Describe about the Corporate Governance and Social Responsibility for Smooth and Efficient Functioning.
Corporate Governance and Social Responsibility goes side by side for smooth and efficient functioning of business activities in an organization. Corporate Governance means the mechanisms, relations and processes in which the organization is directed and controlled. It helps in identifying the rights and responsibilities of various participants in the corporation, such as board of directors, shareholders, managers, creditors, auditors and other stakeholders. The practices of corporate governance are often affected by attempts to align the stakeholder’s interests.
Corporate Social Responsibility means the self regulated integration in a business model. This policy aims to ensure compliance with ethical standards and spirit of law (Horrigan, B, 2010). It mainly keeps its focus on increasing long term profits and building shareholders trust by making positive relation with the public and ethical standards to reduce business risk. It wants to get a positive impact from the stakeholders and other communities.
Both Corporate Governance and CSR aim in maintaining ethical practices in business and responsiveness towards its stakeholders as it will result in better image of an organization. (Boubaker, S and Nguyen, D, 2014).
Fantasy Products Inc. should not only focus on increasing its profit. In an organization it is necessary to maintain a balance between the shareholders value and profits. The discussion that occurred between Blanche and Stanley clearly leaves an impression of dissatisfaction in the ways that company has engaged itself in making profits. It is the CSR of an organization to make its corporate governance policies keeping in mind the rights and need of their shareholders and employees (Simpson, J and Taylor, J, 2013). The primary goal of Fantasy Products Inc. should be to increase the wealth of their shareholders by making payment of dividends and causing an increase in the price of the stock. We know that the executives of Fantasy Products are obligated to maximize the profit of the company and shareholder value maximization is not their obligation, still the rights of the shareholder should not be completed ignored as it may create a bad reputation for the company.
A publically owned company raise its funds from investors. Therefore it is very essential to make a significant amount of return to their investors to attract more investments that can bring long term profitability for Fantacy. The shareholders have direct as well as indirect roles in the company. In the stock market they play an indirect role, as an investor will want to invest more only when the company is beating the expectations of the shareholders (Basu, C, 2016). Corporate Governance policies in this company are absolutely formal. The company should make timely disclosure of its profits to the shareholders. In Fantasy, if the management team continues to offer insufficient value of shares, the shareholders will unite to block such moves for their dissatisfaction towards the current management policies.
Some other ways in which the company can achieve its overriding goals are Firstly it will be a wrong perception to say that making money should be the overriding goal of a company. Fantasy can achieve the determined goals of the company by increasing the employee efficiency, increase in productivity, customer trust and practicing social and ethical values (Dishman, L, 2012). The efficiency of employees can be increased by allowing the employees to participate in the decision making process hence opening gates for themselves; to become more productive and innovative.
Yes, it is very much true that there is some sort of Agency problem going on in the company. As Stanley has mentioned in the case study, that company is not taking the consideration of the shareholders while planning its profits and long term goals. Agency problem is the conflict that may arise between the company’s stockholders and the management, where one party does not act in the best interest of another (Solomon, J, 2007).
In Fantasy Products the agency problem is mainly between the Managers and the Owners. The goal of management is different from that of the shareholders (Kafi, A, 2014). And this is the reason why shareholders are not allowed to participate in the management process directly. In this company the managers are giving priority to their own interest without giving any consideration to the interest of the shareholders. And this results in a conflict between both the parties. In Fantasy it is the shareholders who appointed the managers to work for their interests, but the managers are working for their own benefits. This kind of conduct can be harmful for the company and the stockholders.
Another reason that can cause agency problem is when the managers refuse to merger with another company although that would be in the best interest of the shareholders (Sarra, J, 2011). Therefore, to prevent such issues and challenges certain measures should be taken to control the position and power of the management of the company. The shareholders of Fantasy should use several mechanisms to control the activities of the managers. Internal measures include internal audit, change in the payments and salaries of the company managers and by concentrating ownerships (Boubaker, S, Nguyen, B and Nguyen, D, 2012). Good corporate Governance can also help in doing so. Measures should be taken to detect and prevent the inefficient operations of the company by protecting the assets and capital of the company. Internal audit should be conducted regularly to be aware about the financial position of the company and also to ensure that managers have maintained all the compliance as prescribed in the policies of corporate governance. For the availability of external financing and a better approach the company should form a good system of its corporate governance. Fantasy should properly define its priority goals and allocate tasks to the respective managers keeping in mind the benefits and rights of their shareholders. External audit and capital market also has some influence measuring the conflict arising between the management and shareholders.
From the information available in the case study of Fantasy Products Inc. we can relate that it is not being able to take effective control measures to control the pollution caused by the company. It is stated that the company is being investigated by the inspectors of State and Commonwealth environment as the company is engaged in polluting the storm water drains and also causing harm to the national park wildlife. This is not the present issue but it is being carried forward from many years. The company has a negative attitude towards the safety and social responsibility of the environment as it thinks that it is very costly and time consuming to take preventive measures to stop such pollution; and it will ultimately affect the profits of the company badly.
Fantasy is totally irresponsible in taking pollution control measures as it is unaware about the facts relating to the benefits of controlling pollution while conducting business activities. In order to avoid criticism Fantasy should take suitable measures to prevent pollution. Some of the important reasons are as follows:
Reduction on health hazards: There is clear evidence that pollution will bring health hazards such as cancer, lung complications and heart attacks. (Louche, C, Idowu, S and Filho, W, 2010). When pollution control techniques are adopted it not only checks the seriousness of the disease but also supports a healthy life in and around.
Risk of liability is reduced: Fantasy is held to pay compensation to those people who are affected by the toxicity and wastes that it produces and releases in the environment. It will be a safe to install devices of pollution control to reduce the liability risk.
Cost savings: The cost of operating business can be reduced by an effective pollution control procedure. Due to improper production technology it results in greater wastages that lead to a higher cost of waste disposal and increase the cost of cleaning the plants.
Improved Public Image: The policies and practices of Fantasy is likely to influence the attitude of the people as we know that the society is becoming more conscious of environmental quality day by day. In order to earn a good reputation Fantasy has to promote the cause for environment and be socially responsible (Maximiano, J, 2003).
Other social benefits: Pollution control can result into other advantages as well like clearer visibility, better quality of life, cleaner buildings and availability of natural products in a pure form (Peddle, R, 2004).
Despite of the fact that pollution control techniques acquires a high cost to install various devices that controls pollution, Fantasy should take long term benefits into consideration so as to build trust among the customers and a good reputation to attract more investors to meet the funding that the company requires to carry out day to day activities.
The corporate governance structure of Fantasy Products Inc. is totally an ineffective one as it only focuses on profit maximization and neglecting the maximization of the benefits of its shareholders who are the actual owners of the company. The reason behind the poor corporate governance structure of Fantasy Products is its ownership structure, the structure of company’s board and the financial structure. The institutional environment such as legal, political and regulatory environment in which a company operate also influences the structure of corporate governance (Urlacher, P, 2008). It is the outcome of political decisions that takes place in the firm. The right of control should be in the hands of shareholders as well to control the activities of the management that is truly for their own benefits (Davies, A, 2006).
Fantasy Product should plan a new framework for deciding the goals and objectives of the company if it wants to solve the emerging problems amongst its employees and shareholders. It should realise the importance of corporate governance in a business – improved reputation, fewer penalties, fines and lawsuits, and decreased conflicts and fraud. The practice of sharing information related to its profit will increase transparency that will allow people to feel more confident in making investments and maintaining business relations with the firm. Fantasy is not being able to maintain effective corporate governance and as a result it will have to suffer a heavy loss in the coming future. The company is being investigated by the respective authorities and soon will have to face a heavy fine and penalties for not conducting ethical practices and corporate governance. It is high time now, for understanding the importance of corporate governance by Fantasy; they can limit the bad behaviour of their employees by considering their value and the value of the shareholders. If Fantasy still continues to neglect the rights of its shareholders, the shareholders might file a suit against the conduct of the company for the non – compliance of corporate governance.
Conclusion
From this case study we can say that the relation between various shareholders and management of the firm raises many questions related to the process of value creation. The shareholders have specific expectations from the firm and require a specific knowledge and information on this condition. We know that shareholders participate in the value creation and a lot of questions are raised to know the measurement of shareholders value. It should frame its policies according to the needs and wants of shareholders, customers and environment to maintain its goodwill and long term profitability; balancing CSR and Corporate Governance in the best possible manner.
Thus, Fantasy Products Inc. should contribute some effective incentive methods to encourage shareholders to make efficient and responsible conduct in order to achieve the common objectives of the firm and that of the partners. Profit maximization is important for every firm but they should not ignore the maximization of shareholders value. Before the disclosure of investigation report, Fantasy should realise its responsibility towards the shareholders and environment protection, to avoid penalties and fines. There is also a chance of being ceased to carry out business activities.
References
Basu, C. (2016). [Online]. The Importance of Shareholders in Business. Viewed 5 October 2015 from https://smallbusiness.chron.com/importance-shareholders-business-20844.html
Boubaker, S and Nguyen, D. (2014). Corporate Governance and Corporate Social Responsibility: Emerging Markets Focus. World Scientific.
Boubaker, S, Nguyen, B and Nguyen, D. (2012). Corporate Governance: Recent Developments and New Trends. Springer Science & Business Media.
Davies, A. (2006). Best Practice in Corporate Governance: Building Reputation and Sustainable Success. Gower Publishing.
Dishman, L. (2012). [Online]. 6 Achievable Business Goals Your Company Needs To Set Now For 2013. Viewed 5 October 2016 from https://www.fastcompany.com/3003820/6-achievable-business-goals-your-company-needs-set-now-2013
Horrigan, B. (2010). Corporate Social Responsibility in the 21st Century: Debates, Models and Practices Across Government, Law and Business. Edward Elgar Publishing.
Kafi, A. (2014). [Online]. Types of Agency Problem. Viewed 5 October 2016 from https://educenterbd.com/types-of-agency-problem
Louche, C, Idowu, S and Filho, W. (2010). Innovative CSR: From Risk Management to Value Creation. Greenleaf Publishing.
Maximiano, J. (2003). Corporate Social Responsibility: basic principles and best practices: historic philosophical issues in international business. PLDT.
Peddle, R. (2004). Implementing Effective Corporate Social Responsibility and Corporate Governance: A Guide. BSI British Standards Institution.
Sarra, J. (2011). Corporate Governance in Global Capital Markets. UBC Press.
Simpson, J and Taylor, J. (2013). Corporate Governance Ethics and CSR. Kogan Page Publishers.
Solomon, J. (2007). Corporate Governance and Accountability. John Wiley & Sons.
Urlacher, P. (2008). New Issues in Corporate Governance. Nova Publishers.
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