Corporate Structures and Governance Arrangements Vary Widely from Country to Country - Essay Example

? 'Corporate structures and governance arrangements vary widely from country to country...[b]ut the underlying issues of managerial accountability are the same everywhere' (Hampel Report 1998, pp. 17-18). Discuss. In so doing, explain the extent to which decision rights and appointment rights (selection and removal of directors) differ across jurisdictions. In practice, to what extent are those differences of any consequence? Introduction As per Dalton and Dalton (2005), in recent years, managerial accountability has attained a fast increase in accountability pressures particularly on large multi-national companies. In normal parlance, the corporate governance (CG) has given more emphasis on disclosure, internal mechanisms and transparency with much focus to the financiers of the business. As per OECD (2004), this does not connote that the significance of stakeholders in general is deprived off1. Initially, Jensen and Meckling (1976) advocated stakeholder theory and then followed by Freeman (1984) who advocated an agency concept of accountability. Enron scandal resulted in the introduction Sarbanes-Oxley Act of 2002 which is a chief chapter in the vibrant annals of Anglo-American corporate governance renaissance2. As per OECD, managerial accountability elucidates governance responsibilities and roles and to make sure that shareholder’s interest and managerial interest are lined up and supervised by the board of directors3. The term “ managerial accountability “ can be defined as an understanding of a cluster of desired and predetermined yardsticks by which employees and management alike, which can be gauged to be held responsible for specific actions or decision vis-a-vis some clearly explained role or responsibilities in a company4. As per Fisher(2004), the managerial accountability is nothing but the delegation of power which means of integrating relationships between institutions , demarcating responsibilities , improving legitimacy , controlling authority , and finally promoting democracy within a company and thus , the main goal of developing accountability is establishing trust in governance institutions in companies. In UK, the Cadbury Committee was asked to review those features of corporate governance especially pertaining to financial reporting and accountability as early in May 1991. This research essay will analyse in detail how the managerial accountability remain the same under corporate governance across various jurisdictions with particular emphasis to the USA , UK and Germany. Analysis What is Managerial Accountability? Stanton (1997) refers Rosenfield finding on accountability as “the reasonable holding of one to be liable for personal decisions or to make a rejoinder to a charge where justiability is being ushered by an authority affiliation between the individuals concerned. From two perspectives, the authority relations can be assessed by two angles namely the stakeholder’s theory and the shareholder-value maximisation theory. As per Spira (2001), business organisations and individuals are discharged of their responsible obligations by disseminating the required information on a periodical basis to interested parties5. Business accountability connotes making the management of a company accountable for its performance and it includes making of business decisions on the proper usage of executive authority. Such business judgment can be employed only when the specific information is available. Further, accountability makes certain that the demeanour is compatible with the objects of the business, that it is consistent with the conditions that steer the company’s policy. In a way balancing the impact of the open market, which sets out prices and evaluates the real margin, a system of accountability offers objective yardsticks for administers and consulting performance. To evaluate the managerial accountability, it is necessary to assess the individual performance periodically whether it is the individual director, CEO, the outside auditor, the entire board or its officers and the regulatory authority. In this process, the devices of accountability should themselves be assessed and keep posted regularly6. In liquid, well-functioning stock markets and institutional investors due to their size, which offer the chief opportunities to maintain managerial accountability as a part of corporate governance. The subject of corporate management is subject to the internal control carried out by the directors of the board and also the external control followed by the markets, especially the capital markets appropriately notified on performance of the management due to the legal requirements for disclosure. Towards the external pole, the locus of the managerial accountability will vary as in the case of UK and US with their well advanced capital markets or toward the internal pole as in the case of Japan, Germany and France with their concentrated ownership7. In Unocal Corp v Mesa Petroleum Co8 , it was held that the main objectives of the company law in UK and USA has been the “ omnipresent spectre “ that a company’s board may be functioning chiefly in its own interest , instead of those of the shareholders and corporations. Managerial accountability is given the utmost concerns in UK and USA whereas not in Italy, Germany and France where families, the state and the banks own the major percentage of shares of the company. Thus, in these regions including Germany, majority shareholders wield their influence on the managers without having to bank upon on markets or courts. Hence, in this region, the managerial duties will be very inadequate and responsibility of directors of company under corporate governance has not been granted great importance by the company law in these regions9. For successfully implementing managerial accountability, well functioning stock markets will be helpful mainly to implement shareholders’ wishes. If they dissatisfied with the functioning of the management, the shareholders can simply dispose of their shares in the share market. The anticipations of financial analysts’ are more powerful in evaluating managerial performance, the failing to cater the analysts’ predictions force the stock price down and will act as indicators to shareholders that there has been underperformance by the management. Thus, under corporate governance, managerial accountability acts as a self-help mechanism which derives its prop up from financial transparency regulations that help market enforcement and valuations10. In UK and other European countries, more significance is given to accountability through disclosure as the companies have to peruse a regulatory regime which includes the stock market regulations, the company law fortified by voluntary codes of practices, which are focused to enhance confidence of investors. Many jurisdictions across the globe rely more on the trusteeship of independent directors as pillars of corporate governance. In single –tire jurisdictions like Japan, UK and USA, single board employs the legal authority to manage and supervise a company either through committees or directly. In two-tier jurisdictions like the Netherlands and Germany, supervising authority are accorded to a non-executive director by the elected supervisory board which then appoints and oversees management boards that will include chief executive officers who plan and introduce a business strategy. France and Italy allow domestic companies to select either two or single-tier boards and companies in each EU jurisdiction may select between two or single-tier board by preferring into Societas Europaea (SE) which permits either of the board structure11. After carefully reviewing the corporate governance standards and rules of various jurisdictions, Hong Kong had introduced tighter governance standards like appointment of at least three independent directors in their board12. King III explains that there should be accountability to all shareholders by the directors, how the resources of the company should be employed properly, both for taking responsibility and for not jeopardising the sustainability of the environment and to employ the company’s resources properly. With a focus on the future financial needs, this needs apt resource management by the management. By managerial accountability, the directors have respect for the human right, should focus more on the positive effect on the community within which the company functions, and the efficient management of stakeholders’ affiliations including the usage of alternative dispute resolution methods13. In UK, Greenbury Committee of 1995 stressed for the constitution of the remuneration committee of the board of directors which had to be made up of independent non-executive directors, which acted as the main core of its recommendations of fortifying the accountability and increasing the performance of directors. Connecting the performance of the company to the director’s remuneration was the main feature of the said report14. To improve the managerial accountability, China in 2008 introduced the Basic Regulations on Enterprise Internal Control. This stresses a significant endeavour to operationalise a systematic structure of government and management practices that will offer more implementation of transparent instruments and embedded accountability to increase risk management and performance results15. As per Huse (2007b), the Norwegian Companies Act contains many provisions concerning the board’s accountability, composition, tasks, structures, liability and processes. Now, let us analyse even though corporate governance regulation differs in the jurisdictions like UK, USA and Germany but managerial accountability in these regions remain the same. UK In UK, recommendations by Cadbury focussed on aims to enhance the accountability of executives thereby decentralising the power within the company and empowering non-executive directors in supervising the function of executives which include separation of power between the Chairman and CEO16. Through the following checks and balances, managerial accountability is accomplished in UK companies like separation of the position of chairman and the chief executive, separation of powers between non-executive and executive directors, establishing a vibrant, independent remuneration and audit committees and the assessment of board’s performance on annual basis. Further, a code of good practice footed upon the principle of “explain or comply” has been introduced. In UK, shareholders through their rights to information and voting rights, which have been detailed in the Listing Rules and the company law, which facilitates the shareholders to hold the board of directors for accountable for their business decisions. In UK, shareholders are having powers to appoint or dismiss a director through moving a resolution in shareholder’s meeting. Further , under UK company law , directors are responsible for setting- up and preserving the company’s values ,mission and vision, to institue company’s strategy ,structure and risk profile, through delegation of authority and by supervising and analysing the implementation of company’s strategies ,policies and operation plans and to responsible and accountable to shareholders and other interested parties. Immediately, after WorldCom and Enron scandal, there was an update of the Combined Code in 2003, which included a report of the performance of non-executive directors through the Higgs Report, and the Smith Report’s recommendation on the part played by the audit committee. Listed companies are subject to more accountability due to Listing Rules, which specify shareholders’ approval is essential for major transactions, and certain key development should be informed to the market etc. In UK, the board of directors is accountable for publishing a balanced appraisal of the position of the company through audited annual accounts and to maintain a vibrant, reliant system of internal control. Germany Major companies in Germany have two-tier board systems. The management board consists of full time executives whose activities will be overseen by a supervisory board of nonexecutive directors. This two-tire board intends to make sure that there is a clear control over managers and there exists accountability. As per Deakin & Hughes (1997), the companies’ main goal in Germany is focussed towards broader “social interest” through which the concerns of the different company constituencies are reconciled. As per Mintz( 2005) , the main objectives of Germany’s CG are not only intended with safeguarding the interest of shareholders but also broader areas like employees , lenders , shareholders , banks and other stakeholders. To cater these demands, Germany has framed a corporate governance setup that is divergent from that of UK or USA. Since the enactment of Germany’s Corporate Governance Code in 2002, German companies have to adhere “explain or comply” position as followed by UK. As part of accountability, the German companies must divulge either in the company’s websites or in their annual reports, an announcement of compliance, which illustrates how the code has been adhered. Both the USA and UK follow the governance standards which are focussed at safeguarding the shareholder whereas the Germany model considers that the company owes an obligation to safeguard the interest of all stakeholders like lenders, bankers, employees which include shareholders also17. For instance, under German law, the supervisory board cannot expel without any valid reason the management board, and it cannot take any decision on items, which are reserved for management board and on some occasions, any decision taken can be overruled by the militant management board by obtaining the accent of a super-majority of shareholders’ support through their votes. In theory, as happen commonly in France and USA, the single tier-board allows companies to mingle with the roles of chief executive officer and the board chairman whereas two-tier jurisdictions like Germany forbid supervisory boards from taking managerial decisions. Thus, two-tier boards favour collective decision-making whereas single-tier boards concentrate on decision -making powers18. Under German laws , shareholders have the power both to appoint and remove a director. USA As per Grant (2003), as early as in 1919, in Dodge v Ford Motor Company, it was held by a Michigan court that managers of the corporations were responsible for creating profits for owners. In the wake of corporate scandals like WorldCom, Enron, Parmalat, Ahold, USA has enacted Sarbanes-Oxley act, which also gives more spotlight on internal mechanisms like auditors, managers, board of directors, risk and control aspects, especially to enhance the shareholder’s perceptiveness and influence on behaviour of corporate on the entire range of business issues19. In addition to Sarbanes Act, both NASDAQ and NYSE have perused new listing rules as regards to board structure. The approach by US is to move towards more regulations and laws as to how to safeguard the interest of shareholders, which is a contrast from UK and Germany. In US, the adherences to CG rules are demanded by law whereas in UK and Germany, just “explain or comply “provision is being followed. As per Mintz (2005, 583), the rule-based CG regulations in US will pave the way to follow a “tick-the-box” approach towards compliances of regulations rather than spot lighting on aim of the regulations to safeguard the shareholders20. The SEC amendment rules in 2010 stressed that there should be board’s disclosure about the status of CEO and the chairman of the board , whether they are separated or combined , the justification for the policy in place. The Dodd-Frank Act needs public companies in USA to peruse for executive compensation, a nonbinding periodic say on pay votes and also on golden parachutes in case of mergers or acquisitions. In September 2011, companies in USA received some transparency on the shareholder’s proxy access in the future for director nomination. Under the proposed norms, the shareholders first amend the bylaws if any and then, in the latter years, can nominate their favourite nominees for directorships to be included in the company’s proxy materials21.. In USA ,decision making is done by unanimous consent of the board throguh resolution and Chairman/CEO is empowered to implement those decisions . In US , shareholders are empowered with the removal of directors before end of their tenure in the general meeting. Allocation of power between Board and Shareholders and how it is going to reduce the managerial agency problem In Unocal Corp v Mesa Petroleum Co22 , it was held that the main objectives of the company law in UK and USA has been the “ omnipresent spectre “ that a company’s board may be functioning chiefly in its own interest , instead of those of the shareholders and corporations. Managerial accountability is given the utmost concerns in UK and USA whereas not in Italy, Germany and France where families, the state and the banks own the major percentage of shares of the company. Thus, in these regions including Germany, majority shareholders wield their influence on the managers without having to bank upon on markets or courts. Further , it is to be noted that in UK, it is easy to remove the director whereas in contrast in us the shareholders can not remove the director easily. Conclusion Business accountability connotes making the management of a company accountable for its performance. The managerial accountability can be assured by employing techniques like separation of the position of chairman and the chief executive, separation of powers between non-executive and executive directors, establishing a vibrant, independent remuneration and audit committees and the assessment of board’s performance on annual basis. USA and UK follow the governance standards which are focussed at safeguarding the shareholder whereas the Germany model considers that the company owes an obligation to safeguard the interest of all stakeholders like lenders, bankers, employees which include shareholders also. It is strongly recommended that to ensure managerial accountability under corporate governance, it is not only important to safeguarding the interest of shareholders but also broader areas like employees , lenders , shareholders , banks and other stakeholders. 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