Corporate Governance Coursework - Essay Example

Corporate Governance work The common view of the public corporation is that of an organization runby top managers, and monitored by a board of directors on behalf of public shareholders. The separation of decision management (the CEO) from decision control (the board) and from risk-bearing constituents (public shareholders) is thought of as a reasonable way to structure firms, and so long as decisions are made in the interests of the shareholders, efficiency is maximized.” [Acharya, Myers and Rajan, NY Stern School of Business] Identify and explain clearly the theoretical arguments and empirical evidence in favour of and against this view, using appropriate examples to illustrate both sides of the argument. Introduction In larger organizations like a public corporation, the management and monitoring of the daily activities rests with the top managers and the board of directors. This creates a situation where, the CEOs are tasked with decision management while the board of directors charged with decision control on behalf of a public corporation’s shareholders. This means that the public shareholders do not engage directly in running the affairs of their Company. As such, effective corporate governance is necessary to ensure that those charged with running a public corporation engage in good practices (Shleifer & Robert 1997, p.743). Most public corporations tend to experience an incentive problem. Accordingly, those tasked with the management of the public corporation are not the owners (shareholders) or stakeholders who have an interest in the success of a public corporation. For example, the top managers (CEO) are a paid professional and may have their self-interests. As such, solving the problem where senior managers make decisions that are guided by personal interests and not the shareholders, require a system of checks and balances (Shleifer & Robert 1997, p.751). The governance systems in an organization may include the board of directors, whose purpose involves, for instance, hiring of the management. In addition, hiring the services of an external auditor is also necessary to check regularly on the accuracy of financial statements in an organization. Further, other constituents, for example, the media and regulators have an important role to play in terms of enhancing corporate governance in larger organizations that serves the risk bearing constituents (Harris & Ravis 2010, p.4118). Where the CEO and the board of directors work on behalf of the public shareholders, good corporate governance is critical. In this sense, the institutional systems and measures of enhancing accountability and proper ethics are necessary for efficient management of large organizations (Harris & Ravis 2010, p.4121). This paper explores whether the separation of decision management (CEO) from decision control (board of directors) is a reasonable way to structure public corporations to serve the interest of the shareholders and maximize efficiency. Example of how separation of decision management and decision control improves efficiency in a public corporation When a company is publicly traded, shares are sold to the public and, as a result, they also become owners of the company. However, they are not directly involved in managing the daily affairs of the company. This means that the shareholders need a representative to protect their interest in the company. When a company is publicly traded, it is not to say that operations are halted. All the functions continue as usual with the only difference being the change of ownership (Siciliano 2005, p. 8). On this note, the shareholders concerns regard how their company can be managed efficiently. Through the representatives that shareholders have selected to form part of the board members, their interests can be protected in a company through good governance (Siciliano 2005, p. 9). Among the functions of board members involves hiring the personnel and including, the CEO. As such, the board members on behalf of other shareholders have the mandate to hire skilled and experienced personnel to carry out the day-to-day running of the company. Consequently, the separation of decision management and decision control improves efficiency in that, the CEO is left to undertake the daily running of the company and the board members are left with the responsibility of monitoring what is done in the company. In addition, this separation provides a check and balance on how a company is managed because; the board of directors plays a role in ensuring good practices are embraced by the top managers employed by the company (Maharaj 2009, p.108). The importance of separating decision management from decision control Since the majority of shareholders are not involved in the direct running of corporations that they have shares, they need a representative. As such, board members represent shareholder’s interests in publicly traded organization. The role of the board of directors of an organization is important as the representatives of the shareholders because, they are charged with hiring the CEO. In addition, their mandate also involves assessing the overall direction and the organization’s strategy. On the other hand, the CEO’s responsibility includes overseeing the daily operations of an organization. In such a structure, maximizing efficiency is possible due to the separation of roles (Hermalin & Michael 1991, p.104). The management of a public corporation is complex and requires the division of tasks to promote efficient management. For instance, while the CEO or manager is responsible for decision management (initiation and implementation), the board of directors is tasked with decision control (ratification and monitoring). As such, this separation between the board of directors and the CEO ensures that there are checks and balances to enhance corporate governance in an organization (Hermalin & Michael 1991, p.109). The CEO or manager is a paid professional whose responsibilities require monitoring to ensure that the work they do is purely for the interest of the shareholders and not for personal reasons. Cases have emerged where; CEOs with more autonomy have used such freedom to serve their personal interest at the expense of the organization’s shareholders. Because the board of directors has the mandate to hire personnel, this separation provides the board with an opportunity to hire an independent regulator. For instance, efficient management of an organization’s finances is important in terms of ensuring an organization remains stable and to protect shareholder’s interests (Deli & Gillan 2000, p.18). In this case, the services of an independent auditor in an organization ensure that the financial statements submitted to the board of directors by the CEO are accurate and reflect on the actual performance of the organization. As representatives of the shareholders, the board of directors performs an important function of providing crucial information to the shareholders regarding the progress of the organization. Such information is necessary because, it helps to improve trust in the management of an organization, and in turn, improve investment by the major stakeholders (Deli & Gillan 2000, p.18). Where the power of running an organization is vested only on an individual or a single body (board of directors), there are risks that an organization can be mismanagement. For instance, the technical part of running an organization should be left to professionals with specialization in different fields while the board of directors should engage in approving and monitoring the work done by the hired professionals. Having different roles for board of directors and the CEO also provides the board charged with overseeing the affairs in an organization the chance to carry out their fiduciary duty (Klein 2002, p.378). The board members are also shareholders and it is necessary that they take charge in terms of safeguarding an organization’s assets. Because a public corporation has many shareholders, not everyone can be involved in managing their interests in an organization. As such, selecting a few representatives to form part of the board members helps to improve efficiency of operations in a public corporation (Klein 2002, p.379). The shortfall of separating decision management and decision control in an organization While it is the tradition for public corporations to have the CEO and board of directors as the two organs of authority, there are challenges in terms of coordinating functions of a corporation. The challenges in most cases often arise because of conflict of interest between the CEO and the board of directors or the board members themselves (Joseph, Ocasio, & McDonnell 2014, p.1841). On the same note, the issues that seem to create problems with this structure include matters related to integrity, transparency, gender balance and accountability. In most public corporations, the CEO is given more authority in running the affairs of a company with minimal supervision from the board. In the event that a CEO is interested in pursuing personal interest, this can be detrimental to the shareholders and other stakeholders in an organization. Where the top managers lack integrity, they can use their position to exploit the organization without taking into consideration the interest of other people depending on the organization, for their daily livelihood (Joseph, Ocasio, & McDonnell 2014, p.1843). Similarly, board members also have integrity issues where they can use their position to advance their interests. For instance, board members can take sides in appointing a CEO that they believe will serve their personal interest and not the interest of shareholders, in general. Gender balance is another issue that is common in a structure that separates decision management and decision control. For instance, there is still a belief in the corporate world that women lack leadership abilities. As such, their contributions on a corporate board dominated by men are often ignored or taken lightly. This has created a situation where women are reluctant to take a leadership position in organizations (Holst & Kirsch 2000, p. 38). In a corporate board dominated by one gender, biases may exist in the decision-making process. For example, the hiring of top managers in an organization by the board of directors may lack impartiality due to lack of another opinion from a different gender on the way forward. In the end, it is the shareholders who normally suffer because of poor decisions by board of directors with a vested interest in how an organization should be managed (Barnett 2009, p. 396). On the other hand, the pressure from shareholder can also force the board of directors to make a rushed decision that can affect negatively on the management of an organization. In some cases, shareholders are often restless in terms of demanding for instant changes in how an organization is managed. This creates a situation where the top managers are hired and fired on a frequent basis. As a result, the top managers are denied adequate time to implement their strategy in an organization, and this explains the stable downturn in some organizations (Marquis & Lee 2003, p. 486). In addition, wrangles between the board and shareholders can scare prospective investors and other key stakeholders. There are also situations when the board members are not in good terms. As a result of such wrangles, important decisions are left pending, and this derails the daily operations of an organization (Marquis & Lee 2003, p.487). Under this type of structure, issues of accountability and transparency tend to be a problem when sound ethics is not emphasized. For instance, the CEO can engage in malpractices such as colluding with the internal auditors to provide inaccurate financial information to the board of directors. This is a common practice, particularly in organizations that do not seek the services of an independent regulator (Marquis & Lee 2003, p. 491). On another note, the board of directors may be complacent with the manner in which they oversee the activities of an organization. As a result, they may lack substantial information regarding how an organization is run. Consequently, the shareholders are left in the dark regarding how their interests are being managed in a publicly traded corporation. In essence, where sound ethics lacks in organizations that embrace the separation of decision management and decision control, the result is often the collapse of an organization with the most affected, being the shareholders (Cohan 2002, p. 277). Example of the shortfall that can be associated with the separation of decision management and decision control The collapse of Enron can be associated with a structure that separates decision management and decision control. In the case of the Enron collapse, conflict of interest existed between the board of directors and the management. This resulted in the breakdown of proper governance in terms of the board having oversight on the activities taking place in the Company. In essence, the board of directors of Enron failed in their fiduciary duty of monitoring the management and ensuring the policies and procedures that regulate partnerships are followed (Cohan 2002, p. 281). Even though the management informed the board of directors, it was monitoring the transactions taking place in the Company, the board never went far on its monitoring duty. In a structure that separates decision management and decision control, it is the practice of corporate governance that can help to maximize efficiency (Cohan 2002, p. 284). Conclusion In the corporate world, the role played by the board of directors and the management is necessary for enhancing the efficiency of an organization. However, the success of public corporations depends on sound ethics embraced by the board of directors and the management. In this case, a structure separating decision management and decision control requires emphasis on accountability, transparency, trust and reliability in serving the interest of the shareholders. Conversely, in an arrangement where the management is given more freedom to run the affairs of public corporations, there is need for check and balances to ensure that the management does not overstep their mandate to advance personal interests. 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