The Corporate Governance and Ethics - Term Paper Example

Running Head: Corporate Governance Governance reporting and ethics Introduction. Many companies have adopted the corporate governance. It has a Combined Code that recommends things that should be done by those companies or organization that chooses to use it. However, some companies do not comply with this Combined Code and they go further to explain why they don't comply. The Combined Code on Corporate Governance dictates that companies should address their Directors and also provide in training services to the Directors and the working staff so as to enable the prosperity of the company. Remuneration levels should be sufficient so as to attract, as well as retain and motivate directors and the other working staff towards working very hard so as to achieve success of the company (Nam & Jinn 2000). However, a company should not pay more than required for this case but the remunerations should commensurate with individual performance (Bebchuk & Roe, 1999). The committee for remuneration should also judge where to place their Company in relation to other companies. However, these comparisons should be made wisely such that remuneration levels correspond with performance improvement. According to the Combined Code address on accountability and auditing, the company's board should be able to show a balanced as well as an assessment that can be understood in order to determine the position and prospects of the company. This can simply be termed as financial reporting. The code provides that the directors in an annual report should explain their responsibility of Code Provisions The directors should explain in the annual report their responsibilities for account preparation and there should also be auditor's statements concerning their reporting responsibilities. The main roles and responsibilities of the committee for auditing include: Monitoring whether there is any integrity in the company's financial statements. Monitoring whether there is any formal announcements that are concerned with the company's financial performance. Developing and implementing policy to facilitate the engagement of the external auditor to distribute non-audit services. It also recommends that, all directors including the non-executive directors should be re-elected at regular intervals by the shareholders. This contributes to continued improved and satisfactory performance. The code requires that a company should produce disclosure statements and also report on how they apply the principle of management and governance (La Porta et al. 2000). Companies should be free to explain the governance policies that they as well as any circumstances that have led them to employing a particular approach. The company has also to confirm that it adheres to the provisions of the Combined Code and if it does not, then it is liable to giving an explanation as to why it cannot comply. This is referred to as "comply or explain" approach and has been in existence for long whereby it is widely accepted by the investors as well as company boards. The people who are concerned with governance evaluation should do this with an aim of promoting partnership as well as trust in the company. They should consider company's nature of risks as well as the challenges that it faces. They should also consider the size as well as the complexity of the company. ISSUE 1. Non-executive directors and Independence. Non-executive directors play a very key role and are believed to be very effective in the building of good corporate governance structures. The chairman has the capability of holding meetings with non-executive directors even in the absence of executives. The non-executive directors also meet annually under the leadership of the senior independent director but in the absence of the chairman to give an appraisal on the performance of the chairman. The non-executive directors are usually provided with professional advice at the expense of the company whereby they consider it important to discharge their Responsibilities and concern as directors. According to (Coffee, 2000), a good corporate governance involves holding of special meetings to address on the needs of the company as well as ensuring that transparency and clarity among the directors. It also entails creation of systems to ensure clarification of director's responsibilities and also a corporate advisory committee to ensure better objectivity as well as transparency. Better governance is an issue that is constantly addressed in most companies since it leads to customer satisfaction as well as protecting the company from conflicts, risks and errors (Sheikh & Rees 19995). Independence is a state of being free to work on your own, exercising enough freedom and contributing positively to the growth oneself or an organization. The non-executive directors of Wal-mart Company exercise a lot of independence in their work but they have also tied to consult one another, something that has seen the erosion of intimidation and a boost in self-esteem. This has contributed to an increased performance of the company since the non-executive directors have gone further to devising ways of managing internal controls within the company. This independence has enabled the non-executive directors of Wal-Mart to observe more transparency and accountability as well giving constant appraisal to the other members of the board and the workers as they gear out for attainment of the company's goals. ISSUE 2. Non-Compliance to the Combined Code. Wal-Mart is a very successful company in the US that does not comply to the combined code giving explanations that the code provides an excessive concern level about the growth and effective control of the company. It also explains that the main focus of the directors or rather the board should be to see to it that performance of the company and its development are achieved. This is opposed to the good corporate governance that is recommended by the Combined code. The company goes further to stress that, as required in the combined code, there are a lot of difficulties and challenges in recruiting or selecting sufficient and effective non-executive directors who can exercise independence, have the necessary experience and knowledge to ensure the success of the company. The company is also against the idea of the combined code that all companies should ensure disclosure of their statements reporting that unlike the recommendation of the code, the disclosure does not yield to any value or success of the company. It also does not support that disclosure can improve the quality in reporting due to the more requirements of the code. The remuneration that is offered by Wal-Mart to its directors and other working staff are very high. However, this has not seen to any reluctance in their work performance but instead it has boosted their working morale, which consequently has resulted to continued success and prosperity. The non-compliance of Wal-Mart and Tesco is justified in that there should no be no limit to the level of remuneration that should be offered to the director as well as the workers of any company. This should not always commensurate with effort put in but also remuneration should be extended even to those who are under performing so that they can get motivated and improve their performance towards the success of the company. According to (Stulz 1999), disclosure of the company's statements may lead to collapse of the company. This may occur for example in a situation where company is running at a loss and the stakeholders decide to withdraw their inputs to the company. The position of Wal-Mart and Tesco that company's statements should not be disclosed hence is a valid one. The companies also through their failure to comply with the Combined Code have been able to hire competent, experienced and knowledgeable independent non-executive directors not only during recruitment time but also during working process. These companies have used these explanations as to why they don't comply to Combined Code for quite a number of years. The "Comply or explain" approach used in the Combined Code enables companies to be flexible and to exercise the necessary degree of freedom. It enables companies to exercise their business according to the interests of their shareholders (Gilson, 2001). It is a good approach that facilitates the operations of a company although some companies don't like the idea of explaining the reasons for failure to comply to this code. A different approach therefore should be adopted whereby more efforts are put in independence of the company. This approach will enable companies to work on their set regulations, capitalize on them and avoid external influences that may drag it behind. ISSUE 3. Differences in accounting standards and policies in Wal-Mart and Tesco. Accounting standards and policies in Wal-Mart are very much organized and follow clear-cut principles in which the company finds a very stable ground for the company to grow. It is therefore able to deal the ever-rising legal challenges especially in the accounting as well as vendor issues. Wal-Mart has not faced accusations of fraud accounts and has also very strong ethics policies unlike Tesco. Wal-Mart has devised an idea of carrying out projects with a view of improving financial accounting as well as reporting on stock compensation (Black & Gilson 1999). However, this is not practiced in Tesco. Most of the accounts that are undertaken in Wal-Mart are done at departmental levels for example financial accounting, which is carried out by FASB. This body operates independently from enterprises and auditors. Conclusion. Corporate governance is a very useful practice that is recommended to all companies. It is only through good governance that the company will be able to overcome losses and other fraud financial problems. It is also through good corporate governance that the company attains the capability of providing full satisfaction to its customers. REFERENCES Black B.S & Gilson R.J. (1999). Venture Capital Require an Active Stock Market 11-4 Journal of Applied Corporate Finance 36 Gilson R.J. (2001). Globalizing Corporate Governance: Convergence of Form or Function, 49 American Journal of Comparative Law 329 La Porta R. et al. (2000). Investor Protection and Corporate Governance, 58 Journal of Financial Economics 3. Bebchuk L.A. & Roe M.J. (1999). A Theory of Path Dependence in Corporate Governance and Ownership, 52 Stanford Law Review 127. Rafael La Porta R.et al (1997) Legal Determinants of External Finance, 52 Journal of Finance 1131. Coffee J.C (2000). The Modern Market for Corporate Charters: Competition, Collusion, and the Future, 25 Delaware Journal of Corporate Law 87. Stulz R.M (1999). Globalization, Corporate Finance, and the Cost of Capital, 12 Journal of Applied Corporate Finance. Nam J.H & Jinn T. (2000). Bankruptcy Prediction: Evidence from Korean Listed Sheikh S. & Rees W (19995). Corporate Governance and Corporate Control. (Cavendish Publishing Ltd. http://walmartwatch.com/pdf/2005-annual-report.pdf.Accessed on 29/11/2006 http://www.tescocorporate.com Read More