Corporate Governance and Corporate Accountability - Essay Example

CORPORATE GOVERNANCE AND CORPORATE ACCOUNTABILITY due: Introduction An effective board behavior is dependent on a number of parties. These parties include the non-executive, the managers and shareholders. The way these parties relate determines the success or the failure of the company. The effectiveness of various corporate governance mechanisms will be examined. Regular scrutiny of the board of directors will keep them on check, so as to limit incidences of corporate frauds and failures which happens from time to time. Regular monitoring of the board of directors will also ensure their performance is up to standards, something which attracts investors, meaning growth of a particular company. It is however unfortunate that the board faces challenges such as prejudices and lack of transparency in operations, spelling doom for the company, since the malfunctioning of the board may not go unnoticed by the investors who will in turn be discouraged and shun the company (Jensen & Meckling 1979: 163-231 ). Springer Netherlands). Non-executive directors always have their eyes on the executive directors, ready to raise the alarm at the slightest malfunction by the executive directors. In addition, the non-executive directors are also tasked with advising the executive directors and the chief executive. The board of directors must maintain a good relationship between shareholders and the managers, for the success of the company. The boards maintain the shape of the company as well as upholding its reputation, by setting the guidelines for the company operation. For the non-executive directors to effectively achieve their mandate, they need to possess the ability, willingness to tackle the issues affecting the organization and should also be well knowledgeable on the framework of the firm. Trust amongst the members of the board and the key external environment forms the backbone of the success of the organization (Stiles & Taylor 2001: 2). The success of a company is key in attracting new investors, meaning continued growth of the company. The success however depends on various factors, both internal and external to the company. The directors of the company determine the performance of a particular company. They are tasked with providing directions. This essay will prove the effectiveness of the boards of directors in corporate governance. Purpose of a board Board of directors is a cluster of individuals elected by the owners of an organization. The board of directors has the power of decision-making on behalf of the managers and owners of the organization. Board of directors in organizations basically has two main functions. One of their tasks is monitoring the management on behalf of the investors. The directors therefore serve as the managers of other people’s money entrusted to them. They are expected to avoid all forms of negligence and instead remain focused on proper management of the money under their care. The other role of the board of directors is to provide resources for facilitating smooth running of the organization. They should ensure proper distribution of the organization’s resources, to avoid chaos which may arise in the event of stalling the organization’s operations. Combination of the two roles of the board of directors clearly shows that the board capital affects both monitoring of the board and the provision of resources, which determine the success of the organization, achieved through moderation of the two relationships (Hillman & Dalziel 2003: 383-396). Failure of the board of directors to achieve their mandate may have somber repercussions on the life of the organization as a result of distrust developed in the shareholders. A case in point is the Anglo-American shareholder capitalization. The shareholders developed a serious lack of confidence in the organization. Due to of the poor management of organizations by the executive directors, Britain has suffered serious blows of its organizations, leading to a fall in the stock market prices. The decline in the stock market prices like the one which happened in June 2002 has negatively impacted on the pension provisions, causing a widespread public disappointment. The falls in stock market prices has also posed the problem of severe decline in the public trust, something which could take many years to restore. Confidence in the stock market calls for proper auditing of the accounts, prepared with full management and auditor integrity. Any system of governance by the executive directors has to be at par with the expected standards for the firm. The directors must be accountable to the shareholders whom they serve, instead of letting their self-interest prevail, which could affect the organization so badly. Non-executives who work with managers review and refine the strategic decisions of their organizations. Corporate directing involves strategizing, governing and leading, according to (Wright, Siegel, Keasey & Filatotchev 2013: 167). Good relationship between the chief executive officer and the board provides strong benefits to the company. The benefits include enhancement of mutual trust, advice-seeking on the part of the executives, reduction in defensive and political behavior within the board as well as opportunities for enhanced learning. The non-executives support the executives in their leadership, and also monitor and control the conduct of the executive. Effectiveness of the board will depend on the degree to which non-executives act individually and collectively, as well as how they create accountability within the board in terms of strategy and performance. Boards may at times have to make the critical decisions of replacing poorly performing CEOs, even though the decision may badly affect the company and its future (Choi & Dow: 2008: 145). Summary of the roles of the board of directors The board is responsible for hiring and evaluation of management. The board also votes on major operating proposals and major financial decisions. The board also offers advice to the management. The board also ensures that the organization’s activities and financial conditions are accurately reported to the shareholders. The board also plans the succession of top management positions. Evaluations performance of the board The performance evaluation of the board is important in that it provides a way by which the boards can identify and correct issues affecting the organization. Governance failures in the organization can be prevented by proper exercise of the performance evaluation. In the United Kingdom for instance, the scandal of the losses at Marconi plc could have been prevented. Apart from being concerned with just the organisational and management performance, they also need to be review their own performance. Even the seemingly well performing boards, they will benefit greatly from conducting a proper evaluation. Governance failures manifest themselves in the significant reduction or total destruction of the shareholder’s wealth. Board evaluations provide a process for identification of the sources of failure by the boards. Once identified, the boards can contain the situation before it reaches a crisis point. Properly conducted board evaluation will contribute significantly to performance improvements on the levels of the organisational, board and also the individual director level. Regular evaluation provides the benefits of improved leadership, well defined clarity in roles and responsibilities of the directors, improved teamwork, proper accountability, better decision making, improved communication as well as more efficient board operations (Hillier & Mccolgan 2006: 575-607). There should be a clearly defined objectives set to enable the board in setting specific goals for the evaluation and decision making. Determination of the issues the board intends to evaluate will be based on the board size, complexity of the performance problem, the stage of organisational life cycle and the development plans of the firm’s competitive environment. Evaluation provides the board with an opportunity to diagnose the various issues affecting the firm. The directors are also able to identify their personal strengths and weaknesses. For effectiveness, members of the board evaluate each other, thus gaining a clear picture of the strengths and the weaknesses of the individual directors and the contribution of each. Through such evaluation, skills gaps are also identified and sealed before they reach a point of affecting the performance of the firm. Evaluation of the board enhances the board effectiveness and improves investor confidence by raising the standards of corporate governance. In most cases, boards will undertake evaluations as a demonstration of their commitment to performance improvement to both external and the internal stakeholders. Performance evaluation has become an important exercise for boards and directors. This has raised the call for mandatory performance appraisals to promote corporate transparency and accountability. The evaluation process is an activity which contributes to team-building and shapes the ethics of the organisation. Implementation of a robust and successful board and director evaluation is a crucial exercise in ensuring that a board averts governance failure and consequent organisational failure. However, serious conflicts may arise within the board when individual performance evaluation is introduced when some directors are in opposition of the move. The role of executive directors The chief role of the executive directors is to work together in unison with the board of directors and the rest of the employees. Their regular meeting with the board keeps them informed on the operational issues, after which they develop strategic solutions to complex challenges facing the organization. The executive directors also oversee the heads of the various departments, including marketing, fundraising and program development. In addition, they oversee the lower-level executives in larger organizations. Department leaders rely on the executive directors for directions in their operations. Development and maintenance of relationships with their counterparts in other organisations adds to the role of the executive directors. They for instance work towards establishing opportunities for partnership with other organisations for the growth of their individual companies. The directors also work with leaders in the government, so as to cultivate long-term strategic partnerships for effectiveness in the operation of the organization (Nicholson & Kiel 2004: 442-460). Problems faced by boards Independent board members might have some sort of business or personal tie to the chief executive officer. Some directors do not show commitment and interest in the firm. In other cases, some directors lack the expertise to be board members. The other challenge is that some boards are too large, thus straining the resources of the shareholders. Agency theory _agency cost theory This theory originated in the early 1970s and is used to describe the relationship existing between shareholders and agents, including the company’s executives. The theory gives a suggestion that a firm can be viewed as a string of contracts between resource holders. In this theory, the agents act with rational self-interest that is the agency cost. When one or more individuals, called principals come together and hire one or more other individuals called agents, an agency relationship is formed. The principals delegate the authority of decision-making to the agents. The principal agent relationship separates ownership and control of the corporation. It offers utility maximisation of the managers. Another characteristic of this relationship is that it is resistant to change and conservatism. In this particular relationship, information is a private good. In addition, it offers higher levels of centralisation and formalisation. The relationship however lacks communication and trust. Such an agency relationship exists between stockholders and managers, as well as between debt holders and the stockholders. The theory is concerned with conflicts of interest between the agents and the principals. Occurrence of the agency gives rise to agency costs. An agency cost is a term used to refer to the expenses incurred when trying to sustain an effective agency relationship. The theory raises a primary problem in organizations as the corporations’ managers compete with the owner’s goal of maximization of the shareholder wealth. Conflict of interest arises as shareholders authorize managers to administer the firm’s assets. Effectiveness of boards Directors are meant to provide a way forward for the operations of a firm. Directing means showing the way ahead, as well as providing leadership. The boards of directors are categorised into two, either unitary board or two-tier board. The former is the most common, more so in countries where there is Anglo-Saxon style of corporate governance (Solomon 2007: 80). There are two types of corporate governance. The first one is the Anglo- Saxon model of shareholder primacy. The second one is the stakeholder approach which puts into consideration the well-being of a wider constituency, for instance the two-tier boards common in many continental European countries. This particular type of board involves both the executive and the non-executive directors and they tend to make decisions as a unified group. Two-tier boards involve two separate boards, a management board and a supervisory board. The management board is headed by the chief executive officer and includes only executives and focuses on operational issues .the supervisory board on the other hand deals with strategic decisions and oversees the management board. The chairman of the company acts as a non-executive and sits on the supervisory board (Sykes, A. (2002: 256-260). The supervisory board introduces diverse stakeholder groups into corporate governance. This is done through inclusion of representatives such as employees or environmental consultants, on the board. Two-tier boards have an advantage over unitary boards in that they provide a much greater opportunity for the stakeholder. Effectiveness of two-tier boards is only seen in a case where there is an effective relationship between the chief executive officer who heads the management board, and the chairman who heads the supervisory board (Solomon 2007: 81). Corporate financial performance is further enhanced by splitting the roles of the top management that is the chief executive and the chairman. A company with split roles as a way of good corporate governance is likely to display a more effective monitoring or management strategy. On the other hand, boards of directors who fail to attain a balance of power, end up reducing board effectiveness. A case in point is in the USA where boards of directors have failed in their mandate and such a board culture is considered to discourage conflict. This means the CEO possesses excessive power and has the final control over decision making (Stiles & Taylor 2001: 4). Corporate governance in the UK has been significantly proactive than in the USA (Solomon 2007: 82). Another factor contributing to board effectiveness include board size which is an important factor included in most corporate governance rating systems. Most companies constrain the board size so as to achieve a more effective board (Solomon 2007: 103). Conclusion Effective corporate governance linearly dependent on the strategies implemented by the board of directors. The board leads the in the management, since it manages the resources of the company on behalf of the shareholders. Governance failures in the organization can be prevented by proper exercise of the performance evaluation. They run the day-to-day operations of the company, by overseeing all the operations of all the departments. Proper management of the company by the directors boosts the confidence of the shareholders. The agency theory gives a suggestion of how the company is viewed in terms of handling contracts with its resource holders. The link between the managers and the board of directors paints the picture of the entire company, which is an imperative factor as it determines the perception of the shareholders. As per the regulations set by the company, the directors will work towards perfection of the operations. Success of the company in terms of revenue means better remuneration for the directors as well. This serves as an incentive for the directors, motivating them to work harder for the growth of the company. The effectiveness of boards of directors will determine the success and the life of a particular company. Bibliography CHOI, J. J., & DOW, S. (2008). Institutional approach to global corporate governance: business systems and beyond. Bradford, Emerald. HILLIER, D., & MCCOLGAN, P. (2006). An analysis of changes in board structure during corporate governance reforms. European Financial Management, 12(4), 575-607. HILLMAN, A. J., & DALZIEL, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management review, 28(3), 383-396. JENSEN, M. C., & MECKLING, W. H. (1979). Theory of the firm: Managerial behavior, agency costs, and ownership structure (pp. 163-231). Springer Netherlands. NICHOLSON, G. J., & KIEL, G. C. (2004). A framework for diagnosing board effectiveness. Corporate Governance: An International Review, 12(4), 442-460. STILES P. AND B. TAYLOR (2001), Boards at Works: How Directors view their Roles and Responsibilities, Oxford University Press, Oxford. SOLOMON, J. (2007). Corporate governance and accountability. Hoboken, NJ, Wiley. SYKES, A. (2002). Overcoming Poor Value Executive Remuneration: resolving the manifest conflicts of interest. Corporate Governance: An International Review, 10(4), 256-260. WRIGHT, M., SIEGEL, D. S., KEASEY, K., & FILATOTCHEV, I. (2013). The Oxford handbook of corporate governance. Read More