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The definition of corporation tells that a corporation is created by a group of shareholders who have ownership of the company. They select a board of directors who elect and look after management of the corporation. The directors must supervise the work activities of the executive and guarantee that the interests of the shareholders take precedence. The majority of corporations are setup in order to make profits for shareholders.
From the corporate definition we can take that the shareholders are always interested in being informed about the company financial situation to feel secure that managers are carrying out a suitable policy of corporate governance.
In recent times, certain cases of poor governance practices happening and it are described following:
In the United States of America in 1929, a stock market crash takes place. The reasons for this event were a set of bad corporate governance practices, such as corruption. The crash marked the end of a period of rising market.
The later stage was the Great Depression, characterised by high unemployment rates and low economy activity. As a consequence of bad practices and the market crash, the investors lost confidence in the stock exchange and the companies. The U.S. government designs the New Deal program with the aim of recover the market trust and promotes the recuperation of the U.S. economy.
Furthermore, and as a consequence of the crash, the U.S. government designed two legislations, the "Securities Act of 1933" and the "Exchange Act of 1934".
The acts were drafted to regulate corporate activities and protect the citizens and shareholders to corrupt behaviours. Also, the intention of recovering confidence remained present.
The principal goal of the "Exchange Act of 1934" was to found the Securities and Exchange Commission (SEC). The purpose of the commission was to regulate corporate procedures, guide companies for proper compliance and establish methods of information gathering. After this moment, companies must regularly show and submit information about their accounts. The principal reasons of these measures were the aim of protect shareholders from corporate corruption and false accounting practices.
In the last years, some cases of poor corporate governance practices have released to the public opinion. The principal causes of these bad practices were inaccurate financial reporting practices and other corrupt practices conducted in the knowledge of the company managers where it takes place. These habits had as a consequence on court cases, bankruptcies and civil suits.
The most famous cases of financial crisis and poor corporate practices takes place in American companies, such as Enron, Tyco International,Â WorldComÂ y Peregrine Systems. Moreover, the stock market crash in the earlier twenty century revived the feeling of low confidence in the stock exchange market.
Enron Creditors Recovery Corporation was an American company based in Texas. Its main activities were energy, utilities, stationery, and communications. The company employed around 21,000 people and its profits amounted $ 111,000 million in 2000. According to their notional accounting, it becomes one of the most important and with higher revenues of the United States.
In the year 2001, was discovered that the company was carrying a continuous creative accounting practice distorting their financial situation. They use
The Enron case became famous in late 2001, when it was revealed that its financial condition was sustained by creative accounting fraud.
These cases of fraudulent activities reached the ears of public opinion producing distrust in corporate companies among shareholders, investors and citizens.
After these events, the government was forced to legislate to prevent the financial fraud. For this reason, the government draft the Sarbanes-Oxley Act in 2002.The goal of this act is to protect investors and establish accounting procedures to enable the companies' transparency in the financial reporting of corporations. The SOX created the Public Company Accounting Oversight Board (PCAOB) as a agency to formulate standards for corporate executives, accounts and auditors.
2. What are the characteristics of good corporate governance and how are they contributing factors in enhancing the value of the firm?
As a consequence of the illegal accounting practices and the distrust in stock exchange market, some organizations has drafted principles, codes and recommendations with application to any businesses to ensure that corporations are developing an adequate policy of corporate governance.
For this reason, it is important the integration of the codes at the business culture, without ignoring the business strategy. The implementation of these practices benefits organizations in the way that projects an adequate image of the company, showing it as a reliable company which generates safety and value.
As we can extract for the definition of corporate governance, it controls relationships between shareholders and organizations.
For that, shareholders are always concerned about good practices in order to assure its own profit.
The structure of the major part of corporations shows intensive relationships among shareholders, board of directors and executive management, controlling each one action and decisions.
The Board of Directors is the entity from which the good corporate governance practices should start. The president, directors and executive committees must promote, develop and ensure that good methods are being carrying out.
There are some aspects which managers should take into account to develop a good policy of corporate governance, and it is the following:
Aspects of Good Corporate Governance
Ensure the adequate performing of the administration and control organs.
Reflect and communicate trust and transparency to investors.
Promote control culture between staff members.
Ensure an appropriate flow of functions, duties and responsibilities.
Increase the efficiency of operations and aspects accordance.
Generate shareholders value.
Corporate governance structure:
Board of Directors
The diagram explains the flow of responsibilities between the members of the company and how they supervise, elect and appoint. The company is able to design as committees as they need. In the example diagram, the committee one represents the possibilities of the corporation to design them.
OECD (Organization for Economic Co-operation and Development)
The mission of the Organization for Economic Co-operation and Development (OECD) is to design and enhance policies that will make better the economic and social framework of people around the world.
The OECD established regularly a meeting when country leaders and OECD representatives meets to work together with the goal of thinking about social common problems and try to look for solutions. They work with the aim of try to understand which factors affect economic, social and environmental change. Moreover, the organization gauges productivity and global flows of businesses and investment. They observe and compare data to forecast future tendencies and define international standards on a wide range of matters.
In the wide range of matters which are analyzed by the organization, some are things that include the day to day life of population, such as the quantity they pay in taxes and social security or how much leisure time they enjoy. Moreover, they make comparisons between the different countries school systems, among other things.
Considering real-life experience, they design and advocate for policies to make the lives of ordinary people better, safer and longer. The common purpose of the organization and market economies is a interest to make life of citizens better.
The organization signed the setting arrangement on 1960 in Paris. It promotes policies designed:
- "To achieve the highest possible sustainable growth of the economy and employment and a rising standard of living in Member countries, while maintaining financial stability and contributing to the development of the world economy"
- "To contribute to sound economic expansion in Member States as in the non-members in the process of economic development"
- "To contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations"
(Source: OECD website)
The founding member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the USA. Then have signed the Convention, on the year indicated, the following countries:
Japan (1964), Finland (January), Australia (1971), New Zealand (1973), Mexico (1994), the Czech Republic (1995), Hungary (1996), Poland (1996), Korea (1996) and the Slovak Republic (14 December 2000).
In matter of corporate governance, the OECD Ministers drafted the Principles of Corporate Governance in 1999. After the publication, they have become a source for policy makers, shareholders, companies and other interested parties around the world. The regulatory guidelines proposed by the organization are the following:
"Ensuring the Basis of Effective Framework for Corporate Governance"
"The corporate governance framework should promote transparency and efficient markets, be consistent with the legal and articulate a clear division of responsibilities among different supervisory authorities, regulatory and enforcement"
"The Rights of Shareholders and Key Features in the Property Scope"
"The corporate governance framework should protect and facilitate the exercise rights of shareholders"
"Equitable treatment of shareholders"
"The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders"
"All shareholders should have the opportunity to conduct an effective remedy in case of violation of their rights"
"The Role of Stakeholders in the Field of Corporate Government"
The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements"
"Data disclosure and transparency"
"The corporate governance framework should ensure disclosure
timely and accurate of all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company"
"Board of directors responsibilities"
"The corporate governance framework should ensure the orientation company's strategic, effective control of the executive by the Board and the responsibility of it against the company and the shareholders".
(Principles picked by the OECD official website, oecd.org)
3. How Ryanair develop and promote corporate governance within the organization?
Ryananir, as a corporation, promotes the effective accomplish of standards of corporate governance. The directors are required to comply with the principles, ensuring total compliance. This company applies the 2010 UK Corporate Governance Code (the 2010 Code).
The Code is a handbook that refers to a range of criteria based on effective board practices. The principles from which leave the criteria are the most common in matter of corporate governance:
Accountability, transparency and reliability. They focus on the long-term performance and success of a corporation.
The main principles of the code are the following:
Section A: Leadership
A company should be headed by an effective board of directors that is responsible for the proper operation, development and evolution of the company. The responsibilities must be clearly defined and must be carried out carefully to ensure the proper conduct of business. No member of the board should have more responsibility than another.
The Chairman is responsible for which roles are carried out successfully and their enforcement.
Ryanair develops this section as follows:
The Ryanair board of directors is composed by one executive and eight non-executive directors. It is a policy of Ryanair that the most part of the Board be formed of non-executive Directors, and that the Chairman is non-executive. The company considers the current size and composition of the Board is optimum to ensure the adequate development of their business.
The Board of Ryanair is in charge of conducting a leadership strategy and supervises the overall management of the Group. The tasks specially reserved to the Board are designation of senior management, approval of the annual budget, large capital expenditure, and key strategic decisions.
The Ryanair chairman is Mr. David Bonderman since December 1996. Its duties are manage the Board, make sure that the Board pursues a single order, run the group as a unit and assure that the Board promotes high standards of integrity and corporate governance. He is in charge that the Board carries out the key strategic issues confronting the group. Moreover, he must supervise the Board reviews and approves management's plans for the Group; and that directors receive accurate, timely, clear and relevant information.
Section B: Effectiveness
The board and its committees should show the appropriate equilibrium of skills, experience and knowledge of the company to empower them perform their respective tasks and responsibilities rightly.
In Ryanair, all the managers have experience in the company field; which is a necessary requirement to develop properly the duties of management. The company considers that the members of the board meet together the necessary requirements in terms of experience and knowledge, including international experience. The Company has a Chairman with an extensive professional career in this industry, and significant public company experience.
Section C: Accountability
The board must display the continuous assessment of the company's position and prospects.
To meet with the accountability statement requirement, the company has appointed "The audit committee", which is in charge of tracing and check the truthfulness of the financial statements of the Company. In addition, this committee is responsible for any formal announcements relating to the Company's financial performance.
Section D: Remuneration
In the matter of remuneration, the salary should be enough to maintain and motivate managers. In contrast, the salary should not be excessively high in reference to the task that the manager is in charge.
To control the remuneration methods, the Board of Directors has appointed the "Remuneration Committee" in 1996.
This committee has authority to fix the remuneration of senior executives of the Company .Senior Management remuneration is determined by a fix pay and extra bonuses related to performance. The performance bonuses are obtained by a mix of achieving of individual objectives and the Company's financial performance.
Section E: Relations with shareholders
The relationships with investors should subsist on the basis of mutual understanding of objectives. The board has the responsibility of ensure the satisfactory flow of information between the corporation and the shareholders.
The way that Ryanair communicates with its shareholders is based on the publication of quarterly and annual results directly via road shows, investor days and/or by conference calls.