intelligence, which are being combined to provide opportunities of reshaping the process of decision-making and performance (Steger, & Amann, 2008). The management accountants in the organizations have significant role to unlock the prospect of business intelligence, which is obviously a threat to the traditional accounting system. Business Intelligence software are being integrated in organizations to improve the financial functions and efficiency of the accounting operations as the technology used in Business intelligence is matured and advanced, which includes tools for analysis, reporting and performance management for the finance managers or accountants (Fleming, & McNamee, 2005). Effect of Financial Success of Organization. The decision-making process in the organization, especially in the financial departments have evolved and transformed. As it can be seen in Figure 1, the transaction processing segment has shifted and the responsibility has gone to the line managers, which signifies that the structure have become flatter and even the line managers are being included in the decision-making along with the specialist financial serve managers and other supports. Every function is segregated among specialists (Rezaee, 2007). The financial decisions would be taken by financial experts, while accounting decisions would be taken by accountants, while they can share the same data on similar platform and work in co-ordination with each other, which will assist then to achieve group goal. It also signifies an ethical financial structure where the financial information is transparently shared among employees at different levels and the framework corporate governance is followed in decision making (CIMA, 2008). Figure 1: Decision-Making Framework in Modern Organizations Source: (CIMA, 2008). Strengths and Weaknesses. The article puts forward that sustainable finance is not about just investing funds in certain way, but something more than that. It involves inputting resources, which must be incorporated in a right and practical manner to influence the outcome of the business. As far as integration of IT infrastructure is concerned in maintenance of governance, it can be said majority of the trait signal towards the strength of the modern governance system supported by IT. It assists the financial managers to be on the same page with the Chief Finance Officer, management and the board members (Steger, & Amann, 2008). Even the accounts and finance executive get an idea regarding the financial objectives of the organization. Weakness however prevails in every system because human resource being the most powerful resource in the organization can manipulate even in IT integrated environment in the organization (Crane, 2009). Moreover, IT integrated framework such as business intelligence tools function totally on the basis of available data, so there is less scope of analysis which are usually backed by human intelligence. CONCLUSION In this research study on ethics and corporate governance, the aim was to focus towards the impact on financial decision making of the managers with regards to the regulations and usage of technology in business environment. A primary article was considered to discuss the role of corporate governance in the mentioned scenario, but other articles were also reviewed for revealing how financial managers conduct their daily activities and the regulations they follow. It was found that the traditional corporate governance responsibilities were specifically on the senior management or major stakeholders of the company, but now it has percolated to the basic levels in the organization. The organization structures have become flatter and every employee ranging from line managers to board of directors are eligible of viewing the information or data of the company for ethical functioning. A significant code of ethics in the company is followed to ensure corporate governance. In this point technology integrated framework has a major role to play. It assists in maintaining transparency in terms of reporting, analysis, monitoring and control activities. References Bloxham, E. (2011). Corporate governance and sustainability: New and old models of thinking. Journal of Sustainable Finance & Investment, 1(1), 77-80. CIMA. (2008). Improving decision making in organizations: Unlocking business intelligence. Retrieved from: http://www.cimaglobal.com/Documents/Thought_leadership_docs/cid_execrep_unlocking_business_intelligence_Oct09.pdf Crane, F. J. (2009). Ethics, entrepreneurs and corporate managers: A Canadian study. Journal of Small Business & Entrepreneurship, 22(3), 267-274. Fleming, S., & McNamee, M. (2005). The ethics of corporate governance in public sector organizations. Public Management Review, 7(1), 135-144. Hib, M. (2012). New Corporate Governance: Successful Board Management Tools. (4th ed.). London: Springer. John Wiley & Sons, Inc. (2013). Sarbanes-Oxley practices for good corporate governance. Retrieved from: http://www.dummies.com/how-to/content/sarbanesoxley-practices-for-good-corporate-governa.html Johnstone, K., Gramling, A., & Rittenberg, L. E. (2011). Auditing. (8th ed.) Connecticut: Cengage Learning. Kostiander L., & Ikaheimo S. (2012). “Independent” consultants’ role in the executive remuneration design process under restrictive guidelines. Corporate Governance: An International Review, 20(1), 64-83. Larcker, D., & Tayan, B. (2011). Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences. New Jersey: FT Press. Martin, G., & Gollan, P. J. (2012). Corporate governance and strategic human resources management in the UK financial services sector: the case of the RBS. The International Journal of Human Resource Management, 23(16), 3295-3314. Monks, R. A. G., & Minow, L. (2011). Corporate governance. (5th ed.). New Jersey: John Wiley & Sons. NYSE. (2010). Report of the New York Stock Exchange commission on corporate governance. Retrieved from: http://www.nyse.com/pdfs/CCGReport.pdf Parker, L. D. (2007). Financial and external reporting research: The broadening corporate governance challenge. Accounting and Business Research, 37(1), 39-54. Rezaee, Z. (2007). Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, and Integrated Processes. New Jersey: John Wiley & Sons. Steger, U., & Amann, W. (2008). Corporate governance: how to add value. New Jersey: John Wiley & Sons. The McGraw Hill Companies. (2008). Ethical decision making: Corporate governance, accounting, and finance. 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