Corporate Governance Issues - Assignment Example

Title of the Paper Name Course Tutor Date Section A: Letter of Advice Thank you for asking for advice from this organization. After such a lengthy discussion we had with both of you, I highly recommend that you engage in a business partnership. I will give you a brief background on the forms of partnership that are applicable to you and later narrow down on the best fit. It is important to remember that you already have shared interests in running a business over the long period you have known each other. Note that a partnership is formed by a number of people from two to a maximum of twenty. This is important for you to know that you already a number that is legally acceptable to begin a business partnership (Benet & Abbe 1964, p. 16). A general partnership will require the two of you to be equally responsible for the management of your business, each of you will have unlimited liabilities for all obligation that occur and debts. The second option for consideration by the two of you is the limited partnership. This form exempts one partner from particular liabilities that would be incurred when the business is operational. The affected member will have limited liability. This means that the remaining partner is an automatic general partner. The general guidelines on this form of partnership are that if you wish to expand in future, the number of limited partners has no limit in the law (Poe1988, p. 21). One advantage that you will enjoy with this type of business investment is that since you are of two different professions that are John is a lawyer and Fred an accountant, and then you will pool the diverse knowledge, skills and experience. The risk involved is that you ought to be careful to avoid conflicts of personalities as this may cause disputes (Benet & Abbe1964, p. 33). This form of business partnership is flexible in the sense that you are at liberty to change the structure to suit the circumstance. In addition to following the legal processes of registration, the partners will have to draw up a Partnership Agreement. The agreement identifies important elements that include authority, roles and liabilities of each partner. It also stipulates how the business partners will share the profits that the business will gain. The process of registration will include searching for the business. It is however, important to remember that if you decide to run the business in your two names that John and Fred, then you will be exempted from the process of searching the business name. I recommend that engaging in a general partnership would be better that the limited partnership. In doing this, the Partnership Agreement will spell out their exclusive rights, obligations and duties. It also underscores what is legally mandated to each partner. Gaps that may appear in the Partnership Deed are catered for in the general guidelines that government laws have stipulated that in most cases are used as foundations of developing specific agreements for partnerships that form. Your duties as partners in a general partnership will include running the business to the benefit of both partners (Poe1988, p. 51). The two professions are very important. John will apply his experience in law to deal with legal matters of the partnership that may include registration and legal aspects that the business may face in future. Fred, who is an expert in financial matters, will deal money with matters very well. Each partner has an obligation to be faithful to the other. They are expected to demonstrate maximum fairness towards other partners in business throughout the business activities. Proper accounts are to be provided by each partner to avoid mistrusts from creeping into the partnership. Every transaction is supposed to be accompanied by supportive documents that include vouchers. In the spirit of being faithful and practising utmost good faith, partners must divulge full information relating to business activities. This creates transparency and trust between the two partners. It is also an obligation of the two of you to be committed to your roles bearing in mind that partners are not entitled to remunerations. It is also the responsibility of the partners to share losses that accrue equally between themselves. This goes along with using partnership property for business activities only. A business car for instance should be used to run personal errands. When used by any partner, then it must be on a business mission (Poe1988, p. 32). The Partnership Agreement also stipulates the exclusive rights that are enjoyed by partners. The two of them are entitled to take part i the daily management of the business. They have a right to air their opinion be consulted before the decisions of the business are made (Benet & Abbe1964, p. 39). This is in addition to accessing the books of accounts, indemnifying payments that pertain to liabilities and using the partnership property exclusively for business activities and the right to continue being a member of the business for as long as they wish to continue. Section B: Corporate Governance Corporate governance is a technique of law and resonance style by which corporations are engaged and managed. The focus is centred on both internal and external mechanisms with the aim of supervising the management actions with the aspiration of justifying the risks which could branch from the transgression of corporate bureaucrats. Through corporate governance, the business can police itself. The company outlines its own customs, laws and policies for its staff across the board and without discrimination (Monks & Minow 2004, p. 13). The process increases accountability of the business companies to avoid particular actions that may be harmful to the company in the end. Genuine elimination of problems with utmost good faith is important in enhancing the success of corporate governance. Enron, a former powerhouse in the energy sector business is widely quoted to have crumbled because of failing to successfully implement corporate governance. It was surprising to realize that the junior employees, those in managerial positions and the stakeholders were all bankrupt. Most countries are in the process of drafting legal frameworks to make sure that shareholder are fully engaged and that companies that are suitable operate within countries. These are efforts from the law enforcers to enhance transparency between companies and the entrepreneurs. The laws are aimed at improving the mode of operation across countries while at the same time encouraging long-term engagement of shareholders. A case to mention is the Action Plan which is a European company law and corporate governance. It was formulated on December 12, 2012. Importance of corporate governance It is said that if a company must have a business plan, then it must also corporate governance. The importance of corporate governance to a business company is equalled to the role of a primary business plan. It is the best tool that is used to mitigate risks. A solid structure of corporate governance prevents scandals and liabilities that are either criminal or civil in nature to a company. The company brand is improved when its image is well received as company that controls itself using its internal mechanisms. Effective execution of corporate governance creates a good working culture among company employees that is particular as well as establishing shared ideologies and practices. It is the conscience of any business company. For instance, the company must b aware that their staffs are human can make mistakes (Monks & Minow 2004, p. 43). In the case of Salomon v A. Salomon & Co. Ltd [1897] AC 22 it was stated that a company once registered represents a legal entity which is separate from those who formed it and those who will later join it. The obligations created are that it becomes a limited company, capable o being sued and suing, can own property and perpetual succession applies. To ensure that the company runs smoothly, the secretary acts as the main person in guidance of the affairs of the company and provides directions to the non-executive directors. Executive vs. Non-Executive Director Executive and non-executive director are the two broad categories of company directors. The Executive Director is also called the Chief Executive Officer. He has the full powers and authority to fundamentally manage the company. He takes the leadership duties within the organization. Common duties of the Executive Director include giving the necessary support to the board of administration by advising them and acting as a link between the board and staff. He also gives the overall supervision by overseeing production of good and services. He also gives recommendations on financial matters among many more (Jackins 2004, p. 31). Generally both the director and the non-executive directors have a common law duty as stated in the Re City equitable case to show reasonable competence and duty of care. In the case of Dorchester Finance Co Ltd v Stebbing 1977 a non-executive director claimed that they had no liability since they were not experienced. The court held that all of them are liable in signing bank cheques, being negligent and not showing reasonable skill and care. One can therefore make a reasonable conclusion that even though the difference only exists in relation to their titles, they are all bound by the same duties as fiduciaries. Fiduciary Duty A fiduciary is a person who takes the responsibility to act for and on behalf someone else on a specific issue that leads to a relationship of trust and confidence. This is a relationship of trust between parties that is either ethical or legal. It involves one party taking care of the money of the other. It is the utmost standard of care of equity or law. Loyalty is the key to the relationship (Rahim 2005, p. 07). A fiduciary duty as defined in the case of Re Equitable Fire Insurance Co [1925] means that the standards set by the law for directors to do their functions. This broadly means that they must be honest and not seek personal advantages. The tests that have been formulated to determine whether there is a breach of fiduciary duties as stated in Re Lee, Behrens & Co Ltd 1932 are; Is the transaction reasonably incidental to the business conducted by the company, is the transaction bona fide, or s the transaction done for the benefit of the company or promote its prosperity. The importance of fiduciary The greatest importance for the existence of fiduciary duties in a company is that it ensures that the directors both the executive and non-executive directors exercise their powers honestly for the best interest of the company (Re Smith & Fawcett Ltd (1942)). The duty created through a fiduciary is not owed to the individual shareholder but to the company. According to the case of Howard Smith Ltd v Ampol Petroleum Ltd 1974 it was stated that the powers of a fiduciary are restricted to their powers in accordance with those that are enshrined in the articles of association. On the other hand if a director uses their power irregularly shareholder would apply to the court to declare any transaction as void as held in Hoggy Cramphon (1966). List of References Benet, V & Abbe, G 1964, Stephen Vincent Benet on writing: A great writer's letters of advice, Greene Press, Brattleboro. Jackins D 2004, Special needs trust administration manual: A guide for trustees, IUniverse.com, Lincoln. Monks, G & Minow, N 2004, Corporate governance, Malden, Blackwell Pub, Mass. Poe, W 1988, The McGraw-Hill handbook of business letters, McGraw-Hill, New York. Rahim D 2005, The fiduciary an in-depth guide to fiduciary duties--from Studebaker to Enron, iUniverse, New York. Read More