Corporate Governance, Reporting, and Regulation - Term Paper Example

Corporate governance, reporting and regulation Contents 1 Introduction 2 2 Independent directors 2 3 Role and responsibilities of independent directors 3 4 Impact on organisational performance 4 5 Conclusion 6 6 Reference 8 1 Introduction The performance of the company largely depends upon the strategic decisions and policies of the organisations. The main strategic decisions and the policies regarding the objectives of the company and ways in which they can be implemented are decided by the board of directors. The board comprises of the chair person, executive directors, non executive directors and independent directors. The appointments of independent directors are mainly done from the point of view of better corporate governance and enhancing the independence of the company board. The independent directors are also appointed in order to have some added benefits in terms of additional knowledge and experience which would be useful for achieving better results by the company. There has always been a debate about the relevance of the independent directors in improving the performance of the company. This project is an attempt to identify and analyse the relevance of the independent directors in improving the organisational performance. The paper discusses the extent to which the appointment of independent director can influence the performance of the company and whether the independent director can improve the performance of the company or not. The meaning and the reasons behind the appointment of the independent directors have been studied and discussed in order to have an idea about the independent directors moreover the role and responsibilities of the independent directors have also been analysed to assess the independent director’s scope in improving the organisational performance. 2 Independent directors The executive directors are employed by the company therefore the company has a control over them. The concept of the independent director came from the thought of having someone in the board who would think only for the betterment of the company without being influenced by someone. Thus the decisions taken by such person would be unbiased and free of any personal interest. Hence the independent director would be someone who cannot be controlled by the company or its management and could not interfere in the work of the independent director. Hence an independent is a director who was not an employee of the company or any of the related party of the company in the last five years. The independent director should not be the company’s advisor or should not have any contract of personal service where the company or any of its related members is a party to such contract. The independent director should not be related to any non-profit organisation to which the company provides funds. In the last five years neither the independent director nor any of his family me3mber should be the company’s employee. Neither the independent director’s children nor his immediate family members should be in the management and control of the company (International Finance Corporation, 2002, p.1). Thus the objective of having an independent director of the company’s board is to have a person who would recommend can give unbiased advised to the management which will be based on the betterment of the company only. As per Laura Cha independent directors should be such who would be capable to add value to the organisation by using their industry knowledge and experience. There may be many things which may be avoided by the company are other directors but the independent director can seek answer to those queries (OECD, 2008, p.70). 3 Role and responsibilities of independent directors In the previous segment the meaning and the important criteria of an independent director has been discussed. In this segment the role and the responsibilities of the independent directors have been discussed in order to identify the extent to which the independent director could influence the performance of the company. Independent directors are responsible to combat the weakness of the company. The independent director has responsibilities towards the stakeholders of the company. The independent auditor plays a vital role maintaining the transparency of information and various relevant disclosures. Independent director also plays a major role in stakeholders’ interest protection by enabling fair decision making in matters regarding creditors, suppliers, customers, service providers, employees etc. The independent directors also look over the matters regarding the late payments or payments defaults debenture holders, other depositors, creditors etc. The independent director also reviews the mechanism of whistle blowing. Thus the main role of the independent directors is protecting shareholders’ interests. Apart from these functions the independent directors perform all other board functions like other board of directors but the time spent on these activities are quite less than that of the other executive directors (Gopalakrishnan, 2005, p.863-864). Thus the independent is responsible for the betterment of the company’s stakeholders. Apart from the roles and responsibilities mentioned in this segment, the independent director plays a major role in identifying the most important matters and issues of the company. This means that the independent director has to prioritize the issues faced by the company and has to play a major role in deciding on those issues. The independent director must ensure efficient and smooth decision making so that the issues could be resolved fast. Hence the independent directors not only play a major role in protecting the stakeholders’ interest but also it ensures the better corporate governance which helps the company in the long run (KPMG, 2011, p.1-8). 4 Impact on organisational performance In the previous section the role and the responsibilities of the independent directors have been discussed. From the above discussion it is clear that the major role and the responsibility of the independent director are to protect the stakeholders’ interest in the company. In this segment the impact of having an independent director in the company’s board on the organisational performance have been discussed. This part has been analysed on the basis of various researches. In one of the research which was conducted on the top 100 firms of Australia which were listed in Australian Stock Exchange, it was found that the inclusion of independent directors enhance the quality of corporate governance but it did not performance of the companies. No evidence was found of the influence of the independent directors on the share price of the company or producing better share holders’ return. As per the surveys done in the Unites States no correlation was found between the organisational performance and the independent directors but such correlation was found in the Orient were the companies have independent directors witnessed improved performance. As per the research the main reason behind the non correlation was stated as the independent director’s lack of knowledge of the actual situation as the non executive independent directors devote less time in the organisational activities compared to the executive directors. As per Iwu-Egwuonwu the independent directors have some impact on the performance of the organisation (Iwu-Egwuonwu, 2010, p.194-197). In the research done by Hsu and Li it was found that those companies’ performance and share price improved which were having large number of independent directors in its board (Hsu and Li, 2009, p.107). Many evidences were found regarding the non improvement of the organisational performance on having independent director on the board. These evidences reflected that the independent directors did not add any value to the organisational performance. This result may be because of inefficient performance of the independent director in the organisation or may be the effectiveness of the independent director of the organisational performance depends upon the composition of the board like in the case of Hue and Li who found that the organisations having large number of independent directors in its board performed better (Lawrence and Stapledon, 1999, p.53-54). In some of the studies it was found that there either no or negative correlation between the performance and the independent directors due to the negative correlations between the ‘corporate governance and independent directors’. The main reasons which can be analysed from these results that the inclusion of independent director certainly increases the performance of the corporate governance but the corporate governance is not only depend on the performance of the independent directors but also on the performance of the other factor (Ritchie, 2007, p.9). On the basis of all these researched work one thing can be said that the independent directors do not have a major impact on the organisational performance but to some extent the performance of the of the firm gets affected on having a number of independent directors if the independent directors perform efficiently and if the corporate governance of the firm gets improved. Hence simply having independent directors on the firm’s board would not have any positive impact on the company’s performance. 5 Conclusion The main function of the independent director is to protect the stakeholders’ interest. Hence appointment of an independent director is a part of corporate governance. Good corporate governance to some extent has a positive impact on the company’s performance but it should be kept in mind that the corporate governance includes other things too. Thus having only independent directors would not enhance the quality of the corporate governance, if the other factors of the corporate governance are not fulfilled. The number and efficiency of independent directors also has an impact on the organisational performance. Thus to conclude it can be said that having an independent director would not have any major impact on the firm’s performance if the independent director is not efficient and the other factors affecting the corporate governance are not managed efficiently. 6 Reference Gopalakrishnan, S. (2005). Role & Responsibilities Of Independent Directors. [Pdf]. Available at: http://icai.org/resource_file/10500jan05p861-866.pdf. [Accessed on: December 5, 2011]. Hsu, C. and Li, C. (2009). Stock Price Reaction to Voluntary Announcements of Independent Director Appointments: Effect of Multiple Directorships from Taiwan. [Pdf]. Available at: http://www.eurojournals.com/irjfe_33_07.pdf. [Accessed on: December 5, 2011]. International Finance Corporation. (2002). Indicative Independent Director Definition. [Doc]. Available at: http://www.ifc.org/ifcext/corporategovernance.nsf/AttachmentsByTitle/Independent+Director+Definition.doc/$FILE/Independent+Director+Definition.doc. [Accessed on: December 5, 2011]. Iwu-Egwuonwu, R. C. (2010). Some empirical literature evidence on the effects of independent directors on firm performance. [Pdf]. Available at: http://www.academicjournals.org/jeif/PDF/pdf2010/Sep/Iwu-Egwuonwu.pdf. [Accessed on: December 5, 2011]. KPMG. (2011). Role of Independent Directors Issues and Challenges. [Pdf]. Available at: http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/Role_of_Independent_Directors.pdf. [Accessed on: December 5, 2011]. Lawrence, J. and Stapledon, G. (1999). Do independent directors add value. [Pdf]. Available at: http://cclsr.law.unimelb.edu.au/research-papers/Monograph%20Series/Independent%20Directors%20Report.pdf. [Accessed on: December 5, 2011]. OECD. (2008). Using the OECD Principles of Corporate Governance. [Pdf]. Available at: http://www.oecd.org/dataoecd/20/60/40823806.pdf. [Accessed on: December 5, 2011]. Ritchie, T. (2007). Independent Directors: Magic Bullet or Band-Aid. [Pdf]. Available at: http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1004&context=cgej. [Accessed on: December 5, 2011]. Read More