Corporate governance principles and practices

Corporate Governance

There have been controversies on the subject of the governance and accountability of big corporations, but it is only recently that these issues have gained prominence. The compensation for the top management is one of the major issues of corporate governance today. The primary reason for offering stocks to executives was for raising the share prices and thereby increasing its value for both investors as well as shareholders. Though this proved to be a major success, there were a few executives who would not disclose their stock options or would not make full use of the stock options offered to them. This caused inefficiency in the financial market. Stakeholders have the freedom to check their shares and to question the management if there were any discrepancies. Despite these constant checks with financial analysts, the board of directors, the panel of regulators, auditors and managers, there has been instances of failures.

Stock market values, because of the complexity of their operation, became a perfect choice for those who wanted to hide the actual amount of money being paid to executives. Many examples of such mismanagement on the part of the compensation committee are evident in the present day when huge amounts of money are badly mismanaged and even those executives who did not deserve it were paid large amounts of money in salaries as compensation. Another method was to expense stock options so that all costs would be more transparent, and the result would be that excesses could be controlled to a large extent, and the pay packages would be adequate. Today, there is a lot of change happening in the corporate industry. These changes may be the creation of new technology as a response to changing consumer needs, and new competitions, all of which involves huge amounts of money and human resources. The intense pressure laid on short-term market capital performance is another issue that is threatening the corporations today.

Introduction:

Corporate Governance is the innate relationship that all shareholders, employees, the management, and the board of directors share between one another. Certain statutes that serve as a reference to the private and public institutions of a country, either formally or informally, govern this relationship. Such statutes, some of which are corporate and security laws, and some of which are accounting practices, maintain the balance between the management and the shareholders. There have been controversies on the subject of the governance and accountability of big corporations, but it is only recently that these issues have come to light. (Williamson, 1979, p.78)

Corporate governance affects the government in that it is an inherent function of every government to develop more efficient corporations by improving functionality as well as productivity by offering incentives to improve on these issues. Such situations have now changed the international nature of corporate governance. Now the government is obliged to provide a sort of safety net for the investors and for the society by keeping a close watch on the behavior of the corporations. The trend, in the past, of focusing more attention on the external factors that govern corporations like, for example, environment and labor problems, has been replaced by a focus on insider issues like trade unions. In broad terms, corporate governance should comprise of overseeing the company's general performance, and focusing attention on the board of directors who run the show. (Fort, 2001, p. 51)

The board should be capable of contributing to the company's success by maintaining relations with the other members; with the Chief Executive, who has to be appointed after careful consideration of various factors and whose performance has to be closely monitored, and between the other members of the board, and the way in which they conduct themselves, both mentally as well as ethically. There also has to be a flow of information between the various members of the board and the management. The information may be in the form of corporate strategies, and corporate communications. Business must be conducted in a transparent manner, and the responsibilities must be fairly divided between the board and the management. (Preston, 1995, p.18)

One important factor in corporate governance is the fact that there is a vital difference between the governance of public and that of private institutions. Both these institutions operate under different circumstances: while private institutions must be capable of producing results, being faced with stiff competition, the public sector has a major responsibility towards its numerous shareholders who have to be kept in mind at all times. The operation of a public sector unit is also more transparent than the private sector. The governments as well as the various organizations become well equipped to achieve fulfillment of all their goals when there is proper corporate governance. This is done by the optimum use of the management structure, which includes various executive groups and the various committees connected to them, the effective monitoring of the management environment which includes making proper decisions and strategic plans for proper governance, the clear monitoring of management procedures and also accountability. (Monks; Minow, 1995, p.79)

Risk management is also an important part of corporate governance. This includes the monitoring of conformity and compliance of various strategic plans. Control systems such as internal audits, assurances of value and ethics and organizational capabilities are also utilized for this purpose. Stakeholders find this performance control to be of utmost value to them as they benefit directly. The corporation is thus answerable not only to the stakeholders but also to the investors and therefore, to the government. (Davies, 1999, p.35) There is a mistaken notion that corporate governance is meant for those companies that deal in public shares for which outsiders make the investments to the company. However, it is a fact that if a company is well governed, it would be able to raise finances at lower costs to the company, as opposed to poorly governed companies. Growth in any form would only be good for the future of the company as well as to the nation, especially in under developed or developing economies. The entire nation's economy would either improve or fail according to the nature in which corporate governance is conducted; the better it is, the better the future of the nation and national development. (Charkham, 1994, p.26)

Issues identified and discussed:

The compensation for the top management is one of the major issues of corporate governance today. The primary reason for offering stocks to executives was for raising the share prices and thereby increasing its value for both investors as well as shareholders. Though this proved to be a major success, there were a few executives who would not disclose their stock options or would not make full use of the stock options offered to them. This caused inefficiency in the financial market. Investors were misled, the market information was falsified, and a few even created an artificial value when there actually was none. This only led to disaster, as for example, what happened in the U.S.A. In the nineteenth century. This was the time of market innovations such as the railroad and the telegraph. A certain few with adequate foresight rose in their position as important figures, such as John Rockefeller. Such people enjoyed a great freedom in being able to build their businesses and racing much ahead of the competition. (Gugler, 2001, p.127)

Stakeholders have the freedom to check their shares and to question the management if there were any discrepancies. Despite these constant checks with financial analysts, the board of directors, the panel of regulators, auditors and managers, there has been instances of failures. The scandals that result may have been caused by a breakdown in the communication between members of the company that may have been caused by the presence of greed within the company, which may have gone unchecked by the management. There is also a breakdown in the monitoring carried out by the auditing and compensation committees. The major problem, however, is the lack of proper information; the board of directors has been known to take a lackadaisical attitude when it comes to gathering accurate information. The rising stock market values proved to be the cause for this top management compensation. (Fort, 2001, p. 62)

Stock market values, because of the complexity of their operation, became a perfect choice for those who wanted to hide the actual amount of money being paid to executives. Many examples of such mismanagement on the part of the compensation committee are evident in the present day when huge amounts of money are badly mismanaged and even those executives who did not deserve it were paid large amounts of money in salaries as compensation. The board, therefore, has the responsibility of maintaining a good balance between salary and perks, and not to decrease the compensation for executives. This was difficult because, for one, the salary package did not have a method for controlling fluctuations according to the fluctuations of stock prices; in fact, executives made a good bargain out of stock price rises instead of making profits for the company. In order to compensate for this, the system of claw back was initiated, whereby an executive had to pay back his share of the unprecedented profits. (Monks; Minow, 1995, p.94)

Another method was to expense stock options so that all costs would be more transparent, and the result would be that excesses could be controlled to a large extent, and the pay packages would be adequate. The issue of unauthorized groups or cartels that benefit from corporate control is another one that has to be tackled by corporations. (Williamson, 1979, p.81) These groups are more interested in investing in resources that are controlled, rather than in resources that would benefit others by either creating new wealth, or by making use of resources to make new wealth. The government is manipulated, the state is manipulated, and the corporation is made use of in their climb to political and economic power, and as a result, there is stiff competition and rivalry between firms and this only leads to a gain of finances for the cartels or groups and a gross misuse of finances by the warring firms. The nation's economy suffers as a direct result of such actions as its precious economic resources are wasted by unnecessary expenditure. The cartels and insiders together create a massive loss of economy as one operates within the economy at the same time as the other. An example would prove this. In certain developing economies, a large amount is invested in production. This is hardly utilized by the countries that have scarcity of finances. (Charkham, 1994, p.40)

Today, there is a lot of change happening in the corporate industry. These changes may be the creation of new technology as a response to changing consumer needs, and new competitions, all of which involves huge amounts of money and human resources. This may induce a resistance to change by the corporations as they may feel that there is no need for global competition. This may harden the bureaucracy against any change, and build up stiff resistance to the same, resulting in a volatile economy. (Fort, 2001, p. 66) To break out of this vicious cycle, corporations need to concentrate on corporate governance in both financial and non-financial sectors of the company, as well as on the real sector. Policy makers have to keep in mind these factors while making changes in their policies, and also see to it that there is interaction between all facets of the corporation, including other main institutions and policies concerning them. The dividing line between voluntary and mandatory, between judicial enforcement and regulatory enforcement must be made clear. This would sort out other problems as well. (Preston, 1995, p.20)

The intense pressure laid on short-term market capital performance is another issue that is threatening the corporations today. This, along with the issue of compensation for the management, is the issue that threatens corporations. When the modern day financial wizards and managers ask for quarterly performance reports, the management feels obliged to show better and better figures, when there are actually none. This is what happens when there is intense pressure on performance and many people to judge the performance. Added to this is the freedom to turn money around at will that could become dangerous if allowed to continue. The goal should be that of a better future in the long run, rather than on excellent short-term performances. Information about performances, both financial and non-financial should be made available to the management, rather than information that puts intense pressure on the management for the achievement of short-term targets. (De George, 1995, p.82)