Transparency in Corporate Governance - Essay Example

? Transparency in Corporate Governance Corporate governance is a term that gets used to describe the system through which a company gets controlled and directed. Transparency in corporate governance, hence, is the communication, openness, and accountability in the system through which a company gets controlled and directed. This ensures that the relationship that exists between a company’s board, its management, its shareholders and other stakeholders is a cordial relationship that would last. It also ensures there is no conflict of interest between the parties. This gets achieved through laws and policies et cetera that govern the company’s operations. Transparency in a company is vital because it increases the confidence in the management of the company by its shareholders and other stakeholders. This consequently leads to the shareholders willing to invest more in the company which in turn, eventually, reduces the cost of capital. Being transparent also helps a company’s management to fight off corruption and fraudulent activities that would otherwise be rife and detrimental (Hermalin &Weisch, 2007). With all these factors put together, the company’s productivity, and eventually, its productive capacity increases. For a long time now, corporate governance has undergone different overhauls so as to increase the level of transparency. This is through various means such as an increased control on how financial reporting gets done and who exactly does it. These control mechanisms ensure that what gets measured, accepted and reported to the public is true and fair. There are also various trends currently in the market that give the procedure on how a company should be audited. Auditing is when an external entity, separate from the company, goes through the company’s reports and records. It gives its assessment and opinion of fairness and truthfulness of the company reports to the public (Shleifer, 1996). There are also other measures that ensure transparency gets achieved. These measures include laws, policies, Companies Act, Parliamentary Acts (Hermalin &Weisch, 2007). Reporting and adhering to these policies, laws and acts, however, comes at a price. Governments around the world exempt the small companies from fully complying with these stringent measures. It is mandatory, however, for these small companies to prepare their own reports as a performance measuring tool (Hermalin &Weisch, 2007). In the McBride scenario, the CEO of the McBride Financial Services receives an email from a recently added investor. The Beltway Investment is the investor that has invested in McBrides Company. It is in the email sent by their principal in who reiterates the need for transparency and use of best practices. He tells the CEO to run his company as would see fit but in turn, the investment firm would need to be shown the reports of the company’s progress. This is a way of ensuring transparency in corporate governance gets achieved by equitable treatment and rights of the shareholders getting observed. The management should do this by openly and effectively communicating the information to the stakeholders. They should also encourage them to participate in the company’s general meetings, so as to give their thoughts and opinions (Solomon, 2010). In the scenario, one also sees the management chain of command. The CEO, Hugh McBride makes the crucial decisions such as who will sit in the company’s board of directors and his subordinates implement these decisions. They deal with a wide range of matters from public relations to issues to do with governance of the company (Solomon, 2010). We also see that when the stakeholders, in this case Beltway Investments, know of their rights and practice these rights keeping the management on toes. This gets clearly seen when Doug, the Beltway Investment’s principal sends the CEO the email. The CEO, in the following days, communicates to his subordinate to get an accounting firm to audit their reports. The urgency becomes also portrayed when he says that he needs this done fast. Governance gets also brought about in the McBride scenario. Here, we clearly see that the company has quarterly and annual reporting processes which they update their stakeholders with. This shows the progress of the company in every three months and after a whole year. Disclosure of this information also needs to be timely and balanced ensuring all investors and stakeholders have clear, correct and factual information (Hermalin &Weisch, 2007). This gives the stakeholders time to review the details and ask questions on the issues that may crop up and also offer suggestions to these issues. It also makes the stakeholders be on the same page with the company’s position. The other issue that comes out in the McBrides scenario is that which uses incentive plans. This is a formal plan that becomes used to award and encourage a certain group of people in a defined duration of time. A company gives this to its employees or to other stakeholders. This is usually in an effort to increase the targeted stakeholder’s loyalty to the company. Transparency also helps in disclosure of information the management used to make the business decisions. It also reduces the self interest in the management. This gives one the ability to monitor a company’s control structures which are usually subject to various checks and balances. In the financial reporting, transparency is the act that relates to the financial information of the organization that gets provided to the public and investors. When Beltway Investments decided to invest in McBrides Financial Services Inc, the company, McBrides Financial Services Inc, had no internal controls, procedures or policies that got used to regulate corporate compliance (Organization for Economic Co-operation and Development, 2010). The CEO has, however, through an email sent to his subordinate, ensured that corporate governance gets upheld in all the procedures undertaken by his company. This gets seen when he ensures that Sarbanes-Oxley Act of 2002 gets upheld to the letter. In the McBrides scenario, we see self-interest manifest itself in various forms. First, the CEO also tries wooing directors of his choice to his company. It is wrong because the board is a vital part of the organization directors acts as a watch dog to the company’s management (Millar, 2007). It needs people who will not only do a decent job but qualified ones. This is because part of the board’s responsibility is to challenge the management’s performance and to do this one does need relevant skills and understanding. With this board, we see the CEO manipulating a weak board that will not act as a watch dog but follow whatever he wants (Hoskisson, Hitt & Ireland, 2008). The value of truthfulness and integrity of an organization starts from the top organ. Self-interests of management often, than not, restricts transparency in a company through unethical practices in decision making et cetera. Such occurrences are common in society. They become kept in check by independent oversight committees. Improving the procedures and processes in corporate governance that provides the basis to strengthen a board’s motivation and ability to monitor and check the management’s performance (Hermalin &Weisch, 2007). It gets also seen that McBride does not have knowledge in accounting, internal controls and financial reporting. His company gets also seen not to comply with the United States Security Exchange Commission (SEC) regulations. He is unwilling to learn about financial disclosure, internal control mechanisms and compliance to these laws and policies. This shows irrational behavior on his part because of his refusal to assimilate information and to get used to new changes authorized by the regulations and applicable laws. Corporate self-regulations are more effective in corporate governance than self-interests. They help avoid heavy penalties by the SEC and prevent damaging of a company’s reputation. The risk of compliance and financial issues are also drastically reduced through transparency and openness in the company (Hermalin &Weisch, 2007). This also paves way for the evaluation of the company’s management’s performance. It is only through a sound financial risk management that a company can evaluate its business strategies. Financial auditing by an external body demonstrates honesty and fairness resulting in investor trust and confidence. This is because responsibility and accountability gets clearly demonstrated (Hoskisson, Hitt & Ireland, 2008). In conclusion, one sees that McBrides Financial Services Inc needs to put in place policies that pay attention to its stake holders wants other than towards the organizational growth. The CEO wants control over every aspect of his company. Also, McBrides Financial Services Inc requires a board that is independent, one that will cancel out the CEO’s excessive powers (Hermalin &Weisch, 2007). This will help the company to avoid heavy penalties, as well as, criminal prosecution of its directors. It is only through this that the company will achieve its desired goals and objectives. References Organization for Economic Co-operation and Development. (2010). Corporate Governance Accountability and Transparency: A Guide for State ownership. OECD. Hermalin, B. E., & Weisbach, M. S. (2007). Transparency and Corporate Governance. New York: Charles & henry Publishers. Hoskisson, K. E., Hitt, P. A., & Ireland, S. D. (2008). Competing for Advantage. New York: ABC-CLIO Incorporated. Millar, c., Eldomiaty, T., Ju, C. C., & Hilton, B. (2007, November 23). Corporate governance and institutional transparency in emerging markets. Retrieved May 13, 2012, from Journal of Business Ethics: http://www.springerlink.com/content/p32443xn6128t876/ Shleifer, A. (1996). A Survey of Corporate Governance. New York: National Bureau of Economic Research. Solomon, J. (2010). Corporate Governance and Accountability. New York: McGraw-Hill Companies. Read More