Corporate Governance and Regulations - Essay Example

Corporate Governance and Regulations The paper ascertains the two-tier systems and clarifies the separation between the supervisory body and their subjects. The issue of Corporate Governance has gained relevance over time in the ever growing world. As a result, various regulations have been put in place to restore investor confidence, enhance corporate transparency and accountability. The term Corporate Governance is a system that provides checks and balances as proposed by Briault (1998), with respect to structures and policies through which an entity is managed and controlled (Luigi, 2008). In a two-tier system, it purely distinctive and two bodies are viewed as separate entity. The management may be held responsible for internal operation but the power lies with the external board. This represents separation between the separation between the supervisors and those who are supervised. The supervisors occupy the top level while the internal board assumes the next lower level (Sifuna 2012). Introduction The concept of Corporate Governance and Regulations has made fundamental improvement to the corporate society. The rise of economic transition greatly had an impact on the formation of Corporate Governance and Regulation principles. The principles which embraced the two-tier system improvised a decisive factor where- the supervisory or external board and the management or the internal board existed as separate bodies. As a result, the management became a separate entity under the direct supervision of the external executives (Pardaphash, 2011). This is a clear indication of a relation where internal boards are subjects of the external board. The division of power of the supervisory body is substantial indication that two-tier system emphasizes more on separation rather than mutual coexistence. This extensive distinction extended over the shareholders as well as those who fall under the supervisory body. The external boards are further entrusted with follow ups to ensure such performance set are achieved against the set goals (Sifuna, 2012). In some cases, the two-tier system may be stated by the law. This may vary with different countries regarding economic status and policies. In such cases, the management is only entrusted with the day-to-day management while the external board oversees its overall management and supervision (Pardaphash, 2011). This is a quite distinctive approach to management since the Supervisory occupies one level above the management in the two-tier model. Regulatory Bodies Acts and Laws The two-tier model approach will not make sense without law enforcement. There are comparative corporate Laws for various countries. Though they might vary from one state to another, they are purposively meant to ascertain moral conduct and responsibility in the corporate world. For instance, in Germany “Two-Tier System and Best Practice” under the German Corporation Act of 1965 (AktG) was established for the purpose of solving conflict of interest of the external board (Abowd & Bognanno, 1993). The laws are commonly based on two-tier system or one-tier system. This paper exclusively describes the two-tier system in relation to the laws and its role in separating supervisory from the internal board. The laws based on the system have been established within various countries in Europe and other countries as well. The European commission was not left out in the uprising of economic change. They implemented various acts that provided for the Corporate Governance. The regulations adopted clearly defined the lines between the supervisory boards and the management. The example of Indian Act stipulated laws that covertly reduced the relevance of Company Secretary in private companies. This is a clear indication on how the law and Acts have been exploited to draw lines between the external and internal boards. This is a typical example of two-tier system where the Board of Directs acts as superior body which is beyond the control of shareholders and the management (Shleifer & Vishny, 1997). The position of the Directors in two-tier system gives them the ultimate power to fire the management in case of incompetency or mismanagement. Although its implications were to provide an overview over the management, it seems to create a ridge between the two bodies. Though the existence of Corporate Governance is guided by certain laws, general purpose and common interest, the excesses of the Supervisory body is more emphasized compared to those being supervised (European Corporate Governance, 2013). The UK, US, Russia and Germany are example economic superpowers where the system is vastly used. The objective was to maintain confidence and accountability to the investors and shareholders. The acts were based on: 1. Purpose and clarity- This is dependable on the clarity of the codes in terms of objectives, reduced emphasis on sanctions for non-compliance and intended purpose (European Corporate Governance, 2013). The laws are imposed to regulate the companies and its associates while it remains adoptive and favorable to investors. This includes both the Board of directors and the management. 2. Legal reinforcement: In order to successfully reinforce companies to comply with the rules, there must be set backs that may lead to total failure or partial failure. This is often experienced due to legal underpinning by companies or bodies that may not be willing to comply. Since the process of the law is quite involving and tricky, there was the need to establish certain set of standards to regulate corporate bodies. The result is a uniform system unit where the law applies indiscriminately based on ethics and good morals in the practice of management and supervision 3. The principle of legislation- compliance and commitment is fundamental in evaluating the legislation. Since the management and the board coexist as independent entities, the virtue of willingness to comply with certain laws may be omitted in the process of management or disagreement. The legislator comes in to solve conflict of interest and thereby serves as an intervening body separate and independent from the internal executives. Discussion The two-tier system has been a major breakthrough in financial institutions. Financial discipline is a critical element that should be practiced with care and precision in any economy in the world at large. The financial supervisors have adopted the two-tier system. This has been the trend in most countries of the world. As a result, they have established supervisory body that oversees the minor financial institution. European Central Bank is an example of a statutory body that monitors other minor financial firms. This is a replica of separation whereby one body is solely responsible for supervision while the other body assumes responsibilities while being monitored. Advantages Though the there is evidence of separation, the system has restored investor confidence over their investments. For example, the US created the country’s regulation regime in the 1930s where the law provided for a divisive rather than a combination of the management and the board. The supervisory body is given absolute power to sack non performing management and thus reducing corruption and complacency in the management. The separation of the two bodies is quite logical given the fact that the number of supervisory staff is quite large and independent from their subject thereby curbing corruption (Goodhart, 1995). The supervisory body has direct control over the activities and conduct of the inferiors. What does this mean? The board in a two-tier system exist independently of the management and therefore able to evaluate the performance without influence or intimidation by a third party whatsoever. The gap between the investors and the supervisory body is even wider. The corporate governance and regulations imposes a level of self-discipline on the managers of the firm which ultimately impacts positively on the bottom line. As a result, the private sectors have evolved to create more competitive market economies. In the US, “the business judgment rule” emphasizes more on the duties of care of loyalty of corporate officers and directors (Zingales, 2008). Demerits Though the two tier system has been adopted and entrusted by many countries, it is subject to failure in some instances. Recent economic study and analysis has established that the influence of politics, shareholders and investors has been a constant intimidation to the management. The influence may be inflicted down upon the management which may have no otherwise but to comply given their detailed understanding of the internal management. This may likely lead to failure if not compromising the management. The corporate government is not immune against rules and decisions of certain private bodies. These may consist of the stock exchange, professional accounting institutions and industrial organization. According the Principles of Corporate Governance, the corporate must observe the law to the same extent as natural person, may take into account ethical consideration that are reasonably regarded by Pardaphash(2011) as appropriate to the responsible conduct of its business. They are also compelled by the statutory bodies to give back part of the investment back to the society. This is achieved through regular checks by the supervisory body which exists as an independent party. It is a belief that no system can be entirely perfect. It may be an illusion that a single superior model structure of institution may be applicable to all countries (Pardaphash, 2011). To some extent, the optimal structure of the two-tier system depends on the economy and financial system of a country. In other economies, the two-tier system may utterly fail due to inconsistency or leniency on the part of the board to take necessary actions against the management. In such cases, the management may likely collude with the external supervisory to the disadvantage of the shareholders. The banking system is a typical example where the central banks act as a single unified body to monitor other banks (Vishny and Andrei, 1997). While it is true they should regulate other banks, questions have risen about whether central banks should regulate all aspects of the financial system and all types of institution (Pardaphash, 2011). This is so since the financial sectors is very sensitive and therefore external supervision may interfere with its internal operational structure. In some cases (Vishny and Andrei, 1997), the independent supervisory body may be driven by prejudice and pre informed decision to take actions over the management which may not be the due course to take. These may be as a result of low profit generated by financial instructions that may not necessarily imply failure on the part of the management but the economic downfall. Conclusion: The two-tier system is a purposeful and objective approach to separation of duties and power between the internal and the external executive. Different countries have adopted corporate governance and relegations act in order to protect investors and shareholders. The variables of the acts may differ between the countries but the course is to achieve viable and trustworthy management team which is compliant and effective. The two-tier system comes in to distinguish between the supervisory body and the management by ensuring absolute control over the management. Though the system has been perceived to be more of divisive of the two bodies, it has proved to work with financial institutions and several economies like the UK and USA. The paper has covered the two-tier system in relation to corporate government and regulations. The system is perfectly in time and suited to the current dynamic economic scandals. It is logical to separate the supervisory body from those being supervised in order to banish corruption, incompetency and absconding of duty by the management. The two-tier system may not be invisible from external influence regarding politics and economic level of a country. Though the political factor may be viewed to be a minor factor to the Corporate Governance and Regulations act, it is infarct the most tremendous menace on the face of external and internal executives. When the political factor will be put at bay, the two-tier system will be the best improvement to the corporate society. Therefore, the two-tier system embodies a clearer separation between the supervisory body and those being supervised as evident from the arguments. References European Corporate Governance Initiative. (2013) Cadbury Report para. 2.5 retrieved from http://www.ecgn.org Abowd, J.M., & Bognanno, M.L., (1993). International Differences in ANNALS, American Academy of Political Science. 570, 153-154 Briault, C. (Ed.). (1998). A Single Regulator for the UK Financial Services Industry, Economics, London: Earthscan Goodhart, C.A.E. & Schoenmaker, D. (1995). Institutional Separation between Governance. Journal of Finance, 52(2),737–783. Luigi Zingales, (2008).Corporate governance, The New Palgrave Dictionary of Managerial Compensation,Executive and mimeogr., New York: Cornell Publishing Pardaphash, J. (2011) Report of the Committee on the Financial Aspects of Corporate Governance Mahakall News Management New York: Pvt. Ltd Press Shleifer, A. & Vishny, R (1997). "A Survey of Corporate of corporate Governance. The Journal of Finance, 52 (2), 737—783. Sifuna, A. (2012). Disclose or Abstain: The Prohibition of Insider Supervisory and Monetary Agencies’, In Goodhart C, The Central Bank and the Financial System, London: Macmillan Footnotes The paper has extensively covered the laws regarding corporate governance based on the two-tier system in European Countries. The UK and the US has been prioritized due to their economic status. Read More