Corporate Governance Process - Essay Example

Corporate governance can be describe as the "the process and structure used to direct and manage the business and affairs of the business enterprise with the objective of enhancing long-term value for the shareholders and the financial viability of the business" (p 44). It is structure, which provides proper incentives to the management and company to attain their objectives, which are in the favor of both company and its stakeholders and also provide proper monitoring. (OECD Principle of Corporate Governance, 2004, p 13). Corporate governance consists of many focus areas as the participants in corporate governance are many such as board, management, stakeholders, creditors and shareholders. So OECD has provided principles for proper check and balance among them. There are six principles Ensuring the Basis for an Effective Corporate Governance Framework: A legal, regulatory or institutional base should be provided upon which market companies can depend on while establishing contractual relation (p 31). The Rights of Shareholders and Key Ownership Functions: The rights of shareholders must be protected and facilitated by providing proper framework. Equity shareholders may not be involve in corporate decisions but they have right to choose board of management, amendment to company's organic document, extraordinary transactions and basic issues related to company's law and company's status. Shareholders must also be informed periodically about general board meeting and they also have the right to ownership registration, transfer of votes, and share in profit. (p 34-36) The Equitable Treatment of Shareholders: Big shareholders are controlling shareholders while other are minority shareholders, it is therefore necessary to safeguard the rights of the minority shareholder so that management board, managers and controlling shareholders cannot advance their own interests. The legal and regulatory framework should be present to penalized company if any shareholder right is been violated and redress for grievances with reasonable cost without any delay Minority shareholder can also pose a lawsuit against management to avoid any misuse to this right of minority shareholders even management is protected by law in the form of safe-harbor a method to find the authenticity of shareholder's complaint. Thus a balance is required to be maintain so no shareholder is being deprive of his legal right and management is also being protected from superfluous allegations.(p 42-47) The Role of Stakeholders in Corporate Governance: The rights of shareholder are defining by law. Corporate governance also requires heartening various shareholders to commence economical optimal level of investment in company's capital. Contribution of all the shareholders helps to build competitive and profitable company. They must be provided with sufficient and valuable information. They have the right to bring into board knowledge the illegal and unethical practices. (p 48-50) Disclosure and Transparency: All the information about the Company's objective, major ownership rights, voting rights, financial situation, operating results, related party transactions to the market, performance, ownership, foreseen risk factors of the market, governance structure and policy of the company and matters of the company should be periodically disclosed to shareholders accurately. This disclosure ensure transparency which builds confidence of investors and creditors in the market and maintaining market integrity (p 51-55) The Responsibilities of the Board: Besides developing corporate strategies, the role of board is also to monitor managerial performance and to ensure handful return for its shareholders. The board is also bound to prevent the conflicting interest and check system to grantee that corporation comply with application law including tax, competition, labor, environmental, equal opportunity, health and safety laws. Board should take decisions which are not biased and fair to every class of shareholders. Key functions performed by board are guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures. (p 60-68) Corporate governance is also bound to have "the systems and procedures by which enterprises are directed and controlled" (code of practice for the governance of state bodies.2001). So Information system helps to control through internal auditing and gives information which is of strategic importance which lend a hand to direct the company in right direction According to An Rolnn Algeadals Department of Finance 'Code of practice for the governance of state bodies' internal auditing should include detail testing of all the specified areas and the internal audit function in each State body should review acquiescence with procurement and disposal procedures as per demanded by the Board Audit Committee, periodically and report to the Board Audit Committee(2001,p 24-25). Example of internal auditing potential to unravel any malfunctioning is stated by Armao that "In addition to bringing to the authorities' attention that its subsidiary, U.S. Foodservice, unit had overstated revenue by more than $800 million, the company, without prompting from the regulatory agency, conducted a top-to-bottom review of all potential problems. It then shared the results of its investigations with the SEC, analyzed and reformed its accounting practices at all its operating units and dismissed employees, including high-ranking management, who were involved in the fraud". (Armao Joseph, Changing Corporate Cultures: No More" Pure Hearts and Empty Heads", 2005). As the world is rapidly changing so do the corporate efficiency measure tools have been evolved. Today information system tools are mainly incorporated to maximize outcome of corporate governance. So IT governance is another dimension which involve actively it governance around enterprise's objectives and performance goals. TVA's IT governance includes a project review committee, benchmarking, and selective chargeback. (Weill, Ross (2005): Ten Principle of IT Governance, 2005). IT governance require redesigning but individual need time to learn about new roles so redesign should only be done when change in desirable behavior is required. For example State Street Corporation, JP Morgan Chase, Carlson Companies, and UNICEF designed governance to create balance in business unit autonomy and commonality (Weill, Ross (2005): Ten principle of IT Governance, 2005). IT governance can also be used to give confidence in introducing change for example State Street Corporation launched enterprise-wide IT budgeting when shifting from enterprise to corporation. These processes facilitate organization reforms through IT. Information systems are building to gain business unit synergy as well as autonomy. Now let us consider an example of Sun Microsystems Ltd which has 30,000 employees in 100 countries. Sun Information Technology Department thought to design a framework to view IT alignment with company's overall business strategy. So they implemented Control objective for Information and related Technology (COBIT) framework. COBIT caters to following categories Data security classification, System-granted access control, Role-based segregation of duties, Event-driven authorizations, Data validation, Interfaces, Batch processing.( COBIT and IT Governance Case Study: Sun Microsystems). One of the major principles of corporate governance is accountability and transparency .IT has no direct impact on accountability but information and Information System (IS) does affect it. According to Richard Heeks, computerized accountability IS initiatives in the public sector appear to have supported: - Financial accountability to some extent - Managerial accountability to a limited extent - Political accountability to a very limited extent, and - Public accountability hardly at all. So corporate governance can be considered as the framework which provide directive to attain company's objective by maximizing the interest of its shareholders, management and stakeholders. This framework also makes sure of the informational, legal, political rights of its shareholders and management. In the mean while accountability and control is also provided by information systems like auditing financial systems thus keep check and balance in and company. REFERENCE: 1. Code of Practice for the Governance of State Bodies: A Rolnn Algeadals Department of Finance Retrieve on 22 April'07 http://www.finance.gov.ie/documents/publications/other/codeof practice. PDF 2. Peter Weill, Jeanne W.Ross: Ten Principles of IT governance 7 April'05: Harvard Business School. http://hbswk.hbs.edu/archive/4241.html 3. OECD Principles of Corporate Governance (2004): Organization of Economic Cooperation and Development Retrieve on 22 April '07 http://www.oecd.org/dataoecd/19/10/34081097.pdf 4. Heek, Richard July 1998: Information System for public sector management Retrieve on 23 April '07 http://unpan1.un.org/intradoc/groups/public/documents/NISPAcee/UNPAN015474.pdf 5. Armao, Joseph (2005): Changing corporate cultures: NO More 'Pure Hearts and Empty Heads" http://jobfunctions.bnet.com/whitepaper.aspxdocid=142360 6. COBIT and IT Governance Case Study: Sun Microsystems: IT Governance Institute. Retrieve on 22 April'07 http://www.itgi.org/Template_ITGI.cfmSection=Case_Studies1&CONTENTID=22889&TEMPLATE=/ContentManagement/ContentDisplay.cfm Read More