• Posted on November 5, 2020
• Unique Submission Team

Critical Evaluation-Corporate Governance

Introduction

The main purpose of this report is to develop a critical understanding of corporate governance so that it can be determined whether corporate governance is proactive, reactive or a waste of time.

In this manner, to understand corporate governance, there is a need to understand the primary goal of corporate governance so that it can be identified that why corporate governance was introduced.

In a similar manner, this report also contains the main cause of agency problem means the key problem area of corporate failure or different kinds of corporate scandals.

In the end, some important key factors are also discussed in this report that influences the board of directors within the overseeing corporate governance and at the same time, the roles and responsibilities of the executive and non-executive directors are also described under this report in order to analyze that what corporate government is actually.

Here, also needs to know about corporate governance that is defined below:

Meaning of Corporate Governance

Corporate governance is determined as the system of a number of rules, practices, and processes through which an organization or a corporate entity is directed and at the same time controlled.

In addition, it is also found that the balancing the interest of a company’s many stakeholders are involved in the corporate governance and this stakeholder can be shareholders, senior management, employees, government, financials, suppliers, customers, and community (Mair et al., 2015).

At the same time, corporate governance also helps the organization or the company by providing it a framework in order to attain the organizational objectives. In this way, Gregory and Simms (1999) noted that it is important to maintain the quality of corporate governance because it has a direct effect on:

• The competence with that a corporation employs assets
• Its capability to be a magnet for low-cost capital
• It’s capacity to meet society’s expectations
• Its overall performance

Moreover, in concern or corporate governance, CGAI (Corporate Governance Association of Ireland) was founded in April 2006 in Ireland for promoting the high standards related to corporate governance through adhering to the association code of professional conduct (Muller, 2017).

Main Body

Primary Goal of Corporate Governance

While analyzing about the corporate governance, it is determined that the primary goal of corporate governance is to enhance the value of an organization or a company by adopting the ethical behavior, supporting the policy of openness or fairness and making sure about the decision making in whole the company.

Instead of this, in some cases, the center of corporate ethics such as the board of directors of the company becomes the point of attraction for unethical practices (Schwaninger, 2019).

In this way, James D. Wolfensohn who is the incumbent President of the World Bank gave a statement about the significance of corporate governance that “the governance of the corporation is now as important in the world economy as the government of countries”.

In this manner, it can be declared that nowadays, corporate governance has become an important factor for an organization in order to operate it ethically and to secure the interest of organizational stakeholders.

In addition to this, it is also determined that the corporate governance is important for the organization because it is the topic of increasing interest to the investors and stakeholders as it is the way by which a business is enacted that is not always consistent (Kim and Kim, 2016).

In a similar manner, one more goal of corporate governance is to establish the correct balance of power-sharing among the board of directors. By maintaining the corporate governance, companies can earn public trust and they are also capable to develop reliable and transparent information related to finance that contributes to the efficiency.

That is why, in the words of Gillan and Starks (1998), “the corporate governance is the system of laws, rules, and factors which helps to control the operations under the company”.

In this manner, corporate governance is one of the important systems for the organizations or the companies as corporate governance provides the significant control on the organizational operations so that they can be performed with more fairness and transparency (Goergen and Tonks, 2019).

At the same time, it is also disclosed that the aim of the company is directly associated with the interest of the company’s board along with the company’s shareholders.

These connected factors help the organizational management to deliver the added values to the stakeholder of the company in context to a long time period. Due to the corporate governance, the board of directors of the company follows some important principles such as fairness, accountability, responsibility, and transparency, etc.

In this context, Shleifer and Vishny (1997) reflect as per their observation that “corporate governance (CG) as a way in which suppliers of finance to corporations assures themselves of getting a return on their investment”.

On the basis of the above study, it can be mentioned that corporate governance under the organizations ensure that all the stakeholders of the organization will be treated well and it will also be ensured that they get return fairly and equally (Martin et al., 2016).

Apart from this, in concern of the corporate governance, there is a number of important people who considered and mentioned in their several statements that corporate governance is the topic and there are many recent developments that have been outlined in case of corporate governance (Joslin and Müller, 2015).

In this way, the people of the Central Bank of Ireland depicted about the behavior and the culture of the Iris Retail Banks that culture is more important compared to behavior and in this manner, a list of culture includes the offering responsible products, committing to the diversity and inclusion, having robust internal audit, risk management procedures, prioritizing the best interest of customers, and reviewing board effectiveness, etc.

In this way, it is determined under the defining culture that how an organization can deal with the adverse situation. With the help of this, it is analyzed that the best most inert of the customers are protected even the short term profitability has damaged.

These all the statements are related to the corporate governance that helps the organization to develop its culture (Wang et al.,  2017).

In a similar manner, Philip R. Lane Governor of Central Bank of Ireland mentioned in their statement that the key issue with the best practices codes and regulations of corporate governance is a reactive component of corporate governance.

In this way, every new wave of scandal related to corporate is the cause of another regulatory reform and often politicians due to public pressure, bring back to knee-jerk reactions in concern of developing new regulations which do not resolve the real causes of the corporate failure (Aguilera et al.,  2018).

In this way, it is analyzed that corporate governance plays an important role in an organization or a company in order to make it more growing and profitable. At the same time, it is also essential to develop trust among the customers in concern of the organization or a company.

Cause of Agency Problem (Corporate Failures/Corporate Scandals)

The major cause of the agency problem is the conflict of interest among the needs of the different agents and the principal agent (such as the needs of shareholders and the company management).

The agency problem can be caused due to the incentives issues among the shareholders and the managers (Kostova et al., 2018) as well as due to the existence of diplomacy in the completion of business operations/ activities (Brennan et al., 2016).

In addition, the information asymmetry or the incomplete information among the shareholders and management give rise arise the agency problem. This can be in a situation when managers hide information about poor sales or performance form the principal agent, senior managers and hamper the business objectives.

Such information asymmetry issues can affect profitability increase transactional cost, risk and uncertainties that become a conflicting situation that leads to agency problem (Brennan et al., 2016). When shareholder does not have sufficient knowledge on the corporate performance then the lack of information influences their return on investment.

Also, in the situation of fraudulent financial reporting the trust gets affected in the agency relationship i.e. in the company directors and the shareholders.

It can be said that such corporate scandals are the cause of agency problem from a corporate governance perspective. In essence, the non-effectiveness of the corporate governance practices or failure of overall corporate governance also forms one of the grounds in agency problem (Ambos et al., 2019).

Thus, it can be said that the principal and the agents are known to have a different interest where it is not possible in every situation to ensure that agents act on behalf of another party best interest.

Similarly, when the agents have more information and do not share causing asymmetric information it cannot be guaranteed that agents to always acting in its principals as sharing information may be costly or risk for the agent and not is in the agent best interests. These also lead to a moral hazard which is closely linked to the agency problem motive.

On the different side, a company with losing profits and failing in the marketplace is at more risk of agency problem (Kostova et al., 2018). This is because the company may take risks to sustain which may result in expected profits or unexpected loss which require the top management/ directors to take actions or develop unsuitable behaviors that fulfill their self-interest over the shareholder’s interests.

The influence of the board of directors in overseeing corporate governance and the roles and responsibilities of the executive and non-executive directors

In concern of corporate governance, it is determined that the boards of directors of the company have a greater influence in overseeing the corporate governance under the organization.

In addition, while discussing the corporate, it is supposed that corporate board matters because it is quite difficult for observing all the routine operations of an organization (Ioannou and Serafeim, 2017).

Apart from this, if an organization is not working well or it is caught in any kinds of scandal or going to bankrupt, then it will be the point of attraction. In this manner, there are many scandals that have seen in past years as example Enron, WorldCom in which directors were responsible for the fraud and due to this, they had to pay back millions of dollars excluding insurance.

On the basis of this, it can be defined that the board of directors have the responsibility of directing the company along with the appropriate business plan and they are also responsible for managing the risk with the appropriate governance arrangement on track.

In this way, it is also identified that the pressure of the investors of funders leads the business towards the risk phase that increases the obligations as well as the responsibilities for the directors. Due to this, these obligations also enshrined in the legislation (Aguilera and Crespi-Cladera, 2016).

On the basis of these obligations, the duties or responsibilities of the directors are framed under the organization in law in order to act in concern of the best interest for the shareholders, ignore any kind of personal conflict of interest as per their personal position and to perform maximum along with ethical aspect and integrity.

In addition, the in-depth study of the corporate clearly reflects that the board of directors managed the business of the company under their direction.

The chief executive officer is delegated by the boards of directors and with the help of that person, the authorities and responsibilities are distributed to other senior management in concern of managing the business of the company (Uyar et al., 2017).

In this way, the role of the board is to oversee the corporate management as well as corporate governance of a corporation. In addition, to monitor the performance of senior management is also considered under the role of the board of directors. Apart from this, there are some core responsibilities that are defined below:

• It is the board member’s responsibility to select the individuals in respect of board membership and measure the performance of the board, individual directors and the board committees.
• The selection, monitoring, evaluation, and compensation to the senior management are also the board member’s responsibility (Rao and Tilt, 2016).
• It is assured by the board that the succession planning of the management is appropriate.
• Board also performs the duty of reviewing and approving significant corporate actions.
• It also has the duty of reviewing and monitoring the implementation of management’s strategic plans.
• In addition, the company’s annual operating plan, as well as budgets, are also reviewed and approved by board members.
• Board of members also perform the duty of monitoring the corporate performance and evaluate the results in comparison to the strategic plans as well as other long-range goals.
• Board also has the responsibility to review the financial controls of the company and at the same time, legal compliance (Oh et al., 2016).
• It is also reviewed and approved that the company’s financial statements and the financial reporting are accurate by the board.
• The organizational ethical standards and the program and the procedure of legal compliance are also reviewed by the board members.
• It is also overseen by the board that the company is capable to manage the enterprise’s
• It also performs the duty of monitoring the relations with shareholders, employees as well as the communities under which the company is operated.

Thus, it can be declared that by performing the above-mentioned roles and responsibilities, board members can ensure the success of the organization. In this way, they perform there all the duties as per the corporate governance policies and procedures that have been followed by the corporate in order to develop the values towards the organization.

Conclusion

On the basis of above discussed actual facts about the corporate governance, it is clearly concluded that Corporate Governance is one of the essential parts of an organization or a company as it provides the new frontier of competitive advantages as well as profitability to the organization or a company.

In this way, it can also be concluded that corporate governance cannot be considered as wastage of time because it is important for the organization.

Apart from this, corporate governance can be declared as proactive because organizations are maintained by it for its future growth and at the same time, corporate governance can also be considered as the reactive because adoption of corporate governance policies under the organization provides the fairness, transparency and ethical environment under the organization or a company by which it is capable to attract and gain the trust of the customers.

References

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Aguilera, R.V., Judge, W.Q. and Terjesen, S.A., 2018. Corporate governance deviance. Academy of Management Review, 43(1), pp.87-109.

Ambos, B., Kunisch, S., Leicht-Deobald, U. and Steinberg, A.S., 2019. Unravelling agency relations inside the MNC: The roles of socialization, goal conflicts and second principals in headquarters-subsidiary relationships. Journal of World Business, 54(2), pp.67-81.

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