Countrys Corporate Legal Framework Is a Reflection of Its Socio-Economic and Political Values - Essay Example

?It is often said that a country’s corporate legal framework is a reflection of its socio-economic and political values. Corporate governance is a set of rules, processes and practices for controlling and directing corporations. Corporate governance differs from country to country. In the developed countries, corporate governance mechanisms are better and function independently. In the developing countries however, the corporate governance system is wanting. The institutions mandated to carry out corporate governance roles are in most cases affected by external factors for example wealthy people and the government. In this case, corporate governance may favour certain people because they can afford to pay hefty bribes to government officials. Comparing corporate governance in the developed and developing countries, the former are accountable but the later are not. Digging deeper into the political and social-economic situations, people in the developing countries face unprecedented oppression from the very government they choose. It is therefore evident the corporate legal framework of a country reflect its social economic and political values. History of corporate governance Interest in corporate governance started after the Wall Street crash of 1929. Edwin Dodd, and Gardiner C and Adolf Augustus Berle, Jr. Gor very concerned with the Wall Street crash. These scholars were wondered the changes to introduce to modern corporations to protect the stakeholders and the employees. Another scholar, Ronald Coarse from the University of Chicago tried to understand how corporations operated. The main was to introduce measures to prevent corporation collapse.1 However, these concerned scholars could not do anything to change the corporations of the time. The American government introduced a set of rules but did nothing much at that time. After the world war two, a class of scholars in management, business and organizational behaviour continued studying modern corporations to come up with ways to make them better and accountable. At that time, some corporations in United States, United Kingdom and other developed countries started establishing branches in other countries. This made the companies complex in that accountability would become challenging. Like before, the scholars in the third quarter of the twentieth century did not do much regarding corporate governance.2 Corporate governance got the attention of the government and the public in the 1990s. In early 1990s, boards of large companies dismissed Chief Executive Officers. Some of the companies involved were Kodak, IBM and Honeywell. Around the same time, it emerged that companies were not accountable in any way. There was a belief that Chief Executive Officers had good relationships with the board of directors. As such, each of the two covered the other in the times of accountability. Emergence of these issues led to a wave of activism, initiated in California by the California Public Employees Retirement system (calPERS). The primary concern for this organization was stakeholders’ protection. The campaigns were making sense but the government did not do much regarding the case. However, this outcry made the government to be more cautious with corporations.3 In the United Kingdom, Steps towards corporate governance started in 1992 when the Financial Reporting Council set up a committee chaired by Sir Adrian Cadbury. The report recommended many things in relation to corporate governance. Some of the recommendations gained acceptance from the beginning but others got amendments along the way. The amendment of the company executives’ compensation clause in 1995 is a good example. Another report on corporate governance came up after the Hampell Report in 1998. Hampell reported evaluated the Cadbury and Greenburg reports and provide recommendations.4 Action on corporate governance became a serious issue in The United States in the early 21st century. Enron and WorldCom became bankrupt and other major companies including Tyco, Arthur Andersen, AOL, Global Crossing and Adelphia communications got into corporate scandals. The theory in these collapses and scandals was that the management and directors played foul play in the collapse and embezzlement of funds. These cases created a lot of interest in the political field. Politicians had to do something before more companies collapsed or got into scandals.5 The United States government introduced the Sarbanes-Oxley Act.6 Corporate Governance Corporate governance is of great interest to the government. It specifies the roles and responsibilities of the stakeholders of any govern company. This all starts when people interested in starting a company apply for the same. Governments across the world have certain protocols for corporate governance. The people involved in the company have to meet certain requirements as provided by the government of that jurisdiction. A year later, Turnbull report evaluated how companies were dealing in compliance with the principles of the corporate governance in the United Kingdom. 7 The turnbull report complied with the American Sarbanes-Oxley Act 2002. United Kingdom companies listed in New York Stock Exchange had to comply with the American corporate governance regulations. American companies listed in other countries are also required to comply with the corporate governance requirements of the jurisdiction. This is the case for all companies listing and establishing networks in other countries. Most countries in the world today have specific corporate governance requirements local and international companies operating there have to meet. Corporate Governance Principles There are universal principles that govern corporate governance. These principles started in the developed countries, specifically United States and United Kingdom. Organizations like Organization for Economic Co-operation and Development (OECD) came up with acceptable corporate governance principles. Countries that do not have good corporate governance principles tend to follow the guidelines provided by OECD and other renowned companies. Countries that use the OECD principles are the developing and emerging countries. The major principles of corporate governance are to stimulate companies to operate in their best capability, limit the powers of the internal officials of the company and to monitor the activities of the company o confirm they comply with the regulations. Independent individuals or organizations monitor the company’s actions to avoid any favours. 8 Corporate governance as an indication of socio-economic and political values Corporate governance varies a lot in different countries. The greatest variation is between the developed countries and the developing or under-developed countries. While corporate governance is mature and effective in the developed countries, there is no proper corporate governance in the developing countries. In some countries especially the very poor, there is no corporate governance whatsoever. The huge difference in corporate governance between the developed and developing and under developed countries is because of the social economic and political situations in those countries.9 Developed countries are mature in many ways. Companies agree to be accountable to the shareholders and comply with the set of rules and regulations provided by the government. It does not matter whether the wealthy own the companies or not in the developed countries. The people in the developed countries are determined to ensure all people within their jurisdiction have the protection they deserve. Governments in these countries play an important role in achieving this goal. Institutions whether governmental or non-governmental in the developed countries can operate independently without any influence from the company owners. When it comes to the developing and under-developed countries, the situation is very different. The corporate governance in these countries is below average for the countries that appreciate company control and accountability. Some countries in this category may state they have corporate governance structures but in reality, they do not. Other countries especially the under-developed and the poor do not have any form of corporate governance at all. The wealthy in the poor and under-developed countries dictate what people do and what they cannot do. Other people literally worship the rich in these countries. The wealthy in the developing and under-developed countries have a lot of influence to the government. In fact, government of such countries seem like marionettes of the wealthy. In most cases, the wealthy bribe politicians who use their powerful positions to push the wealthy agenda.10 As such, the wealthy do whatever they like and influence the governments to do what favours them. The wealthy would not be accountable to anyone including the government under such case scenario. Companies owned by these people can do anything including embezzlement of funds intended for other purposes yet the government cannot do anything. At the same time, they can also influence organizations to audit the firm financials and accounting records to their favour. In fact, auditing and monitoring companies owned by the wealthy in the developing and under-developed countries is just an illusion.11 In developing countries that have a form of corporate governance, the process if marred by irregularities. Developing and under-developed countries have the highest rates of corruption. Firms owned by the wealthy are not audited and if they do, the auditors do not have an option but to document what is not. In most cases, the auditors get bribes to mask the real situation at the firms. It is interesting that the auditors are not in a position to refuse bribes. If they do not accept bribes, they do not live to work another day because the wealthy say so. In some cases, people refusing to take bribes are in some cases killed in the developing and under-developed countries. The conception is that these people will whistle blow the real situation at the companies. Since most of the wealthy do not like scandals in these countries, they may opt to get rid of those who cross their line. 12 The wealthy, middle class and the poor in the developing countries are familiar with corruption. They are constantly giving money to people who matter to get favours in return. This was the case in the developed countries as well. Some people do not like to wait and they would give money to officials in charge of corporate governance certification for them to complete their requests faster. While the people did not take this as bribes, it is actually bribe. Bribe is giving something to get something else in return. However, this practice is no longer common in the developed countries. The governments created acts and policies that bar companies from giving money to government and auditing firm officials. 13 In the developed countries, government institutions follow up individual transactions keenly at all times. In this case, whenever a person receives money from another person, they have to explain why they received that money. If the money is accountable, then they can use the money. However, if the transaction is suspicions on the money received by such officials, inquiries and investigations start. Those found guilty of violating the corporate rules and principles after investigations are required to pay fines or be imprisoned. While this process if clear and transparent in the developed countries, it is the opposite in the developing and under-developed countries. 14 15 Many wealthy people in the developing and under-developed countries cannot account for their wealth. A certain percentage of the wealthy in the developing and under-developed countries got wealthy under mysterious circumstances. It is interesting that the governments of these countries do not follow up on such people to prove the source of money is legit. It is questionable whether such a government can follow up on companies for the sake of corporate governance. It is no wonder many companies in these countries steal public money while the government institutions are aware. In fact, it is evident that rule of law does not operate in such a country, which is the breeding ground for corruption and other illicit activities.16 As that is not enough, governments of the developing and under-developed countries do not only disregard the corporate governance principles but also insult the donors. Most of these countries receive billions of dollars every year as aid to help in corporate governance and other sustainable projects. The government of the recipient country receives the aid money. As it emerges, some governments use the donor money for other self-interests. The Forbes Article for the most corrupt countries 2009 states that the government of Zimbabwe, under Robert Mugabe, used more than seven million dollars meant for medicines on election campaigns.17 It is important to note the qualities of a government influence the qualities of the corporate governance. Studies indicate companies in countries with weak government tend to have weak corporate governance.18 In such countries, the corporate governance does not protect investors’ investments and interests. They stand to lose a lot if things go wrong with the investment. The impact of government policies and actions is more on the corporate governance. Internal company organization, dividend payout and sharing of roles are not as they ought to be. 19 Looking at the case scenario for Zimbabwe, it is evident the government would not respect any regulations including the international regulations. A government doing such a thing would not even have corporate governance regulations in place. If there were any, they would not hold any water. In fact, claiming there is no law in such a country is authentic. Corruption erodes many values of corporate governance. One of the principles of corporate governance is transparency. However, with corruption and weak government regulations, companies and organizations can hide critical information including transactions. In addition, company officials seize the opportunity to steal public funds and other illicit activities. 20 Falsifying information in the developing and under-developed countries goes beyond the finances and accounting audits. Many cases of unavailable and non-existent persons occur in these countries. Usually, some people start companies under other people names who may be alive and not knowing or not existing at all. The weak laws and regulations in the developing countries may it practically impossible for the governments and related organizations to verify identify of company owners. With influence, the people who use fraudulent names get special favours from government officials, which make it easy for such people to operate companies. The only difference is that ownership of such companies is not authentic and in the event that company collapses, the owners are untraceable. Legit stakeholders and investors lose.21 The big question is why developing countries fail in corporate governance so much. Many theories try to explain this factor. One is the fact that people in the developing countries are not well educated. In another case, the organizations that would assist company owners to understand corporate governance lack knowledge and information on the same. International Monetary Fund implied that Kuwait did not have enough information to establish corporate governance principles compliant with the OECD principles. At the time of the study, International Monetary Fund noted that the minority shareholders did not have any form of protection. 22 Another major issue affecting corporate governance in the developing countries is interference by the government. Government officials and institutions in the developing countries do not understand that companies are separate identities that should operate independently. Interference is because of the high rates of corruption, which government officials and politicians demand from the companies. Lack of proper guidelines and knowhow on corporate governance and the role of the government in it also have an impact.23 Although there are many corporate governance issues in the developing countries because of their social-economic and political issues, research indicates some companies are determined to be different. Companies in some countries, especially family owned businesses appreciate corporate governance. The family or owners are committed to ensure the company operates seamlessly. It is for this reason some authors imply that corporate governance in the private sector is better as opposed to the public sector in the developing countries. Changes in the corporate governance can change the public corporations as well 24 Conclusion Corporate governance is very important in protecting investors. The idea of corporate governance started after the Wall Street Crash of 1929 but actions on the same started almost half a century later. In the few decades companies and governments appreciate corporate governance changed the perceptions of many people. However, corporate governance is more developed and mature in the developed countries. Investor interests are in good hands in the developed countries. However, things are very different in the developing countries where the interests of investors’ assurances are not authentic. Developing countries need to improve corporate governance to attract foreign investors, grow economically and improve the lives of the people in their jurisdiction. Though the challenges are many, achieving corporate governance is possible as long as corporations, the society and the government work together. References Ambrer, L. ‘Corporate Governance, the OECD Anti-Bribery Convention and Good Practice Guidance’. (OECD 2012). Berglof, E and Claessens, S. ‘Enforcement and Good Corporate Governance in Developing Countries and Transition Economies’. [2006] World Bank Research Observer. Cage. J ‘The Most Corrupt Countries’. (Forbes, 20 March 2009) accessed 14 January 2014. Chartered Institute of Personal Development. ‘History of corporate governance’. (CIPD, November 2013) accessed 14 January 2014. Douma, S & Schreuder, H (2013) ‘Economic Approaches to Organizations’, 5th edition, Pearson. 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