Corporate Governance: Principles, Policies, and Practices - Coursework Example

Corporate Governance Name: Course: Tutor: Date: Introduction Corporate governance refers to the practices implemented to facilitate effective, sensible and entrepreneurial management for a company’s success. Lack of accountability and transparency in the running of companies can be attributed to major collapses of giant firms in the past including Enron, Parmalat, WorldCom, Adelphia, and Arthur Andersen, to name but a few. The definition of corporate governance as used in the United Kingdom is that “corporate governance is the system by which companies are directed and controlled” (Financial Reporting Council, 2010). The definition above has been used in the various reports and committees such as the Cadbury Committee report of 1992, the Hampel Report of 1998, the Higgs of Report of 1992, the UK Combined Code on Corporate Governance of 2003 and even the newly revised UK Combined Code on Corporate Governance of 2010. In the United States, the Sarbanes Oxley Act of 2002 was introduced after the collapse of Enron and WorldCom, and is aimed at, among other things, increasing accountability and transparency in the management of companies. Australia has also not been left behind in the management and overseeing of company activities through the Australian Securities Exchange (ASX). The ASX Corporate Governance Council’s definition of corporate governance is that “corporate governance is the system by which companies are directed and managed” (ASX Corporate Governance Council). In particular, corporate governance pertains to what company boards do to set values of their respective companies. This implies that boards have to strive to attain the interests of the company as a whole, and in particular its shareholders. Boards can thus be assessed by how well they exercise balance authority, performance and profits with integrity, accountability, transparency and reform in both public and private sectors. Against a background of the above information, this paper seeks to discuss corporate governance in the context of board structure, responsibilities of the board, the role of non-executive directors, director remuneration and assessment of board performance. In doing so the paper highlights a number of theories such as agency theory, the stewardship theory and the resource dependency theory. The paper also highlight a case of the Mark McInnes who was the Chief Executive Officer of David Jones Company in Australia to show that directors who be held responsible and accountable for their actions in companies. Finally, the paper highlights the future challenges and opportunities related to corporate governance. Company board structure It is always perceived that the main reason for lack of effective corporate governance and monitoring can be attributed to the ineffectiveness of the board (Haverkamp, 2009). In deed, how the board is structured will determine how well it performs in terms of accountability, transparency and self-monitoring. At present, there are two models of corporate governance in existence: the neo-liberal model exemplified by the market-driven American regime, and the neo-corporatist model that is represented by the codetermined and back-centered regime of Germany (Haverkamp, 2009). The two models define the duties and rights of directors in differently and also define the structure of the board differently. The approaches used are different depending on the nature of problems that certain measures are supposed to solve. The board of directors is the definitive decision-making body in a company. The management is charged with the responsibility of running the enterprise; and the role of the board of directors is to ensure that the company is being managed responsibly and that is able to achieve its long-term and short-terms objectives (Cascarino & Van Esch, 2007). Like other countries that have adopted the Anglo-Saxon approach to corporate governance, embraces a unitary board model. In reference to this type of board structure, all directors participate in a single board that comprises both executive and non-executive directors (NEDs) in varying proportions. This system of corporate governance is also practiced in the United States, the United Kingdom, Canada and other Commonwealth nations such as South Africa (Cascarino & Van Esch, 2007). The unitary board structure is different from the two-tier board structure in that the latter is characterised by an exercise of corporate governance through separate boards. In this case there is an upper board that supervises the executive board on behalf of stakeholders (Benedicte & Ronald, 2009). Corporate governance in Australia was considered to be unnecessary until the late 1990s (Du Plessis, 2010). But since around 2000 the issue of effective corporate governance has been intensified particularly with the corporate collapses that occurred between 2000 and 2003. This ended the complacency that had characterised corporate governance in the previous years. Principle 2 of the ASX Principles of Good Corporate Governance and Best Practice Recommendations of 2003 clearly stipulates that the board should be structured to add value to the company (ASX Corporate Governance Council, 2003). The Principle also defines an effective board as one that enables the efficient discharge of the duties imposed by law on the directors and which adds value with regard to the particular company’s circumstances. In the United Kingdom, both the Cadbury Committee report and the new UK Corporate Governance Code of 2010 note that the role of shareholders in governance is to appoint the directors as well as auditors and to satisfy to be content that an appropriate governance structure is in place (Financial Reporting Council, 2010). This again emphasises the role played by the structure of the board. Responsibilities of board All board members are answerable for doing their best to assist in ensuring that the board a whole is performing the legal responsibilities it is supposed to (Renz & R D Herman, 2010). In addition, individual board members can be held liable for inappropriate organisational acts. There are many instances when board members can be held personally liable for act they commit, for instance: (1) Where the board violates employment laws or contracts; and (2) where the board has failed to take reasonable steps to protect others from harm or a situation that is understood to be potentially dangerous (Renz & R D Herman, 2010). Such circumstances include failing to address inappropriate conduct of board members such as sexual misconduct or harassment. Case study: Mark McInnes as Chief Executive of David Jones, Australia The case of Mark McInnes as Chief Executive of David Jones is highlighted by Tricker (2009) and Young (2009). Mark McInnes resigned from his position after being involved in a case of sexual harassment against an employee of David Jones. This features despite the fact that McInnes is credited for repositioning the company since he took leadership in 2003 (The Telegraph). The case highlights the importance of a robust code of conduct, which is important for corporate governance practices. According to Malley (n.d.), if this code is applied appropriately, it may lead to a reduction if the risk of behaviour, which, if uncontrolled, could ultimately cause significant damage to a company both in terms of financial performance and reputation The ASX Principles of Good Corporate Governance and Best Practice Recommendations of 2003 are clear on the conduct of the chief executive of a company. Recommendation 3.1 on how to achieve best practice states that there should be established a code of conduct to guide the directors, the CEO the chief financial officer and other key executives regarding the practices necessary to maintain confidence in the company’s integrity; and the responsibility and accountability of individuals for reporting and investigating cases of unethical practices (ASX Corporate Governance Council, 2003). Good corporate governance thus requires people of ultimate integrity. In this case therefore, it did not matter that McInnes brought significant change to the performance of David Jones during his tenure. He acted unprofessionally and thus had to take responsibility for his actions. Unethical behaviour in organisations has been widely reported even if such behaviour may not be related to sexual harassment. For instance, Bernie Ebbers, the former chief executive officer of WorldCom was praised as a great leader for the significant growth of the company during his tenure. However, the same man was later discredited for his failure to provide moral leadership as WorldCom went down surrounded by scandals that are termed as the largest bankruptcy case in the United States history (Trevino & Brown, 2004). Good leaders, and in the case the chiefs executives of companies, are required to and in fact do, influence organisational ethics. Role of non-executive directors: Remuneration and assessment of performance The role of non-executive directors has become significant in many corporate governance reforms across the world. In Australia, Recommendation 4.3 of the ASX Principles of Good Corporate Governance and Best Practice Recommendations of 2003 requires that only non-executive directors should be members of the audit committee. Non-executive directors play a major role in constructively challenging and helping develop proposals on company strategy. Hence, they are in charge of scrutinising the performance of management to achieve the set goals and objectives and oversee the reporting of performance. Non-executive directors are required to satisfy themselves on the reliability of financial controls other accountability systems within the company. Non-executive directors are also responsible for determining the proper levels of remuneration of executive directors and play a fundamental role in the selection, and where appropriate, removal of executive directors and in succession planning of the company (Solomon, 2010). To ensure accountability, transparency and ethics in the governance of the company, non-executive directors must constantly seek to establish and maintain their own confidence in the conduct of the company. They are also required to be active assessing the performance of the team, developing strategy, assessing the adequacy of financial controls as well as risk management, and determining the appropriateness of remuneration. Hick and Goo aptly sum this up by noting that the role of the non-executive director is “both to support executives in their leadership of the business and to monitor and supervise their conduct” (Hicks & Goo, 2008, p. 320). Related theories Agency theory Agency theory states that managers, by virtue of their superior knowledge of matters pertaining to the company, have an advantage of the company’s owners. This means that conflict of interest usually exists between shareholders and the managers. The managers usually strive to satisfy their own interests in the company. This can however be avoided if there is a strong team of non-executive directors, who play the role of an oversight body over the executive. Nonetheless, this role is not felt where executive directors display greater loyalty to management – which is usually the case in most circumstances. In such a scenario, executive directors are more likely to influence the chief executive than are the outside directors (Fleming, 2003). Stewardship theory Stewardship theory posits that shareholder interests are maximised by shared incumbency of the role of the board chair and the company chief executive (Donaldson & Davis, 1991). This implies that the managers may perceive that by working towards organisational goals, they also fulfil their personal goals. Resource dependence theory The resource dependence theory highlights the role of the board in achieving the necessary resources (for instance skills, csapabilities and knowledge) rather than utilising them (Andre´ s-Alonso, 2010). From the perspective of this theory, company boards act as the source of resources for any given firm. This means that directors, both executive and non-executive have the capacity to reduce business uncertainties through their network connections. Directors who have more contact with the company, that is internal directors, are perceived to be more resourceful than external directors in this context. However, from another perspective, the role of non-executive directors is portrayed in terms of how they formulate strategies and ensure that the resources that the company has access to are used for the best interest of the company as a whole. Conclusion This paper has addressed the issue of corporate governance in many dimensions. Key areas addressed include board structure, responsibilities of the board, and in particular the chief executive officer, the role of non-executive directors, director remuneration and assessment of board performance. A good example given in terms of accountability and code of conduct is that of Mark McInnes, former chief executive officer of David Jones in Australia. The former CEO stepped down because of his case of sexual misconduct against a female employee of the company. The paper has thus addressed the code of conduct in detail. The paper has also analysed the conflict interests of managers and stakeholders using the agency theory, the stewardship theory and the resource dependence theory. In particular the paper has also analysed the role of non-executive directors in helping to eliminate these conflicts of interest. References ASX Corporate Governance Council (2003). Principles of Good corporate Governance and Best Practice Recommendations. March 2003. Retrieved 12th March 2010, from http://www.nfcgindia.org/ASXRecommendationsonBestCorporateGovernancePractices.pdf Benedicte, M & Ronald, Z. (2009). International differences in board structure, Proceedings of ASBBS, Vol. 16, No. 1, February 2009, Retrieved 12th March 2011, from http://asbbs.org/files/2009/PDF/M/Millet-ReyesB.pdf Cascarino, R. & Van Esch, S. (2007). Internal Auditing (2nd edition), London: Juta and Company Ltd. De Andre´ s-Alonso, P., Azofra-Palenzuela, V. and Romero-Merino, M. E. 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