Corporate Governance and Financial Regulations - Essay Example

Corporate Governance and Financial Regulations Corporate Governance and Financial Regulations Section A The core purposes of most Central banks around the world are to ensure monetary stability and to protect and enhance the stability of the financial system. a. How does the Bank of England achieve these core purposes in the UK? Banks all over the world are required to perform certain duties which actually justify the purpose of their existence while also increasing their worth for economic and financial institutions. Similarly The Bank of England has the primary function of ensuring monetary stability and subsequently the protection and enhancement of the entire financial system (Annual Report, 2013). Monetary Stability: It is one of the core purposes of The Bank of England which plays an important role in building currency confidence and stabilizing the prices. For instance, the prices are stabilized through the inflation target set by the government. These targets are supposed to be met by the Bank through the pronouncements of Monetary Policy Committee which are then implemented in the local market. This should be done in an effective manner while considering high level of transparency (Annual Report, 2013). Financial Stability: It is the second most important function of The Bank of England which helps funds to flow efficiently. This is surrounded by the confidence of economy and financial intermediaries. Moreover, The Bank of England performs this function through different financial operations such as last resort lending, financial institutions’ prudential regulations, Financial Policy Committee decisions, The Bank of England’s role as the prime resolution authority, key payment regulations, Bank’s oversight, infrastructure settlement and clearance (Annual Report, 2013). In order to implement both of its primary functions The Bank of England encourages communications and sharing viewpoints while making extensive analysis. The Bank works in collaboration with other significant central banks and global organizations which strive to improve the financial system and the international monetary market. In addition to this, The Bank also plays an important role in promoting financial centers in United Kingdom which are actually based on international competition. This subsequently helps the bank in making the UK’s financial system significantly efficient. This is categorized as the expertise of The Bank of England. Moreover, these functions will be in direct public interest without raising conflict among other important duties performed by the Bank (Annual Report, 2013). b. How would you describe the behavior of the UK Financial Conduct Authority (FCA) on the gold fixing scandal associated with GDI and other UK large banks? The central banks, jewelers and miners have been using benchmarks in order to fix gold rates in London. Research indicates that the monetary value of metals such as gold might have been maneuvered since a considerable time period by the banks functioning in UK (Vaughan, 2014). Gold Dust Industries were also involved in the UK fixing scandal of gold prices. Here, it is important to mention that gold price fixing has been practiced for more than a century now. This was primarily done secretively however, in the last few years banks and GDI have started fixing gold prices over the phone. London scandal involved five major banks in this activity and GDI was one of them. It has been noticed that the banks communicate with one another minimally twice in a single day so as to settle the benchmark rates of gold. The process is conducted in the same way as other banks agree upon the prices of palladium, platinum and silver. United Kingdom’s Financial Conduct Authority has been playing its role in scrutinizing the process of gold price fixing. Moreover, it publishes different reports concerning its forward particularly for commodities regulation such as gold. However, FCA also mentions that it is not responsible to regulate physical commodities (Vaughan, 2014). GDI was invested by FCA in accordance to the gold fixing scandal. The accusation was made that large Banks of England might have been abusing the gap between price agreement and price coming to the notice of general public. This subsequently helps them in acquiring greater profits. Considering this intense situation BaFin, the German Regulator asked explanations from GDI while investigating the possible manipulation of gold price agreements. Additionally, FCA does not claim to get in to a direct investigation against gold fixing scandal however, it is actually examining it from a larger perspective of financial benchmarks. This is substantiated on the basis of the fact that abusive behavior might occur in the markets dealing with physical commodities. The behavior can actually directly impact the prices and financial market activities. As discussed by the representatives of FCA, the regime concerning regulatory either in United Kingdom or internationally requires having a vigorous and suitable oversight (Vaughan, 2014). 2. The usefulness of corporate governance lies in the fact that it attempts to deal with conflicts of interest between the interested parties in entities. a. In your opinion, what are the corporate governance failings that are included in the article ‘Banks Price Fixing Scandals – A case of ‘Gold Dust Industries (GDI) Plc? Your discussion should cover DGI’s board structure and challenges (including conflicts of interest) of doing business across sectors and across countries. Corporate Governance fundamentally relates to the idea of rules of regulations which direct the actions of an organization. More specifically it describes the rights and responsibilities of different participants involved in the corporation. In the article ‘Banks Price Fixing Scandals – A case of ‘Gold Dust Industries (GDI) Plc’’ there is discussion about different failures concerning corporate governance. Following is a brief analysis of the findings: In the past ten years there have been significant accusations of manipulating the prices of various commodities and the relevant financial products. The markets which were investigated primarily included crude oil, energy in terms of electricity, gold, aluminum, silver and different agricultural products. GDI and its competitors who have been playing very actively in the banking and financial sector were actually accused of taking significant advantage of different regulations. This helped them in constructing aluminum supplies so as to increase their prices. This was an important example of corporate governance failure included in the article. Other than this, GDI has Morgan Commodities which are restored in Detroit Warehouse. Research indicates that this warehouse has reserved more than 33% of the available aluminum in the markets of USA. Recent financial crisis motivated the organization to kept aluminum in more than double quantity. Moreover, the corporate governance failure of GDI is also reflected in the accusation made against the organization about back and forth metal blocks’ shifting from the warehouse. In this way the organization charges buyers for rent while bending regulations and making sure that a specific quantity of aluminum is shipped to the market. In addition to this, GDI has been involved in fixing gold prices which further illustrates the weak corporate governance of the organization. Other significant financial institutions and banks have also been involved in similar activities. For instance, DGI bank has begun to have interest conflicts concerning its aluminum business. This has created greater challenges for DGI as now the organization is planning to leave market of physical commodities. This will subsequently impact the organization’s structure of board and the corporate governance practice in all the sectors in different countries. Section B 3. The UK Corporate Governance Code (2012) states that ‘the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems’. a. How would you describe the role of GDI’s Board of Directors in providing oversight of the company’s commodities pricing and internal control systems? As discussed by the Corporate Governance Code of United Kingdom that the board has the responsibility of evaluating different risks and opportunities which extensively considers strategic objectives. Similar is the case with the GDI’s Board of Directors in providing oversight about company’s internal control system and the prices of commodities. The members are particularly responsible to possess significant expertise, skills and knowledge related to industry and business. Moreover, they should have significant experience in order to give effective oversight about organizational practices. GDI has total 12 directors and 9 out of them are independent in providing supervision to the senior management and the firm. The idea of independent leadership is further supported by a senior Director who has independent unreserved responsibilities. This helps the organizations in generating independent oversight about the most prominent areas of business, for instance, the performance of CEO, succession planning, compensations, risk management and strategies. The Board actually engages external consultants in order to provide recommendations about different management areas. In broader term, the Board of Directors of GDI has developed four committees including Compensation, Auditing, Nominating, Corporate Governance, Risk Committees and Responsibilities. Each of them has its own independently designated directors. b. Managing specific risk should always take priority over the management of generic risks”. Critically evaluate this statement with reference to the scenario where appropriate. Financial risk can be largely distinguished in to specific and generic risks. Specific risks usually affect an insignificant number of assets hence they are also known as the unsystematic risks. On the other hand generic risks relates to more commonly occurring risks which have the possibility of causing harm. Moreover, they require extensive precautions and measures in order to reduce the harmful impacts of routine accidents. These are usually associated with different activities or organizational events. It has been critically argued that management should focus on the specific risks in comparison to generic risks. For instance, client risks as discussed in the article can be reduced by counterparties interventions which are usually businesses trading in different commodities. However, client risk can also be manipulated by control of goods and knowledge about physical trading. On the other hand reputational risks do not occur frequently but they have the ability of harming specific business operations. This is one of the primary reasons due to which GDI wants to limit its commodity trading since the business was destroying organization’s reputation. Currency risks and appetite risks are further examples of specific risks discussed in the article. 4. The UK Corporate Governance Code (2012) recommends that ‘the levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose’. ‘The Code also states that the performance-related elements of executive directors’ remuneration should be stretching and designed to promote the long-term success of the company’. a. Against this backdrop, do you agree that the compensation system of GDI and its subsidiary CPF may have influenced the risk appetite of its officers and corporate governance structures? If yes, provide valid justifications. If not, provide reasons for your disagreement. In greater perspective, risk appetite relates to the idea of directing an organization’s approach towards efficient and effective risk management (National Research Council, 2012). Considering this the Corporate Governance Code of UK suggests that the payment levels should be attractive enough for motivating and retaining directors. However, the company must not make payments other than necessary. The compensation system of GDI and CPF actually influences the risk appetite of the corporate governance structures and officers. This is substantiated on the basis of the fact that CPF’s compensation encourages performance through introducing payment culture. For instance, the senior management of CPF acquires a large portion of compensation primarily made in cash. This is associated with their contribution and performance towards the betterment of firm’s financial position. Moreover, the CEO of CPF has the total payment comprising of 94% share-based and flexible bonuses. The company’s traders and other officials are also given compensations as per their performance. This performance based payment structure is authorized by the Board of Directors in case of both CPF and GDI Group. Section C 5. Identify the stakeholders of banks and in particular GDI Group, and explain the concept of Corporate Social Responsibility (CSR) Following are the most important Stakeholders of Banks and GDI Group (Stakeholders, 2014): Professional Bodies: These primarily include the financial institutions which are responsible to regulate corporate governance and other environmental aspects. Employees: Bank employees play an important role in acquiring long term sustainability and success. All the employees including managers and directors are required to present their particular opinions regarding company policy in a respective manner through pre designed communication channels. Current or Potential Shareholders: These include people who have certain percentage of shares in the organization. They might or might not be able to influence company’s decisions depending upon the distinctive nature of their shareholder agreement. Customers: Banks have a very critical responsibility towards customers due to the fact that banks exist to serve their customers while generating significant revenues through them. If somehow customers are unsatisfied with company’s services then the management is strictly required to alter its policies in a way that is suitable to the needs of customers. Suppliers or Business Partners: Business Partners are the individuals or consultants who provide extensive business services, for instance, human resource training and management. On the other hand suppliers are responsible to fulfill fundamental business requirements. If business partners and suppliers do not comply with the financial regulations then businesses suffer to a greater extent. Government Authorities: Government has all the significant rights of regulating the financial policies. Hence if any of the government policies are changed then the organizational operations are directly impacted. Non-Government Organizations: They have a stake in influencing organizational practices through different social and cultural perspectives. These usually include values, language and religious concerns put forward by general public. Corporate Social Responsibility Corporate Social Responsibility (CSR) is a comprehensive concept which relates to different actions of organizations which in some way or the other affects the society. In the contemporary world organizations are particularly concerned about their corporate image which they try to maintain through performing humanitarian activities. These also include different social functions such as student scholarships and sponsorships (Schwartz, 2011). 6. Draft the press statement to be released to the media by GDI board, covering the following points: a. An explanation of an environmental audit and discussion of how this could ease stakeholders’ concerns. Environmental Audit is an effective tool used by management to systematically document the objectives of an organization in regard to different business functions. Broadly, it is associated with the management’s performance and its consistency to the environmental policies. Environmental audit is usually conducted on periodic basis whereas its equipments, aims and stakeholder concerns are frequently evaluated (North, 1997). Environmental audit can ease the stakeholders’ concerns in the following manner: Management activities can be controlled through environmental practices. Regulatory requirements can be met by frequent compliance assessment. Policies and regulations can be easily formulated on the basis of environmental audit. b. A description of the benefits that the introduction of environmental accounting (reporting) could bring to GDI Group especially the Inner City Airport. Introduction of environmental accounting and reporting procedures will bring following benefits to the GDI Group particularly associated with the Inner City Airport. Peculiar environmental issues will be discussed and subsequently solved through the direct involvement of top management. Discovery of different business areas and environmental aspects will become significantly easier. Most importantly campaigners will be persuaded to sale their lands which they have deliberately acquired. c. A definition of the term ‘environmental footprint’, illustrated with reference to the situation of Inner City Airport An environmental footprint is defined as the measure of environmental influence over an individual, a business or an activity (Environmental Footprint, 2014). Organizations such as GDI which enforce environmental footprint are committed to investigate the affects of routine business operations. Once the impacts are evaluated then their solutions are formulated. Moreover, the Board of Directors of GDI has called a meeting to ensure that the Inner City Airport emphasizes upon environmental problems and their subsequent solutions. These will be undertaken through environmental accounting, auditing and different disclosure programs. References Annual Report 2013, Bank of England, UK, viewed 12 May 2014, Stakeholders 2014, BBC, UK, viewed 12 May 2014, Environmental Footprint 2014, Export Finance and Insurance Corporation, Australia, viewed 12 May, 2014, National Research Council (U.S.), Airport Cooperative Research Program, United States, Marsh Risk Consulting (Firm), Hntb Corporation, & Direct Effect Solutions, INC. 2012, Application of enterprise risk management at airports, Transportation Research Board, Washington, D.C. North, K. 1997, Environmental business management: an introduction, International Labour Office, Geneva. Schwartz, MS 2011, Corporate Social Responsibility: An Ethical Approach, Broadview Press, Canada. Vaughan, L 2014, Gold Fix Study Shows Signs of Decade of Bank Manipulation, Bloomberg, USA, viewed 12 May 2014, Read More