Corporate Governance and Enlightened Shareholders Value - Coursework Example

Corporate Governance Name: Institution: Course: Lecturer: Date: Corporate Governance The approach of enlightened shareholders and application of ‘comply or complain’ principle are enshrined in corporate governance concept. Corporate governance is a system of firm’s management and oversight. Consequently, governance is comprehended as integral organism where different regulations interplay with the market forces. The resulting combination shapes regulations related to corporate governance (Jensen 2001). Enlightened Shareholders Value Enlightened shareholders value requires corporations to pursue stockholders’ wealth with long-term orientation that strives for sustainable growth as well as profitability based on overall attention to fulfilment of shareholders interests. This means that the concept focuses on creating shareholders value, putting into account long-term external effects of wealth creation (Pichet 2008). The shareholders’ interests take the foremost precedence. However, ethical, environmental as well as charitable concerns come into play. The disregard of the issues could lead to massive losses of shareholders wealth in the long-term (Pfarrer 2010). It takes the embracement of legal background to dictate observance of the approaches and well as implementation (Millon 2010). In a non-modern way, Anglo-Saxon law derives its shape from shareholders value approach. In the present times however, the approach of enlightened shareholders is practically the norm. Nevertheless, the law of the United Kingdom contains heightened dispute whether corporate boards should take into account interests of the other stakeholders (Pfarrer 2010). Comply or Explain The corporate governance regime of United Kingdom is rooted in Corporate Governance Code which is applicable in all listed companies that have been incorporated in UK. It is the requirement of these firms to conform to Governance Code principles as well as explain to company’s shareholders about how the compliance has been done. The main purpose behind ‘comply or explain’ kind of approach is to provide companies with degree of flexibility and to mandate the market dictate what is appropriate (Freeman & McVea 2001). The Financial Reporting Council has advocated fully compliance of the approach, making the firms’ shareholders have express advantage over the requirement. However, according to the submitted feedback, great support has been rallied over company’s stakeholders (customers, regulators, employees, suppliers) with supporters emphasizing that overall stakeholders plays a significant role in realizing corporate governance in the entire European Union. Shareholder Theory The shareholder theory asserts that the main duty of the firm’s management is maximising shareholders’ wealth. According to Milton Friedman, the main social responsibility of a firm is increasing its returns. According to Micheal Jensen, a company is a legal fiction whereby shareholders are principals whereas managers act as their agents who pursue the goal of maximising wealth of shareholders (Jensen 2001). This academic backing about shareholders primacy resulted to dominance of such kind of aspects by lapse of the millennium (Anderson, Jones, Marshall, Mitchell & Ramsay 2005). The Financial Reporting Council delivered formal complaint against Price Water House Coopers; Mr. Nicholas Boden who is the Senior Statutory Auditor as well as Audit Engagement Partner; and Mr Russell McBurnie a former director of RSM Tenon. The trio conducted preparation, approval as well as audit of financial accounts for RSM Tenon in the year ended 2011. PRC alleged that both Mr Boden and Price Waterhouse Coopers while working fell short of fundamental principle regarding professional competence as well as due care which is contained in the ICAEW’s (Institute of Chartered Accountants in England and Wales ICAEW) code of ethics. This dispute was in respect to the audit of financial accounts of RSM Tenon which was performed short to the stipulated guidelines of ICAEW. The respondents to the disputes; that is, Mr Boden and PwC were full member of ICAEW. Subsequent to admission of misconduct by the former CEO of RSM Tenon, the Executive Counsel agreed to a settlement (to act a fine) which was approved by legal members of Independent Legal Panel. The CEO admitted that his conduct and the conduct of his company fell way below the expected standards of ICAEW members. Furthermore, he conceded to have acted contrary to the prescribed fundamental principle of competence as well as due care stipulated in the code; concerning approval of financial statements. He further admitted to have failed to seek the needed level of assurance expected of a member, in relation to accounting treatment pertaining bonus accruals, lease and sign off on financial account of RSM Tenon; on the basis that the statements were in accordance to applicable accounting standards as well as a true representation of fair view of state of affairs of the company. In this dispute Mr. Raynor was asked to pay 26,500 Sterling pounds which was to act as a fine, 50,000 Sterling pounds acting as the Executive Counsel’s overall cost as well as a reprimand. In yet another financial misconduct that occurred in year 2016, Financial Conduct Authority (FCA) heavily fined five individuals as well as two firms an amount totalling 15.5 million pounds plus an imposed ban for failure in financial integrity and competence. The FCA unearthed that Shay Reches performed controlled functions as a Director of Coverall Worldwide Limited as well as acting as Managing General agent for Aderia UK Limited. Shay Reches conducted regulated activities regarding setting up and operating the insurance schemes having not been fully approved to do so by FCA. In his practices, Mr. Reches in a reckless conduct directed proceeds of insurance premiums to other parties other than insurers or reinsurers responsible of lodging claims of payment. This conduct increased the risk that the true policy-holders would not receive payment of their claim. This misconduct resulted to broad failure of a substantial number of insurance schemes whilst three insurers went to into administration. Consequently, in the year 2015, the Financial Services Compensation Scheme (FSCS) was required to make huge payments totalling to 12.7 million pounds, acting as substantial claims. The FCA fined Mr. Reches an amount totalling to 1.05 million pounds and another amount of 13.1 million which was to be directed to three insurers. The amount was to cater for liabilities to FSCS as well as UK policy holders. Mr Reches was to pay an amount equivalent to the unpaid amount; that is, upon failing to honour the agreement. Moreover, he was prohibited by the FCA to conduct any activity that that FCA deem as been regulated. Such actions were also taken against Collin McIntosh, Coverall, Andrea Sadler, Robert Bygrave, Bar Profession Limited as well as Millburn Insurance Company Limited. Failure of Shareholder Theory and ‘comply-or-explain’ Approach In the recent times, the debate on corporate governance has been resolved favouring shareholders value-model. Ronald Gilson once asserted that the only feature of corporate law is to boost the shareholder value1. However, criticism about the whole concept looms with scholars asserting that such principle is irrelevant to modern decision making and that it existed in the first place to resolve massive disputes between minority and majority stockholders within closely-held firms. The argument further declares that courts never comprehended about the existing difference between closely-held firms and public companies until up-to the middle of the previous century. According to researchers, shareholders value results to short-term focus whilst short-term earnings performance surpasses all else failing to maximise the overall wealth. According to Professor Larry Mitchell, American corporations are extremely centred on turning over companies’ short-term profit to benefit shareholders. Larry asserts that such a move is detrimental to other various groups which include employees, suppliers and consumers as well as long-term welfare of the company itself (Anderson, Jones, Marshall, Mitchell & Ramsay 2005). Further argument that has been put across emphasizing that shareholders are residual risk-bearers is misplaced in relation to other stakeholders. It is important to note that it is not shareholders alone who make exclusive investments in companies to warrant them vulnerable positions within the companies. The employees for example, can be made to rely on specific experience, skills and training programs they have undertaken with a certain company, curtailing them seek employment somewhere else. In such a context, firms are unable to hold such employees virtually accountable. As a matter of fact, company shareholders are better placed to diversify risk at the expense of other stakeholders. Moreover, the main idea put across that shareholders are the owners of the company do not augur well with concept of separate legal entity. Shares are the property of stockholders while the company is not. Shareholders of a company are in some cases unable (apart from event of a firm’s liquidation where distribution is effected according to shares held) pin-point their exclusive ownership rights over assets held by the firm (Pfeffer 2009). According to theorists, several queries persist over normative worth of shareholders value. Theorists holding communitarian view objects to stockholders value principle largely on normative grounds2. They argue that company directors should have exclusive mandate to steer the company forward and thus benefitting all stakeholders within the firm; that is, creditors, consumers, the staff, suppliers of goods, the government as well as the surrounding communities. This basically aligns with communitarian’s view that firms should operate to serve social purposes rather than making funds for shareholders. According to communitarian theorists, all people engaged in the affairs and future endeavours of the company are humans, and that corporate law ought not to be de-personalised. In regard to communitarian assessment, social arrays as well as political values are taken into consideration. They assert that whether the firm is useful is determined by the overall evaluation of how it assists the society gain richer comprehension of the community through respect to human diversity as well as overall welfare3. The communitarians embrace the view which emphasizes that people forms the larger community that is supposed to inherit the immense benefits, values objectives of a shared community, which means that the community’s culture milieu should not be ignored. The company in this case is regarded as community of interdependence; reciprocal-benefit as well as mutual trusts (Saint & Tripathi 2006). The major consequence regarding communitarian view is that interests of stockholders don’t fall short of other interests overseen by company’s directors while carrying out their functions. Rather, other complementary vital constituencies exists which warrant consideration of companies executives. The impact behind invoking stockholder’s value approach is thus assumed as to damage major incentives of other stakeholders. Thus, such stakeholders can be wary of investing into the company since they would have perception that their resources will be subordinated to favour shareholders’ interests every time4 (Fontaine, Haarman & Schmid 2006). Unlike a substantial number of communitarians who lean on economics focusing on ethics as well as fairness, stakeholder theory strive to bring into collaboration both economics and ethics. In such context, the theory tries to tame cruel aspects of capitalism5. Many scholarly writers are in support of stakeholders’ theory. Conclusion The issue regarding shareholders value and stakeholders’ value is worth researching. According to a survey conducted by Melbourne University in the year 2005, ideological acceptance may never prevail in practical managerial behaviour. According to the study’s findings, even if shareholders supersede the managers in controlling the company, proposition that the company managers are there to pursue the interest of stockholders is illegitimate. While stockholders continue to be perceived as an important instrument of the firm, the study asserts that directors prioritise the other stakeholders, such as customers, as well as their interests (Freeman, Harrison, Wicks, Parmar & Colle 2010). Despite this phenomenon, it comprehensible that transition exists within the global business community. The two theories (shareholders theory and stakeholder’s theory) exist as tools of value addition. However, they have different prescription. According to the arguments put across which makes stakeholder theory strong is that, taking the interests of the other stakeholders into perspective is likely to be financially beneficial to the firm, especially in the modern economic landscape. Even though disagreement remains that the theory (stakeholder) put more emphasis on non-financial market’s stakeholders, experiential observations via comparative analysis of renowned firms in recent years establish the view to be misinterpreted. In conclusion, despite a long historical root regarding shareholders value theory, the stakeholder theory has played a significant role as far as owners, the managers and the entire society is concerned. Thus, as the theory remains incomplete; that is, in its present form, the stakeholder theory has been very instrumental in steering the path of businesses. Moreover, the theory has had profound effects in realizing the goals of the firm, value creation, and for the good of shareholders as well as societal stakeholders (Stout 2012). Bibliography Anderson, M., Jones, M., Marshall, S., Mitchell, R., & Ramsay, I. (2005). Evaluating the Shareholder Primacy Theory: Evidence from a Survey of Australian Directors. University of Melbourne Legal Studies Research Paper. Fontaine, C., Haarman, A., & Schmid, S. (2006). The Stakeholder Theory. Edlays education, 1, 1-33. Freeman, R. E., & McVea, J. (2001). A Stakeholder Approach to Strategic Management. Darden Business School. Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & Colle, S. d. (2010). Stakeholder Theory: The State of the Art. Cambridge: Cambridge University Press. Greenwood, M. (2008). Stakeholder Theory. In R. Thorpe, & R. Holt, The SAGE Dictionary of Qualitative Management Research. London: SAGE Publications Ltd. Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21. Laplume, A. O., Sonpar, K., & Litz, R. A. (2008). Stakeholder Theory: Reviewing a Theory That Moves Us. Journal of Management, 34(6), 1152-1189. Millon, D. (2010). Enlightened Shareholder Value, Social Responsibility, and the Redefinition of Corporate Purpose Without Law. Washington & Lee Legal Studies Paper 2010-11. Pfarrer, M. D. (2010). What is the purpose of the firm?: shareholder and stakeholder theories . In J. O’Toole, & D. Mayer, Good Business: Exercising Effective and Ethical Leadership (pp. 86-93). The Institute for Enterprise Ethics. Pfeffer, J. (2009, July). Shareholders First? Not So Fast… Harvard Business Review: Corporate Governance. Pichet, E. (2008). Enlightened Shareholder Theory: Whose Interests should be Served by the Supporters of Corporate Governance? Corporate Ownership and Control, 8(2-3), 353-362. Saint, D. K., & Tripathi, A. N. (2006). The Shareholder and Stakeholder Theories of Corporate Purpose. Samatvam Academy. Stout, L. (2012). The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, And The Public. Oakland: Berrett-Koehler Publishers, Inc. Gilson, R.J., 1981. A structural approach to corporations: the case against defensive tactics in tender offers. Stanford Law Review, pp.819-891. Sullivan, D.P. and Conlon, D.E., 1997. Crisis and transition in corporate governance paradigms: the role of the chancery court of Delaware. Law and Society Review, pp.713-762. Kelly, G. and Parkinson, J., 1998. The conceptual foundations of the company: a pluralist approach. Company Financial and Insolvency Law Review, 2, pp.174-197. Plender, J., 1997. A Stake in the Future: The Stakeholding Solution (Nicholas Brealey, London). Google Scholar. Accessed on 9th April 2017, https://www.fca.org.uk/news/press-releases/financial-conduct-authority-takes-disciplinary-action-against-five-individual Financial Reporting Council, accessed on 9th April 2017, https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2016/December/Formal-Complaint-and-admission-of-Misconduct-relat.aspx Read More