Question:
Discuss about the Regulation and Effective Corporate Governance.
Corporate governance refers to a stipulated set of guidelines and laid down procedures through which a corporation is governed through. It includes rules and regulations which dictate how decisions are achieved at in a corporation (ASX Corporate Governance Council, 2014). Corporate governance is anchored on striking a balance among the various components of a corporation, such as the shareholders, regulators, directors and other stakeholders, as well as outlining the rights of each stakeholder according to Al-Tawil (2016). Nevertheless, some of the stakeholders – more so the board of directors – have been violating these laws, hence, leading to the downfall of several corporations all over the globe. The board of directors is mandated to oversee the operations of a company to safeguard the interests of the shareholders (Martin, 2015). As a result, the Board is expected to hold regular meetings to review the performance of the organizations and chat the way forward. Some of the notable companies that have fallen as a result of violations of the company rules by their board of directors – for instance, the CEO’s – include Enron and DuPont.
Sonnenfeld points out that most of the board of directors play a key role in the failure of a company by failing to act whenever they note something unusual has happened or making a hasty decision to fire a performing CEO without having enough evidence that he/she may have engaged unethical conduct (Sonnenfeld, 2015). In some cases, the Security Exchange Commission (SEC) has been forced to move in to try and save the shareholders from suffering immense losses. For example, in 2001, SEC decided to investigate the accounting practices at Enron after getting a lot of complaints from the shareholders (Forbes, 2013). Ultimately, various key stakeholders (the CEO and the Chief Financial Officer) were prosecuted for flaunting the accounting rules.
The main factor that enables a firm to succeed is appropriate leadership, which is provided by its executives. As leaders, the directors are supposed to provide a vision for the firm to the employees and also motivate them (the employees) in order to ensure that the desired objectives are met within the set timeline. There are a number of leadership factors that may lead to the failure of a firm one of them being poor management skills by the leaders. In some cases, the directors have failed to enact adequate policies that guide the process of hiring new employees, which may lead to a case whereby unqualified staffs are enrolled.
At other times, the boards have turned down the employees’ demands for better remunerations and promotion schemes, hence, making the experienced employees (who are very resourceful) to seek for greener pastures elsewhere. There have also been cases whereby the boards of directors have failed to encourage innovation, which is an important factor that enables a firm to counter competition from its rivals. Such organizations (which do not support innovations) may end up exiting from the market due to lack of skills to attract new clients, counter the ever increasing competition, and even failure to retain their existing customers, which leads to a decline in their market base. However, during the 2008 financial crisis, it has also been noted that the lack of accountability from the board of directors is a key reason that has led to the collapse of various organizations. In some scenarios, it has been found that the directors have failed to provide the necessary oversight while in others, they have been engaging in unethical conducts, hence, violating the firm’s policies.
As noted earlier, several organizations have failed to perform as expected as a result of a failure by their board of directors. Kirkpatrick notes that weaknesses in the composition of the boards as well as their incompetence may have played a significant role in the failure of the firms (Kirkpatrick, 2009). According to Kirkpatrick, the negligence of duties by the board of directors was a key factor that led to the financial crisis in 2008. He notes that most boards did not perform one of their critical functions – reviewing and offering guidance on risk-taking – which made some companies (more so financial institutions) encourage and reward higher levels of risk-taking. In some other case, it has been noted that the board of directors work in cahoots with corrupt officials, which eventually leads to great losses within the organization (Sonnenfeld, 2002). Sonnenfeld notes that most of the directors possessed the required qualifications to sit at the firm’s executive meetings, which affirms that their lack of accountability is the key factor that has led to the downfall of their respective institutions.
Keay and Loughrey point out that accountability is one of the factors that make up good governance in any organization. According to them, the Committee on the Financial Aspects of Good Governance revealed that its Code of Best Practice principles are anchored on accountability and integrity (Keay & Loughrey, 2015). The scholars claim that accountability of the board of directors leads to value creation in the body, hence, it is an integral factor that may enable a firm to minimize its costs to reap maximum benefits (profits). As a result, the Keay and his colleague emphasize that accountability and the transparency of the board of directors are the most crucial factors that enhance corporate governance. They also cite that the Financial Reporting Council had redefined corporate governance and had noted that it is a means of coming up with a system of control between an organization’s management and its board and a means of enhancing accountability from the board of directors as well (Keay & Loughrey, 2015). Keay also claims that the accountability of the board of directors is a major issue in corporate governance that has attracted the attention of not only the government but also that of international bodies (Keay, 2015). He cites that a lot of powers are bestowed on the boards and, thus, it is reasonable if they were asked to account for their actions. According to Aguilera, the boards of directors have been found to be at the center of corporate misdeeds, which have led to the downfall of a lot of companies (Aguilera, 2005). Keay is also of the opinion that most of the Corporate Governance Codes are based on the principle of apply or explain (an organization’s board has to follow the dictations of the codes or give a reason on why it does not follow the code’s stipulations), which makes it optional for the firms to embrace it or not, hence, giving the boards an opportunity to engage in unethical conduct and ultimately fail to account for their deeds (Keay, 2012).
Bonime-Blanc and Brevard also suggest that it is the responsibility of the board to make sure that the stakeholders have confidence in their company and, thus, they need to promote an ethical culture within the firm (Bonime-Blanc & Brevard, 2013). Therefore, the directors must realize that their oversight duties have an ethical element, which they must comply with at all times. To ascertain that every board member upholds the desired values, it should be made mandatory for any new member to have a commendable ethics and compliance history. Additionally, whenever it is noted that a specific director has some interests in a given issue that may result in a conflict, he/she should be stripped of his/her duties so as to save the company from incurring any losses that any arise due to such conflicts. Obert, Suppiah, Desderio, and Brighton claim that the success of an organization is hinged on the efficiency of its board of directors (Obertet, al, 2015). According to these scholars, poor corporate governance – more so, the directors’ failure to play their roles – has been the major cause of the failure of most organizations from all over the world key among them being Tyco, Enron, Global Crossing, and WorldCom (Obert et al., 2015). Obert and his colleagues are of the opinion that most directors have not been exercising their oversight roles as required, hence, making the investors suffer immense losses. They, thus, note that lack of appropriate corporate governance is due to the negligence of the board of directors to safeguard the interests of the stakeholders as required. In 199, the Turnbull Committee into the Combined Code of the Committee on Corporate Governance pointed out that a board of directors must always make sure that there exist appropriate mechanisms that enhance a sound system of the internal controls to protect the company assets and the shareholders’ investments (ACCA, 2017). Dans is of the opinion that the directors of quite a number of companies have also failed in ensuring that the firms produce environmentally friendly products. He gives the example of the Volkswagen firm, which had produced cars that were poisoning the environment (Dans, 2015).
Investigations revealed that the manufacturing of such cars was due to the CEO’s failure to ascertain that the engineering standards were complied with. According to Aguilar, a lot of corporations have incurred a lot of losses through the executive compensation schemes. He notes that such schemes are usually not aligned with the performance of the executives, which has impacted negatively on the sustainability potential of the firms (Aguilar, 2014). In addition, he cites that most of the directors have been enjoying the ‘pay-for-performance booms’ benefits without demonstrating the increased performance, hence, defrauding the companies. Aguilar is of the opinion that the dictations of the Dodd-Frank Act, which gives the investors the right to approve the compensation benefits of the directors should be implemented (Aguilar, 2014). The Act, hence, gives the shareholders the powers to have a ‘say-on-pay’ policy adopted by their organizations to ascertain that they do not lose a lot of funds as a result of lack of accountability from the firms’ executives.
The adherence to the organization’s ethics and risks policies plays a critical role in the elimination of the factors that may adversely affect its level of economic operations. Solomon points out the organizations’ boards should always embrace the Aristotelian ideas on virtue wherever they discharge their duties. To start with, the board of directors must realize that in every situation, the interests of the community members (shareholders) come before their self-interests (Okoye & Siwale, 2017). Therefore, they are supposed to pursue every matter with an objective of benefiting the shareholder’s so that they – the shareholders – can realize the value of the money they have invested in the respective businesses. Secondly, Solomon is of the opinion that the directors must have wisdom, which would hinder them from doing anything wrong that would adversely affect the firm (Soppe, 2012). Wisdom also enables them to uphold integrity and make rational judgments whenever a need arises. By making sure that everything runs as outlined in the company’s policies, the board of directors promotes integrity within the firm. Nevertheless, they failure to provide oversights as expected or even act whenever they suspects that something fishy in the firm happening depicts their lack of honesty as the shareholders’ guardians
The stakeholders believe that corporate governance should be exercised in a manner that promotes their interests at all times. According to them, effective corporate governance would lead to long-term prosperity of the firm (Rahman & Bremer, 2016). As a result, they point out that corporate governance incorporates a number of key issues one of them being transparency, which implies that the directors must always make a full disclosure of the non-financial and the financial information regarding the firm. In addition, the directors are required to uphold accountability, whereby they are supposed to appoint an independent body that would investigate some of the critical issues that would befall a company and even make sure that those found guilty of any wrongdoing are subjected to the outlined disciplinary measures (Kim & Kim, 2016). Kim and Kim also notes that the board of directors should exercise fairness at all times, which makes the stakeholders – more so the investors – to have faith in them (directors). Finally, the directors must be willing to take responsibility whenever it is proved that they have been involved in unscrupulous dealings that may have a negative impact on the firm. According to ACCA, the directors can ensure that there is transparency and accountability in their respective institutions by strengthening the rules that govern some procedures such as the auditing of the organization’s financial accounts (ACCA, 2017). By doing so, the directors are in a position to ascertain that all the procedures involved are transparent and, thus, denote that their commitment to remaining accountable at all times.
The board of directors is in charge of all of all the affairs that take place in an organization and, thus, they must be persons of a high degree of integrity and sound judgment to be in a position to deliver as anticipated. Over the recent years, firms have become increasingly committed to corporate social responsibilities with an objective of not only meeting the interests of the shareholders but also promoting the welfare of the community members (Rodriguez-Fernandez, 2015). The shareholders are increasingly demanding for the exercise of transparency in the institutions’ affairs and also the incorporation of the social programs in the firms’ policies. Therefore, corporate governance has been extended from being just a matter of the control of the inner affairs of a company to include the implementation of the social projects it launches. Rodriguez-Fernandez notes that the success of the social programs rolled out by various organizations is dependent on the conduct of their respective boards of directors. He, thus, notes that the directors must always be accountable for all the finances set aside to cater for such programs as a means of ensuring that no losses are incurred under the pretext of bettering the welfare of the society members. The directors are also mandated to harmonize the company interests with those of the interest groups, key among them being the members of the community (Rodriguez-Fernandez, 2015). In addition, Bowen claims that a firm’s economic and social responsibilities are inseparable and, thus, due diligence must be exercised while discharging such duties (Rodriguez-Fernandez, 2015). The directors must, thus, ensure that the proposed social programs are implemented through the outlined policies and standards to guarantee that the projects will not result in any environmental threat that would adversely affect the society.
Besides, they must provide training programs for the ones involved in the implementation of the policies while exercising their oversight responsibility to confirm that all the resources have been utilized as anticipated (Altschuller, 2011). It has been found that most companies have suffered immense losses during the implementation of the social projects, which have been blamed on the lack of accountability and oversight from the boards of directors. Even though most of the directors believe that their input is crucial in the successful formulation and implementation of social programs, most of them have been found to be reluctant in providing oversight to affirm that everything runs as stipulated.
As noted before, the directors are obligated to make reasonable decisions that boost the welfare of the firms, hence, enhancing their (the institutions) sustainability. As a result, the shareholders have increasingly shown their concerns in being involved in the companies’ affairs to gauge the level of effectiveness of the boards of directors (Wilcox, 2014). Trade unions and the investors have also been pressuring the directors to guarantee transparency in their corporations’ affairs as a means of guaranteeing their integrity. Although most of the directors have been reluctant in meeting the demands from such interest groups, they have been forced to concede defeat more so on issues related to accountability and governance (Wilcox, 2014). Due to the adverse effects of the financial crisis, most investors opted to shift their analysis of a company’s performance from not only being a matter of evaluating the financial statements but also the nature of their corporate governance – more so, the accountability of the directors. The investors have, thus, made it mandatory for the directors to be answerable on any matter that pertains the nature of governance, the environmental and the social involvement of the organization as well. Aguilar points out that, by demanding accountability from the directors, the investors have been trying to depict that there should exist a separation of control and ownership of the corporations (Aguilar, 2014). By doing so, the shareholders are interested counter-checking the actions of the directors and the possible effects of their decisions to evade the probability of suffering numerous losses as a result of directors’ failures.
Conclusions
The illustration above demonstrates that there is a need for the boards of directors to be accountable for every occurrence in the firm. Since they are mandated to ascertain that all the laws and policies governing the operations of a company are followed, they should also be held accountable in case it is found that they did not discharge their duties as dictated. For quite a long time, the directors were not questioned for their actions, which have led to the collapse of many organizations as it was witnessed after the occurrence of the financial crisis in 2008. However, evidence suggests that asking them to be transparent in their dealings and to account for every action has the potential to enhance not only service delivery within the firms but also the capability to boost the organization’s profit levels. The discussion above reveals that some directors have been engaging in unethical conduct – such as working in cahoots with corrupt employees – hence, the reason why they have been unwilling to depict their transparency. From a stakeholder’s perceptive, it is believed that asking the directors to be accountable would make them (the directors) discharge their duties appropriately and even raise the alarm whenever the suspect that something fishy is happening in a given department. It has also become evident that most organizations have lost a lot of funds while implementing social projects due to the negligence of the directors. Therefore, it would be rational for the stakeholders to demand accountability from the directors as a means of ascertaining that the resources set aside for such projects would be used in a prudent manner. Finally, the analysis on the sustainability perspective has revealed that some companies have been losing finances through some financial benefits offered to the executives – such as the ‘pay for performance booms.’ On the other hand, some executives have been defrauding the corporations by awarding themselves some compensation that has not been approved by the investors.
Basing my argument on the above analysis, I propose that the following recommendations be put in place to enhance corporate governance;
References
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