BUSM4403 – Ethics and Governance

Assignment 3: Corporate Governance Report

BUSM 3115 Ethics & Governance

1.0 INTRODUCTION

Corporate governance is tasked with overseeing the decision, the responsibilities and rights of an organization’s board, shareholders, management and various stakeholders and ensure that the organization’s board of directors makes in the interest of the organization’s shareholders. Effective corporate governance is essential to promote the productivity and integrity of an organization. The board also needs to have a high degree of transparency, access to information and their responsibility is to give the shareholders of the company the right to have their opinions and concerns taken into account. The board’s performance of the duties of accountability as laid out in the above mentioned principles could be detrimental to the company if the board decides not to exercise its responsibilities in such a manner. Many businesses most certainly would outperform those who are not adopting integrally strong corporate governance standards, including responsibility, fairness, transparency, and responsibility. A central feature of strong corporate governance is the concept of board accountability. The board is responsible for all operations of the company and guarantees an evaluation of the company opportunities and performance in a reasonable, equitable and understandable manner

The purpose of this report is to compare and contrast the corporate governance theory including the government owned, shareholder owned and membership owned theory. The weaknesses and the strengths of each of these theories will also be discussed. In addition, this report further outlines how organizational boards can be made more accountable to ensure the success of an organization. For certain public organisations, boards are the main executive accountability system. They have a multi-faceted portfolio of employment, policy guidance and critical scrutiny and external connections. Nevertheless, the efficiency of the boards is in question (Boyd et al, 2011). The reported will be developed with three main parts in the body including an overview of the key concepts, a discussion on Shareholder owned, Government owned, and membership owned model with a detail strengths and weakness of the three models (Appendix), followed by a discussion on accountability and how organisations and specifically organisational boards be made more accountable

2.0 BODY OF CG REPORT

An overview of the key concepts

Accountability is associated with how entities account to stakeholders for their actions and is embedded in accounting, ethics and transparency and includes corporate governance, management and internal regulation, and external auditing and reporting. There are various forms of accountability at various levels of the enterprise and, as a result, different processes to ensure that agents carry out their duties in an appropriate manner. At the management level , managers need to conform with the rules and standards of society, keep their obligations to consumers, vendors, etc., and enforce the policy of the company. At the governance level, directors need to track and work with management to ensure that the management activities are carried out. Accountability systems should be used to support managers and executives to carry out their duties.

The key assumption of the agency theory is that there exists a difference in term of interests between the owners of the enterprise ( represented by the principal) and the agent who manages the enterprises. The owners or shareholders of every company therefore are placed in trouble with the problem that managers act in the interest of shareholders has not succeeded in the absence of executive controls or corporate governance. Under the Agency theory, corporate governance arrangements play a critical role as another means to ensure that management acts in the best interests of shareholders. The arrival of the agency theory also saw the critical function of the board including non-executive directors which is central to corporate governance arrangements. In the perspective of the agency theory, the board mainly functions as a monitoring device to control management. In this regard, the board members of enterprises are all independent of management, and these non-executive directors primarily function to ensure managerial compliance, that is to monitor and if necessary control the behaviour of management to ensure it acts in the shareholders’ best interests.

 

In contrast to the agency theory however, the stewardship theory ensures that the executive should take responsibilities to protect the interests of the shareholders and act on their behalf. A stewardship theory requires a high level of trustworthiness and a relentless commitment to the success of the company. The stewardship theory is based on a viewpoint of human relations and continues with other assumptions in theory of agencies. It suggests that managers are more driven in general by more than their own minimal economic interest. Managers are expected to do a decent job and be successful managers of the resources of an enterprise. This improves the perception of the management and owners as partners. Therefore, the key goal of the board is to maximize operational efficiency rather than to guarantee management compliance. The theory of stewardship also suggests that companies should be managed according to the way that leaders and employees choose. The importance of engagement thus is emphasized under the stewardship theory. The function of a governing body in implementing this perspective to the public sector is primarily strategic, collaborating with senior management to lead the entity, added value to high-ranking decisions and increased performance.

 

Stakeholder theory suggests that executives should encourage multi-trust functions in order to protect all stakeholders ‘ interests. Morck  and Yeung (2003 )suggest that this can be done by establishing accountability systems which foster interaction and commitment of these competing stakeholders and resolve differences between them. In addition, he suggests that strengthening the accountability of management to all stakeholders would help avoid confusion and fraud. Freeman et al (2007) also proposed that managers must interact with stakeholders at different levels of hierarchy to understand the interests of all different constituencies. Therefore, they suggest that managers must seek a balance of controlling shareholder and competing stakeholders, as well as meeting each constituency’s respective needs. For many public organisations, boards are the primary accountability mechanisms for management. Boards have a multipronged portfolio: strategic advice, employment, external linkage and critical scrutiny.

 

Shareholder owned

By buying the stock, shareholder models invest in a business and thus reap financial benefits. Shareholders are not involved in the management of everyday business operations. They will, however, elect directors and receive information related to investing decisions. In this model, shareholders expect that corporate management and boards be accountable for their investment in the business. Shareholders also want management and board to discuss concerns and issues of broad concern to long-term shareholders and to have an impact on the organization’s long-term value. Company profits are profit-making organizations structured to provide all stakeholders with sustainable and enduring value. Shareholders do therefore not anticipate employing the public entities in which they invest and participate in as forums to push their agenda.

Government owned

State ownership is a paradigm that has vast control over the government or the state by means over substantial, full or large share ownership.  One of the government-owned institutions’ distinguishing characteristics is their unique activity and legal form in company and business activities. The government-owned entities function in societal and strategic services.  These enterprises are establishing a defensive line in the general interest, social justice arrangements and the protection of citizens. Their line of security is also established on the accountability to the opinion of the public and the mastered management.

Membership owned

Membership owned or family-owned corporate governance model in which two or more family members share in a company’s business operations. Moreover, ownership or control stays in the family in this type of system. The model is a dominant business structure worldwide. Partnerships, sole traders, public companies and private companies can all be listed in this model

Strengths and weaknesses of the ownership models are presented in detail in the Appendix

 

Board accountability

The boards are the principal accountability mechanisms for management for the major of organizations. Boards are multi-functional in their portfolio, including employment, strategic consultation, external communication, jobs and critical review. The Executive Board is seen as a further audit on public corporations. It must act as a counterweight to the company’s daily management. Boards are also essential to the company ‘s obligations. The Boards also provide assistance, strategic guidance and policy advice as a link to external constituencies. The Organizational Board is the most important forum in first order transparency, according to Schillemans and Bovens (2019). The principle of accountability has been researched and mainly researched by the governance academics and hence the definition of accountability does not have any conceptual agreement (Tasan-Kok 2019). The approach of corporate governance and regulation recognizes board oversight function to create check on the power of management. Corporate Governance literature presents various perspectives on board oversight including the role of board as role of providing guidance for management in formulating the strategies, policies and plans of the organization. Formalism of governance focuses on the governance of strategy, policy and plans of a company, the rules and regulations that guide organizational activities.

All other areas of management are left to the discretion of the management and are, therefore, handled by management itself. According to the rationale, board is a necessary layer of supervision which can provide a useful link between the formal, operational and the strategic governance of the organization. Schillemans and Bovens (2019) believe that a part of the board’s role is more theoretical and concerns to align the strategy, policies and plans of the company. The recent study by Schillemans and Bovens (2019) has sought to bridge the gap between the academic and practical views on board oversight. The authors use the example of a company with multiple stakeholders. The company has a number of stakeholder groups, including the customers, employees, shareholders, other shareholders and even the suppliers. It is clear that the company has multiple stakeholders. The company’s structure of governance makes it more complicated. The company has board of directors and the board has multiple sub-committees; each of which deals with a specific area of responsibility of the company. The challenge for the company is the responsibility of satisfying its different stakeholders, in turn, making the company accountable. Therefore, the task of board is not only to supervise the internal organization but also to satisfy the external stakeholders.

The concept of accountability bridges the gap between the academic and practical views of governance (Schillemans and Bovens 2019). It emphasizes on strategic accountabilities and principles of organisation oversight. The accountability is intended to meet the shareholder and other stakeholders’ requirements for profitable and sustainable company growth. In addition, to enhance accountability, organization boards will need to present strategic report in which they present balanced, fair and understandable assessment of negative and positive facets of performance, development, future prospects and position of the company openly and devoid of bias. The report should align with the business size and complexity. It is the responsibility of the board to ensure that the strategy laid by the company is optimized in the light of external and internal constraints (Schillemans and Bovens 2019). Mechanisms should therefore be established and controlled constantly as a core part of public sector operation in order to establish the board ‘s effectiveness.

To maximize the accountability of the board, the scope and existence of the risks within the company should be thoroughly understood and deliberated. Clear lines of contact and decision making would also be required for the Boards. The accountability therefore requires transparency. Clear, transparent and accurate reports from the board can assist businesses in maintaining partnerships with stakeholders such as staff, customers and clients. The annual financial statements will encourage the board to report on the annual results and record the performance evaluation. To further enhance board accountability, the minimum size for the board should be not more than 40 members. The individual and individual member roles should be clearly defined so that they can effectively perform. Thus, with the influence of shareholders and the overall stakeholder relations in mind, it is essential to develop strategic report as a key tool to enhance accountability. Moreover, the said report should be reviewed at least every three years in order to respond to changing environment and to allow the board to address and monitor the key issues. This is of course not an exhaustive list but it has provided a high-level concept. The above-mentioned features help in effectively improving the financial health of the companies. By adopting the right governance structure for accountability, companies will be able to identify their risks and quickly work towards minimizing them. Further, by complying with the principles of corporate governance and avoiding unethical behavior, companies will be able to avoid business scandals and other negative reputation issues.

3.0 CONCLUSION

This paper is the first step towards understanding the different governance models of corporates. The performance of corporate governance is determined by various factors. This paper aimed therefore to compare the various current governance models. The corporate governance mechanisms include the government owned model, the membership owned model and the shareholder model. This paper is expected to be helpful to the stakeholders, administrators and general managers in determining the success of the selected corporate governance business model. This paper has investigated the different parameters of corporate governance viz. the entity structure and operational relationships amongst the entities, internal control environment and accountability organization. However, it is concluded that some of the entities are lacking critical component in implementing necessary governance norms like regulatory compliance and strategic report of the company’s profit and loss statement with high level of transparency. The report also described how the board could be more accountable. It was proposed that the scope and existence of the threats within the company should be thoroughly understood and addressed. Clear communication and decision making channels should also be established for the Boards. In addition, accountability requires transparency. The board’s transparent, open, truthful reviews would enable organisations, to establish relations with stakeholders such as staff, customers, and clients,

RECOMMENDATIONS

To enhance accountability within organizations, several recommendations can be made for organizational boards as below:

  • By defining and reporting respective duties and functions and evaluating their performance, organizations could establish solid foundations for supervision and management. The development of a unique organizational code of conduct for management and employees should be initiated and communicated to employees, where the standards and responsibilities of management and employees are codified and evaluated every year
  • In order to add value and be efficient, the Board should be organized. It should be of sufficient scale, expertise, composition and commitment so that responsibilities are successfully discharged. The success of each individual participant and of the organizing board should be periodically evaluated.
  • Organizations should cultivate a legal, accountable and ethical culture with a code of ethics for their boards, personnel and senior managers. In addition, the code must be communicated by organizations.
  • The report suggests protecting the integrity of company reports. A listed firm requires robust and structured procedures that will preserve and validate the integrity of corporate reporting. An audit committee composed of at least three non-management directors and other independent directors shall be established by the board. The audit committee oversees the company’s corporate management mechanisms and audit procedures through the fiscal reporting process.
  • Finally, a valid and timely disclosure should be issued. A listed firm must ensure that its interests are disclosed in a balanced and timely manner. Companies must have a formal procedure to meet their permanent mandates under the laws on listing.

 

Appendix: Strengths and weaknesses of the ownership models

 

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