Adopting Corporate Governance And Social Responsibility Accounting Essay


In the United States, corporate governance legislation was introduced primarily directed at listed enterprises requiring executives to certify financial statements as accurate and requiring increased oversight of boards and auditors. Private unlisted enterprise however, remains free from such regulatory control and security.

Chapter Two - Adoption of Corporate Governance Principles

Evaluations & Recommendations

I would recommend the following Corporate Governance principles; gleaned from the Sarbanes Oxley Act (2002), OECD (2004), Combined Code (2003) and the Australian Securities Exchange (2007).

Corporate Governance and Managerial Compensation

Being a mining company in today's economic climate, a major responsibility as far as corporate governance goes is for the board of directors is to determine managerial compensation systems. How should managers be compensated? Should pay be tied to performance?

From an accounting perspective, organizing the firm into cost centers and evaluating managers on the basis of costs alone is essentially an input based monitoring system. For managers, though, output measures are more likely to be used than input measures. These measures are not direct measures of effort but, instead, are what are called instrumental measures. They either measure something that is thought to be closely related to effort or compare outputs to inputs. Historically, such measures have included net income, profit margins, return on assets and return on equity (both measures that compare outputs to inputs), and growth in earnings and sales (Levitt, 2005; pg. 145). In terms of maximizing the wealth of the existing owners of the company, the company's stock price is also assumed to be related to these measures. So, increasingly, more and more companies are using the stock price itself or some compensation scheme that ties rewards to the stock price to finesse the ever-present problem of measuring effort. Still, the problem of separating the contributions management makes to performance from factors that are not under management control (luck, noise) remains (Carroll, 2001; pg. 27). How do we get out of this box?

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

Measures of relative performance may be one answer. Owners can measure managerial performance relative to the performance of other firms in the industry or some other benchmark. For example, managerial performance can be benchmarked against such industry wide financial ratios as profit margins, return on assets, return on shareholders' equity, and rates of growth in sales and net income. As we will discover, many companies do use such relative performance measures and measure performance against peer groups' With respect to the stock price, managerial performance can be evaluated by adjusting the change in the company's stock price for what happened to the market in general-all companies-during the same period. Suppose the per share price of XYZ Corporation fell by 8 percent over the year. Was the decline in the share price due to poor management or to factors beyond the control of management, such as an economy wide recession? Some insights into this question can be gained by looking at what happened to a broad-based market index such as the Standard & Poor's 500. If the index fell by 20 percent, perhaps the managers of XYZ Corporation should be paid a substantial bonus because they were able to guide the company through the recession far better than the managers of other companies. However, if the index rose by 20 percent during the period, a different story emerges.

Common Pay And Performance Schemes

In the United States, senior managers' pay typically has three components: a fixed or base salary, a short-term or annual bonus payment, and a long-term bonus or performance payment. Both the short-term and long-term bonus payments are tied to performance measures, with the long-term bonus often taking the form of stock options. In 1996, the median CEO pay, inclusive of all forms of compensation, was $3.2 million in mining and manufacturing, $4.6 million in financial services, and, $1.5 million in utilities' (Lunnie, 2007; pg. 189). For U.S. CEOs, the fixed base cash salary represents between 20 and 40 percent of total compensation, with the fixed salary percentage being lowest among large manufacturing firms and financial services companies (a category that includes investment banks) and highest among utilities. Furthermore, the CEO's base salary as a percentage of total compensation has been dropping since 1990. However, one explanation for the reduction in fixed salaries as a percentage of compensation may be a 1993 change in the U.S. tax code that prohibited firms from deducting as business expenses nonperformance pay over $1 million to executives. Consequently, any compensation in excess of $1 million is likely to be disguised in one form or another as incentive-based pay (Carroll, 2001; pg. 121).

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

Corporate Governance Dividend Issues

Managers can do two things with current year's earnings: They can distribute them as cash dividends, or they can retain them in the company. If the earnings are retained, management can use them to make additional investments or to pay down debt. The decision to pay down debt is part of the financing decision and is connected to the notion of an optimal capital structure and solving governance problems through the financial structure decision. So, setting aside the ʻpay down the debtʻ alternative, when should management retain earnings and reinvest them in the company, and when should management distribute the earnings as cash dividends ? Arguably, the best reason for paying cash dividends is that management knows that no positive NPV investments exist for the firm. Therefore, rather than keeping cash in the company, where it earns no return, the managers should distribute it to the owners of the company as cash dividends. The owners of the company can then use these cash dividend payments to invest in other companies that have positive NPV projects available to them. Thus, they would be able to create jobs and economic growth for the economy as a whole were they to receive the funds-essentially the public policy objective of a well-functioning corporate governance system . This theory is called the residual theory of cash dividends. If corporations were actually following this policy, though, we would observe much more volatility in year-to-year cash dividend payments than we do in reality-volatility that would be more akin to that observed in net income and earnings per share (Drucker, 1984; pg. 156).

The Board of Directors and Shareholders' Rights

The board should have audit, compensation, and nominating committees made up entirely of outside directors. The audit committee ensures that the books aren't being cooked and that shareholders are properly informed of the financial status of the firm (Levitt, 2005; pg. 109). Typically, the audit committee recommends the CPA firm that will audit the company's books, reviews the activities of the company's independent accountants and internal auditors, and reviews the company's internal control systems and its accounting and financial reporting requirements and practices. The compensation committee normally does the following : (1) recommends the selection of the CEO, (2) reviews and approves the appointment of officers who report directly to the CEO, (3) reviews and approves the compensation of the CEO and the managers reporting to the CEO, and (4) administers the stock compensation and other incentive plans (Lunnie, 2007; pg. 256). The nominating committee establishes qualifications for potential directors. It also puts together a list of candidates for board membership for the shareholders to vote on. In all these cases, the point of having only outside directors is to prevent management from concealing information, deciding on its own pay, and gaining effective control of the company by controlling the board election process. Diversity should be an important factor in constructing a board. The members should all be qualified individuals, but there should be a diversity of experience, gender, race, and age.

The corporate scandals of recent years have resulted in a wave of new regulations and legislation. Most prominent among them is the Sarbanes-Oxley Act of 2002 (often referred to as SO). This Act addresses perceived weaknesses in auditing, reporting, and corporate governance of U.S. public companies and has been hailed as the most dramatic change to federal securities laws in over 50 years. In combination with related actions and provisions from the Securities and Exchange Commission (SEC), which administers the laws set forth in the act, and rule changes from the major stock exchanges, notably the New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange (NASDAQ), the Sarbanes-Oxley Act has established enhanced regulations for public company governance and reporting requirements (Pava & Krausz, 2005; pg. 83). The rule changes at the NYSE and NASDAQ came in response to a request from the Chairman of the SEC, who asked the exchanges to examine their listing standards with an emphasis on all those related to corporate governance. In response, the NYSE and the National Association of Securities Dealers (NASD) through its subsidiary, the Nasdaq Stock Market, Inc., filed corporate governance reform proposals with the SEC. Specifically, in August of 2002, the NYSE filed the NYSE Corporate Governance Proposal to amend its listed company manual. In October of 2002, the NASD, through the Nasdaq, filed a proposed rule change known as the Nasdaq Independent Director Proposal. Both proposals were subsequently amended and eventually approved by the SEC.

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

The audit committee makes sure that the books aren't being cooked and that shareholders are properly informed of the financial status of the firm. characteristically, the audit committee advocates the CPA firm that will audit the company's books, appraises the activities of the company's independent accountants and internal auditors, and reviews the company's internal control systems and its accounting and financial reporting requirements and practices. The compensation committee usually does the following : (1) recommends the selection of the CEO, (2) reviews and approves the appointment of officers who report directly to the CEO, (3) reviews and approves the compensation of the CEO and the managers reporting to the CEO, and (4) administers the stock compensation and other incentive plans. The suggested committee establishes experience for potential directors (Lunnie, 2007; pg. 90). It also puts collectively a list of candidates for board membership for the shareholders to vote on. In all these cases, the point of having only outside directors is to prevent management from concealing information, deciding on its own pay, and gaining effective control of the company by controlling the board election process. Diversity should be an significant factor in constructing a board. The members should all be qualified persons, but there should be a diversity of experience, gender, race, and age.

Chapter Three - Adoption of Corporate Social Responsibility Initiatives

Analysis & Recommendations

Corporate Social Responsibility Initiatives

Corporate social responsibility tends to mean different things in different business settings and times. As a concept, it emerged first in the 1960s among internationalizing companies from America and those involved in former colonial states in Africa and Asia. US corporations such as IBM, and Xerox in its earlier day, with marketing companies throughout the world, developed concepts of stakeholder relations to justify their positions as overseas companies engaged in new markets (Carroll, 2001; pg. 65). It also evolved as a response to the American civil rights movement in the 1960s and 1970s and claims for economic justice in the troubled US cities and later in the conflicts in UK inner cities.

Those multinational enterprises engaged in commodities and natural resource developments, evolved the concept in the face of sustained threats to post-colonial investors, nationalization and an increasingly negative environment for business. Some, in any case, had a long tradition of good business standards and active, if paternalistic, community support. The pressure was on companies to justify their presence, and the little interest taken in business at that time by the UN system was essentially negative in its approach to multinational enterprises, some of whom had been accused of engaging in 'political interference'. Some of the first social impact studies appeared at this time, focusing on economic, social, and human development contributions and far less on environment which had not yet emerged as a significant concern.

In the main, corporate social responsibility was seen as a defensive shield at times when business and its property were under threat. It emerged in a similar form at the time of intensive anti-apartheid campaigning against South African investment in the 1970s, with calls for disinvestment and an onus on demonstrating the contribution(s) that could be made by a continued presence (Lunnie, 2007; pg. 167).

Throughout these years, corporate responsibility, sometimes used interchangeably with 'corporate citizenship', was often equated with corporate philanthropy as there were a large measure of community support and charitable donations involved in action, whether in the regeneration of US cities, the building of schools and health centres or the funding of scholarships (Carroll, 2001; pg. 11). To this day, US corporate and foundation behaviour, conditioned to major roles as a donor in US society, sees corporate responsibility mainly as a philanthropic strategy, whereas a European model is emerging with far greater emphasis on nonphilanthropic activity. Japanese major company behavior has often followed the American model, even though it gives significant emphasis to its supply chain contributions (Guerra, 2004; pg. 3).

According to the view of social responsibility as social responsiveness, socially responsible behavior is preventive rather than restorative. The term social responsiveness has become widely used in recent years to refer to actions that go beyond social obligation and social reaction. The attributes of socially responsive behavior include taking stands on public issues, anticipating future needs of society and moving toward satisfying them, and communicating with the government regarding existing and anticipated socially desirable legislation (Drucker, 1984; pg. 67). Corporate managers, according to this view, use their skills and resources to solve an existing or anticipated problem. This view places managers and their corporations in a position of social responsibility, far removed from the traditional one that was concerned only with economic means and ends.

Events during the 1980s reinforced the attitude that corporations must react to problems created by their own actions. More important, the 1970 crisis initiated the idea that corporations have to be proactive and should be responsive to a wide range of social problems because they have the expertise and power to do so. The current debate on the social responsibility of business is not concerned with obligatory behavior but with socially responsive behavior.

The proliferation of product certification schemes touches many of the issues. A broad government-backed mechanism emerged to certify that international trade would be free of "conflict diamonds" associated with human rights violations in Africa. Exports of soccer balls and rugs from South Asia feature certification processes to assure the goods were not produced using child labor. "Green" labels tout the environment-friendly record of many products, from recycled paper or plastic products to energy-saving devices to "dolphin-safe" tuna (Guerra, 2004; pg. 5). Remarkable variety exists in the types of issues addressed and certification measures employed. The constellation of certifying and supporting organizations can also mix public agencies, business organizations and civil society groups.

Fair Trade initiatives represent a particular application of product certification schemes, usually but not exclusively applied to products based on agricultural commodities. The basic concept seeks to establish a dependable, long-term relationship with commodity growers in developing countries, offering them a higher price for their products by eliminating middlemen traders. Many schemes also provide an additional premium to growers for using environmentally friendly methods and/or for community social development projects. The general approach reportedly stems from efforts begun in 1986 by the Max Havelaar Foundation in the Netherlands to respond to desires for development projects that emphasize trade rather than aid. Starting with coffee and expanding to honey, bananas, tea and orange juice, the Foundation supported Fair Trade products sold primarily in Europe. During the 1990s fourteen other Fair Trade organizations were established, reaching over $200 million in sales by the end of the decade (Guerra, 2004; pg. 11), still largely concentrated in European markets. Some approaches expect consumers to pay a somewhat higher price for certified Fair Trade products while other efforts try to remain price-competitive, using cost savings in the distribution chain to redistribute profits toward developing country growers (Lunnie, 2007; pg. 19).

An important extension of the Fair Trade mechanism to the US market occurred in 2000 when Starbucks announced the introduction of a blend of Fair Trade coffee certified by the non-profit TransFair organization that encourages farmer co-operatives in developing countries to sell direct to coffee roasters or retailers. The breakthrough with Starbucks came after some of its coffee houses were vandalized during anti-globalization protests at a World Trade Organization meeting hosted in the company's hometown of Seattle, Washington. This initiative complemented Starbucks' broader social responsibility programs and helped expand Fair Trade coverage in the United States beyond craft shops and a few grocery stores. Subsequent discussions between Starbucks and Oxfam also led to cooperation on a project to aid coffee growers in poverty-stricken areas of Ethiopia.

Wage standards represent one of the most problematic labor issues in code of conduct debates. The wage debate revolves around the question of where to set an ethical minimum wage rate. Traditional choices involved either the local legal minimum wage or the local industry market wage (that may fall below the legal minimum where laws are not well enforced). In many developing countries, neither choice appears ethically acceptable to civil society groups. Governments often set legal minimum wage rates low as an incentive to attract foreign investment and promote labor-based exports. In these countries, excess labor acts as a competitive economic factor endowment, meaning market forces of supply and demand also repress wage rates. Under these circumstances, either standard can leave workers with insufficient money to live, even well below the local poverty line.

The concept of a living wage attempts to address this issue by setting an ethical minimum wage rate based on a worker's survival needs rather than other possible distributive justice standards such as contribution (productivity), equality, seniority, etc. The normative argument draws on the employee's position as a central stakeholder to whom the firm owes a strong social responsibility (Drucker, 1984; pg. 2). A major difficulty, however, lies in defining "living wage." For example, while providing enough money for minimum survival requirements appears reasonable, agreement rapidly disappears as the list of included items lengthens: food, clothing, housing, health care, transport, education, savings, etc. If a list of items is agreed and priced by the local cost of living, troublesome questions still remain regarding, for example, whether a worker's salary should provide only for that person or also for family members (spouse, children/how many, extended family). Wage-related standards may also conflict; for instance, two workers, one single and the other the head of a large household, might require a different minimum living wage, but such a differential would conflict with an equal pay for equal work standard.

Chapter Four


Many companies, including mining conglomerates object to extending social responsibility beyond the direct employee relationship, particularly in cultures where large extended family ties are common and important. Living wage standards, particularly if liberally defined, could quickly push labor compensation far above local law or industry market levels, leaving the firm at a competitive disadvantage. Losing their low wage rate advantage could also drive investing or purchasing firms to look elsewhere for a production site, leaving the workers without any wages. Companies also argue that governments or other social institutions should be responsible for providing individual minimum income needs; employee wage rates should be set by market forces that respond to worker productivity (contribution to the production process). The rejoinder from critics often relies on the thesis that corporate social responsibility becomes greater where market forces do not work efficiently and governments are ineffective or unresponsive to the needs of their people circumstances that mark many developing countries.