The Future of Corporate Governance - Essay Example

THE FUTURE OF CORPORATE GOVERNANCE Essay Student’s Name Instructor’s Name Course Title Date Introduction Corporate governance can be described as a system established to direct and keep companies under control. The system involves both relationships and the interactions between the company and all its stakeholders. It involves decision making and the control of the corporation’s resources. The major external stakeholders in any company include the shareholders, suppliers, customers, debt holders and the community in which the company operates. The internal stakeholders include the board of directors, the management and the employees. Components According to Young and Thyil (2008), a good corporate governance framework should be aimed at promoting transparency and efficiency attributes in the markets. The framework should also be in line with the legal requirements for operations, articulating the division of roles among the different authorities within the corporation. The framework should also ensure that the rights of the shareholders are observed at all times. The treatment of the shareholders should be in an equitable manner regardless of whether one is a minority or a foreign shareholder (Tricker, 2012). The framework should be in line with the legal establishments that guide corporate governance. Another major component of corporate governance is disclosure and transparency which involve the timely relay of information to all concerned parties regarding the corporation governance and financial status. The strategic governance of the corporation should be factored in the framework. This will ensure monitoring of the major aspects of the corporation by the board, such as the management, which in turn has to be accountable to the shareholders. The Models of Practice Structures and components corporate governance, vary with the legal framework outlining the role and responsibilities of all involved parties. These legal frameworks vary from one country to the other. According to Randoy and Nielsen (2002), most of the models used by major corporations today can be classified into three major categories. The three models are classified as market-based such as the Anglo-US model and relationship-based such as the German and Japanese models. One of the models used is the Anglo-US model, a model characterised by the ownership of shares by individuals and investors not affiliated with the corporation. To raise capital, the corporations employ the equity finance method making the capital markets in the countries in which they operate to be large. The model emphasises on the inclusion of an Annual General Meeting (AGM), to facilitate the interaction between the different stakeholders. The model is developed within a context of free market economy necessitating the separation of ownership and the control of the public corporations, exempting investors from being liable for the actions of the corporation. The board of directors in the Anglo- US model, both the non-executive (outsiders) and the executive directors (insiders). The non-executive directors are institutions or people with no direct relationship with the corporation (Randoy and Nielsen, 2002). The executive directors are either persons employed by the corporations or those who have significant business relations with the corporation. The second model is the Japanese model. Here, the ownership of shares is mainly by the affiliated banks and other companies which create a system with strong, long term relations between the banks and the particular corporations. The board of directors is mainly comprised of the executive directors with a relatively low input from the outside shareholders due to the difficult procedures in the exercising of shareholder votes (Pye and Pettigrew, 2005). The capital contribution of the outsiders is also very limited hence making the corporations to rely mainly on the insiders and their affiliates. The model laid emphasis on having long-term shareholders who are preferably affiliate parties. A third model is the German model, which shares some characteristics with the Japanese model. Here, the banks hold long-term stakes in the corporations with bank’s representatives being appointed into corporations’ boards. The corporations are required to have two boards with different members. The two boards are the management board, which is made by the executives of the corporation and the supervisory board, mainly made of representatives of the employees and shareholders. The law bars an individual from being a member of the two boards. Another difference arises in the voting rights of the shareholders, which is determined by the law and hence not in any way dependent on the number of shares one holds. Changes have been realised in all the three models. According to Randoy and Nielsen (2002), traditionally the Chief Executive Officer (CEO) served as the chairperson of the board of directors which resulted in the abuse of power. Due to the problems that have arisen from this, there is more inclusion of the non-executive members ine governance of the corporation’s affairs. The current trend, does not encourage the CEO’ doubling as the chair of the Board of Directors (Trickler, 2012). This has been brought about by the increased governmental regulations which include the right of the shareholders to vote at the AGM. Individual shareholders have worked hard to gain knowledge of the trends so that they can be able to represent their interests better in the corporation. The increase in the investment and the change of voting patterns in the AGM are the major drivers in the changes being made as regards the corporation that employ this model. There is increased need to enhance the confidence of the shareholders without losing the self-regulatory elements that characterise the corporation (Ees et al, 2009). More changes in the boardroom are bound to be seen as the shareholders gain more knowledge of the functionality of the corporation in which they have invested. New approaches are emerging in the countries which use the Japanese model. It can be noted that, government control of the corporations in these countries has been reduced significantly. Westphal and Stem (2006), state that the growth in the world market has led to fragmentation of polices as it calls for the involvement of many Ministries, hence leading to the diffusion of the power that was initially held by the Ministry of Finance. With entry into the global market, most Corporations that were using the Japanese model have reduced their reliance on their domestic markets hence making them more independent from the industrial policies. To further open themselves to the global investors, the corporations using the Japanese model have, continued to accept liberalization and adopting openness. According to Trickler (2012), these changes are bound to continue as the corporations try to position themselves at the centre stage of the ever dynamic global market. The change in the alignment of these models has been taking place over the recent years. This has been brought about by the increase in regulation of the governance, increased pressure from the social and environmental agitators, and the increase of work within corporations. The Australian Stock Exchange Corporate Governance Council plays a central role in the changes made in corporation governance through its review of governance frameworks. For instance, it’s a requirement that all Corporation should ensure that the decision making process is both ethical and maintains responsibility in its execution. The governance of the corporation is therefore moving away from the singular approach that has been the norm by ensuring the linking of ethics, responsibility and the stakeholders. Thus, when making decisions, the corporation is required to consider both the views of the corporation and the society. As seen today, most businesses are determined to excel, a goal which cannot be achieved if all the stakeholders are not satisfied with the corporation's performance and its ability to handle its issues. There is also a quest to incorporate the firm-specific factors in the new governance framework (Young and Thyil, 2008). Key Drivers The key players in the corporate governance vary with the model of practice that is adopted by the different organisations. In the Anglo- US model, the key players include the corporation’s management, the board of directors, the shareholders, the self-regulatory organisations, consulting firms and other government agencies (Ees et al, 2009). The management, the board of directors and the shareholders are the major players constituting what is known as the “corporate governance triangle.” In the Japanese model, corporate governance is mainly centred on the main banks and a network of other financial affiliates, forming what is mainly referred to as the keiretsu (Pye and Pettigrew, 2005). The main banking system and the keirestu are different but they overlap and complement each other. The corporations that apply this model maintain a close relationship with a major bank. The bank’s function is to provide loans and other services such as bonds, equity issues and other financial consultancy services. The major bank in this case, is one of the majority shareholders. The government also has a key role in the operations of the corporations due to the industrial policies it has put in place. The interactions between the key players are aimed at linking them rather than ensure a power sharing. The non-affiliated shareholders have no voice in the affairs of the corporation. In the German model the key players include the banks and the corporate shareholders. The banks like in the case of the Japanese model, plays several roles including providing finances, shareholder, issuing equity being the custodian of the company's property. The inclusion of the representatives of the employees and the labour officials on the board is another key feature of the German model. Trickler (2012), asserts that new approaches in corporate governance require that, the board should be comprised of independent members who cannot be influenced by “group mentality.” This negates the undue influence of the corporations and tends to maintain a holistic approach to the issues that affect the corporation. A board that is made of independent individuals is more likely to make decisions that are of more benefit from the corporation’s and the social point of view, a balance which may require some sacrifice on the side of the corporation (Westphal and Stem, 2006). This is necessary as the corporation has a social responsibility to fulfill to all its stakeholders, failure to which the survival of the corporation is at a risk. The fact that businesses have an obligation beyond making profits, must be considered and its well factored in if the board has independent thinkers. Issues Related with Corporate Governance As it is, corporate governance does have its issues. During the transition, there have arisen issues as regards accountability. The initial mentality was that corporations were only supposed to be accountable to the owners and the shareholders (Pye and Pettigrew, 2005). This has changed since the accountability scope has widened to include other stakeholders such as the corporation's employees, all the creditors, the corporation's customers and the suppliers. Some governments, for example Germany, have included the concept of social responsibility in their statutes. The concept of corporate governance has also been questioned by others. This is because it has been deemed to be representing and working to safeguard the shareholders' interests. Like any other system that a corporation adopt, there are merits and demerits to the model of corporate governance used. According to Randoy and Nielsen (2002), it is important for the corporation to evaluate a model of corporate governance adopted on the basis of capital acquisition, competitiveness and productivity. For it to be maximally beneficial to the corporation, the model adopted should be put at the centre of any corporate restructuring and any structural adjustments. Another major issue is the question of who are the determinants of the corporate governance. The common mode of conceptualization is that the model of corporate governance is determined by the shareholders, board of directors and the management team. This thinking is wrong since the three only provide the skeletal structure upon which corporate governance is exercised. The dynamics of the corporate governance also depend on the statutory provisions that define how the shareholders exercise their rights and the disclosure of the activities of the corporation (Young & Thyil, 2008). The attributes of the board such as the composition, independence, representatives and qualifications of the board members are also variable and are changing with the review of the models based on the business needs and the laws governing corporate activities. Conclusion The need to have an all-inclusive corporation that is both focused on profit making and the maintenance of its role as a social entity has a significant effect on the operationalisation of corporate governance. The continued review of the legal requirements for the corporations and the reviews on how the corporations should be governed, necessitate changes in corporate governance. There has also been the interaction at the level of global market which has helped to shape corporate governance. These factors are here to stay and as long as they exist, changes in corporate governance are bound to occur. This means that the face of corporate governance today will be completely different from what will be seen in the next ten to twenty years. References Ees, H. Gabrielsson, J. & Huse, M., 2009. Toward a Behavioral Theory of Boards and Corporate Governance, Corporate Governance: An International Review, 17 (3), pp: 307–319 Pye, A. & Pettigrew, A 2005. Studying board context, process, and dynamics: Some challenges for the future, British Journal of Management, 16 (Special issue): 27–38. Randoy, T. & Nielsen, J 2002. Company performance, corporate governance, and CEO compensation in Norway and Sweden, Journal of Management and Governance, 6, p. 57–81. Tricker, B., 2012. Corporate Governance: Principles, policies and practices. Oxford University Press: Oxford Westphal, J. D. & Stern, I, 2006. The other pathway to the boardroom: Interpersonal influence behavior as a substitute for elite credentials and majority status in obtaining board appointments, Administrative Science Quarterly, 51: 169–204. Young, S. & Thyil, V., 2008. A holistic model of corporate governance: a new research framework. Corporate Governance, 8 (1), pp. 94-108 Read More