Corporate Governance - Literature review Example

Corporate Governance The global financial crisis started during the Reagan administration in the US, when the New Deal Financial Legislation, which had helped in averting major financial crises after the Great Depression, was slowly being undone. Britain’s Prime Minister, then, Margaret Thatcher was conducting similar measures in her time of office. They entailed the systematic deregulation of the financial markets coupled with tax reduction to the wealthy. This was steadily accelerated during the Bushes’ administration that was unabated by the Clinton administration that came in between the Bushes’ eras. Regan’s era in office was characterized by the laissez-faire attitude to business conduct and on the trickle down economies that were resultant of the above attitude. The inside job is a film that captures the state of economical crisis in America and shows the participation of people from the inside of the company in the deal (Carroll, 2004, p. 136). The film and Greenbury Report 1995 both present states of financial hardships and strategies of solving these issues. Deregulation of the financial system and the savings and loans industry, led to lesser vigilance over these systems. This resulted in the spread of multiple fraud cases, bad loans and investments practices and insider trading that led ultimately to massive losses (Jones & Pollitt, 2002). Coupled with Clinton’s era of administration where the bridge between Wall Street and Washington became less separated, more and more Wall Street CEO’s joined the government, taking up administrative posts. There in turn was the repealing of the Depression Era safeguards that allowed for Wall Street mega mergers and the enactment of laws favoring the financial services sector. There was thus, the creation of the derivatives industry that went on unregulated by financial administrators (Jones & Pollitt, 2002, p. 57). With the resultant lax regulation, coupled with oversight, cases of fraud, intense lobbying, unethical practices, and fraud increased. This created complex investment systems that tied different types of investments, from credit to mortgages, to the risky practices of the financial sector. The resultant effect was high inflation speculation and unethical malpractices by the leading credit rating, financial and insurance agencies that led to the 2008 economic collapse. The ‘good times’ rolled on, with banks increasing in both capital liquidity and asset bases. They offered mind blowing-bonuses to their traders for their increased and continued participation in risk taking tradeoffs, corporate loyalty, and the ever-insatiable drive for profit making (Mallin, 2007, p. 24). The Greenbury Report is the final report, of the Confederation of British Industry study group, that was tasked with the identification of good practice in the determination of directors’ remuneration and also with the preparation of a code of practice/ethics for the Publicly Listed Companies in the UK. This final report was published on 17 July 1995. It was chaired by Sir Charles Greenbury. This report compilation was brought about by concerns over executive remuneration that was centered on large pay increases and gains that were derived from share options in utility industries that had been privatized. These increases, at times, coincided with staff reduction/layoffs, price increases for services and low staff wages. There was also the concern over compensation that was paid to some of the departing Directors. It recommended the strengthening of accountability and also encouraged performance based work ethics. Key to strengthening accountability is the proper allocation of responsibilities for the determination of Directors’ remuneration, transparency, and proper reporting to shareholders. The Boards of Directors need to hand over the responsibility for determining the Executive remuneration to an impartial group of people, knowledgeable in the company’s day to day affairs, but with no personal financial interests in the decisions concerning remuneration that they are undertaking. The group in turn needs to constantly submit a full report, to the shareholders concerned, explaining the company’s approaches to executive remuneration and also provide full disclosure of the different elements factored in the remuneration of individual Directors (Spedding, 2008, p. 352). The report also found out that the key to enhanced performance, by directors, lay in the remuneration packages that linked rewards to performance by both the company and individuals employed in the company. The packages also are supposed to align the interests of the shareholders and Directors in promotion of the company’s progress. Therefore, in view of the above fundamental principles, that have great bearing on performance, accountability, and transparency, there was need for the encapsulation of arrangements and procedures into a new Code of best practice on Director’s remuneration that companies should observe and implement. It therefore proposed that companies, listed and registered in the UK, should comply with the Code in reporting annually to shareholders about their compliance with the code. It also asked for the London Stock Exchange and existing investor institutions to use their influence and power to enforce the above compliance. In order to avoid potential conflicts of interest, Board of Directors should set up remuneration committees, of Non-Executive Directors, to determine, within the agreed-to terms of reference, the company’s policy on Executive remuneration and on specific remuneration packages for each of the Executive Directors inclusive of their pension rights and any other compensation payments (Mallin, 2007). Members of these remuneration committees should be listed annually in the committee’s report to the shareholders. The committee in consultation with the company’s Chairman and/ or CEO should have access to professional advice from within and outside the company on matters pertaining to their proposals. The attendance of Annual General Meetings (AGM’s), by the remuneration committee Chairman is of vital importance; this enabling the answering of shareholder’s questions concerning Director’s remuneration and ensuring that the company maintains contact with principal shareholders on the same issue (Mallin, 2007, p. 39). The committee must provide attractive pay packages in order to attract motivate and retain quality Directors. It should judge the company’s relative position to other companies because of relative performance. They should be sensitive to other factors, including the employment and pay conditions elsewhere in the company, especially in their determination of annual salary increments. They should weigh the options of the eligibility of Directors to annual bonuses and/or benefits under long-term incentive schemes. Grants under all types of incentive schemes should be subjected to challenging performance criteria that reflects the company’s objectives and performance relative to other comparable companies. Grants, provided under executive share options and other long-term schemes should ideally be phased, rather than awarded as a whole block (Halbert & Ingulli, 2011, p 70). The inside job film by Oscar Ferguson presents an economic crisis from an American perspective. The title of the film suggests it is a crime movie and he calls 42 people including friendly witnesses and unfriendly witnesses to testify in the film. The film does not hint, as it might have done, that there is a fact embedded in the American mind, which produces buccaneering financial types of the people who formed the great national fortunes in the Gilded Age of the 19th century (Boone & Boone, 2003, p. 94). The UK Corporate Governance Code of 2010 goes hand in hand with the above. It entails the facilitation of effective entrepreneurial management that is prudent and can deliver on the company’s long-term success. It is thus, the system through which companies are directed and controlled, by Boards of Directors who are responsible for the day-to-day running of their companies. Shareholders appoint the directors and the auditors so as to ensure prudent and appropriate governance structures are in place. The core responsibilities of the board are: - setting the strategic aims of the company, providing the required leadership to effectively manage the company and the reporting to the shareholders of their progress in their stewardship of the company. The board’s actions are subjected to the existing laws, regulations, and wishes of the shareholders during the AGM’s (Plessis, J. J. Du Plessis, & Hargovan, 2010, p. 316). Corporate governance entails what the board of a company does and how the values of a company are set; thus, it should be distinguished from the day-to-day operational management of the company that is carried by full-time Executives. Its main principles include- Leadership: where every company is headed by an effective board, which collectively is responsible for the long-term success of the company. Clear division of responsibility at the management levels should distinguish between the running of the board and the executive responsibility for the company’s running. No individual should have absolute powers of decision-making. The non-executive directors should challenge and help develop strategies constructively. This is directed mainly at the chair of the board and the Chief Executive of the company. Effectiveness: where the board of directors and its committees should display balanced skills, independence, experience and knowledge of the company. This is to enable them discharge their duties and responsibilities effectively. There should be rigorous, formal, and transparent procedure in the appointments of new directors to the board. Refresher courses should be taken regularly so as to update their skills and knowledge, with the board being supplied with information, which is of quality, so as to enable it discharges its duties. There should be elections held regularly that are subject to continued satisfactory performance. Directed mainly to the board of directors and ultimately to the Chairman of the board. Accountability: where the board is responsible for determining the extent and nature of the risks it is willing to take so as to achieve its strategic goals. They should be able to maintain sound risk management and implement internal control systems. The board should initiate formal transparent arrangements in the consideration of application of corporate reporting and risk management. They should implement internal control principles and also maintain appropriate relationships with the company’s auditor(s). This is the sole responsibility of the board of directors and the Chairman. Remuneration: where the levels should be sufficient enough to attract, retain and motivate the directors of quality, to run the company successfully. However, there should be structuring of the remuneration so as to link it with rewarding of both corporate and individual performance. No director should be involved in the determining their remuneration packages and there should be formal and transparent procedures to developing policy on remuneration. This is the sole responsibility of the Board of Directors (Solomon, 2007, p. 54). Relations with shareholders: there should be encouraged dialogue between the boards of directors and their respective shareholders, based on mutual understanding of the company’s goals and objectives. This should be done best during AGM’s. This being between not only the board of directors, but also between the board’s Chairman and the company’s CEO. The inside job film and the code both address accountability issues. In the film, Ferguson captures the irresponsibility of the employees in the company in the participation of a rogue deal. The inside job considers the financial crush as a result of the deregulation of markets and financial services in the 1980s, and the driving force behind this liberalization as caused by Alan Greenspan, the formidable chair of the US Federal Reserve board from 1987 to 2006. The film states that bank CEOs become government officials and create laws that are convenient for their once and future employers (Young, 1991, p. 48). The Greenbury Report 1995 and the code address issues that executive employees must consider in accountability of their positions. In conclusion, the film presents the facts that are presented in the Greenbury Report 1995. The code has helped in guiding companies to effective board management, since it is based on good practices and principles essential for good governance. Its purpose has been the facilitation of good corporate governance that in turn enables the continued success and sustainance of a company or group of companies. It is essential, together with the recommendations from the Greenbury Report, in the prevention of future financial crises. References Boone, B., & Boone, R. S. (2003). Inside Job: A Life of Teaching. London: The Puddinhead Press. Carroll, C. (2004). Life Is an Inside Job: A Primer on the Job of Living. New York: iUniverse. Hart, R. (2011). Photography For Dummies. New York: John Wiley & Sons. Halbert, T, Ingulli, E. (2011), Law & Ethics in the Business Environment, 7th ed. South Western Legal Studies Jones, I., & Pollitt, M. G. (2002). Understanding how issues in business ethics develop. London: Palgrave Macmillan. Mallin, C. A. (2007). Corporate governance. London: Oxford University Press. Plessis, J. J., J. J. Du Plessis, M. B., & Hargovan, A. (2010). Principles of Contemporary Corporate Governance. London: Cambridge University Press. Solomon, J. ( 2007). Corporate governance and accountability. New York: John Wiley and Sons. Spedding, L. S. (2008). The due diligence handbook: corporate governance, risk management and business planning. Geneva: Butterworth-Heinemann. Young, D. M. (1991). An inside job: policing and police culture in Britain. London: Clarendon Press. Read More