Multinationals and Corporate Governance - Term Paper Example

Multinationals and Corporate Governance Abstract Assuming that laissez-faire principles of free trade and fair economy are correct, various corporate structures can then emerge as wealth-producing business parties. The involvement of large monetary values makes them susceptible to fraud. It, therefore, requires an effective and strong internal supervision and management of the whole process through external means. Management becomes a priority as it involves public money where the public is the owner and major stakeholders of the business. The paper discusses how corporate governance issues are evaluated by disclosures and effective audits. The paper explains what multinational enterprises are, gives a history of corporate governance, its importance, and some aspects of OCED. Introduction Multi-national enterprises are corporations with production operations in various countries. The operations of the corporations can be utilizing cheap labor, securing law materials, or taking advantage of the local markets. The enterprises have strong influences on the local and global economy. They have crucial roles in globalization and international relations. They can be termed as the best form of organizations because of their effective use worlds resources (Gatto, 1-2). Corporate governance refers to a system where companies are controlled and directed. It involves the relationship between a company, its management, and shareholders. The concept of corporate governance involves the sharing of responsibilities and rights by stakeholders as they perform their duties with care (Fernando, 14). History of Corporate Governance (CG) CG was enacted in 19th century where state laws enhanced the rights of corporate directors to oversee their enterprises efficiently. In 1929, after the happenings of Wall Street Crash, two scholars, Berle and Means, came to the limelight with their book titled “The Modern Corporation and Private Property.” The book explored the evolution of businesses through an economic and legal lens. They argued that people who have legal ownership over companies have no control in the modern world. A second edition was released in 1967 and took consideration of corporate law, institutional economics, and corporate governance (Kieff & Paredes, 24) The scholar’s argument concerning corporate governance in the US, therefore, separated ownership and control in an attempt to differentiate the duties and roles of the corporate management. They researched the consequences of control and ownership as separate entities as a company continues to grow and as stakeholders continue to increase. The director’s income was to be derived from labor return, but not from part of the capital investment. From 1970s, corporate governance has formed a topic for debate in the US and all over the world. There have been significant efforts to reform corporate governance to achieve the needs of stakeholders in exercising their rights of corporate ownership and raising value for their shares. The duties of corporate directors have expanded from their traditional legal duties to managing corporations and the shareholders. Various crises such as Enron and the 1997 East Asian Financial Crisis made severe economic recessions and scandals because of lack of corporate governance mechanisms and bankruptcies (Fernando, 243-306). Importance of CG Corporate governance has of late become a high-profile issue in business management. The interest in corporate governance traverses countries and continents. It applies to large public corporations and a range of business forms such as family-owned firms, state-owned enterprises, and non-profit organizations. It emphasizes on performance because corporations must deliver suitable results to the shareholders, society, community, and the economy (Joshi, 5). Good corporate governance is crucial to competitiveness as it facilitates the access of capital markets by corporations. Access to capital markets contributes to economic growth and development of financial markets. Improving corporate governance practices leads to good decision making within a company’s governing bodies. It, therefore, enhances the efficiency business operations. Good corporate governance leads to improved accountability system and minimized risks of fraud from company officers. A system of governance that is effective helps a company comply with applicable regulations and laws and avoid sophisticated and costly litigation (Joshi, 5). The availability of good governance facilitates access to capital and supports growth because of its broad institutional and social dimensions. Well-designed rules should focus on the implementation of transparency, values of fairness, accountability, and responsibility to stakeholders and shareholders. For ethical and effective governance, businesses must operate in an environment with proper institutions. Elements such as a functioning judiciary, free press, and private property rights are necessary for translation of corporate laws into on-ground practice (Joshi, 6). Corporate governance regulates and ensures business environments are transparent and fair, and that companies are liable for their actions. On the other hand, poor corporate governance leads to corruption and mismanagement of resources. Although corporate governance is commonly used to manage stock corporations, it is also applied in the management of family businesses, state-owned enterprises, and governance. Regardless of the venture, only good governance can sustain good business performance. Corporate governance is the basis of integrity in financial institutions, corporations, and stock markets. It ensures the stability and health of the economy. OECD deals with the principles of Corporate Governance and their method of implementation in various economies (Joshi, 6). OECD Guidelines OCED relates to corporate governance because of their principles and implementation in various economies worldwide. The guidelines are recommendations undertaken by states for multinational companies that run in different countries. The guidelines provide willful standards and principles for responsible business activities and conduct in various fields. The enterprises observe the principles in regard to employment, human rights, taxation, competition, industrial relation, and science and technology. The guidelines have received endorsement from 41 countries (Fernando, 17). Different businesses have their codes of conduct, but it is only OECD guidelines that are complete and authentic. The guidelines are multilaterally accepted and the 41 nations are keen in promoting them. Their main reason for promoting OCED is to maximize reasonable contributions that multinational enterprises make in economic, environmental, and social progress (Fernando, 17). The outstanding characteristic of the guidelines is that they are non-binding and base from the will of the individual enterprises. They promote mutual understanding and confidence among stakeholders because of their nature. The guidelines require support from labor representatives, non-governmental organizations, and the business community for them to be effective. They form part of the OCED declaration on multi-national enterprises and international investment. The1976 declaration was a political commitment by member countries to promote direct investments in their regions. The guidelines form a basic framework for various enterprises that have big shares in international investments. International investment and trade enhances the relationship between OCED economies, as well as, acceptance of national rights from the host countries (Fernando 19). Theories of corporate governance Theories that explain the approach and role of corporate governance can be classified as either a micro-level or macro-level. The micro theories propose a model on how companies and their managers are governed. On the other hand, macro theories dwell on the variation and specificities in the governance systems of different nations. The agency theory, micro theory, is a theoretical framework, and corporate governance practices are proposed as solutions to its problems (Dietrich 417). In modern corporations, capital ownership is separated from its management by a contractual agreement. The managers act on behalf of corporations while the shareholders are the principals. In such a relationship, managers have an advantage on information, and they can misuse for their own vested interests leading to a rise in conflict of interests. The managers can also use the advantage in a positive way and disclose the information to enhance the firm’s value and boost its investment (Dietrich 417) The agency problems are different in the developing and developed countries. In developed countries, the problem exists between shareholders and managers while in developing nations; the agency problem is between the minority and majority stakeholders. Instead of using the traditional principal-agent model, there is a new version called the principal-principal (PP) that is a synthesis of both macro and micro theories of governance. The principal-principal model suggests conflicts between the minority shareholders and controlling shareholders result from extensive family ownership, concentrated ownership, poor business structures, and a weak legal policy protection for the minority shareholders. The agency problem in CG can be resolved in various ways such as using an observant board of directors, being timely and accurate, have sufficient disclosure of all information, being transparent in the ownership structure (Dietrich 417). Importance of Audits in CG Annual audits form the basis of corporate governance. The director’s report to their stewardships through financial statements and annual reports sent to the shareholders. Audits provide objective and external checks during preparation of financial statements and their presentation. It forms a crucial part of checks and balances. The management should ensure the audit is object, as well as, effective. Audits provide a reassurance to all people with financial interests on the company and are also a valuable tool to the board of directors. Some direct methods that ensure companies are accountable of their activities are by use of audits and through open disclosure by board members. The audit is carried out using strict accounting standards (Solomon, 144-170). Conclusion OCED guidelines form part of the steps needed to get to the destination of proper corporate governance. The efficiency of governance can be increased, but having a perfect system will forever remain a dream. Various problems that relate to corporate governance can be solved by adopting the OCED guidelines, but that does not provide a definite solution. Philosophies on corporate governance differ around the world. With a few minor exceptions, however, there exists an agreement on the aspects of desirable corporate governance. A strong board of directors, management compensation oversight, corporation laws and regulations, public disclosure, and an independent audit team are essential for effective corporate governance. Despite the consensus, there exist differences in the extent of implementation. Investors have varying confidence depending on the market situation. Issuers and markets that demonstrate high standards will receive investors with the most favorable terms. The best public companies continue to advocate corporate governance as a worth investment. Furthermore, the aspects of effective corporate governance must be facilitated by strong private-sector and government enforcement mechanisms. Works Cited Dietrich, Michael. "10." Handbook on the Economics and Theory of the Firm. London: Edward Elgar Publishing, 2012. 417. Print. Fernando, A. C.. "1." Corporate governance principles, policies and practices. 2nd ed. Chennai: Pearson Education/Dorling Kindersley (India), 2011. 14. Print. Gatto, Alexandra. "1." Multinational enterprises and human rights: obligations under EU law and international law. Cheltenham, UK: Edward Elgar, 2011. 1-2. Print. Joshi, Vasudha. "1." Corporate Governance: The Indian Scenario. Custom book ed. Delhi: Dorling Kindersley (India), licensees of Pearson Education in South Asia, 2010. 5-6. Print. Kieff, F. Scott, and Troy Paredes. "2." Perspectives on corporate governance. Cambridge [U.K.: Cambridge University Press, 2010. 24. Print. Solomon, J.. "3." Corporate governance and accountability. New York: John Wiley, 2007. 144-177. Print. Read More