Corporate Governance Issues - Assignment Example

Corporate Governance and Section # of Question The board of directors is a key corporate governance mechanism. Discuss the board structures and characteristics which are generally believed to contribute to effective corporate governance. Tricker (2009) suggests that the BoD (Board of Directors) definitely is a key mechanism to deal with corporate governance issue in organizations across the world. Their major responsibility is to provide endorsement for the organizational strategy and development of the direction policy, appointment, supervision and remuneration of the senior officers, and ultimately ensuring the accountability of the organization towards its stake and share holders. Researches mainly by Mallin (2010) lead to the conclusion that having an independent and autonomous is profitable but certain interest of the BoD should be present to ensure their interest in the firm’s progress. In the similar regard, there are various characteristics regarding the structure and composition of the board that significantly tends to influence its productivity and efficiency, and some would be discussed within this response. Researches also by Clarke(2007) reveal that the size of the board tends to have a significant impact on the efficacy of the board itself, as this implies bigger challenges for each of the directors, intimating them to be more actively involved in the meetings and activities of the business, subsequently, being involved in better value addition for their job responsibility. A smaller board also implies that the junior executives get better opportunities to have interaction with the board, and contribute their understanding for the strategies, tactics and ideas. Another critical factor that influences, as mentioned by Clarke (2004), the effectiveness are the weightage of the executive and non executive directors in the BoD. Researches reveal that having an appropriate mix of both gives an optimal outcome rather than one outweighing the other. This plan of action tends to keep a check and balance kind of a situation when it comes to the independence of the board and their accountability towards their required job description. Finally, a very critical variable is the decision of having the same or different CEO and Chairman – each approach having its distinct advantages and otherwise. There are legal obligations in certain countries against this rule but on a general note, there is almost no harm in taking this approach i.e. of having the same person being CEO and the Chairman. There are certain key elements that Chew (2005) suggests for the composition of an effective board. Firstly, the leadership should be objective and independent, accountable to the owners (shareholders) of the business. Secondly, it is also to be proposed that there should be an appropriately and openly defined system of internal controls that are visible and auditable to the owners of the organization. Other than this, the board should also develop appraisal system for the senior officials of the management i.e. the BoD so that their performance is also measured and brought under scrutiny. Finally, each time a new director is embedded into the team, they should be given an appropriate inductee introduction. Question 2. Should corporate governance issues be dealt with through the establishment of voluntary codes or by legislation? In accordance with Frederick (2006), Corporate Governance is similar to developing rules and then making appropriate checks and balances to ensure that the developed rules are being followed up by the concerned organizations. With reference to the similar context, it has been argued many a time that should the corporate governance issue by tamed through codes of conducts and regulations or with the use of regulations. It is a dilemma where no one answers is all correct. Each of the two approaches has their advantages. First the response shall discuss the implications if codes are established. The establishment of codes presents a one-time boundary line with limited exceptions that need to be altered with the passage of time, as situations arise. In accordance with Colley (2004), the major advantage of this approach is the consistency in decision making for the corporate governing body as the acts and violations become comparable on grounds of what corporate governance suggests the act should be. Secondly, rules become well defined for the followers of the same i.e. the organizations. The major disadvantage of this approach is that when rules are pre-defined, there tend to be creation of loopholes to be maximized to an extent whereby advantages can be obtained from them, which are not the legalized view point of the issue. Now, the discussion would be about corporate governance through legislation. According to Macey (2008), the utmost advantage of development through legislation is the authenticity associated with the application of the corporate governance – its more like being compulsory than optional, as once presented through the law, the application becomes very definite. At the same time, the disadvantage is a major one – the exceptions in the law are limited and very well defined thus any major variations would require redefining of the law. Establishment through legislation would have pre-defined values and norms that need to be implemented in an off the shelve kind of a situation, and this would allow a pathway for organizations to have deployed through their BoD or the relevant concerned body. Over all, it seems from the benefits and issues that the development of corporate governance through the means of voluntary codes should be appreciated and acknowledged because through that mechanism, the developed codes tend to have input from various organizations in the business industry and subsequently, the rules for respective business setups can be developed accordingly. In the UK, corporate governance is established by means of codes; the classical examples of which include, but are not restricted to Cadbury Report of 1992, Rutteman Report of 1994, Greenbury Report of 1995, Higgs Report of 2003, and the Turnbull Report of 1999. Such codes are developed and practiced as norms amongst the organizations in a business circle. On the contrary, consider the example of the US where the Sarbanes Oxley Act was defined as a federal state law in July 2002, setting enhanced benchmarks for the US business sector. This is a classical example of legislation based corporate governance regulation being deployed. Briefly, this act is based on the practices and flaws learnt from various fraud cases in the history such as the Enron case, WorldCom scam, Tyco International and others. Question 3. Debates about improving the effectiveness of UK corporate governance currently focus on improving engagement between shareholders and boards. Discuss theoretical and practical advantages and disadvantages of shareholder engagement. Nofsinger (2009) suggests that UK has been under strict surveillance with respect to the corporate governance issues particularly with the recent rising scandals, and steps have been taken up to develop the regulations to ensure no or least violation in the future. At present, the debate and argument is about the establishment of the shareholder agreement between the shareholders and the board, and this section is devoted to shedding light about the same. In accordance with Minow (2008), shareholders engagement is probably one of the finest areas in corporate governance. Fundamentally, it is all about involving the shareholders in the major decision making of the organization. This has its advantages and disadvantages to be taken care of. Firstly, the presence of shareholder engagement brings about enthusiasm and motivation amongst the board as the shareholder intents to make profits depending on his horizon of investment i.e. short or long term, subsequently, if the shareholder is a short term investor, he might opt for a decision that is fruitful in the short run rather than otherwise. Shareholder engagement may also lead to issues within the competitive arena; a competitor may purchase heavy share base of the organization and get this form of engagement only to extract knowledge about the business process. Engagement formation requires the shareholder to think as an owner to the extent of decision making. According to Lipman (2006), institutional shareholders have a significant role to play in the board of an organization. Firstly, institutions are not authorized to invest in all forms of stocks – they have to retain a balance amongst various forms of investments, and within a particular segment of the investment as well. And since institutional shareholders have a higher degree of stake then a casual investor, there has to be the right level of engagement between the board and the shareholder collaboration. Classically, the relationship between the board and the management should be as simple as development may be, and this should be constraint via various means. Engagement becomes very much time consuming and expensive to deploy. In the similar context, three theories have been briefly discussed as below: Agency theory defines how principal and agent works; with reference to the current case, the shareholders/owners of the organization are the principal, while the principals appoint the BoD for conducting business on behalf of them. It becomes critical, therefore, to deal with two issues. Firstly is the agency problem i.e. the conflict of interest, while the second one is the reconciliation of the risk tolerance levels. In shareholder engagements, these issues need to be taken care of on a serious level. Stewardship theory is based on an assumption that managers and the management would always work in accordance with the responsiveness towards the work for which they have been hired by the organization and its ownership. In simpler terms, it is more bent towards the assumption that the appointed management would work towards the interest of the owners of the organization i.e. the shareholders. Stakeholder theory is more concerned with the organizational management and business ethics side of the operations whereby the theory defines mechanisms by which the management would defined stakeholder groups and devise mechanisms by means of which the interest groups can appropriately be taken care of. References Bob Tricker (2009) Corporate Governance: Principles, Policies and Practices. Oxford University Press Christine Mallin (2010) Corporate Governance. Oxford University Press Clarke, T., (2007) International Corporate Governance: A Comparative Approach. London: Routledge Clarke,T., (2004) Theories of Corporate Governance. London : Routledge Chew, D and Gillan, S. (2005) Corporate Governance at the Crossroads Boston, Mass. : McGraw-Hill Frederick D Lipman, L Keith Lipman (2006) Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations. Wiley Stephen Bainbridge (2008) The New Corporate Governance in Theory and Practice. Oxford University Press John Colley, Wallace Stettinius, Jacqueline Doyle, George Logan (2004) What Is Corporate Governance? McGraw-Hill Jonathan R Macey (2008) Corporate Governance: Promises Kept, Promises Broken. Princeton University Press Kenneth Kim, John R Nofsinger (2009) Corporate Governance. Prentice Hall; 3 edition Robert A G Monks, Nell Minow (2008) Corporate Governance. Wiley-Blackwell; 4 edition Tricker, R., (2009) Corporate Governance, Oxford University Press Read More