Discuss about the Report for Corporate Governance of Evidence from Private Equity.
To: Chairman of the Board
From: Mr. XXX (Corporate Governance Consultant)
Date: 8th August 2016
Re: Roles and Responsibilities of CEO v. Roles and Responsibilities of a Director
Sir,
This is to bring to your attention that, financial crisis is a way of bringing corporate governance to the forefront. It has been noted currently that many issues take place within an organisation due to lack of defined roles, responsibilities and duties of the company’s director as against the duties of the Chief Executive Officer (CEO). According to the Australian Financial Review, it was reported on 14th April, 2016 that many arguments have taken place between the directors and the CEOs due to the lack of their defined roles and responsibilities in the organisation. This report draws attention to the need of separation of powers between the duties of CEO and the duties of the directors. Additionally, this report includes specific recommendations on the separate roles of directors and the CEO.
Duties of Directors:
A director is the most influential person in the company. Despite of the influence and charisma that is associated with their personality, they are still restricted by rules and regulations in the given organisation (Harford, Mansi and Maxwell 2012). In Australia, the duties of the director are laid in the Corporations Act. As a director, one has the duty to use their powers with care and diligence that is expected from any other reasonable man (Tricker 2015). A director should exercise his powers and duties in good faith and in the best interest of the company. Thus, it is expected from a director to act in the best interest of the organisation. Additionally, the director should not trade while the company is declared insolvent (McCahery, Sautner and Starks 2016). An insolvent company is the one who is unable to pay the debts of the company when they are due. It is a legal offence, if the director is found trading while the company is declared insolvent. Thus, one may conclude that the director of a company is the one who makes the organisation work and has the duty to keep the records of the company. In short, we may consider him as the backbone of the company (Acharya et al. 2013).
A CEO is the top executive having the responsibility for the management and operations of business. The CEO is the one who has the duty to oversee the working and functioning of all the department and divisions in the company (Erkens, Hung and Matos 2012). The CEO has a wider and broader set of duties and role within an organisation such as setting up of annual budget, goals and targets of the organisation and the goals of the management. The CEO serves the board of directors, allowing them to create strategies that support the Board (Westphal and Zajac 2013). For example, if the Board sets the goal of paying dividends, the CEO will reserve the cash of the company rather than than buying assets or paying debts. In a non-profit organisation if the board sets the revenue goal, the CEO will focus on the development of fund raising goals.
The board of directors have the legal responsibility of ensuring that a business meets its aims and objectives. They are guided and restricted by laws that are imposed on them; they cannot act beyond the defined laws (Claessens and Yurtoglu 2013). The rules that impose a prohibition on the Board narrow their scope of using dictatorship on the broad goals of the organisation. Board members serve many positions at the same time, depending on whether they work for a profit or non-profit organisation or with the vice chair of the company. If a meeting is conducted and the CEO sits on the Board, then he shall be subordinate to the chairperson of the Board (Nini, Smith and Sufi 2012).
The Board has the authority to hire, terminate or direct its CEO. At many non-profit organisations, directors who are appointed for a short-term period do not take many responsibilities, allowing the CEO to make most of the day-to-day decisions of the management, including firing, hiring and purchasing (Hermalin and Weisbach 2012). The Board carefully reviews the work of the CEO and takes pre approval on major initiatives on a quarterly or monthly basis.
Hence, it may be said that it is the Board that has the ultimate authority of all the decisions that is taken in the organisation. The board has the authority to over ride all the decisions of the CEO. The CEO does not have the authority to refute the request of the Board unless the Board violates any legal provision (Liu and McConnell 2013). In smaller organisations, the Board has the authority to give their final signature over bills and cheques, while in the bigger organisations the CEO can give their final signature and enter into contracts. Hence, it may be said that the CEO has the ultimate responsibility of the organisation when it comes to management of the assets of the company. The CEO can sign the tax return if the treasury of the corporation is not present (Liu, McConnell, and Xu 2015).
Recommendations and Conclusion:
Relying on the factors that is mentioned earlier, one may conclude that there is lack of clarity between the roles and responsibilities of a director and the CEO. There is no seemingly difference between their duties and roles and this becomes the reason of disparity between the two. Since the directors of the company have legal onus on them, they should have defined roles that clearly state their legal obligations. The working of a company can be divided into the following sub categories such as:
The financial and the executive working of the company can be managed by the CEO, whereas, the managerial and the legal working of the company can be managed by the Board of Directors. It has been already stated that the CEO is subordinate to the directors of the company; hence, it is advisable to have a set of defined situations in which the CEO shall be considered subordinate to the directors. If there is any exception to these rules, the exceptions should also be clearly indicated.
Conclusively, it may be said that with the growing differences between the directors and the CEO, it is important to separate their role from each other. The theory of separation of powers is advisable to the organisation as this would increase the existing disparity between them making the functioning any organisation, almost impossible.
To: Australian Institute of Company Directors (AICD)
From: Corporate Governance Consultant (XXX Company)
Date: 8th August 2016
Re: Need for Good Corporate Governance in Investment
Introduction:
Corporate Governance is the system according to which business and corporations are controlled and directed. Corporate Governance specifies the division of rights and duties among the participants in an organisation based on the framework of corporate governance (Chen, Lu and Sougiannis 2012). An element of corporate governance is important for a successful outcome at all stages in the process of investment. Moreover, it also involves balancing the interest of the stakeholders, managers, financiers, customers, government and the community (Aebi, Sabato and Schmid 2012). This report evaluates the need for good corporate governance and the influence it has with high investor returns. Additionally, it contains a section wherein recommendations are provided so that companies with good corporate governance practices can align these to maximize their investor returns.
In a literal sense, investment means money committed or property acquired for future income. The process of investment is divided into three stages:
The above-mentioned process is the key functions of the any financial system. From the perspective of market economy, individual investors carry out the process of investment and the ultimate outcome will depend on their personal incentives and skills (Brammer and Pavelin 2013). However, the result will also depend on the organisational framework of regulations, laws and business policies that formulate and influence the associations between corporations and equity investors. The organisational framework is often termed as corporate governance.
One of the most important relationships in market life is the positive association between economic growth and investment. By mixing the factor of quality and quantity of human skills and fixed capital, economies of the world have for more than a century had undergone an unprecedented increase in per capita income. This development has made it feasible to improve the quality of economic life for all the citizens (Jo and Harjoto 2012).
The foundation of an investment process is the organisation and the search of efficient ways to mix the different resources available that are needed to produce those services and goods to meet the demand of the market. From the perspective of corporate governance and investment, it is important to focus on the discussion on the ability of the economy to match viable projects that are available commercially along with the financial resources that are needed to change the ideas into profitable enterprise (Armstrong et al. 2015). It is, however, important to note that capital is one among many other inputs that is needed to build a competitive economy. Managerial talent and skilled labour are are also vital for growth of investor returns. This is particularly true for equity financing that permits organisations to increase their exposure to risks that are associated with short or long-term organisations such as business restructuring, research activities and market expansion (Acharya et al. 2013). However, it is not only about the amount of capital that is available in abundance but also about the economic welfare through formation of capital and this can be achieved only a good corporate governance structure. A regularised framework of good corporate governance structure has become very important for creation of wealth globally. Equally essential is the effectiveness with which allocation is made to alternative investment opportunities and how well the organisation’s utilisation of investment opportunities is monitored (Tricker 2015). If savings from household and corporate funds do not reach the best possible use, society will give up opportunities that lead to generation of additional income. In such a situation, entrepreneurs will not find proper funding for their projects and existing undertakings will not be able to expand their workings. The organisations that have the potential to yield profitable innovations will never be able to advertise. Additionally, re structuring of companies will also be impaired and assets will be locked due to underperforming activities (Westphal and Zajac 2013).
A good corporate governance structure enables enforcement of provisions for protection of property and secure methods of registration and enables legal redress that will help in the mobilisation of capital. This framework is followed in the first step of investment. In the second process of investment, it is important to have a transparent and reliable account of corporate affairs. This shall allow the organisation to make informed decisions about the allocation of capital. At the third stage of investment process, proper procedures for internal corporate decision-making, the distribution of powers in the organisation, and proper incentive schemes are important factors for implementing effective corporate governance schemes.
Conclusion:
From the perspective of economic policy, one may conclude that the growing importance of good corporate governance structure does far beyond the interests of shareholders in a company. A weak corporate governance structure will impede the stages of investment and hence this will affect the overall economy of the world. Poor corporate governance will damage the capability to mobilise savings and this will affect proper allocation of resources amongst investors. Additionally, this will also prevent proper monitoring of corporate assets. Hence, it is advisable for the organisations to adopt a good corporate governance structure so that it leads to better investor returns.
References:
Acharya, V.V., Gottschalg, O.F., Hahn, M. and Kehoe, C., 2013. Corporate governance and value creation: Evidence from private equity. Review of Financial Studies, 26(2), pp.368-402.
Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12), pp.3213-3226.
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
Brammer, S. and Pavelin, S., 2013. Corporate governance and corporate social responsibility.
Chen, C.X., Lu, H. and Sougiannis, T., 2012. The agency problem, corporate governance, and the asymmetrical behavior of selling, general, and administrative costs. Contemporary Accounting Research, 29(1), pp.252-282.
Claessens, S. and Yurtoglu, B.B., 2013. Corporate governance in emerging markets: A survey. Emerging markets review, 15, pp.1-33.
Erkens, D.H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide.Journal of Corporate Finance, 18(2), pp.389-411.
Harford, J., Mansi, S.A. and Maxwell, W.F., 2012. Corporate governance and firm cash holdings in the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.
Hermalin, B.E. and Weisbach, M.S., 2012. Information disclosure and corporate governance. The Journal of Finance, 67(1), pp.195-233.
Jo, H. and Harjoto, M.A., 2012. The causal effect of corporate governance on corporate social responsibility. Journal of business ethics, 106(1), pp.53-72.
Khan, A., Muttakin, M.B. and Siddiqui, J., 2013. Corporate governance and corporate social responsibility disclosures: Evidence from an emerging economy. Journal of business ethics, 114(2), pp.207-223.
Liu, B. and McConnell, J.J., 2013. The role of the media in corporate governance: Do the media influence managers’ capital allocation decisions?.Journal of Financial Economics, 110(1), pp.1-17.
Liu, B., McConnell, J.J. and Xu, W., 2015. The Power of the Pen Reconsidered: The Media, CEO Human Capital, and Corporate Governance.CEO Human Capital, and Corporate Governance (January 6, 2015).
McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance.
Nini, G., Smith, D.C. and Sufi, A., 2012. Creditor control rights, corporate governance, and firm value. Review of Financial Studies, 25(6), pp.1713-1761.
Tricker, B., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Westphal, J.D. and Zajac, E.J., 2013. A behavioral theory of corporate governance: Explicating the mechanisms of socially situated and socially constituted agency. The Academy of Management Annals, 7(1), pp.607-661.
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