Corporate Governance as a Matter for Shareholders, Not Governments - Literature review Example

Name: xxxxxx Tutor: xxxxxx Title: Question 3: Corporate Governance as a Matter for Shareholders, Not Governments Institute: xxxxxx Date: xxxxxx Introduction In ensuring a useful corporate governance framework, it is important to consider relevant and effective legal, regulatory and institutional foundation upon which the market participants can depend on when establishing their individual contractual associations. The interest of shareholders needs to be considered as an obligation of corporate governance. This paper therefore discusses how corporate governance is a matter for shareholders but not the governments (Sarra, 2003). Corporate governance as a matter for shareholders, not governments Corporate governance is a term used to refer to policies and processes by which a corporation is managed and directed. It particularly refers to the manner in which the power and accountability flow among shareholders, chief executive officers, boards of directors and senior managers. The main governance structure for many corporations is that the shareholders vote for and empower board of directors whose responsibilities are to look after the interests of shareholders. Corporate governance therefore should be a matter for shareholders, not governments. Considering the interest of shareholders is vital in strengthening corporate governance (Macey, 2010). Macey (2010) argues that Weak rights for shareholders limit the shareholders’ ability to hold boards into account, especially in areas of payment and management of risk. Allowing shareholders to vote on remuneration report of compensation committee of the board is very essential in strengthening corporate governance. The practice was established as a nonbinding vote in United Kingdom in the year 2002 and subsequently established by huge number of European nations and by Australia. The effort of shareholders has of late promoted the implementation of non-binding shareholder vote on executive compensation report in several huge companies. The adoption is already a mandatory process for companies that receive finance under the troubled assets relief program (TARP) of United States of America government. The establishment of advisory vote on remuneration in United States of America is an essential in directing greatly the voice of shareholders in corporate governance. The achievement of right to vote on matters that reflect approval of board performance is one way of strengthening the rights of shareholders. Shareholders need to be assured that their votes really count in corporate governance. Shareholders in Europe are still struggling for removal of control-advancement mechanisms. In Europe, shareholders voting rights, agreements, pyramid structures, ownership ceilings and cross shareholdings are still pervasive. Corporations therefore in this region are highly taking into account the interest of shareholders. The mechanisms have the impact of permitting a particular class of shareholders to manage a percentage of voting rights much more than their ownership rights. This enables shareholders to be able to effectively monitor the governance of an organization (Edwards, 2010). Edwards (2009) argues that Voting arrangements need to permit shareholders to vote across borders since many investors are diversifying their portfolios internationally. Currently the global system does not work well due to complicated chain of administration that carries the vote from an investor to annual general meeting, causing the votes to disappear. Corporate governance therefore needs to take into account the interest of shareholders by ensuring that the votes casted are considered globally. This can be done by adopting shareholder digital voting, and mandating standardized regime for recognition and authorization of shareholder rights to vote via a chain of intermediaries. This therefore, if fully adopted, can greatly develop the global market. Corporate governance need to protect and assist the exercise of rights of shareholders. Equity investors usually have a particular property right. An equity share in a publicly traded organization, for instance, can be purchased, sold or transferred. This share entitles the shareholder to involve corporation’s profits, with liability limited to the size of the investment. By owning an equity share, shareholder is provided with a right to information concerning the corporation, by primarily participating in general meetings and by voting. Disclosing of relevant information to shareholders is very essential since it enables them to know how the corporation is being governed and if they can increase investment in the organization. The governance of the corporation therefore should be a matter of shareholders (Halligan, 2010). Corporate governance should ensure that shareholders have a right to secure ownership registration’s methods, transfer or convey shares, receive reliable information about corporation on timely and regular basis, involve and vote in general meetings, vote for and against board members and sharing the profits of the corporation. Shareholders also need to have right of involving in, and to be well informed on decisions pertaining basic corporate changes such as statutes amendments or incorporation’s articles. They are also supposed to be informed on approval of additional shares and transactions that are not common, which incorporate the transfer of all assets that can result into sale of an organization (Parkin & Hardcastle, 2010). According to Parkin & Hardcastle (2010), the capability of organization to develop partnerships and associated companies and to transfer cash flow rights and operational assets is very essential for flexibility of business and for delegating accountability within complex companies. It also permits an organization to divest itself operational assets and to become a solely holding company. However, minus relevant checks and balances this kind of possibilities can be abused. As a way of strengthening corporate governance, shareholders need to be an opportunity to effectively participate and vote in general meetings. Shareholders are supposed to be informed about the policies, incorporating voting processes that govern the general meetings. Shareholders therefore need to be furnished with sufficient and periodic information that concerns the date, location and general meetings’ agenda, plus, full and periodic information concerning matters to be agreed on at the meeting. A chance to ask the board questions should be provided to shareholders. This incorporate questions relating to yearly external audit, replacement of items in the general meetings’ agenda and resolutions proposal, subjected to rational limitations (Edwards et al., 2010). As a way of encouraging shareholder involvement in general meetings, it is important for corporations to improve the capability of shareholders to place items in the agenda by simplifying the filing amendments and resolutions’ filing. The improvement is very important since it makes shareholders to easily submit their questions before the commencement of the general meeting. It also assists shareholders to easily obtain response from members of the board and management. Corporations need to be governed in a way that it enables shareholders to be able to ask questions that relates to external audit report. Shareholders need to be effectively involved in key corporate governance decisions, such as board members election and nomination. They therefore need to be capable of their views to be known on the remuneration policy for members of the board and key executives. The equity component therefore of compensation schemes for members of the board and employees needs to be subjected to approval of shareholders. The fundamental right for shareholders is electing the board members. Effective election process requires shareholders to be capable of involving in board members nomination and vote on personal nominees (Halligan, 2010). Halligan (2010) argues that corporate governance should be a matter of shareholders since a number of capital structures permits shareholders to practice a degree of management over the corporation disproportionate to the equity ownership of shareholders with the company. Pyramid structures, cross shareholdings and shares that have limited or many voting rights can be applied to reduce the ability of non-controlling shareholders in influencing corporate policy. Other devices apart from ownership relation can affect the management over corporation. Agreements of shareholders are obvious means for shareholders’ groups to participate in concert so as to comprise a useful majority, or at least a huge one block of shareholders. The agreements of shareholders normally provide those involving in agreements preferential rights to buy shares if other parties are willing to sell. As far as the government is concerned, corporate governance concentrates on governance of companies in public sectors plus governance of the relations and interactions of these companies in the public sectors with others, both in and outside the sector. Corporate bodies describe corporate governance as a framework for providing management and accountability for main decision making bodies. As a matter for governments, corporate governance can be affected deeply by political, economic and legal ideology. This therefore implies that corporate governance cannot be a matter for governments but rather for shareholders. In the current context of policies of the government of corporatization and privatization, there is a significant question regarding whether company model in the private sector and its related mechanisms of governance, is a theoretically viable structure of governance for executive government’s commercial activities and whether the model is capable of providing the efficiency and accountability advantages that are assumed under its adoption. The variations here entail much more than just differences of terminology or simple shifts within the context of the sector. Four major problems can occur if corporate governance is considered as a matter for governments. The problems can be described well in the context of Australian commonwealth public sector. The first problem can arise when relating corporate governance with dimensions of international, national and other levels and modes of governance. The second problem relies on articulating modern understanding of corporate governance, provided that there is a historical shaping of corporate governance ideas mostly within the contexts of private sector and in relative to conceptions of corporate governance that require updating within the contemporary conditions in the entire public and private sectors (Kodgruppen, 2004). The third problem relies on recognizing and justifying the extent of convergence and divergence among corporate governance as it function within the context of the public sector and as it operates within the context of private sector, even to an extent of having an exclusive or at least hybrid beginning of corporate governance for public sector (Halligan & Wilks, 2002). The fourth problem relies on translating relevant definitions of corporate governance and the elements within the abstract in which the definitions are theoretically coherent, elementally complete and practically performs as guides for corporate governance regulation, thinking and practice. There is usually a clear point of difference between corporate governance and public sector governance within the official or proposed governance frameworks at several level of government. Various constitutional, legislative and environmental considerations guide differences within the relevant practice and outcomes, for governance of the public sector and corporate governance. Within the official governance, for instance in Australia, guidance within the context of government’s executive arm are differentiated with terms such as corporate governance so as to avoid any supposed ambiguity that concerns the use of the term corporate to non-corporate organizations in the public sector. Corporate governance is therefore a matter for shareholders but not governments (Percy M., 2009). Conclusion From the discussion, it is clear that corporate governance is a matter for shareholders but not governments. It is a term that is usually employed to mean policies and processes that manages and directs corporation. Corporate governance need to ensure that shareholders interests are taken into consideration so as to strengthen its operation. It also needs to protect and assist the exercise of rights of shareholders. Considering corporate governance as a matter for governments can result into a number of problems. Relating corporate governance with dimensions of international, national and other levels and modes of governance can be problematic. Recognizing and justifying the extent of convergence and divergence among corporate governance as it function within the context of the government can be hard. References Sarra P., J., 2003, Corporate governance in global capital markets, UBC Press: New York. Edwards M., J. Halligan, B. Horrigan and G. Nicoll, 2010, Public Sector Governance In Australia, Dimensions of governance for the public sector unpublished book manuscript. Macey R., J., 2010, Corporate Governance: Promises Kept, Promises Broken, Princeton University Press: New York. Percy M., 2009, Broadbanding the nation: lessons from Canada or shortcomings in Australian federalism. Parkin A. & Hardcastle, 2010, Government Business Relations, McGraw Hill, Melbourne. Edwards, M. et al., 2010, Public Sector Governance, Rise of corporate and public governance In Australia, unpublished book manuscript. Halligan J., 2010, Steering from the Centre: Central Government Offices and their Roles in Governing, University of Toronto Press. Australian Public Service Commission (APSC). Building Better Governance. Contemporary Government Challenges. Kodgruppen S., 2004, Swedish code of corporate governance: a proposal by the Code Group, Norstedts Juridik AB: New York. Halligan J., & Wilks S., 2002, Reforming public and corporate governance: management and the market in Australia, Britain and Korea, Edward Elgar Publishing: New York. Read More