The controversial nature of the corporate governance system

1174 words (5 pages) Essay in Business

5/12/16 Business Reference this

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During the last decade, corporate governance has become a contested and controversial issue. Following the collapse of Enron and other accounting fraud and corporate scandals involving firms such as Parmalat, Barings, Tyco, WorldCom, and SOCGEN and in light of the demise of Arthur Andersen, one of the “Big Five” accounting firms appear to have shaken the confidence of investors. The principal weakness of corporate governance today is the excessive concentration of power in the hands of top management. The phenomenal growth of interest in corporate governance has been accompanied by a growing body academic research. As the discipline matures, far greater definition and clarity are being achieved concerning the nature of corporate governance.

Corporate governance is the system of checks and balances, both internal and external to companies, which ensure that companies discharge their accountability to all companies, stakeholders and act in a socially responsible way in all areas of their business activity (Jill and Aris Solomon, 2004). However, there is no single, accepted definition of corporate governance. There are substantial differences in definition according to different country. According to Parkinson (1994), define corporate governance is the process of supervision and control intended to ensure that the company’s management acts in accordance with the interests of shareholders.

The purpose of corporate governance is to safeguard the integrity of the promises made by corporations to investors. Another way to say this that corporate governance is about reducing deviance by corporations where deviance is defined as any actions by management or directors that are at odds with the legitimate, investment-backed expectations of investors. Good corporate governance, then, is simply about keeping promises and vice versa. Generally, Corporations are almost universally conceived as economic entities that strive to maximize value for shareholders. ( According to Chris Thomas (2010) reveals the principal characteristics of effective corporate governance are: transparency (disclosure relevant financial and operational information and internal processes of management oversight and control); protection and enforceability of the right and prerogative of all shareholders; and directors capable of independently approving the corporation’s strategy and major business plan and decisions, and of independently hiring management, monitoring management’s performance and integrity, and replay management when necessary.

The current corporate governance practice in the U.S. can be described as overly complex given the different sets of laws and regulations addressing corporate governance. Federal, state, and market are the mechanisms was utilized by the U.S corporate governance. According to Edwards (2003) explained that the first line of defence with regard to the corporate governance mechanisms in the United States is the basic legal structure comprising state-based corporate law (prior to SOX) and federal securities law. Sufficient corporate disclosure to make the operations of corporations transparent to shareholders in requiring by federal securities law in order to empowers shareholders, which by subjecting it to market inspection and discipline. Besides that, shareholders are also entitles to sue fraudulent managers.

The second level of defence is state law and the certificate of incorporation, which together establish a governance structure for the corporation, assigning rights and duties to shareholders, directors, and managers. Therefore, the legal requirements are differ from one state to another. For instance, most of the large public companies in the U.S., irrespective of the location of their operations, are incorporated in Delaware due to its business-friendly corporate legal environment. However, following the various scandals, the SOX statute came into force leading to at least the partial federalization of corporate law. The third level of governance mechanisms in the U.S. is executive compensation, through which shareholders and their elected directors choose to employ an incentive compensation structure for both managers and directors to better align their interests with those of the shareholders.

For instance, Coca-Cola is one of the best corporate governance practices in US. Coca-Cola is largest manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups in the World. It is also manufacture, distribute and market some finished beverages. Along with Coca-Cola, which is recognized as the World’s most valuable brand, it market four of the world’s top five soft drink, brands, including Diet Coke, Fanta and Sprite. It has been 124 years in business and now sold in over than 200 countries (Coca-Cola Annual Report, 2009). The Coca-Cola Company is committed to sound principles of corporate governance. The Board is elected by the shareowners to oversee their interest in the long-term health and the overall success of the business and its financial strength. The Board serves as the ultimate decision making body of the Company, except for those matters reserved to or shared with the shareowners. The Board selects and oversees the members of senior management, who are charged by the Board with conducting the business of the Company (Coca-Cola Annual Report, 2009).

The company are guided by established standards of corporate governance and ethics. The code guides their business conduct, requiring honesty and integrity in all matters. All of the associates and directors are required to read and understand the Code and follow its precepts in the workplace and larger community. The Code is administered by their Ethics and Compliance Committee. This cross-functional senior management team oversees all our ethics and compliance programs and determines Code violations and discipline. Our Ethics & Compliance Office has operational responsibility for education, consultation, monitoring and assessment related to the Code of Business Conduct and compliance issues. Associates worldwide receive a variety of ethics and compliance training courses administered by the Ethics & Compliance Office. They regularly monitor and audit our business to ensure compliance with the Code and the law. They also maintain a consistent set of best-in-class standards around the world that govern how they investigate and handle Code issues. Acting with integrity is about more than Coca-Cola Company’s image and reputation, or avoiding legal issues. It’s about sustaining a place where we all are proud to work. Ultimately, it’s about each of us knowing that we have done the right thing. This means acting honestly and treating each other and our customers, partners, suppliers and consumers fairly, and with dignity. The Code of Business Conduct is our guide to appropriate conduct. Together with other Company guidelines, such as our Workplace Rights Policy, they have set standards to ensure that do the entire right thing. In 2008, the Code was revised to further improve its effectiveness. In order to preventing workplace violence and drug-free workplace, they trained associates on the Code of Business, European Union competition law, Latin American competition law, financial integrity, intellectual property and competitive intelligence. Besides, they are also rolled out an updated global anti-bribery compliance program with supporting policies, training and audits. In addition, we expanded our compliance program around United States trade sanctions with supporting policies, training and audits (, 2010).

However, the notorious collapse of Enron in 2001, one of America’s largest companies, has focused international attention on company failures and the role that string corporate governance needs to play to prevent them.

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