Corporate Governance and Financial Regulation - Assignment Example

Corporate Governance and Financial Regulation Surname, Name Professor Course Institution Date Introduction Corporate governance is a topic that covers the systems that are used for directing and controlling companies’ operations (Clarke, 2007). The rules, and regulations that govern companies, and how they are applied, therefore, fall under corporate governance. In addition, to that, there are other parties apart from the management and directors, who are part of this corporate governance. These are those who oversee the management, and are involved in decision making, like the shareholders. Successful corporate governance calls for proper planning and strong strategies (Nell & Monks, 2011). This is necessary to ensure that the firm remains stable through out its operations (Hamilton & Gray, 2009). The firm hence has to carry out feasibility studies on a regular basis, and markets researches about competitors, and initiate new methods of handling competition. Arguably, the difference between good and bad corporate governance is in the policies and strategies that are made. The difference between good and bad governance lies in the policies and strategies. Stage 1 Corporate Governance Mechanisms, their Failings The inability to maintain a stable and viable management system in the company is called corporate failure. The 2007-2009 financial crises that were experienced in the US and the entire world were perfect models of corporate failures in our systems. Corporate failure is like a disease that eats up the whole body. The fact that most companies, firms and systems of the world are interconnected means that a hick up in one section can easily paralyze the whole system. This was the case in with the financial break downs that were observed during the period 2007 and 2009, leading to a crisis that almost threatened to dissolve major economies of the world. It is evident that the managements of the firms that failed had divided attention, and greed, which were among the major contributors of their tragedies. One of the most serious problems covered in the article is management’s perspective of moral hazards. Because these were American companies, they became insensitive to changes in the economic environment, and continued to carry out selfish interests, and the taxpayer gets the burden. These companies operated their businesses without having a viable, operational strategy. This was because they knew that the government would rush to save and defend them in case they found themselves in any crisis. As a result, they became careless, because they knew the government cares (Harbish, 2010). Despite the fact that the core value of any business is profit maximization, there is always a need to consider customer satisfaction first. This means designing, developing and selling products that have a real economic as well as non economic value to the customer. Consumer recognition was one area that these companies did not merit. Many Americans were in need of vehicles, but not all of them were rich, manufacturing small utility vehicles would hence be a great way of winning the market, through incorporating the needs of both middle and upper class citizens. These companies, however, chose to produce expensive fuel guzzlers, hoping to earn huge profits. Deciding to sell only large vehicles was one corporate mechanism demonstrated the company’s selfishness. On the contrary, their competitors, being alien to the market recognized the needs of Americans and produced the vehicles that would help them. The difference between American and foreign firms was that, while foreign firms strived to identify a market niche, American firms were creating a need where it was not necessary. Chrysler, for example, forced Americans to believe that they need to drive expensive fuel guzzlers, while foreign firms came in with energy efficient vehicle. This meant that Chrysler would eventually flop, since it ignored the customer’s needs. Another common corporate failure among these American companies was the fear of stiff competition. Competition ensures that businesses provide high end services to customers, at fair prices (Harbish, 2010). It is healthy and desirable in any industry. Business is a game of “the best strategy wins.” Americans companies were not ready to face Japanese firms in the market. Their management failed to come up with competitive plans for American firms, but instead focused on selling as many vehicles as possible. In the mean time, Japanese firms were laying strong roots in the American market. Chrysler and GM had to ask the government to intervene, which saw foreign firms being given some conditions, to prevent them from taking over the market. American firms continued to exhibit undue carelessness; the managers that boarded different jets, heading for the same direction, were a clear reflection of what they do in their companies; they do not reason out strategies. Instead, they act using ad hoc procedures. This is because they believed in bailout; bailouts were an alternative and hence failure, to them, was not a massive problem (Sing, 2007). They knew the government cared; it would not allow them to go bankrupt. The poor corporate mechanisms covered in this article are an inevitable path to failure (Uddin, 2008). The major cause of the financial loss was carelessness and ignorance. American companies were too careless and insensitive to even the slightest economic changes. They ignored such changes and kept hoping that things would work out the right way. These were uncalculated risks and speculations. They never carried out a market survey and study to establish the future of the market, but they kept onto their horses, doing nothing to improve their companies, and hoping that things would change in their favor. There are no miracles in business! They employed the wrong strategies because they always had an alternative; bailouts. They did not carry out market researches to identify their customers’ needs but instead kept selling their old fashioned brands. They set themselves up and became vulnerable to failure. Japanese companies entered the market with refined products that recognized their customers’ needs. They offered these products at reasonable prices and won over the market. American companies could no longer sell their expensive products, leading to heavy financial losses. At the same time, they had to make rush decisions in an attempt to fight competition. Such decisions were not well calculated and would lead to further losses. Stakeholders who Suffered Loss and Those that Appear to have Gained Apart form government support; these companies had developed a great pool of shareholders. This is to say that many people had invested in the shares of these companies had to succumb into heavy losses. At the same time, the ordinary citizens had to bail out some companies like Chrysler, through heavy taxes. This was a great burden to them; paying taxes into the pockets of a few corporate managers. The government, being another source of finance that backed these companies, was also a victim of heavy losses. The directors of these companies, who exercised policies that fed their selfish interests, are the people who gained from these losses. Proposed Reforms of Financial Markets and Corporate Governance Changes The recent crisis was a substantial meltdown in the financial industry, and it almost led to the total collapse of the world’s leading financial markets. In an attempt to curb the situation and prevent such tragedies from occurring in the future, it was proposed that all countries set up their own financial risk management systems, in the form of subsidiary bailout plans. Each country was to set a well calculated amount of money to counter any future bail outs. This would be a self security system for each country to help prepare for any financial set backs that may arise in the future. In the year 2010, the Congress passed a bill to increase the participation of the federal government in regulating financial markets. President Obama also forced reforms in the financial market, which would ensure that these companies do not receive a third bailout. With such reforms, it meant that all players in the industry must be careful and sensitive of even the slightest changes in the economic system and take prior defensive measures. Theoretical Approaches to Curb the Behavior of the Directors Max Weber, a German sociologist and economist, proposed a bureaucratic management system (Zhao, 2011). In this system, each department in the firm has clear rules and regulations that govern its operation. This means that the director must work with well planned strategies, and adhere to each policy set up by the firm, in the journey, to achieve its set goals and objectives. It calls for consistency in work and economical use of the firms’ resources. In an attempt to establish this system, all the stake holders of the firm should hold a meeting and set up new strategies of the firm, and give all the directors targets to hit. Failure to hit their targets will mean they are a set back in the firm and will be laid off. With such an approach in place, these directors will have to be creative, and will design systems that will ensure the success of the firm. Advice to Shareholders and Investors Shareholders, investors and other financiers are the groups that are prone to suffering substantial losses in case of a financial crisis. These are the people who put their resources in the hands of the management, hoping to get good returns from the same. However, the opposite can always happen; no returns at all. Therefore, I would advise them to exercise due caution whenever they are considering to invest their funds in any company. It is crucial for them to take time to study the history of these firms and analyze the firms’ performance and stability. I would advise them to be particularly careful with the solvency of these companies and their strategies. Strategy is the most fundamental driver that spearheads the success of any firm. Investors should, therefore, analyze the strategy of any firms, before they invest their funds with them. A reasonable strategy is an open avenue for success. Stage 2 Cause of the Financial Crisis of 2007 and 2009 and the Response Experienced from Stakeholders and the Influence of the Events The financial crisis of 2007 and 2009 left many economists and financial analysts trying to figure out the cause of the tragedy that was experienced during this period (Clarke, 2009). Arguably, the financial crisis was a product of complications experienced with banks in the United States. Many people had raised questions about the solvency of banks, and their stability. It was argued that credit managers and risk assessors failed to calculate their risks and that managers of many firms in the industry were taking considerably heavy risks, without setting a back up plan; as a result, any slight mistake in their strategy would see them crash to the ground. Poor monetary policies were hence a leading cause of the financial crisis. Worldwide economies were affected, and their operations were forced to slow down. On the other hand, as credit policies began to be tight, international trade experienced a serious blow out .Other causes of the financial tragedy, according to the US senate, were hidden conflicts of interests, and the failure of regulatory authorities to set up viable policies to govern the industry. This means that many firms had secret agendas, which prevented mutual benefits among themselves, and sharing of crucial information and ideas. There was no unity of professionalism among them (Chen, 2010). They all thrived on their own decisions and assumptions, which were not always right. It was also established that most of these firms lacked the right operational policies, considering that they could not be able to track key files and other significant information about their financial transactions. This was a high degree of carelessness, which would not allow them to continue operating their firms, without experiencing a substantial financial crisis (Hamilton & Gray, 2009). The influence of these events was experienced sternly on their stakeholders, who made crucial decisions regarding investments, and on the government authorities, who were forced to stay long hours in boardrooms, trying to find lasting solutions for these problems. The US Federal Reserve, the Treasury department, and the FSA of England, among other stakeholders, responded with prompt fiscal stimulus and economic policies that would ensure monetary expansion. In the US, the first response was a bail out of credible firms, before the relevant authorities embarked on plans of economic growth, all in an attempt to prevent an occurrence of the same. On the other hand, England did not set up any additional bail out plans, but only worked to ensure the economy remains stable through key economic stimulus policies. Why Government Authorities made Different Bailout Decisions During the financial crisis, different government authorities came up with distinct bail out decision, according to the situations and future forecast of these firms. In America, for instance, the government did not want to allow a collapse of some of its largest firms, and hence something had to be done to save the situation (Clarke, 2009). Many government authorities made bail out decisions based on the credibility of these firms and their abilities to recover from the crisis, after the bail out, and develop strong defensive strategies against future tragedies. The funds available to the government authorities were also an influential factor, since these were taxpayers’ funds, and a misuse would possibly lead to a larger crisis than the one being experienced (Vinten, 2010). Difference between the Corporate Governance Policies of GM, Chrysler, Barclays, RBS and Kaupthing From inception, Barclays has had strong corporate governance policies, which have spearheaded its success. Being an international bank, the management designed new policies to help the bank counter any set backs on a regular basis. It also ensured that it complied with the laws to the latter and did not fall prey of moral hazards. Unlike Kaupthing, the bank had a team of credit appraisal who ensured that they took calculated risks, and gave out loans to the right customer. Kaupthing, on the other hand, despite having a system of credit appraisal, did not consider giving it ultimate attention. Kaupthing became a victim of moral hazards and unfortunately, it was left to go bankrupt. RBS, on the other hand developed a strategic plan to counter competition in their future operations, and constantly analyzed the market, to develop new corporate ideas. Strategy is their cornerstone. Chrysler believes in status and class, therefore, their corporate governance policies are built around the goal to maintain a high status of the company (Zhao, 2011). This is was a major reason why they never resolved to manufacturing small vehicles, even during the financial crisis, instead opted to improve on their quality, to win over the rich class of America. GM believes in producing what the customer wants although their prices are relatively high. The company believes in high profits, a key motivational factor for its diversity. What Would Have Happened If Government Refused to Bail out any Firms During the 2007 and 2009 Financial Crisis Government bail outs were the chief savior of the 2007 and 2009 financial crisis (Chen, 2010). However, if the government had refused to bail out any firms during the tragedy, most of them would have collapsed. This is because their competitors were continuously setting up new strategies to counter American firms, in the absence of a government bail outs; these firms would be unable to deal with the pressure from the stiff competition they received from their competitors. They would also be unable to maintain their stability, and as a result, they would have to be declared bankrupt and later collapse, and be forgotten. This is because their investors were too hurt to reconsider saving the same firms, which had already wasted their initial investments. This, however, does not mean that government should discourage firms from growing “too big to fail.” Instead, the government should support such firms, but advice them to establish strong strategic plans and risk management systems, that will help counter any threats in the future. These firms have immense benefits on the society, right from societal welfare, to the provision of quality goods and services, although the costs outweigh these benefits. Arguably, financial crisis does not know the difference between small and large firms. Therefore, even if the government tried to discourage firms from growing tremendously large, and fail to advise the market appropriately, other financial crises will still hit even the small and middle level firms. Stage 3 If I were in charge of bail outs I would generate policies that would ensure that before the government turns is hand to bail out any company, the management must first of all come up with viable strategies that it would employ in recovering from its financial crisis. These strategies would be assessed by the relevant government authorities, to determine their viability. I would also come up with additional policies; rules and regulations to govern the bail out process so that company’s would exercise due attention in their operations, and avoid any careless incidences that may lead them into financial crisis. This will call for stern analysis and scrutiny of company’s techniques of management and operation before I allow the government to bail them out. I would establish new techniques and strategies of bailing out firms that find themselves into financial crisis, so that those firms that intentionally push themselves into financial tragedies would not receive any government help. This will make all companies struggle and fight competition and make policies that would ensure they counter all threats of a financial crisis. I would use both consistent and ad hoc strategies in determining whether a firm should be bailed out or left to go bankrupt. In an attempt to solve the problems of that were experienced in America in the year 2007, the US senate decided that they would bail out firms that have shown consistent struggle to avoid the crisis. This means that firms that only firms that had exceptionally clear strategies but failed due to other non avoidable factors will be bailed out. The effect that would be left behind when these companies collapse would also be considered. I will have to look at the benefit of the company both to the society and the government before deciding on whether to bail it or to leave it to go bankrupt. Firms that have a large market share may have to be spared because they are still needed by both the government and society at large; they are needed by the government for taxes and by the society for their exemplary services. However, this is not a loophole to argue that all companies are useful in that sense; the government would still consider whether these companies have a sustainable future in the economy, based on their past and present strategies. A feasibility study would, therefore, be carried out for each of these companies (Binder, 2010). Ad hoc techniques would also be necessary, since we must always apply common sense in our decisions. This may mean that a company may still be bailed out despite failing to meet most of the requirements, to protect the interests of a certain group in the society, e.g. The less fortunate in the society and the minority groups. Just like the process of bailing out firms, a lot of critical analysis will be useful in determining how to bail out industries. It is first necessary to consider the fact that a failure of the whole industry may have highly detrimental effects on the economy (Hoskisson, 2011). It is also valid to say that saving some industries through bail outs may not only be a large burden to the tax payer, but also a serious waste of money, only for the industries to end up in reds. Therefore, before considering to bail out an industry, I would first have to carry out a feasibility study of the industry to determine how useful it is and whether it has any possibility of survival. It is not easy for the whole industry to end up in a financial crisis (Hawley, 2011); this means that I would also consider the level of risks involved in the industry, in relation to the benefits accrued from the industries. The cost of expenditure would be given a priority in this investigation and would be related to the net profits and other non monetary significance of the industry (Marnet, 2009). The financial industry, for instance, is the backbone of every economy. It is more beneficial than the ceramics industry. I would hence consider bailing out the financial industry and leave the ceramic industry to go bankrupt, since it is easy to start and does not hold any significant sector of the economy. This is a consistent method of determining bail out that has become popular because of its effectiveness (Head & Watson, 2010). However, it will also be particularly pertinent to consider bailing out industries that have potential for future growth, even though they may not have shown significant benefits in the past. Corporate governance and financial regulation are two crucial topics that have elicited high end discussions and debates in the whole universe (Hawley, 2011). After what was experienced 2007 and 2009, as a result of poor corporate governance and careless financial regulations, it has become necessary to develop strong corporate management and financial control systems that will ensure that the world will never see any other financial crisis. It is hence essential for all governments to establish well developed strategies for corporate governance in order to counter any future tragedies in the industry. References Binder, M. 2010. Corporate Social Responsibility Management as a Strategic Instrument for Creating Competitive Advantage. New York: GRIN Verlag Publishing. Chen, A. 2010. Research in Finance, Volume 22. Amsterdam: Emerald Publishing. Clarke, T. 2007. European Corporate Governance Systems; Reading and Perspectives. New Delhi: Taylor & Francis. Clarke, T. 2009. European Corporate Governance: Readings and Perspectives. New York: Routledge Publishers. Habish. 2010.Corporate Social Responsibility Across Europe. Berlin: Springer Publishing Limited. Hamilton, J., & Gray, J. 2009. Implementing Financial Regulation: Theory and Practice. New York: John Wiley & Sons. Hawley, J., et. al. 2011. Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis. 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