Role of Corporate Governance

Question Describe about role of corporate governance? Answer: Corporate governance has started playing a major role in todays world. A concept which was not adhered much in the nineteenth century or even in the beginning of the twentieth has suddenly found itself well positioned in this era of surging global markets and developments. As the industrial revolution of the early 1900s changed the scenario of market, the globalization in the twentieth century saw exponential growth of private firms and corporate. This mushrooming can be credited due to the new routes of clientele based on interconnectivity and bilateral trade between most countries around the world. This meant that a balanced structure must be presented for maintaining and securing the stakes or shares or even financial aspects of the clients who will be involved directly or indirectly with these corporate or firms. Thus the birth of corporate governance took shape and place. This structure must be globally accepted and nationally followed. This provides the required hierarchical co mposite by which a corporation runs and develops its road map. For a better grip on the subject we shall look first at the different components of Corporate Governance with an eagle eye view, understand the different organizations involved in a global field with regard to the governance structure, find the usual style of corporate Governance in UK and its incorporation in companies and finally do a case study on one corporate organization to find the impact of corporate governance. The case study shall aim at finding the pros and cons of initialising of corporate governance, its needs and also its importance. The Important Constituents of corporate governance: An Overview 1. Board of Directors This is the highest position in the hierarchal structure and thus this position is at a pivotal role. The Director(s) not only manage the corporate but also has the responsibility of setting strategy budgets including both the annual estimations and a periodic budget, managing the employees, maintaining company assets and analysing risk factors to it and also ensuring that the corporate governance rules which have been constituted are followed and respected. Directors are responsible for monitoring the overall development and are thus entrusted with decision making. 2. Comptroller and Auditor This also is an important position with regard to the companys financial state and objectivity. They provide the analysed data regarding the balance of payments, account deficit and the statement of expenditure to the Director(s). This group is highly functional and has immense responsibility towards the development and also towards ensuring security in terms of finance. They involve non executive members and hence pave a way for them to play a positive and decisive role as well. Corporate Governance structure in the UK The structure is similar to the structure followed in the United States of America which is of a classical model. This model follows a string of approach, stakeholders and shareholders select the board of directors in an Annual General Meeting and the Board then nominates or selects or appoint the Chief Executive of the company. The structure relies heavily on the market based sanctions and thus the selection of the Board of directors is very important and must be well thought of. Boyd (1996:168-169) states self interested directors could manipulate the operations of a classical structure for their own gain at the expense of the shareholder. Thus the selection of Board of Directors is in itself a very important part in Corporate Governance. A flaw in this could lead to a string of operations that may lead to the decimation of the company concern. Corporate governance codes in UK The Cadbury committee was constituted in the UK for this very reason. The committees report gives an insight to the structure and governance in any company with respect to the way it should function internally. The report provided by Cadbury on the Governance Aspects related to financing was recognized as the highly essential development in corporate governance area. In accordance to Gregory Francessco Maassen 2002, this committee was set up by Cadbury in the year 1991 through a council on financial reporting along with the stock exchange of London leading towards releasing a public comment draft report on 1992. A final version was issued by the committee in the form of this report. In accordance to the report of Cadbury Committee, 1992, the main objective of this committee remained in helping to enhance corporate governance standards and the financial reporting level of confidence. The recommendations were based on the main self regulation beliefs rather than enforcing statutorily w hich was regarded an appropriate step to enhance corporation related pressure for improving the structure of governance. Also, this committee strongly laid focus on financial markets which were more likely at providing the important controls externally instead of focusing only on regulators for enforcing recommended actions. According to Clements, 1995, this committee of Cadbury was focused upon 3 main missions established as corporate governance new standards in the region of United Kingdom. These missions were inclusive of improving the corporations governance structure, avoiding legislative concerns that have the capability of bringing the UK two tier board model along with improving the institutional investors involvement in the companys governance for avoiding UK legislative changes. For achieving the objectives, the report of Cadbury had its basis on 4 separate prescription kinds inclusive of recommended codifications, simple recommendations, legislative change desire and 22 e xhortations. International Code of Governance applicable to corporations in UK There are at present two organizations that uphold the corporate governance and are responsible for overseeing that the rules and regulations are thereby realised. They are 1. Organization for Economic Cooperation and Development (OECD): This is an international governing body established in the year 1961 and is comprised of market economical countries as well as some developing economies.2. International Corporate Governance Network (ICGN).: This is a group comprising of investors and investing institutions established in the year 1995.Corporate Governance: Assertive view on its needGood corporate governance is the necessary catalyst towards attracting investment, economic growth and reducing the cost of capital. Corporate Governance: Constrains on its existence Some arguments have come to light as to the necessity of adhering to governance. Many are of the view that governance may seal of the flexibility of the working of the Directors. The shareholding scheme makes even a non-executive member equal to a non-executive Director thus contradicting the hierarchal structure as it stands. There may also exist a communication gap between the employees and the Directors as due to the seldom availability of the non-executive bench. This may affect the overall implementation of any company policies. Loizos Heracleous (2001) research on the importance of 'best practices' in corporate governance has predominantly failed to find convincing connections between practices and performance in the corporation. Methodology For the purpose of the study on Corporate Governance and its importance in any company, a case study will yield valuable information. A case study taking the governance structure of one organization and critically viewing its performance and its internal policies in lieu with the literature thus studied so far. For our paper we shall take Being Air Force as the organization under the scanner. Being-Air Force F. Cabico (2003) stated that the company of Boeing ended up firing its main finance executive members for conducting unethical practices and he also illustrated the missile defence hiring negotiation while working for the government of U.S. The previous official in the Air Force, Darleen Druyun was removed from the post along with the main chief financial officer even though it had only been 10 months since she had been working there due to unethical conduct. A telling blow to any organization is to be rendered completely ambiguous at the very high level. This sudden shift in the companys ethical view on governance had everyone question the internal policies and also the financial stability of the shareholders. The stakeholders were also brought under the surge as the decision was not conducive to the problem at hand. WSJ, Herald, Sun Sentinel(2003) reported Boeing said that he violated company policy by communicating with Ms. Druyun to discuss her potential employment while she was still negotiating contracts with Boeing on behalf of the Pentagon. The company said that it had compelling evidence that the two had attempted to conceal their alleged misconduct from a team of outside lawyers hired by the company to investigate. This statement stands on the affirmative to prove that the corporate governance as according to the Cadbury Committee recommendations may have not been adhered to which led to this fall of procedural and technical glitch on the part of the Boeing officials. The question does however arise as to how did such a mishap happen? Being a part of a high security organization its structure was breached in an unfortunate and in a telling way. Herald, Sun Sentinel (2003) again reported in the following issue In early December 2003, Boeing announced that Phil Condit, the companys chairman and chief executive, had tendered his resignation immediately. The company stated that its board had determined that a new structure for leadership was needed. This meant that the Board of Directors had decided to change the perspective of the company and may very well implement new policies towards its employees for recovering from the whiplash of the scandal that had surfaced. This may not come as a surprise as for any company following a series of hierarchal structure will have to follow certain method and steps towards adhering to the classical model described in the literature. For this very reason the very nest Chief executive then brought in dynamic changes into the company policies with the inclusion of signing of code of conduct for all employees. Primary inference from the study From the case study thus put under the lens the primary focus lies in the structuring of the company. As per the classical model, Board of directors hold the power and responsibility to appoint a Chief Executive, it may be noted that the autonomy status of the financial sector of the company led to the downfall. The lack of communication and also the unavailability of non executive Directors as mentioned in the constrains of governance comes to light. The Chief Executive of the company under the lens was clueless as to the negotiations under going and it may also be noted that such a scenario is not present in only one company adhering to the classical model but many which have surfaced around the world. The classical model which has been mentioned by the Cadbury Committee may theoretically serve its purpose but practically is plagued with uneven priorities and duty and responsibility assignment. Also the international organizations do not have a strong hold on any company other than providing security in terms of equity and shares. It fails to implement stringent rules and regulations within the company, that is to say the company policies are not prescribed by any organization other than the company itself. Secondary inference from the study For every failure in terms of corporate governance there seems to be only one usual decision making that the companies all around the world follow that is a short term solution as to contain the initial whiplash. From the case study we can infer that the corporate governance may give the structure but does not provide the exact protocol of the same. It may be noted that even the Cadbury Committee recommendation do not have sufficient work around the protocol of Governance. Final deduction from the two inferences From the primary and secondary inference it may be deduced that for Company Governance may be a necessity for taking a company forward but it is not a complete solution to a companys success. It may be safe to argue that a corporate may very well be established without corporate governance. Having said that, it is highly unlikely that any company will be trusted by its shareholders and stakeholders, towards its financial stability without a structure, which of course provided by the Corporate Governance. It may also be noted that Corporate Governance in itself is a flexible component and thus can be moulded as per needs of individual company. A paradox may still linger in its proximity in lieu of its application nevertheless its importance can never be compared to a naught. The literature, methodology and the findings hence directs a certain conclusion; Corporate Governance may very well be a driving point in any companys future but it may have to be implemented with certain more internal policies of the respective company. An individual idea may propagate a greater endurance to the already existing structure as per the recommendations of Cadbury Committee. References Montagnon, P., 2004, The Governance Challenge for Investors, Journal of Organization management, Vol.12(2), pp 321-400 Cadbury Report, Gee Publishing, 1992, The Financial Aspects of Corporate Governance Lo, S.F., and Sheu, H.J., 2007, Is Corporate Sustainability a value-increasing strategy for business, Vol.15(2), pp 234-304 Heracleous, L.,2001, What is the impact of Corporate Governance on Organisational Performance?, Vol.9(3), pp 333-452 Cheng, S., and Firth,M., 2005, Ownership, Corporate Governance and Top Management Pay in Hong Kong, Vol.13(2), pp 212 Larker, D. 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