Does Corporate Governance Work - Research Paper Example

Full title topic Introduction The dissertation aims to evaluate that either the corporate governance work for each corporation or not. The corporate governance of each corporation comprises of different board of directors that usually make decisions, regulations, rules, laws and legislations for their firm, employees and suppliers these corporate governance actually provide the path on which the firm has to move. The corporate governance actually provides a clear direction to their employees that how they have to move during their operations. The paper provides a clear description on the corporate governance, that what it is actually and how it works. What are the different models for corporate governance that are provided by the scholars and different principles that are given for the board of directors? Later different real examples of different firms are used by the paper to explore that either the corporate governance works or not. Background The background of this whole paper is to show that either the corporate governance work or not. The very first section of the paper includes the literature review that shows that what is meant by corporate governance, and who actually includes in this corporate governance. The corporate governance is the set of beings that are known as directors who gave the rules and regulations for the firm to move it in a specified direction to achieve different goals. The corporate governance actually gives different rules to internally control the firm. The paper actually shows different reviews on the corporate governance of different scholar. Where the idea actually generates from and what is its history. Defining the corporate governance completely, the paper defines the historical background of this concept that shows that when this concept actually emerges. Then the paper will elaborate that what actually are the principles of this corporate governance and what are their responsibilities. Two distinctive models are described by the paper for the corporate governance that is used all over the world. These models clearly defines that why the firms in the United Kingdom are not as powerful as in United States. The reason is provide latterly in the paper by showing different examples of United States industries that actually fails because their corporate governance was unable to work. Then what are the corporate governance model used by the Asian companies are provided. The paper uses three different examples to show that either the corporate governance work or not. The Marks and Spencer, Cadbury and European sectors are taken in account as examples to show that wither the corporate governance work or not. These real examples actually elaborate a clear concept of the topic. The last section is the few lines defining the conclusion taken from over all paper. The paper uses the examples of real firms that show that either the corporate governance work or not. These real examples show that how their corporate governance works so that we can conclude that either the concept of corporate governance work or not. The corporate governance concept does work but it all depends on the individual forming the board of director or corporate governance. The corporate governance ideology does work and that is the reason that why the top firms are still working. The best direction and decision making system is the only reason that works and all these are provided by the corporate governance. The paper not only shows that the either the corporate governance work or not rather it also provide that how the corporate governance work. The examples of real firms that are taken to elaborate the aim of paper will clearly define that how their corporate governance working for the success of the firm. Fro instance, the example of Cadbury shoes that their corporate governance decided to separate the confectionery firms from the beverages firms and this decision really works and the firm actually gain profits. Different statistical data of the companies are provided by the paper that shows that impact of decision making and regulation provided by the corporate governance. The approach to literature review is made by the use different scholarly piece of work. Different books are used to elaborate the topic and scholar’s journals are sued to seek the issue discussed by this paper. Moreover, the paper uses the real firm’s data showing the actual and real evidences that either the corporate work or not. This data is taken from different articles and from companies report. The cases of two firms are used by the paper to show that how their corporate governance is working for the benefit of the firm, wither they work or not. Moreover, the paper has taken the United Kingdom sector in which three major industries are used to show that though the region suing well define models of corporate governance but still facing problems. The paper also shows few specific works of different scholars that provide efficient information on corporate governance. Limitations 1. The paper though includes a simple topic but still different limitations and problems were there to provide a clear concept. These limitations are given as 2. On corporate governance very little scholarly work is done by different scholars. Less attention is given to this topic though this is a very important issue. As a corporate governance can help to win or can decline the firms life, therefore, it is required that different solutions related to the problems of this issue should be given by the scholars. 3. Few of the companies elaborate the affect of corporate governance that shows that less attention is given on this issue by the firms. 4. Though, different paper defines the responsibilities of corporate governance, but less attention is given to show that how to measure the efficiency of corporate governance. 5. Different models and principles are still required fro the corporate governance that can provide an efficient corporate governance for the firm. 6. During evaluating the topic, few of the firms shows that either the corporate governance work or not rather most of the firms were unable to show any information on their corporate governance. Literature Review According to Crawford, Curtis J. (2007) corporate governance refer to a set of rules, regulations and processes that are provided in a single corporation to direct the activities of the firm so to achieve the goals and mission specified. Stakeholders, management and board of directors are the major players that compromise corporate governance. These corporate governance actually provided asset of rules that will direct the direction of the firm to achieve some particular and specified goals. Other stake holders include employees, suppliers, bank, lenders, regulators and total community. In simple word, corporate governance is the plan of the firm and this plan defines that what the set of processes that should be acquired are. The corporate governance is actually an important subject that ensures the accountability of the individuals and with this governance, the principal –agent problem is solved. According to Bhagat & Black the corporate governance directly affects the economic efficiency and the welfare of shareholders. Since 2001, the corporate governance theme is changes through renewing different interests and this usually happen due to collapse of different US firms such as Enron Corporation and WorldCom. The reason was that these firms were unable to store the public confidence in their corporate governance policies. Gabrielle O'Donovan first time defines the corporate governance as an internal system that comprises of different rules, processes and policies that use to serves the needs and requirements of stakeholders and these processes and policies usually control the management and activities of the organization. A healthy board culture always safeguards the legislations and regulation within the corporation. According to Gabrielle the perceived value of corporate governance not only increase the value of share price but also increases the value of the capital. One of the review of National Association of Corporate Directors stated that quality of work can be determined by these legislations given by the company ad the policies and processes that are implemented in the firm to direct the behaviour of the people. External forces are usually not in the hand of firm like threat and opportunities but this corporate governance can provide best procedures that can help the firm to gain these opportunities present in the external environment of the firm. Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. (2000) stated that corporate governance is a simple system that is used to structure the firm and make the top management bale to operate and control the activities. Principles of Corporate governance 1. Rights and equitable treatment of shareholders: the very first principle that the corporate governance should adopt is to take care of the right of their each stakeholders. This right can be fulfilled by providing effective communication system through which different information is provided to these stakeholders. 2. Interest of other stakeholders: the corporate governance should recognize and fulfil the obligations to all other stakeholders. 3. Role and responsibilities of the board: the board of director need to understand their responsibilities towards firm, employees, lenders and suppliers. They should enhance a better communication system through which they can listen their employees and suppliers. 4. Integrity and ethical behaviour: the major principle of the corporate governance is to provide the code of conduct by delivering different rules that keep the conduct of all the employees and manager sin the firm in the right path. This code of conduct will define the internal environment and culture of the firm. Either the corporate governance will provide the formal structure or informal. Wither the firm will adopt the centralized system or decentralized system. Compliance and ethical programs are also organized to give a clear concept tot eh employees. 5. Disclosure and transparency: the perfect level of accountability should be provided by the firm to stakeholders by delivering roles and responsibilities to the board and management. Clarke, Thomas (ed.) (2004) stated that such procedures should be adopted by the corporate governance that can safeguard the integrity of firm’s financial reporting. External corporate governance control 1. Financial statements 2. Government regulations 3. Debt covenants 4. Takeovers 5. Telephone tapping 6. Competition 7. Managerial labour market 8. Media pressure There are two models that are used for corporate governance around the world and these are known as Anglo-American Model Anglo-American Model In Anglo-American model, the shareholder and their interest is given as the first priority. This is the liberal model and sued in US. In another journal Clarke, Thomas (ed.) (2004) stated that coordinated model is used in Continental Europe and Japan. This model also defines the interest of managers, employees, workers, customers and community. This model encourages radical innovation and cost competition and the coordinated model that is sued in continental Europe encourage incremental innovation and quality competition. The difference between the two models used in US and UK defines clearly the success of firms situated in US and UK. Moreover, different firm’s examples are sued below to show the affect of this model. The board of directors in Anglo-American model has power to choose executive officer whose second name is chief executive officer. This CEO has power to manage the corporation and take actions on daily basis and can make major decisions. Non-Anglo-American Model This model is mostly used in East Asian companies where the most of the firms are family-owned. According to Claessens and Djankov study there are 15 families in East Asian countries having dominated corporate assets. In different countries like Pakistan, Philippines and Indonesia almost 15 families are controlling more than 50% of publicly owned companies. All the responsibilities and authority is in the hand of these people and these usually define all the rules and regulations. The story belongs to 19th century when the US government and sate corporation enhanced the right of each corporate board and appraise the rights given to these corporate boards to issue their own rules and regulation for the sake of their own benefits. Delaware law is provided by the US and under this law US’s wealth can the securitized into various institutions and entities. The right of each and individual owner and shareholder were increased under this law. The concern of shareholders and administration was increases by reforming the corporate governance. In 20th century fox, after the Wall Street crash of 1929 different scholars actually change the role of modern corporate and provide different views. Ronald Coase’s in 1937 though its “Nature of the Firm” provides a clear concept about the corporate governance. Than after fifty years “Eugene Fama and Michael Jensen’s in 1983 provide a clear concept about corporate governance in “The separation of ownership and control” and in this they provide a clear concept of agency theory which clear the concept of corporate governance. Agency theory of the firm includes the profit sharing, efficiency wages and performance measures. Clarke, Thomas & dela Rama, Marie (eds.) (2006) argued that the agency theory is the corporate governance given theory that defines that how they have to take their employees and their processes to get a better productivity. For instance, marks and Spencer is the leading company and the firm is achieving the excellent work only because the corporate governance is able to provide a better agency theory. Today 290000 shareholders are present with marks and Spencer and the reason is that they are provided with effective return on their investments. Taking full care of the employee’s, the employee’s are provided with 500 pound bonus provided to each single employee on their performance. This bonus providing enhances the loyalty of the employees. When taking profit sharing in consideration than the firm ensures the stakeholders that they will be provided with maximum profits, and the reason is that they want to keep their stakeholders with them at long-term basis. The firm is providing efficient end results with the food retail shops as these are earning highest. Moreover, the firm has launched the performance measuring system to know that what they can do more to increase the market performance of the firm. The agency theory of the Marks and Spencer is in accordance with Hermes but the only thing that they lack is efficient performance measures. According to Jean-Pierre Danthine, John B. Donaldson, (2005) the performance measure of the employees and their policies must be used to now that what are their actual performance. Marks and Spencer is dealing with more than 700 retail stores and thus measuring each employee performance would be difficult, but by using efficient tools and techniques the retail store can measure the performance of the employees form each level. Moreover, the firm is required to measure the performance of each store and their financial output must take in consider while making decisions that which store is incurring lost so that it should be closed to avoid further losses. Later the scholars developed that different decisions should be in the hand of corporate governance so that they can give a clear and appropriate rules and regulation for the firm. Corporate governance work as it provides a better capital investment decisions. This decision is basically done for the benefits of stakeholders and firm. The corporate governance of firms has adopted different process and ways to evaluate their capital investments. For this they try to understand the long-term profits that they can gain form the project. For instance, when the mark and Spencer corporate governance decided to develop their new product live holding home wares they have undertaken different models to evaluate the uncertainty and risk associates with it. As company already announced that they are deciding to invest in such project where they are seeking lowest risk, therefore, they found that they can gain minimum risk. But as already it is known that UK sector follows risk based investments to gain higher return but still firm do not want to invest in such project where they are finding higher risk rate. The reason is that they were facing crisis form the last few years. Crawford, C. J. (2007) stated that the capital investment decision policy of the corporate governance is “seeking that investment project that including minimum risk but providing long-term profit”. According to the views of Philip James Hunt, J. E. Kennedy, (2005), this plan of the corporate governance is enough good to prevent the risk, but still this policy is acting as a great barrier for growth, as higher the risk higher will be the growth. This example shows that how the corporate governance of huge firms is trying to evaluate different investment decision in order to make the better future for the stakeholders and lenders. Moreover, Colley, J., Doyle, J., Logan, G., Stettinius, W. (2004) stated that the investment appraisals are the basic decisions provided by this corporate governance that actually enhances the growth of the firm. The corporate governance usually provides the rules and regulation for the investment appraisals that directly shows that how the corporate governance is working for the stakeholders. For instance Marks and Spencer are promising their share holders that they will maximum return on their investment by seeking maximum profit. That is the reason that their dividend in the year increases, moreover, this year again they found an increase of investor thus increasing their investors to 290000. The investment appraisal system should be latest and efficient to provide the accurate present value of the future income. The corporate governance of Marks and Spencer are promising with eh stakeholders and lenders that they will increase the dividend when the share price of the firm increases. This again is a corporate governance rule and this is directly defining that the corporate governance is taking care of their stakeholders. Moreover, such rules will keep the stakeholders loyal with the firm even in crisis as such rules of corporate governance are directly working for the stakeholders. This whole case study of Marks and Spencer shows that the corporate governance of the firm work well to keep the firm in the track of success as still the corporate governance rules are attracting a huge number of investors all over the world. Moreover, from last few years the firm was in crisis but later with a better corporate governance strategy the firm is again on the track of success. Discussion The above mentioned literature reviews with a clear example of Marks and Spencer firm shows that the corporate governance does work the corporate governance only works when they are loyal and are working for the sake of stakeholders and for the firm. Though, different models and principles are shown that shows that if these are used properly than the corporate governance does work. But all depends on the loyalty and concept of the corporate governance. The better the board of directors, the better they will decide about the firm. Therefore, it all depends on the people and directors forming a whole board of director. The more they are educated and experienced, the more they are loyal with the firm, the better they together work as corporate governance. Below different examples are shown to conclude that either the corporate governance work or not. European Industries are using the coordinated model for the corporate governance but still facing different problems in different sectors. Prominently three main sectors are taken, shipping industry; airline industry and financial sector are chosen to seek what problems are facing by these industries and what were the reasons. Enactment of different shipping polices within a tough political environment remain a problem in the shipping industry. Snap changes in the political conditions within the EU countries grounds serious problems in the late 19th century but later exclusive steps were made to enhance the logistics within the continent. The European airline sector from the last few years undergoes upheaval due to many reasons. The very first reason is that the sector faces the problem of liberalization, the economics downturn, the terrorist attacks and the high fuels cost. These are problems faced by the European airline sector from many years. The airline sector has low cost tickets and services and these might be due to the strong competitive forces that are occurring in the European airline sector. In 2003 the life insurance company which was based in financial market of UK paid the fine of 675,000 pounds due to their mortgage endowment complaints which were not handled properly by their service department and many other different problems were their for the industry. Similarly in 2004, the same Life Insurance Company paid the fine of 725,000 due to their bad handling of mortgage endowment complaints, which they were facing the last year. The only reason was that the corporate governance was unable to provide a better rules, regulations and legislations for the firm that should be undertaken to provide a better performance. In 2005, High Street Bank paid the fine of 800,000 pounds due to their worst rules and regulations provided by the corporate governance. In 2006, again the same Life Insurance Company paid the fine of 750,000. In 2007, IFA paid 330,000 of pounds as fine against worst compliant handling of their customers. The only reason that the researchers found in the failure of these sectors is that different firms are unable to provide the sufficient rules and regulations that can enhance a better working within the firm. The corporate governance was unable to enhance the internal conditions as they were unable to make efficient decision making and are unable to provide enough regulations for their corporation. Though the European corporations are using the coordinated model of corporate governance that enhances the quality and innovation but still they were unable to enhance the performance of their firms from the last few years. This shows that not the models provided by the scholars work rather it is the corporate governance that work if these corporate governance can perform in better ways. Though different models are defined for the corporate governance, but these models do not work until and unless a better team work of the board of directors are not formed to provide a better way for the firm. Another example that is used top provides a better conclusion for the working of corporate governance is the Cadbury firm. Cadbury, Sir Adrian, (1996) stated that the corporate governance of the firm is providing better decision making and regulations and that is the reason that this is the single firm providing the confectionery product all over the world. In March 2007, the corporate governance decided to reveal that the firm is planning to split it into two different firms; one will focus on the main chocolate and confectionary market whereas, the other will focus on the US beverages. The decision was very useful as it causes the firm to earn from 12,600 million pound of money to 16,000 pounds of money. In October 2007, the Cadbury corporate governance decided to close its Keynsham chocolate factory and transfer the production to the plant of England and Poland. This affects the jobs from 500 to 700. The four groups of the company capture 43% of the global market. The company sale their non-core business in the year 2007 and these were Canadian bulk and seasonal candy business, Cottee’s food in Australia, Cadbury in Italia and Italian confectionery business. This results in saving 200 million pound of money in the year. Whereas, the corporate governance acquire three main companies causing profits in the year end. The brands of the companies working in 2007 were Cadbury, Schweppes, Halls, Trident, Dr. Pepper, Snapple, Trebor, Bassett, Dentyne and Bubblicious. The company owes 70,000 people in 2007. The Cadbury is the only single international company serving with organic food. The company earns 7971 million pound in the year 2007. Confectionery revenue grow to 7% where as the beverage sector earn the growth to 4%. The earning per share of the company increases to 2% and dividend growth was 11%. In May 2006, the company outsource the transactional accounting and order capturing function. For this outsourcing, the Genpact Company was chosen for Shared Business services. The company belongs to India, China and Romania. This all affected the business unit in the United Kingdom and in United states. The major problems were the unemployment. Thousand of the employees lose their jobs where as on the other hand thousand of jobs were provided in the developing countries. The decision was made to gain the low cost services of labour in the developing countries. These all decisions were made by the corporate governance for the sake of the benefits that are provided to the stakeholders, employee’s and firm. This is all because the corporate governance of the Cadbury is efficient to make decisions for the favour of the firm. This above example concluded that the corporate governance does work but only when it is compromises of efficient directors. The corporate governance of each firm works only when the directors are efficient enough to work fro the company. Different scholars are providing different models and principles for the corporate governance but these models and principle would not work until the corporate governance is compromises of efficient directors that are loyal with the firm and its stakeholders. Conclusion The over all paper review concluded that corporate governance do work but its working do not require any specific models or principle. Rather the firm is required to choose the best corporate governance that can work for the loyalty of the firm. The corporate governance of any firm must be efficient enough to provide a better decision making and principles for the firm. The over all paper shows that historical background of the corporate governance, what it is and what are its responsibilities. Moreover, the paper shows the working of different scholars on this topic and thus introduces different models and views on this topic. Later, the paper reviews different examples of the firms that show that either the corporate governance work or not. These all information together actually defines that the corporate governance work. It is the corporate governance proper decision making for the future of rim that keeps the firm in proper position. The corporate governance provides enough well-defined rules and regulations hat keep the firm track in the way of success. We can say that the success of any firm do depend on its corporate governance as their proper decision making, rules, regulations and processes directly emphasis on the performance of the firm. These rules, regulations and legislation actually direct the employees and suppliers to achieve a single goal for which the firm was basically formed. Therefore, the CEO (chief Executive officer) and board of directors actually define the success of the firm. Suppose the firm adopt benchmarking or total quality management, these all decisions are given by the corporate governance to achieve the excellence. The managers and employees can not sue different process by themselves for the sake of firm. This is the corporate governance who allowed using different processes and procedures. Therefore, when the corporate governance of the firm is efficient enough to know that what actually the firm is required to achieve its goals, the firm can work but is its corporate governance is not inefficient than the firm can not successive in its goals. Thus, the paper conclude that the corporate governance does work, but only when it is compromises of efficient personalities. Using the simple models for the corporate governance, applying principles and rules fort eh corporate governance can not work efficiently for the firm. Rather the efficient personalities, their experiences and knowledge forming the corporate governance can only work. When the corporate governance is compromises of exclusive personalities, these are then able to direct and control the firm efficiently to achieve different goals and objectives. References Crawford, Curtis J. (2007). The Reform of Corporate Governance: Major Trends in the U.S. Corporate Boardroom, 1977-1997. Doctoral dissertation, Capella University Bhagat & Black, "The Uncertain Relationship between Board Composition and Firm Performance", 54 Business Lawyer) National Association of Corporate Directors (NACD) – Directors Monthly, “Enlightened Boards: Action Beyond Obligation”, Vol. 31Number 12 (2007), Pg 13. Cadbury, Sir Adrian, "Corporate Governance: Brussels", Instituut voor Bestuurders, Brussels, 1996. Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. (2000) The Separation of Ownership and Control in East Asian Corporations, Journal of Financial Economics, 58: 81-112 Clarke, Thomas (ed.) (2004) "Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance," London and New York: Routledge, ISBN-X Clarke, Thomas (ed.) (2004) "Critical Perspectives on Business and Management: 5 Volume Series on Corporate Governance - Genesis, Anglo-American, European, Asian and Contemporary Corporate Governance" London and New York: Routledge, ISBN Clarke, Thomas & dela Rama, Marie (eds.) (2006) "Corporate Governance and Globalization" London and Thousand Oaks, CA: SAGE, ISBN Colley, J., Doyle, J., Logan, G., Stettinius, W., What is Corporate Governance? (McGraw-Hill, December 2004) ISBN Crawford, C. J. (2007). Compliance & conviction: the evolution of enlightened corporate governance. Santa Clara, Calif: XCEO. ISBN 0-976-90190-9 9780976901914 Read More