Corporate Governance Concerning Shareholders - Essay Example

A. Discuss the meaning of the term corporate governance with reference to shareholders and stakeholder interests. All shareholders or stakeholders inorganizations covered by the corporate governance law are mandated to elect responsible and qualified board of directors to manage and direct the affairs of the organization towards their mutual goals. The board of directors shall provide entrepreneurial leadership in the affairs of the organization to ensure that their common interest is protected and their goals satisfied. The board of directors not only have the fiduciary responsibility to manage the organizations affair to the best of their abilities provided that it is within the ambit of business ethics. Every stakeholders or shareholders shall also have the right to examine the organization’s books of account to its satisfaction. Dialogues and consultation between the board of directors and the stakeholders should not be limited to the annual general membership (AGM) meeting. In the interest of the public’s and stakeholder’s rights, the accurate state and fiscal condition of the organization shall be fully disclosed to the stakeholders. The United Kingdom’s Corporate Governance Code’s aims to protect the interest of stakeholders or shareholders of the organization in particular and the public’s interest in general. The Governance Code mandates that controls and risk mitigation processes with the aim of protecting the interest of stakeholders are instituted and maintained by the executive board tasked to manage the affairs of the organization on day to day basis. The executive board are mandated to regularly report incidents and or explain incidents that would appear to be serious breaches in security. B. Explain why over the last two decades, numerous attempts have been made to improve corporate governance in the UK Organizations that operated in multiple jurisdictions have in the past been threatened by scandals or have been embroiled in scandals that affected not only the financial health of the countries where they operate but also the shareholders who are residents of the UK. Foremost of these are financial institutions hold principal offices in the UK or most of its stakeholders are UK residents and the same organizations due to size, operation and influence have threatened the economic health of a country or the region in general if they are not properly managed. Exercising its inherent right to protect the public’s interest, the government has been mandated to ensure that corporate governance is properly implemented in every organization where it has jurisdiction. This is to ensure that any financial mismanagement is detected and mitigated before it can adversely affect the entire organization and the country in general. Corporate governance is a set of controls designed to ensure that all decisions of the executive leadership of an organization are compliant with good governance or if not, the leadership should be able to explain the rationale behind such decisions or directions. The UL Combined Code of Corporate Governance are therefore designed to prevent a national financial crisis that can be rooted from mismanagement or mishandling of funds in particular or the company in general from taking place. Recognizing the need from the experience of other countries, specially the United States, and was affirmed by its own experience in the 2008 financial crisis, the UK reviewed its corporate governance law. The need to improve stricter controls and update the intent and scope of the law prompted the review and revision of the UK combined code of corporate governance. C. Outline the recommendations of the UK Combined Code (2010) concerning the ‘board chairman’ and briefly discuss why the code does not support board duality. Corporate governance practices have been embedded in corporate structures to make corporate officers more aware of their responsibilities and demand from them accountability and transparency in the performance of their fiduciary functions as well as in undertaking its decision and policy making processes to protect the interest of its stakeholders and the public in general. One of the reforms embodied in corporate governance is the selection of independent directors to the board which would provide the cold neutrality of an impartial and dispassionate corporate officer to avoid excessive and unbridled in the exercise of corporate prerogatives. Thus, it is required that the Boards for big companies to have at least one half of the sitting Board, excluding the Chairman, as independent directors while small companies require at least two independent directors who shall not only ensure that strategies or policies are challenged and debated upon but equally to dissect the performance of the management towards the achievement of the goals and implementation of the policies enunciated by the Board as well as to monitor compliance with the reporting requirements. The independent directors shall serve as the check and balance as it is likewise tasked to verify and affirm the integrity of all financial documents and information, the soundness of the risk management plans and appropriateness of remuneration package and manner of succession. The determination of independence of a director is not limited to character and judgment or lack of material interest. Even those who may have relationships or circumstances perceived to affect judgment may be appointed provided that a formal, rigorous and transparent procedure in the search is conducted. Consequently, the appointment shall be based on merit pursuant to the qualification standards giving due regard to the balance of skills, experience, independence and knowledge of the board, including diversity and gender sensitivity. If a director is declared as independent notwithstanding existence of debilitating relationships or circumstances, the reasons must be provided the shareholders for its consideration. The duality of a Board is proscribed. The Chairman is responsible for the leadership of the Board and to ensure the effectiveness of the Board in the discharge its duties and functions. The Chairman’s duty includes preparation of the agenda with the assurance that sufficient time for discourse shall be allotted to tackle all issues, proposals and policies set forth in the agenda. The Chairman shall be selected from among the Board and in no case shall the Chairman become the Chief Executive Officer (CEO) in concurrent capacity. This is prohibited but nonetheless admits exception as when the Board decides that the Chairman shall likewise sit as CEO. This would require advance consultation with major shareholders with the appropriate justification for the appointment at that present time and stated in the next annual report. The natural barrier in the roles of the Chairman and the CEO is delineated and established to avoid conflict of interest. It is reiterated that the primary functions of the Chairman, among others, are to plan the stratagem and direction of the business and to evaluate the performance of management in the manner set forth by the Board. On the other hand, a CEO is tasked with the day to day operation and management of the business as well as to implement the policies and strategies decided by the Board. Thus, if the power and authority is concentrated in one individual alone, it is prone to abuse as safeguards and controls were eliminated. This will ultimately damage and prejudice stakeholders as the exercise thereof may serve vested interest only or equally, to cover up fraudulent activities. Corporate governance not only demands compliance with the legal requirements but likewise demand ethical, virtuous and honourable behaviour amongst the corporate officers to ensure the stability of business and establish trust in its shareholders which ultimately redound to economic growth and development that trickle to the public at large. Corporate governance in the US and the UK are both focused on the controls on processes that affect the financial health or the main business of the organization. Security measures also manifest itself in the form of controls and the reporting of exceptions and the corrective measures implemented to plug the hole of those breaches. Business continuity and longevity is also the main focus of the corporate governance. United Kingdom. Financial Reporting Council. The UK Corporate Governance Code. 2010. Financial Reporting Council Limited. London: England. [Online] Available at http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/UK%20Corp%20Gov%20Code%20June%202010.pdf [Accessed 18 January 2011] Read More