Successful Leadership: Corporate Governance Principles and Recommendations - Assignment Example

Corporate Governance & Ethics Question a) Ethics could be defined to be the norms of human behavior with regard to specific of conduct during interaction with other living beings, or the rules of conduct with regard to a sect or group of people. Business ethics could be the norms of human conduct with regard to business environment, what business people should do or refrain from doing in the settings of business. It also examines the morality and ethical values of business decisions and problems and how they could be solved in the business environment. (b) Coming to the second part of the question, the need to have business ethics, in the case of companies, where only people with sound ethics are employed, it is necessary to differentiate between theoretical and practical aspects of ethics. While employees may have theoretical knowledge about ethics, its application in practical situations could only be determined by business ethics. Question 2: (a) An ethical issue is an issue that arises out of the performance, or non-performance of an act that is underpinned by ethical considerations. For instance, the taking of bribes by a public servant could be said to be a major ethical issue. A real life example would be the case of a Fulton county Georgian erosion control inspector, DM, 57, who pleaded guilty in Federal District Court for soliciting and receiving cash bribes from contractor whose work this inspector was checking for the county. 1 (b) Coming next to an ethical dilemma, it could be seen that an ethical dilemma would arise when the protagonist has to exercise a choice between two or more equally challenging alternatives. An example of ethical dilemma in business is when a dishonest, independent auditor of the company threatens to reveal secret documents to the public, unless he is paid a large sum of money. In such a case, the management has only two options, either to pay up, or face the consequences brought about by auditor. Going to the police, or informing investigating authorities would compromise the trade secrets of the company, which could cause harm in the long run. Question 3: (a) The shareholders of the company are the people who have invested funds in the business, whereas stakeholders are people to whom the company may be in debt, namely, creditors, bankers, employees, internal revenue services, etc. When seen from a stakeholders’ perspective, top employees are induced to accept employment offered not only in terms of the salary scales or perquisites, but also in terms of the ethical character of the employers. Thus, it is quite possible that the company’s ethical status is a major consideration for potential employees to accept or refrain from accepting employment opportunities from potential employers. From the point of view of shareholders, the main aspects would be the safety, yield and returns on their investments and the fact that their investments in the company would progress due to good corporate governance of the company. (b) For shareholders, the return on investments (ROI) factor is the major corporate governance issue, whereas for stakeholders, the protection of their debts and interest, as applicable are important factors. When considering social responsibility, it is seen that the company needs to conserve funds, and address ROI and asset protection issues that may infringe social considerations in terms of non-business payments. Shareholders do not invest, nor approve non-business payments, since this may affect bottom line and their ultimate returns. Similarly, stakeholders are aware that erosion of assets through social obligations may be difficult to recover. Moreover, this may also impact upon other factors, including debt repayment capability of company in future years. Question 4: Definition of “disclosure” (a)From a business viewpoint, disclosure could be said to be the process by which each party identifies to the Court, the details of evidences which need to be revealed before a competent Court. (b) Similarly corporate governance (CG) could be said to be the system by which business Corporations are directed and fostered. The main function of CG is to delineate the rights and responsibilities among different players such as managers, shareholders, stakeholders, and the various norms that control corporate affairs. “In the broadest sense, which is increasingly widespread today, corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals.” 2 (c) The directors of the company are responsible for taking correct decisions and stewarding the company along the path of high profitability and growth for the maximum returns to the shareholders and protecting the rights and privileges of stakeholders. The appropriate disclosures of the duties and obligations of directors need to be fully and coherently explained to the various interest groups through their Annual Reports, etc. Thus improved disclosures of all facets of the company’s operations help good governance in terms of full and fair disclosures of all activities of the company. Question 5 (a) Definition of “ethical culture” and “leadership” Ethical culture seeks to develop and nurture relationships in order to bring forth the best in ourselves and in others, irrespective of religious beliefs. It seeks to provide “inspiration and guidance for moral living.” 3 Further, by acknowledging individualistic patterns among people and its bearing on one another, ethical culture seeks to reaffirm membership as a complete whole, that we reinforce the attributes of positive moral values to every individual. “Leadership is a process by which a person influences others to accomplish an objective and directs the organization in a way that makes it more cohesive and coherent. Leaders carry out this process by applying their leadership attributes, such as beliefs, values, ethics, character, knowledge, and skills” 4 (b) Next, coming to the fact as to how leadership affects the ethical culture of organizations, it could be said that the effects of leadership permeates all segments of organizational culture. Organizational climate is straightly related to the leadership styles portrayed by the leader. This is based upon the perceived skills, actions, values and attributes, as well as the main beliefs of leaders. This is compared to the activities that have ethical connotations that underpin ethical behavior. The conduct of the leader vis-à-vis the prevalent ethical norms is the one most important aspect that affects the climate. 5 Thus, it could be rightly said that ethical conduct and right behavior is important in all facets of business, including the role of the leader who is responsible for the performance of enterprises. CQ 1: Assessment of ASX Corporate governance principles and recommendations against the six recommendations from the Cadbury Report and UK Combined code. 1. Separating the role of the CEO and chairman of the board 2. Establishing a formal process via the nomination committee made up of independent (non-executive) directors 3. Having a majority of board members as independent directors 4. The audit committee should exclusively comprise independent directors 5. There should be a formal, rigorous, and transparent process to select new board members 6. The audit committee should be responsible for monitoring the level of independence of the external auditors as well as the effectiveness of the internal audit It is seen that as far as the above six recommendations from the Cadbury Report are concerned, it delves mainly on the autonomy and independence of directors and auditors of the companies, in terms of their obligations and responsibilities to the company where they hold directorships or are retained as auditors. Taking the first recommendation, that is, separating the role of chairman and CEO, the measure is sought to ward off a potential use of the Chairman in the powers that vest with the Chief Executive Officer (CEO) in the day-to-day administration of the company. If both the roles are combined, it is quite likely that ambitious CEO Chairmen would use their powers to veto board decisions or most likely enforce their own decisions on the board of directors of companies. By segregating their roles what is desired is that the role and position of chairman stands independent of that of the CEO. This aspect could also be seen in the light of the Australian Securities Exchange (ASX) Recommendations on laying robust grounds for management and supervision. (Principle 1 of AXN). 6 Coming to the second recommendation, it is seen that non-executive directors or part time directors are also appointed and they hold office through nomination, or selection and they are not elected. It could also be seen in terms of the fact that their nomination is through a formal process, or procedure that needs to be adhered to, from time to time. Thus, what is more important is that the role and responsibilities of non-executive directors (NED) are formalized and channelized along desired lines. Although non-executive directors are not whole time directors and may not carry executive powers, nevertheless they are in a position to have a voice in the administration of companies. By ensuring a formal nomination through correct and consistent procedures, it will help to avoid issues at later stages. The ASX Principle 2 speaks about the fact of the composition of the Board of Directors to add value to the company’s operation and business dealings and this is what is common in both the Cadbury Report and also seen emphatically in the Principle 2 of the ASX. 7 Coming to the third recommendation, it is seen that majority of the board of directors are independent directors. These directors function autonomously and act without fear or favor. In case these directors are dependent on Board of directors of companies, it is possible that their votes and powers could be manipulated by vested interests; by trying to ensure that they are independent, the notion of free and fair elements in the constitution of Board of Directors, especially public limited companies, is upheld and the independent directors would take into consideration the common good of the shareholders of the company, and not the vested interests of certain directors, who hold vested interests, during the course of their directorships. Principle 3 of the ASX speaks about the need to promote ethical and responsible decision making which is also imbued in the third recommendation of the Cadbury Report and the UK Combined code. 8 Coming to the fourth recommendation, it is seen that audit is a major function of corporate, and through it, a lot about the financial health and outlook of the company could be gauged. It is also possible that vested interests could vitiate the audit processes and the final report through exercise of undue influence or coercion, in order to promote their vested interests, or to subvert crimes committed by them. Principle 4 of ASX speaks of the need to safeguard integrity of financial reporting, which could be achieved through the use of independent directors. 9 Through the use of independent directors in the audit panel, it is possible to ensure the highest standards of integrity, autonomy and correct rendering of accounting and financial functions of the company and adherence to relevant statutes relating to corporate governance, including disclosures. The aspect of true and fair view of the financial position of the business and lack of errors, frauds, misfeasance in presentation of published accounts could also be done away with, to a very large extent. It is also possible that independent directors would carry out their audit tasks without fear or favor and with maximum degree of autonomy and independent outlook which is intrinsic for audit works. Principle 5 and 6 delineate the need for making timely and balanced disclosures in Annual report and also the need to protect the rights of shareholders which is axiomatic to the Cadbury report and UK combined code. 10 Coming to the fifth recommendation, it is seen that the directors are the main organs of the business and the real agents with whom outsiders deal in matters connected with the company. Their status being powerful and influential, it is possible that in some cases, the highest degree of integrity and performance may not be forthcoming, which may reflect in the working of the company. Misfeasance on the part of directors could be costly to companies. In order to avoid such situations, it is seen that the procedure of appointing directors be rigorous and it is ensured that only the best persons are at the helm of affairs in companies. They would not only ensure strong corporate governance, but also ensure transparency, ethical values and disclosures to shareholders, etc. When this is viewed in the light of Principle 7 of the ASX Recommendations, it is seen that great deal of emphasis is laid on identifying and controlling risks.11 Finally, the sixth commendation ensures that powers vested in the audit committee ensures that strong controls over the external auditors are executed, in order to ensure that they do not exceed their jurisdiction and also to ensure that external auditors perform in the way they ought to; again, it is also to be ensured that the internal audit mechanism functions in a way that is laid down by the audit committee and that the internal and external audit systems are in total harmony and understanding with each other. The internal audit committee acts as a bridge between the external audit and the internal audit controls and all three aspects need to be focused on the major aspects of financial accounting and rendering true and fair views, etc. The Eighth Principle of the ASX recommendations also lays down the methods by which remuneration could be fair and responsible thus ensuring strong control mechanism over working of the companies. 12 CQ 2: It is seen that the stakeholder theory best explains the approach to corporate governance adopted in the ASX principles. This is because it is seen that the principles 1 to 8 are mainly concentrating on the ways and means by which the Boards of Directors of companies need to function and also in terms of how reporting and disclosure elements in annual accounting need to be carried out. It seeks to enforce the rights to protection to shareholders, identity and control risks and also remunerate the staff and officers fairly and reasonably. The ASX aims at providing good governance and ensuring that the rights of stakeholders, shareholders and stockholders are protected and growth oriented as far as possible. However, it is seen that these recommendations are not mandatory and cannot prevent corporate mismanagement or inadequate decision making among top management executives. They are fundamentally addressed to the need to provide a reference point for corporate about the need to adhere to sound corporate governance and administrative practices.13 Thus, it could be seen that there are many areas of commonality between the Cadbury Report and the Australian Stock Exchange (ASX) recommendations in terms of protecting shareholders’ interests, fair compensation, and above all the watch dog elements that need to underpin corporate functioning in terms of asset preservation and the need to follow pre-determined norms and conventions as laid down by independent audit committees and independent directors whose main objectives would be the transparency, disclosure and free and fair presentation of annual accounts and day to day management of the company. Working in a disciplined environment is needed in the context of fulfilling corporate aims and objectives and also in terms of ensuring that the interests of stakeholders and shareholders are protected by management team comprising executive and non-executive directors, audit committees and others. This is best envisaged in the stakeholder theory of corporate governance. Bibliography “Concepts of leadership: The meaning of a message is the challenge which it produces in the image – Kenneth Boulding in the image Knowledge in life and society.” 2008. http://www.skagitwatershed.org/~donclark/leader/leadcon.html (accessed July 25, 2009). “Concepts of leadership.” 2008. http://www.skagitwatershed.org/~donclark/leader/leadcon.html (accessed July 25, 2009). “Corporate Governance Principles and Recommendations.” 2007. 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