Issues in Corporate Governance - Research Proposal Example

? Issues in corporate governance Executive summary This memorandum is directed to the Treasury Secretary and aimsto highlight major corporate governance issues affecting American companies. It begins by giving background information about the topic and how previous legislations for instance, the Sarbanes-Oxley Act have not been able to fully tackle the issues of unethical conduct in private and public companies. A thesis statement outlined in the subsequent section of this memorandum gives meaning to the outlined policy interventions. This is because corporate governance laws have a broad dimension; the major issue is in its implementation by making specific laws that governs company conduct. This general understanding of corporate governance and ethics is not sector specific as companies are very unique from one another in terms of size and internal working culture. Poor corporate governance and enforcement hurdles are widely viewed as the structural weakness that resulted to the economic downturn experienced in the late 2008 (Sun, Stewart & Pollard, 2011). The banks that suffered credit crunch were well aware of impending problems but could not alert shareholders and the government about the impending tough economic times. Early detection necessitates adoption of proactive measures that help companies go through tough times. Introduction Corporate governance is the set of guidelines, legislations and processes that directs business operations in any given country. These laws define the relationships existing between top company management with its board of directors, stockholders, employees, suppliers and clients. There are other external publics which the company directly or indirectly interacts with in the course of its operations. These include the government, regulatory authorities and the neighbouring community. Corporate governance laws also determine the lines of congruence that the company has with the external business environment. These rules vary from place to place depending on the economic models countries adopt. For instance, some protectionist countries have laws limiting disclosure of local company information to limit economic spying. Despite existing legislations aimed at reducing corporate malpractices, there have been widespread allegations of bribery scandals pitting American multinationals with foreign governments. A New York Times article by David Barstow dated April 21st, 2012 gave alarming reports of Wal-Mart’s Mexican retail outlet involvement in corrupt practices with Mexican public officials. It is alleged that the company’s internal sleuths found that the executives had authorised payments, adding to around 25million dollars, to these recipients so that they can obtain construction permits without doing an environmental impact assessment (Barstow, 2012). This is a big corporate governance issue because of the ripple effects it has caused to both the Mexican and American governments. According to Barstow (2012), to add to the graft accusations, the management is accused of concealing this internal audit information from the top management; this is against the public information disclosure laws set under the American financial sector management guidelines. Wal-Mart has the obligation to make open its internal audit reports since it is a publicly trading company; this is the reason it’s share trading prices fell by over 5 percentage points the next day after the allegations were made public. The Mexican government is establishing the country’s first anti graft law which is meant to stem economic crimes. This is according to Ivan Castano, in his article dated April 27th, 2012, in response to these alarming allegations that has the potential of eroding the good gains made by the Mexican authorities in tackling economic crimes. The government has moved zealously to get to the bottom of the claims and punish the culprits to improve business environment that is just recovering from drug wars (Castano, 2012). Pedro Hernandez, a partner at PWC Mexico made the following quote to highlight the gravity of the situation: “But if something goes wrong with Wal-Mart, if they don’t pursue this case, all of this could fall down” (Castano, 2012). Thesis statement Legislations on paper are not enough in addressing corporate governance issues; the problem lies in enforcement which is majorly the obligation of company directors, the CEO and company owners. In expounding on this thesis statement, I give a historical perspective on where America has come from in efforts to improve its business environment. Before the turn of the 21st Century, the country was plagued by the Enron and WorldCom economic crimes that significantly reduced American business confidence levels. This is because their share prices fell by wide margins at the securities markets; this in turn reduced shareholder wealth as many international investors shed their shares to reduce market exposure. Sarbanes-Oxley Act was then enacted in mid 2002 to provide guidelines that regulate the conduct of company management. Among the components of the act is the additional duties given to the board of directors and the penalties associated with violations. It tasks the Securities and Exchange Commission (SEC) with enforcement by drafting specific laws which that implements the act. The Public Company Accounting Oversight Board (PCAOB) is given the supervisory role in the act to monitor auditing malpractices and accounting standards used by companies to promote management transparency and accountability. The most beneficial part of the act is the one improving disclosure of company transactions and reduces internal hindrances limiting efficient use of company resources. Despite the application of this act, many corporate governance issues still plague American companies. In line with this point, there was an audit committee effectiveness report prepared in the year 2002 to assess if these committees are accepting the established corporate governance guidelines. The findings were that many auditors and accounts supervisors had not given much weight to corporate governance as it was not included in companies’ strategic plans. Many loopholes were also discovered in implementation as a large number of midsized companies do not have internal auditors who present their findings to oversight bodies. Increasing corporate governance effectiveness The world is becoming smaller as shown by the high number of American companies moving to foreign countries and vice versa. Gaining entry into a foreign market and staying there profitably requires trust between the company management with the local government and its shareholders. This trust is only developed if these companies operate in a transparent manner that limits inefficient use of internal resources; this is to protect shareholders’ wealth and improve government revenue through tax remittances. Good corporate governance therefore goes beyond rudimentary compliance; the initiative has to be inculcated into the organization’s culture to have a lasting effect and have a sense of ownership among the employees. Roles of shareholders According to a recent study conducted by Ernst and Young, minority shareholders have little decision making capabilities in firms as they face difficulties, from the top, in calling for special meetings. They also have inadequate voting rights, do not participate in setting meeting agenda, and have limited say in determining resource allocation channels. In terms of board member determination, they play a minimal role in their selection as such information is only disclosed to them when these members are already selected (Kaen, 2003). An example of bad corporate governance practice that has stayed on in the American system and many other nations is the board member determination processes (Rao & Sing, 1996). This is majorly the responsibility of existing board members with minimal input received from the shareholders. These shareholders who have majority stake in publicly listed companies are only notified of the changes through the media or the annual general meeting. In the same vein, board nomination committees are formed from among the existing board members. This limits shareholder participation in decision making and is not able to put through someone who represents their interests. Roles of board of directors They should be at the forefront in ensuring good corporate governance is internalized within the company; this is by making strategic decisions on governance and exercising oversight over their implementation. Many problems associated with the implementation of the Sarbanes-Oxley Act is the fact that some companies view it as a government control mechanism that is aimed at spying on internal transactions (Arguden, 2010). This then waters down the intended goal set for the act and some executives are reluctant to comply. For instance, despite the 170 billion dollars taxpayer bailout given to American International Group (AIG) in late 2008, the company went ahead to give bonuses to its employees in the higher cadres totalling to 1.2 billion dollars. In a case like this, immoral management of shareholder wealth and public funds is seen as the top management are the ones that make decisions of this nature. According to Treanor & Watt, (2012), Royal Bank of Scotland chief executive, Stephen Hester, declined a 1 million pound bonus authorised by the company board after the information elicited an intense public outcry. The British Labour party sponsored a vote to stop the payments and the party leader said this in response: “The debate about fair executive pay and responsible capitalism is just beginning. We need a government that will tax banker’s bonuses and bring responsibility to the boardroom”. (Treanor & Watt, 2012) According to Nadler et al (2006), the board of director’s success in managing a company is dependent on the ability of individual members to make judgements based on how they understand different scenarios presented before the board. They should not take a wrong collective decisions intended for short term gains as seen in Wal-Mart’s de Mexico’s case. The board in this company made a collective decision to bribe Mexican officials and later hide audit reports to prevent external scrutiny of its transactions. According to Arguden (2010), the quality of information presented to the board by the employee teams tasked with specific duties is presented in all angles; this is to ensure all considerations are noted and debated in coming up with the final course of action. Most midsized companies source their board members from within their locality and this limits their decision making capabilities as these are people with closely related experiences. This is because people from different backgrounds bring forth their divergent opinions; this is good for a healthy decision making processes. Stakeholder participation is also vital at the program conceptualization stage; not informing them on important company policy issues at the annual general meetings (AGM). Roles of the CEO The CEO is at the top of the management chain; they are the ones that are responsible for day to day business operations. One corporate governance implementation challenge is the fact that majority of companies are privately owned and controlled by family interests. Such firms do not have board member independence as decisions are determined by the CEO’s view. The CEO is at the top is determining operational mechanisms and internal transactions, and is always a family representative in such firms (Murray, 2007). The most common practice in privately owned firms with few external shareholders is profit retention or ploughing it back to the business without declaring dividends to the shareholders. This is because such companies pursue their narrow interests and may even go to an extent of declaring losses to avoid taxation from the government. Justification of my policy interventions According to a study conducted by Ernst and Young, shareholders and company clients consider economic, environmental and social factors as the most basic corporate governance issues that they want addressed (Mullerat, R., & Brennan, 2011). These companies therefore need to give consideration to these issues as violations place them at high reputational and financial risks. Most companies focus on the financial aspect especially in matters to do with business reporting and operational transparency. Minimal effort is given to community initiatives and environmental conservation as these kinds of activities reduces company revenues. The policy interventions I propose adds more weight to the process rather that the input components. The journey to ridding firms of unethical trade practices is a long one that cannot just be tackled by mere legislation. Companies have to inculcate good corporate practices in its organizational culture; and this should be part of the broader company vision. Conservation is a key concept in this issue as companies only thrive in sustainable environments. Value addition to all company stakeholders as opposed to profit making should the basic concern as this sustains companies even through tough economic times. For instance, a company with a good image because of its community benefit initiatives maintains its client base despite economic downturns that may be experienced (Charan, 2005). Reducing corporate malpractices In the current business environment, measuring the effectiveness of corporate governance success focuses on how these companies comply, over a period of time. Other measurements look into other indicators such as board responsibilities and employee role definition. By evaluating the effectiveness of these applied guidelines, the company will see the gaps and address the challenges experienced in the process. According to Charan (2005), there should be a shift from these traditional approaches to a more detailed approach that looks into the quality of information shared between a company with its shareholders and regulatory authorities. The other areas they need to look at include: the decision making channels used by a company in making short and long term strategies. An assessment of good corporate governance outcomes also acts as a measure of a company moving in the right direction; this is depicted by good product image, value addition and client fulfilment. Continuous learning and employee empowerment is vital in inculcating this favourable working culture. Many companies, especially the labour intensive ones, focus on the core business functions without giving employees necessary education and free time to cool off (Tricker, 2009). Foxconn is the latest company in the limelight over allegations of poor working conditions; the employees are not given enough free time and no employee empowerment initiatives as they are continually engaged in routine tasks. These reasons are blamed for the psychosocial problems faced by these employees; this is alleged to have resulted to two suicide cases in 2010. Employee development programs are set by the top management in consultation with the human resource department. Conclusion This memorandum explores the question of how to change the corporate governance focus from its overall application, as stated in various legislations, to a more sector specific application. The scope of company stakeholder definition has increased from the known ones including shareholders and employees; to a more expanded socio-economic framework built to add value to the lives of the community at large. The application of corporate governance therefore encompasses the larger business community whose interests must also be represented in the established boards for company sustainability. References Kaen, F. R. (2003). A blueprint for corporate governance strategy, accountability, and the preservation of shareholder value. New York: AMACOM. Arguden, Y. (2010, April 16). Measuring the effectiveness of corporate governance - Business Intelligence Middle East - bi-me.com - News, analysis, reports. Business Intelligence Middle East - bi-me.com - News, analysis, reports. Retrieved May 3, 2012, from http://www.bi-me.com/main.php?id=45992&t=1 Murray, A. S. (2007). Revolt in the boardroom: the new rules of power in corporate America. New York: Collins. Sun, W., Stewart, J., & Pollard, D. (2011). Corporate governance and the global financial crisis: international perspectives. Cambridge: Cambridge University Press. Treanor, J., & Watt, N. (2012, January 29). RBS chief Stephen Hester waives controversial bonus of nearly ?1m | Business | The Guardian . Latest US news, world news, sport and comment from the Guardian | guardiannews.com | The Guardian . Retrieved May 3, 2012, from http://www.guardian.co.uk/business/2012/jan/29/rbs-stephen-hester- waives-bonus Nadler, D., Behan, B., & Nadler, M. B. (2006). Building better boards: a blueprint for effective governance. San Francisco: Jossey-Bass. Castano, I. (2012, April 27). Mexico Launches Anti-Corruption Law As Wal-Mart Scandal Worries Government - Forbes. Information for the World's Business Leaders - Forbes.com. Retrieved May 3, 2012, from http://www.forbes.com/sites/ivancastano/2012/04/27/mexico-launches-anti- corruption-law-as-wal-mart-scandal-worries-government/ Mullerat, R., & Brennan, D. (2011). Corporate social responsibility: the corporate governance of the 21st century (2nd ed.). Alphen aan den Rijn: Kluwer Law International ;. Tricker, R. I. (2009). Corporate governance: principles, policies, and practices. Oxford: Oxford University Press. Barstow, D. (2012, April 21). At Wal-Mart in Mexico, a Bribe Inquiry Silenced - NYTimes.com. NY Times Advertisement. Retrieved May 3, 2012, from http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry- silenced.html?pagewanted=all Rao, P. S., & Sing, C. R. (1996). Governance structure, corporate decision-making and firm performance in North America. Ottawa, Ont.: Industry Canada. Charan, R. (2005). Boards that deliver: advancing corporate governance from compliance to competitive advantage. San Francisco, CA: Jossey-Bass. Read More