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The Corporate governance is the system in which the entire organization's functional aspects are run.In many cases management runs the firm/industry but it is also the responsibility of the Board of Directors to GOVERN the industry by way of managing and representing the interests and wishes of the firm's shareholders.So, the corporate governance implementation is a Strategic Management tool in the organisation's functionality.
As per norms of law,every corporation ,whether small or large size,should have a Board of Directors who are directly elected by the shareholders of the corporation. The directors of the corporation should have a FIDUCIARY duty towards the shareholders, as they are the industry's owners, and directors as well as corporate officers are held responsible for failing to meet their fiduciary duties to stockholders. A inactive board can get into trouble by depending on an influential/ dominating CEO.
CORPORATE GOVERNANCE AS A STRATEGY:
The public and the Investors are particularly very much interested in the financial reports which the company releases for public, and the boards of directors of these companies should have a legal obligation and responsibility to ensure that these reports are accurate and fair . Otherwise if anycase there is a false reports,statements etc. then it would cause a great issue in the society.The media spreads the related news in the society and it would lead to negative word of mouth in the public which reduces the confidence and trust in the public.
The recent business failures, material deficiencies in the financial disclosures,and auditor malfeasance have caused a lot of serious erosion of public confidence in company's financial reporting.
Common law has traditionally says that corporate directors should have a primary duty towards the corporation and a secondary duty towards the shareholders.
Best Corporate Governance Practice
Thers are Five Golden Rules in best corporate governance practices - key concepts in improving the best practices in business and the good corporate governance. Also these principles means that the company's culture and public image will shine out as an example of an well, open, and fairly run organisation.
The public picture of an corporation will be accurately reflect the culture of that organisation. It follows, that good corporate governance should be in the bones and bloodstream of the organisation because this in turn reflects the culture of that corporation. In the same way as the healthy blood and bones are reflected in the naturally healthy person, so an organisation whose internal functions are healthy,as mentioned, would naturally look so from an external perspective. So these Golden Rules of best corporate governance practice are like a health manual for any organisation also come with a practical diagnosis and treatment programme which sets out in good corporate governance implementation.
Five Golden Rules
As it is mentioned above,these rules lays out and explains how the best corporate governance practice and the holistic approach can ensure that a state of good corporate governance exists, and is brought into being if its existence is uncertain. It also considers that the view that there is an over-riding moral dimension in running a business functions and that the governance standard will depend on the moral complexion of the operation. Therefore, the approach and the standards developed are entirely based on the belief that:
The morality of the business and the ethic should passthrough the entire organisation's operation from top to bottom and satisfy all stakeholders .
The Five Golden Rules of best corporate governance practice are:
Align business goals
a clearly ethical basis to the businessÂ
through the creation of a su itable stakeholder decision making modelÂ
an effective strategy process which incorporates stakeholder valueÂ
an organisation suitably structured to influence good corporate governanceÂ
reporting systems structure to provide accountability and transparency
This approach of corporate governance recognizes the fact that the different stakeholders interests carry different weight, and suggests to those with a major interest matter . On the other hand, best corporate governance practice conveys that all stakeholders of the corporation should be treated with equal respect and concern . For some reasons, although the methodology proposed above involves the concept of taking major stakeholders into greater account ,when formulating organisation's strategy,it is designed to improve all round support.This is because of the fact that every stakeholder of the corporation, is given the opportunity to express his/her view. It is key approach that corporations truly respect the minority interests of the stakeholder.
Corporate cultures and vision
In this regard I would consider an example:
The founder of the management consultancy Personnel Administration in 1943, Ernest Butten, issued a document ,which is called as the P.A. Charter. The aim behind this document was to drive the business forward by creating trust and confidence for its staff and well through his retirement twenty five years later. "Ernest Butten's" presence allowed the company and guided its behaviour for a generation.
This ability and the intention to create a vision and turn this vision into a way of life for the firm may be regarded as nothing unusual.But this is until one compares, Robert Maxwell, a supposed entrepreneur and builder of multinational corporations, whose empire collapsed after his dealth. Also, Thomas J atson ,an entrepreneur and business builder, who created,( International Business Machines)IBM, is still a universal force to be bestowed with over eighty years since its inception.
What are the Principles of good corporate governance:
From the above examples, we can come to some conclusions and formulate a short set of principles regarding best corporate governance practice. All the "baddies" to a large extent ignored them. All the "goodies", to a great degree, abided by these rules. The principles underlying these rules are:
Ehical approach Balanced objectives Roles of key players Decision making Equality treatment of stakeholders Accountability and Transparency
culture, society; organisational paradigmÂ
congruence of goals of all interested partiesÂ
which is based on a model reflecting the above giving due weight to all stakeholdersÂ
albeit some have greater weight than others
to all stakeholders
Therefore, with due respect to Milton Friedman who said that " believing in the social responsibility of business begins and ends with increasing profit, we contend that running the Industry's business successfully is not simply about market domination and shareholder value."
And the best corporate governance practice in an Industry is not simply about a tug-of-war between disloyal and distant institutional shareholders and greedy directors but about the ethos of the organisation and fulfilling its agreed goals.
These goals and objectives may be set by the entrepreneur who starts the business, but they are taken into consideration by all parties as being high-minded and in every stakeholders interests. And, of course, different parties want different things from the company. So,there has to be a process of finding out the different needs and harmonising them. This is considered as the starting point for the smooth running of the Organisational business.
Note: "Best corporate governance practice = best management practice"
This regulatory approach towards the subject would consider governance as something on its own, to do with ensuring a balance between the various interested parties in a firm's affairs, or more particularly a way of making sure that the CEO or chairman is under control,and allowing transparency in curbing or reporting over-generous remuneration packages.
This indeed is what the Cadbury recommendations and the subsequent reports and code are all about.
The essence of success in business is:
having a feasible strategy to achieve itÂ
having a clear and achievable goalÂ
having in place a reporting system to guide progress.
creating an organisation appropriate to deliverÂ
So with regard to above we can say that , "Best corporate governance practice is about achieving the stakeholders' goal, and delivering success in an ethical way." Therefore, it follows that the corporation must entail a holistic application of good management in the company.
It is vital that a broad perspective or ideology is to be taken when considering corporate governance because we cannot emphasise too strongly over our belief that "good management practices, will deliver good corporate governance."
As Professor Sir George Bain once said to us, "the big advantage of the shareholder model over the stakeholder model in the management terms is the simple goal it presents: i.e maximise shareholder value."
The governance, the goals,objectives and the strategy of a business must be compatible, and there should be congruence between the various interested parties expectations.
KEY GOVERNANCE ISSUES
The Boards of directors of any corporation have a myriad of duties, which are mostly set by common law and the corporation's own by-laws. These duties often include:
approving major strategic decisions
hiring, supervising, and sometimes firing the Chief Executive Officer;
establishing executive compensation;
refining board rules and policies.
making decisions about mergers and acquisitions;
nominating board candidates;
assessing the viability of potential takeover bids;
meeting with shareholders;
overseeing financial reporting and audits;
taking action if the corporation fails;
One of the most difficult corporate governance duties of the Board of directors lies in the removal of the firm's CEO. This can occur when the board disagrees with the strategic direction being followed by the CEO,( or) if they merely want to show they are "doing their duty" as board members.
For example, when Carly Fiorino was appointed as the CEO of Hewlett-Packard (HP) in 2005, she was viewed as the hard-driving and fearless by many . The Hewlett Packard board of directors had grown increasingly uncomfortable with her inability to deliver the profits that she promised . Her refusal to follow some operating control,( or) to make any changes which the board requested, caused her downfall during a period of low profits and falling stock prices.
Another difficult time for the corporate boards of Directors occur when the firm is the target of a takeover attempt. It is important at such a time that the board have a clear sense of the value of the firm and that it is able to fully evaluate takeover offers. During a takeover it is the board's responsibility to accept or reject offers, the important task of the board members is to match the interests of its stakeholders.
Boards of Directors often administer their corporate governance responsibilities by way of establishing committees so to oversee different areas of concern. Typical committees include
Each committee of the organisation oversees a specific area of corporate governance and the same, reports to the full board members. The audit committee is concerned with the company's financial condition, internal accounting controls, and issues relating to the firm's audit by an independent auditor. The nominating committee's area of functionality consists of issues related to management succession, including the CEO, and to the composition of the board of directors. The compensation committee oversees compensation of the firm's CEO and its officers, as well as director compensation.
In the past,the corporate boards have been described as either passive or active . Some corporate CEOs considered the Boards of Directors as "rubber stamp" who would approve virtually any actions they chose to pursue.But now the Corporate directors are much more independent, and their legal liability towards the shareholders has increased drastically and significantly.
One of the example where a traditionally "quiet" board of directors became more active happened with the Walt Disney Company. For years, Michael Eisner ruled the Disney empire. After Roy E. Disney, Walt Disney's nephew,taken the lead of its shareholder revolt of sorts and complained that investor votes were being ignored , the Walt Disney Company board of directors finally decided to step in. In early 2004, the board of directors took the chairmanship away from Michael Eisner after more than 45% of votes cast at company's annual meeting opposed his board re-election. It was considered as the resounding vote of no confidence. But the board then chose Michael Eisner ally,Geoarge Mitchell(former U.S. Senator)as chairman, over the several larger shareholders objections. Ironically, a year later,michael Eisner was easily re-elected to the board of directors, with only 8.6 %of voters withholding their support for him.
Boards of Directors can take simpler steps in ensuring that they are not passive in voting out the CEO. The board can also staff all board committees with independent outside directors, except the president and CEO. They can establish a non-executive chairman, a chairperson who is separate from the CEO.
So ,from the above paragraphs we can say that for the functioning of the Corporate Governance in the firm ,it is vital that the Boards of Directors must not act,merely, like a "rubber stamp" .But should make decisions keeping in the mind the interests of its stakeholders.
Finally, it is very vital to realize that having the most qualified and the best corporate board of directors is no guarantee that financial reporting or other problems will not occur.