Reflection Paper #4: The Concept of Corporate Governance
Lionell C. Henderson
Northwood University
MBA 664: Satisfying Shareholders
Spring 2015 – Evening
Adam Guerrero, PhD
Adam Guerrero, PhD
This was a very interesting article, in my opinion it brings to mind the derived phrase, which came first the chicken or the egg. Meaning, is corporate governance an attempt to control the results of unethical practices of corporations or is it meant to deter them. In reading this article, it is clear that certain corporations practiced unethical business behaviors for self-interest, but the questions this author have are: 1. Should corporate governance be regulated by the legislature as well as the organization and to what degree, 2. Is corporate governance, there to protect the shareholder or the stakeholder, 3. How effective is corporate governance on a global level. The need for a governance system is based on the assumption that the separation between the owners of a company and its management provides self-interest executives the opportunity to take actions that benefit themselves, with the cost of these actions borne by the owners (Larcker & Tayan, 2008).
Should corporate governance be regulated by legislation as well as the organization and to what degree? The most important formal legislation pertaining to this issue was the Sarbanes-Oxley Act of 2002, which insisted there be a system of requirements to reduce conflicts of interest and improve corporate controls.
As details of the Enron scandal surfaced public outrage grew, calling for action, accountability and consequences. Corporate governance began receiving renewed interest. Corporate governance is a multi-faceted subject that sets forth the rules and responsibilities of the relationship between the corporation and its stakeholders (Cross & Miller, 2012). This includes the company’s officers and management team, the board of directors, and the organizations shareholders.
Corporate governance: “The set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control.” (Cornett, Adair, & Nofsinger, 2016, p. 16).
The rise and fall of the Royal Bank of Scotland is characterized by poor corporate governance which allowed for the complete dominance of the executive management over the board of directors and a massive principal-agent problem. Positive social dynamics and the power of weak ties allowed for compliance while intimidation and bullying tactics silenced questions, concerns and opposition. The board’s utter compliancy and borderline negligence enabled rampant, unchecked empire-building at the cost of shareholder value and led to a spiral of unaccountability and gross incompetence. Stakeholders’ loss of confidence from misinformation and misdirection was an inevitability that sealed
At Paramount the unitary board exists, where according to the textbook, a unitary board is when a company has a single governing body (Tricker 2009). A non- executive director is defined as a person who is not involved in the day to day management of an organisation but rather in business tasks such as strategic planning, and monitoring of executive directors. An executive director tends to be more involved in the managerial aspects of the company.
The need for clarification on the board requirements for a majority of independent directors as it relates to corporate governance is of great importance and would be discussed in this write up.
The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. In the context of public service or private sector organization, Good Corporate Governance is therefore about ensuring all stakeholders’ adherence to organizational policies, procedures and systems.
One.Tel’s ever increasing investments in tangible and intangible assets and its deepening cash deficit in operating activities were financed by issuing both debt and equity. It issued equity capital of $430.3 million and $818.8 million in 1999 and 2000 respectively and raised $58.9 million and $139.8 million of debt in 1999 and 2000 respectively. It could only survive as long as it could raise new capital investment and debts more rapidly than it was burning money.
Corporate governance is concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated by the separation of ownership from management, an increasingly vital feature of the modern firm. A typical firm is characterized by numerous owners having no management function, and managers with no equity interest in the firm. Shareholders, or owners of equity, are generally large in number, and an average shareholder controls a minute proportion of the
1. This article focuses on the Gompers, Ishii, and Metrick (GIM, 2003) study which found that strong shareholder rights lead to higher stock price returns and thus value. This is a great indicator that good governance has a direct effect on the performance of the firm. The article finds the correlation of corporate governance and the positive impact it has on the firm, management, and shareholders. However the article provides a subjective view, is good governance the correct metric of evaluation. The primary finding of the article is a comprehensive and economic analysis defending the relation between corporate governance and performance. This article examines the inter-relationships among corporate governance,
A function of corporate governance, information technology (IT) governance ensures the alignment of IT with business goals and value delivery through the use of investments. This means that there must be a clear understanding of what the business strategy is, in order to align the IT strategy with the business strategy. IT governance provides clarity between the business strategy and the IT initiatives, drawing the links between business objectives and project objectives. However, it is not enough to create the links, so it additionally provides clarity through the preparation of a business case for each initiative, in order to show how the project will improve the organizations business capabilities. From their it attains agreement on priorities as a group looking at the entire enterprise, by making a determination as to what initiatives to continue with and which of these they should finish first. Ultimately they must understand the resources necessary to accomplish the initiatives. Through good governance the organization establishes priorities on both human and financial resources.
The debate regarding corporate governance can be traces to the early 1930’s with the most notable publication being ‘The Modern Corporation and Private Property’ by AdolfBerle and Gardiner Means. In their publication, Berle and Means noted that despites presence of wide dispersion of ownership of firms’ and the subsequent separation of control and ownership there did not exist any check to control the executive autonomy awarded to corporate managers. Their ideas now known as the agency theory are concerned about the possibility of agents employed as professional executive to act on the behalf of business owners, serving their own interests and not those of the principals. This theory asserts that in order to deal with this problem,shareholders must incur ‘agency costs’. ‘Agency costs’ are designed to provide incentives to the professional executives so that they can align their interest to those of the shareholders (Robert. 2014).
The importance of governance has emerged only after the numerous corporate scandals witnessed globally during the past years. The aftermath of these failures have driven most OECD nations towards continuous reformation of their corporate governance practices. (OECD, 2003)
Issues regarding corporate governance of companies are growing in importance. Corporate governance involves ‘the system of rules, practices and processes by which a company is directed and controlled’ (Investopedia, 2014). A company should treat all its stakeholders with respect and integrity. A controversial branch of governance is the extent to which executives gain compensation. This may or may not reflect their performance or be within the best interests of their shareholders; who are the owners of the company. Since the formation of the limited company, whereby management is separated from ownership an agency problem has emerged, as executives and other directors’ aims may not be in line with shareholders’ interests. Different
“Corporate governance, according to the Organisation for Economic Cooperation and Development (OECD), is ‘the system by which businesses are directed and controlled.’” (cited in Britton & Waterston, 2010, p.235) Corporate governance of a company maintains the welfare of the stakeholders in an organisation. Stakeholders are people who are directly affected by the company’s actions and consequences, such as the directors, managers, employees, auditors, and shareholders. Executive compensation is an important part of the corporate governance. It is a financial return for the executives’ services to the company, which is devised to ensure that the directors are “kept in line” in terms of their actions and performance in the business’s
Unfortunately, the (Sarbanes Oxley )law couldn’t prevent another economic crisis because some years later after the law ,and in 2007 the world experienced the biggest economic crisis since the great depression of 1930.So My research study focused on the role of corporate governance to avoid similar crisis in the future.