Corporate Structures and Governance Arrangements - Coursework Example

Corporate Structures and Governance Arrangements Introduction It is important to study the way corporations are structured and governed to avoid possible cases of mismanagement. It is possible to note that even in a country; there are many differences in terms of the corporate administration and management. There is a hierarchical difference in various corporate that exist even in the same country. Therefore, it is prudent to justify that corporate structure differ from one organization or country to another. However, structures and organizations in various corporate is the way in which different structures are formed is to achieve a common goal, that is, managerial accountability1. In the pre-bureaucratic corporate structure, there is a centralized structure with the role of strategic decision making left to the top management leaders, which is the best for solving very simple problems. This system is very common among the small corporate and mostly communication is done on one-on-one basis. Though, it lacks a fundamental role, that is, standardization of roles and responsibility, the consequences of this structure on managerial accountability is that it helps the strategic director to influence and control development and growth of the corporate organization2. How Appointment Rights and Removal Rights Differ and Their Consequences Having looked at the Hampel Report, one comes to consensus that corporate structures and governance arrangement vary from one country, an individual can use the same rights differ across the jurisdiction. The main explanation for this is that the structure of a particular and how it is governed would define how decisions and appointment rights come about in that particular corporation and as a result each decision comes about with its consequences3. It is how rights are allocated that would ensure that the corporation gives quality performance. For example, in a corporate structure where decision rights and appointments are left in the hands of the shareholders, there is a common tendency that the organisation would experience some positive effects in its operations. That is, the shareholders are at times driven by the desire to reap the highest revenues and profits from the company4. Therefore, it would make sure the appointment and removal of directors from the corporation is done in a transparent way and the appointments done based on merit. In countries where decision making and appointment rights are left to the chief executive officer because he/she has broader business knowledge than the shareholders. The main argument for the proponents of this structure is that the chief executive officer knows how effective the mangers are in their daily business operations. In fact, they know when and how to make strategic decisions. However, the consequences of this structure are that it takes a lot of time to transfer certain decision making information to the rest of the organisation. It is also tedious to make all the decisions by oneself, and in case of the appointment and dismissal of directors, then one can consider the action taken to be personal and bias, and this can bring about some unnecessary, tension, conflict and tension in the organisation5. Another different structure is that which foresees all the decisions and appointment rights based on the management, especially if the corporation is a family enterprise. This method is always considered cheaper in terms of experts/employees hiring costs. However, this structure and governance arrangement has its own demerits. Despite the savings on expenditure, decision making in this case is guided more by emotions and this out rightly affects the corporation negatively6. It also seeks to over centralize powers and rights to make decisions to the family members, this would mean that there might be lack of relevant information flowing down to other stakeholders of the corporation. However, it is important to note that decision rights and appointments have their own effects. Therefore, one should not be confused with a particular outcome and the process itself, that is, at times a particular structure can be used to make decision7, but the outcome might not be positive as expected. Therefore, it is not right to move quickly and change the structure of the decision making process, but try and look at the reasons for its failure. Experts have the view that attempting to redistribute decision making rights and appointment rights in the organisation because the earlier one failed can damage the operations of the business. Another difference in decision making and appointment rights is when the board of directors is given the responsibility to make decisions and appointments, and dismissal of other board of directors has a negative consequence since many directors would opt not to go for merit, but try to favour those who are close to them8. In addition, they can as well reward themselves highly at the expense of the company. Corporate structure and governance arrangement can also take the bureaucratic structure that makes sure that all the roles are clearly defined to avoid role duplication and redundancy. Therefore, a hierarchical structure is developed to enhance easy flow and execution of duties. In this form of corporate structure, there is a high level of standardization and the consequence of this arrangement is that it promotes hard work and commitment in the corporate since the employees would be motivated to work hard to attain the highest possible ranks9. In other countries, the post-bureaucratic structure and governance is considered, but in this case what is emphasized is the organizational structure and governance other than the organization itself. In this case, the organization is more of personal integrity and selfless love for the organization, which is very complex in its structure since it incorporates the need for the highest quality management10. The Hampel report recognised that in corporate governance, though varied from one country to another, the issues of managerial accountability were the same everywhere. In this it realised that commanding is not the source of business prosperity that is across the business and corporate world, it is the leadership, teamwork, enterprise, skills, and the people who were responsible for the production process. Managerial accountability is the core pillar for any corporate success. The single belief that effective regulations and roles in a corporate would yield success is not adequate in its self. It is justified that rules and regulations in the corporate governance is important to achieve accountability, but importantly is the fact that disclosure of trading results, accounts are audited on how the business operations are carried out and remuneration remain the most important element of success in a business or corporate11. Another argument that can be used to explain the uniformity of why the corporate governance has spread globally is the 1992 Cadbury report. This provides a turning point and a critical perspective on how people think about corporate governance. That is, it acts as a yardstick on which the efficiency and effectiveness of how a particular corporate is governed can be measured. For example, in the United Kingdom, this public report, an initiative of the private sector, was adopted and endorsed publicly and later incorporated the rules listings. Now the important aspect is that this particular report became so important that several countries adopted it for use. Therefore, there is a similarity, not only on the managerial accountability, but also corporate governance in those countries12. The extent on which appointment rights and decision making rights are concerned differs from country to country. For example, in the United Kingdom, it is the companies’ articles that define the position and powers of the board of directors, and it is the shareholders who are mandated with the task to appoint or elect the directors. In a case where the company is listed, the number of full time executive directors seating in the board is defined. Here, they join another list of non-executive directors who are not engaged in running the daily activities of the company13. Their main duty is to provide the executive directors who work on full time with the necessary assistance and support as they go about their daily management duties. For instance, the non-executive board of directors can play a role that links the corporation to other organisations as well as analysing the critical decisions made by the executive directors. Indeed, this provides a great deal of managerial accountability that is very significant to the organisation14. In other jurisdiction, appointments can be made through a proxy statement or in some cases allow the existing board of directors to appoint the directors because a position was left vacant as a result of death, need to increase the number of directors or some directors resigned in some other places15. Often, it is the top management team who are considered for the position. The inside director is the first to nominate the board of directors before the shareholders participate in the practice. In the literal sense, one can argue that it is very difficult to remove a sitting director, especially through a resolution. This is because the directors enjoy some rights that require them to be given some special notice incase any resolution has been passed to remove him/her from the office. Therefore, a copy of proposal must always be availed to the director whom the intended impeachment is directed to, and has a right to be heard in a meeting. In certain cases, the company the company might need to have a representation that is required by the director to be circulated. In addition, the contracts signed by the directors require them to be compensated before they are removed from office, and this makes it difficult to terminate their contract abruptly16. Indeed, different jurisdictions come with different modes of leaving; the most common one is the case when a director or the entire boards of directors decide to resign, possibly due to the external or internal pressure or failure to deliver the expected results to the organisation. Some positions may remain vacant as a result of death and in some cases a director can be removed through a resolution. In other cases shown by the research carried out by the journal of France, Drexul University, Le Bow College of Business, Professor Jacqueline Garner, and Walking Ralph learnt that the shareholders would not vote in the directors who do not attend the meetings. This has two possible implications; one that the shareholders play a role in governance of the company. Besides, the removal of such directors who do not attend is a clear sign of managerial accountability17. The clear gap on how corporate structures and governance arrangement vary from one country to another is not a dupe. Indeed, many corporate manage their affairs differently, and this varies significantly from one country. This is because the way in which a company is managed in terms of customers, policies, laws, institutions, and business processes differ from one country to the other. But, what is important is how the management handles these important issues18. It is important to note that there are different models of corporate structure and governance arrangement globally. This has been found to differ in line of variety of capitalism that a corporate has been embodied. For example, the Anglo-American models tend to lay emphasis on the shareholders while the coordinated model that is commonly adopted in Japan and continental Europe tend to lay emphasis on the very interest on the customers, workers, managers, and the community. Most of the coordinated model countries assume a method of using a two-tired board of directors as a way of improving their corporate structure and governance arrangement. The two-tiered model is made up of the executive board that comprises of the company’s executives who engage in the day-to-day running of the organization while the other body that is known as the supervisory board consists mainly of the non-executive directors whose main role is to represent the employees and shareholders. The non-executive boards members hires and fires the executive management, determine the compensation of those who are fired19. Besides, the non-executive boards of directors review major decisions made regarding the business operations. Countries which are popularly known for adopting this model include Germany, Netherlands and Japan among others. This format ensures that there is accountability of the managers, and due to this a lot of credit is owed to the parallel board. Another popular jurisdiction is the Anglo-American model. This is also known as the unitary system tiered model. It emphasises on a single tiered board of directors’ typology. This is composed of both the non-executive directors and the executive directors of the company. Often, they are elected by the corporation’s shareholders. In this model, unlike the other jurisdictions, it is the non-executive board members who are expected to outnumber the executive directors and in that case take up the key positions, which include the compensation and auditing committees. One controversial aspect of this model is that despite the fact that all the other elements are the same; the position of the chief executive officer in the board differs sharply in the two settings, that is, in America and Britain. For example, in the United States, the chief executive officer plays a role of both the chairman of the board and that of a chief executive officer. In Britain, the chief executive officer does not chair the board. It differs in that the United State’s laws that directly govern the corporations while offering and trading on the corporate shares, which include the securities, are guided by the federal laws. What is interesting is the fact that individual rules are based on the corporate charter and the corporate by-laws. These corporate laws can never be initiated by the shareholders, but they can stimulate changes in the corporate by-laws20. Evidently, the way the corporations organise their structures and arrangements vary, but what cannot go unnoticed is the fact that all these models tend to make sure that there is accountability to the employees and shareholders by the organization management. However, such differences have certain impacts. It is true that the corporate operate around a set piece of governance framework. Mostly this framework is set by a number of sources, which might include the corporate own constitution, set of laws, regulations, the expectations of the people served and those of the financiers. This explains why there is a difference on how the corporate function. The effects would depend on the degree of reliance on the said sources. Therefore, the consequences would be narrowed on whether or not a corporate adopted the right system that is supported by its culture and history or at times the institutions of the country. Therefore, depending on the latter, a corporate can enjoy success or failure depending on the choice of the system or the degree of the dependency on the other factors. In order to understand the concept well, one has to critically analyse and identify the particular consequences of adopting these models, that is, the Anglo-American model, the two-tiered model and the one-tiered model21. The general merits of adopting corporate governance are highlighted in the discussion that follows. Enhanced Performance It is obvious the effects of corporate governance towards the company’s performance, that is, since the corporate structure and arrangement is clearly defined, there is a more efficient way of supervising how roles, responsibilities and duties are carried out while at the same time ensuring performance. Without proper corporate structure and governance arrangement the organization tends to be weak and at the same time inefficient. It is agreeable that only when all the corporate stakeholders are working together that they can be able to predict changes in the market. Therefore, the company should be prepared to meet these challenges. In addition, it acknowledges the difficulty that can be faced in putting the control management and leadership of a corporate22. Therefore, the manner in which it defines the powers, roles and responsibilities of the board of directors makes it easy to manage and oversee the company’s operations. Better Talent Utilization Without proper corporate governance in line with the company’s organization and arrangement the business operations are bound to fail. This is due to lack of a clear spelt out and organised structure at the highest level of the company, thus making it even very difficult for individuals to rise to the top hierarchy of the management. With the presence of a strong and organised corporate governance, there are defined criteria and formula on which the employees are capable of climbing to the top that would help in solving some of these problems. Therefore, persons in the company are able to adequately utilize their talents as well as aiming higher for the top positions in the organizations, at the same time the hardworking board of directors are able to identify and recruit the best talents to take up various positions23. Notably, the advantages vary in terms of effect, depending on a number of reasons, for example, the model chosen versus the environment, the commitment of the workers and the board of directors. Access to Capital Another advantage is the access to capital, which is as a result of corporate governance. This puts the company at a better position to outsource funds easily. This in turn enables the company to fund its projects easily, and even earn some surplus revenue. The shareholders are always linked to the business through the corporate governance structural arrangement, and in that case they are able to build more trust and confidence in the business. The trust also enables the shareholders to use their contact to their financial organizations and individuals to support the corporation financially. As a result strong corporate system finance in the form of capital becomes very easy to fund24. Managerial Accountability This forms the main merit of the corporate governance since the system provides a structure and arrangement that foresee the accountability checks and balances and integrity. The different branches that are delegated with various roles are held to account for any mistake made. The accountability of the managers met through the audited financial reports and subjecting the auditors to period performance evaluation and re-election processes give the company a good image. The good image would attract investors and encourage the shareholders to contribute more capital through the purchase of shares. Indeed, corporate governance expands the role of the directors from the obvious legal responsibility and loyalty to the shareholders and corporation25. Corporate governance is also considered as one of the most efficient element in improving micro-economic efficiency. This is because the development of the capital markets are directly affected by the corporate governance since it influences the market very strongly and at the same time affects the resource allocation through what is considered as its impact on a company’s behavior, innovation activity, development of an active small market economy, and entrepreneurship. Therefore, it can be argued that the presence of a good corporate governance system is manifested through the enhanced performance by the corporate, in both the emerging and already developed countries, and a steady high growth in the economy26. Disadvantages Contrary to the merits discussed earlier, there are some drawbacks that are associated with the adoption of corporate governance. Impeded Growth of the Family-Owned Businesses If the corporate governance is adopted by the family owned businesses, there might be no good result realised. This is backed by several researches that have provided that corporate governance would only work at its best when the most crucial decisions made by the board members and shareholders are objective. However, when the family members sit on the board of directors, they are likely to influence and make decisions that are guided by emotions rather than reasoning. Thus, they might not be able to make decisions that are binding that lead to negative results27. The High Costs of Monitoring It is important for the management team to effectively govern a corporation. The corporate investors should be involved in the company’s decision making process. This will make them to invest more money in the company by acquiring many shares. Though, this is very difficult to implement due to the organizational politics. At times, some individual buy many shares so that they can be in a position to influence the decision making process of the company. This group of people can easily vote out the minority shareholders during the election process28. Possible Emergence of Corruption It requires the close watch of the government to ensure that corruption is not witnessed in such corporate, especially in the areas of banking and corporate financing industry. For example, between 2001 and 2004, major financial institutions faced the credit crunch due to mismanagement, corruption and poor planning29. Illegal inside Trading The insiders are the directors, employees and corporate officials who are able to access classified, confidential and non-public data and information that might not affect the value of the company’s shares. If a poor corporate structure and system are adopted, illegal trading would then occur when a shareholder who has this vital information decides to sell shares or securities of the company to unsuspecting buyer without revealing to him/her about the anticipated future of the company. This crime can as well be committed by an outside auditor or a government regulator when such confidential matters are made public. The negative consequence about this is the fact that it is not easy for the government to counter this crime or enforce laws that can protect the buyers from such unscrupulous people30. High Regulation Costs The corporate governance has forced the government to put in place large bodies of federal laws and state laws that are designed to stop such malpractices from taking place31. Therefore, the government is forced to incur very heavy expenditures towards the implementation and execution of such corporate laws. A good example is the 1993 securities and exchange act that requires companies and individuals willing to be listed at the stock exchange to pay sums that exceed hundreds of thousands, and at the same time make extensive disclosures32. Even the recent Sarbanes-Oxley act 2002 requires extensive systems to be established on the internal controls. Its main objective is to make sure there are non-misleading and accurate financial reports. Ownership Management Separation In an instance where the system adopted by a country requires that the directors and officers responsible for making crucial decisions and running the daily affairs of the company to be not the shareholders then there can be a serious negative consequence. For instance, in case the entire shareholders vote by proxy and no shareholder has a controlling interest in the corporation then it is the directors and the officers who do not own any shares who control the interest of the organization. It is a potential conflict of interest in case there is an attempt to separate management and ownership of the company. For example, a case whereby the directors or even the chief executive officer is paid an abnormally high amount of money that drives the company to a major financial distress such as bankruptcy33. Misleading Financial Reports At times the financial managers manipulate the financial reports to woe the company’s investors. That is the top management team pass a resolution to sell the parent company’s shares to a subsidiary company with an aim of trying of trying to maximize the revenues of the parent company. It is also true that a company can present a report with some erroneous and false information, which cannot be easily detected. This causes the company to decline in its performance, growth and processes. Conclusion Various scholars postulate that there is a clear relationship between corporate governance and management accountability. Though, all these different structures adopted by various corporate across countries are geared towards one main aim, which is to achieve a more efficient, transparent and managerial accountability that in this case focuses on the success of the corporation. Therefore, it is clear that the main concern of the corporate structure and governance arrangement is about accountability, transparency and prosperity of the organization. The managerial accountability is common to many organizations since they are geared toward quality product and service delivery. Importantly, it is an ideal method of administration and management in the corporate world. Therefore, it is clear that corporate structure and governance should always be maintained for the success of the organizations. It is advisable for other forms of administration to borrow from corporate governance. Moreover, it is apparent that the corporate governance and structural arrangement might vary from one country to another. The corporate governance has both its merits and drawbacks. Importantly, it is for a noble course to achieve management accountability and a company’s prosperity. In fact, the corporate structure and governance arrangement are very fundamental not only to the company, but also the entire economy. References Arcot Sridhar, Bruno Valentina and Antoine Faure-Grimaud, "Corporate Governance in the U.K”. Is the comply-or-explain working? (London, December 2005). Becht Marco, Patrick Bolton and Ailsa Röell, "Corporate Governance and Control" (University of Oxford, October 2002). Bowen and William, 1998 and 2004, The Board Book: An Insiders Guide for Directors and Trustees (New York and London, W.W. Norton & Company, 2004). Brickley James A., William S. Klug and Jerold L. Zimmerman, Managerial Economics & Organizational Architecture (Oxford Legal Studies Research paper, 2002). 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