Corporate Governance Issues - Case Study Example

Current corporate governance model in Sweden Introduction The Swedish Corporate governance is concerned with the ways in which all the companies run in the country meet the requirements of their owners concerning capital invested. The governance leads to proper economic performance that translates to economic growth and efficiency in the society (dArcy, 2014). The present concept of corporate governance originated in the United States during the 1980’s. It started as a reaction by some of the institution owners to the high-handed and self-willed business managers (Dennehy, 2012). In the early 1990’s, it started in Europe and it was connected to a high number of scandals from the high-profile companies and more so in the United Kingdom. Since 1992, the concept has been changing rapidly, and the emergence of corporate governance code with unstable degrees of social sanctions that have been drawn to a number of European countries and some other parts of the world. Similar codes have been issued to the Scandinavian countries like Denmark, Norway and Finland (dArcy, 2014). Swedish Code of Corporate Governance Corporate governance issues have been highly talked about for a long time in Sweden. In the late 1980’s, the commission on ownership and influence in Swedish Business carried an exhaustive inquiry into issues that fall under the corporate governance heading up to date (Dennehy, 2012). The period was then followed by an intensification of a debate on corporate governance. A systematic revision of the Swedish Act has then been underway since the 1990s as a section of the companies’ responsibilities Act Committee. In 1993, the Association of Swedish shareholders published the Swedens first ownership policy that also acted as a guideline for the owners role to be exercised (Gospel and Pendleton, 2005). A great number of similar compilations then followed the published policy and most of the state’s institutional owners all have their shareholder policy. In the year 2003, the Swedish Academy of Directors produced a detailed compilation of the best practice from the top management of the Swedish companies (Dennehy, 2012). The countrys self-regulating bodies in the region, and mostly the Stockholm Stock Exchange, the Swedish industry and commerce Stock Exchange committee together with the securities council have been linking some few several regulations on major corporate governance issues into the regulatory systems (Gospel and Pendleton, 2005). The code for the governance of the Swedish public companies, however, has not been drawn up to completion. During the same year, the Commission started to work towards the development of the Swedish code of company governance and at the same time, the business world discussed the same issue (Haspeslagh, 2010). With the situation at hand, the Commission took the initiative to cooperate with the corporation fraternity in coming up with a uniform national code of the Swedish corporate authority. The result was the formation of the joint working group that was given the name Code Group with members from both the Commission and the representatives of the corporate world (Jones and Thompson, 2012). The Code’s Aim and Fundamental Values The plan to come up with the code is based on the view held by both the Commission and the code group that the Swedish company governance requires to be improved. Again, a accepted code that represents a conclusive picture of the best Swedish practice in the area can assist in bringing about some improvements and needs to be developed(Haspeslagh, 2010). The larger companies that are listed by the Swedish government are expected to improve their corporate governance and act as role models and examples of the other types of companies. The code is made to be a part of self-regulation in the world of business in Sweden. The principal aim of the code is to develop the governance that exists in Swedish companies that will result to the public confidence improvements in the functioning of the business sector (Petersen and Vredenburg, 2009). The other important function of the code is to enhance the understanding of foreign investors and the other actors who play a significant role in the international markets in Swedish corporate governance and therefore lead to the promotion of the Swedish business sectors access to the foreign risk capital (Jones and Thompson, 2012). A code of self-regulation must rest on the existence of a universal value system among those whom the regulation applies. Some of the major principles that underlie the code group work have been aimed at creating good shareholders conditions to exercise responsible and potential ownership. The code also aims at creating a sound balance of power between the company owners, the executive management and board of directors that in turn enables the shareholders to assert their interests in all aspects of corporate governance (Petersen and Vredenburg, 2009). The code also creates a clear division of the roles and responsibilities that exist between the governing bodies. It also upholds the principle of equal treatment of all the stakeholders in the Swedish Companies Act, not least in the companies with one or a few controlling shareholders on the side of a widely dispersed shareholding that is the common ownership structure among the many companies that are listed on the Swedish stock market. Finally, the code acts to create transparency towards the shareholders, the capital market and the whole society in general (Shaw, 2003). The codes target group The code is developed primarily for the companies in Sweden that are listed on the Stockholm stock exchange. However, the code must be relevant to the other types of companies that have some diversity of public interest like the co-operatives and the state-owned companies as well as many larger privately owned companies. The degree to which the companies are required to apply the code is a matter to be decided by their owners. Various rules exist in the code that may appear to be less relevant or too costly for the smaller listed companies (Petersen and Vredenburg, 2009). Code Form and Content The code is concerned with the decision-making system that is used by the shareholders in governing the company directly and indirectly. The concern is expressed by the use of certain rules on the company and the working styles of the individual company governing bodies and the interaction that exist between the bodies. Additionally, there are guidelines that are used in reporting to the shareholders, to the capital market and the public too (Shaw, 2003). The performance of the audit function per section as well as the issues that concern how the stock markets functions are always discussed as they have not been considered to be part of the company governance concept. The above situation has necessary meaning that the issues are considered less important to the company. Contrary to this, the issues are critical to the success and survival of the company. Nevertheless, they are an executive governance management responsibility and they, therefore, lie outside the scope of the governance issues in most of the time (Singh, 2002). The rules that exist in the code are designed as directions for the entity or the group if a group of people owns the company. Most of these rules apply to the duties performed by the board of directors but in some cases, the rules are addressed during the shareholders meetings, and to the top management of the company (Shaw, 2003). Within the applicable law framework and the companys articles of association, the meeting held by the stakeholders is autonomous and it can decide on almost all the matters that it considers being appropriate. Some of the rules that are in the code are expressed in terms that are precise enough to make it possible for the establishment of a reasonable certainty to the extent that is observable (Singh, 2002). The prime reason for the rules inclusion in the code is to define the meaning of the acceptable corporate governance practice and to serve as a source of inspiration for the companies to improve their corporate governance (dArcy, 2014). Most of what is considered as part of the company management has primarily the nature of attitudes and the major patterns of character than accurately defined rules and regulations. The Swedish Corporate Governance Model and its effectiveness The governance model for Sweden lies between the Anglo-American and the continental model in several aspects. The structures of the ownership of most of the companies that are listed by the Swedish government are closer to the ones found in continental European than that found in the larger British and American companies. Most of the companies have a bigger number of owners but most of the companies always have one member or a group of owners (dArcy, 2014). The shareholding of these owners and the number of votes that are effective offer to them their controlling positions in the company. However, only a small number of the Swedish listed companies lack a controlling owner. Again, the existence of the strong and powerful shareholders in the states companies has not affected the growth of a very active country’s market for company control. In this respect, the country is more like Britain and the US than like continental Europe (dArcy, 2014). The takeover actions on the Swedish stock market appear to be a little bit higher than those in the United Kingdom. The structure of governance that is displayed in the laws of Sweden does not contain any resemblance to the two-tier types of governance. The proposed form of governance is closer to that of British one-tier model (Singh, 2002). The main shareholders do election of the company’s Board of directors who in turn appoints the companies managing director. The shareholders meeting is also responsible for the adoption of the company’s balance sheet, profit and loss account and making decisions on the allocation of benefits that arise from the company’s activities (Stafsudd, 2009). The meeting is also responsible for making decisions on how and when to discharge from both managing and board directors liability. During the meeting, the shareholders also elect the auditors of the company. In some occasions, when it is necessary, the shareholders in the meeting may decide to either increase or decrease the amount of share capital and they may change the article of association (dArcy, 2014). Every shareholder at the meeting an executive the right to vote for all the shares owned. At times, there might be regulations that are provided to the shareholders to limit their ability to vote but the limitations are always very uncommon in the standard setting of a company. In Swedish law, the principle voting right is that of equality of voting by all the members who have shares in a company (Stafsudd, 2009). Nonetheless, the law allows for some provisions in the article of association to tell between varied share types on such matters of votes per share. However, a company’s share may not have more than ten times the number of votes of any other given share in the same company. Such variations in the voting rights presently can only be found in almost half of all the Swedish stock market companies. Practically, the difference in the number of votes per share of the listed companies is placed at 1: 10 ratio (dArcy, 2014). A simple majority of the votes cast always takes the decisions that are done during the shareholders meeting. On the other hand, for the protection of the minor shareholders who tend to have reduced voting rights, the law provides that, some decisions must be made together with a qualified majority of both the shares and cast votes that are represented in the meeting (Dennehy, 2012). Additionally, there is a general rule for the protection of the minor shareholders who assert that the shareholders meeting may not make any decisions that might come up with unworthy advantage to some shareholders to the disadvantage of the other shareholders or the company (Vakkur and Herrera, 2013). On matters that concern the governance of a company, a line that differentiates between public and private companies has already been set. Using this setline, the law imposes more strict requirements for the category that are named first. By law, in all public limited companies, there must be a board of directors that is made up of at least three members. During the time within which the board is in action, it usually has unlimited responsibility for the organization of the company and the management of the affairs of the company too (Vakkur and Herrera, 2013). Again, the directors are obliged by their governance to comply with particular directions given during the shareholders meeting; this is done when the directions are not conflicting with the article of association and such directions are always very rare to exist practically. Additionally, there is always an appointed managing director by the board of governors in almost all the public limited companies (Vakkur and Herrera, 2013). The elected managing director is responsible for the daily operations of the company and most unlike the two-tier model; the managing director at Sweden is a subordinate to the board of directors. The director is grateful, under the law and article of association, to adhere to the instructions given by the board on how to carry routine management measures for the company (Dennehy, 2012). The board has a mandate to decide on the issues that are part of their daily management operations but must not at any time interfere with the operations to an extent that the elected managing director may no longer be considered to have his or her capability. The shareholders meeting in accordance with the customary rules of the majority always elect the directors. Under a unique legislation, the employees tend to have the right to representation on the board of management in the major Swedish companies. Those companies that have more than 25 employees always have the right of having more than one representative on the board along with two deputy members. For those companies with operations in more than one branch and with at least one thousand employees, they have the right to appoint three representatives together with three deputies. Nonetheless, the real number of the employee Directors may never exceed the number of other directors. In an ordinary Swedish listed company, few persons who are linked to one or more of the scheming shareholders are included on the board. Additionally, to the managing directors, who sometimes may or may not be a member of the board and the employee’s representative to the board of a Swedish company is typically made up of non-executive directors. As a result, the managing director is the only person in the management who is chosen during the shareholders meeting who is a part of the company’s team of management (Vakkur and Herrera, 2013). It is on this basis that the Swedish companies tend to be different from the British companies, e.g. in the occasion that the shareholders meeting does not have an hand in the appointment of the boards chair, the board is responsible for appointing one of its members to the chair and he is always responsible for showing the directors what to do while in the company. However, the law does not allow the managing director to chair the board in public companies (Stafsudd, 2009). Each public limited corporation must have one or more auditors whose main responsibility is to examine the accounts and for accounting practices of the company annually. The auditors are also responsible for reviewing the management of the company by the managing director and the board too (Dennehy, 2012). The original and the principal purpose of the audit were to safeguard the interests of the shareholders by scrutinizing the activities of the companys board of management. Presently, the auditor is seen to have the duty of protecting the interests of the other members of the company as the creditors, the employees and the capital market actors (Singh, 2002). Conclusion To conclude, a dynamic and a competitive business always needs a well-functioning capital market through which savings in the form of loan capital and risk capital are directed to the company’s investment. Company owners who take the responsibility for the development of the firm and that of their business sector are crucial elements of an efficient market economy. The firm’s shareholders are responsible for the provision of risk capital to the economy and they contribute to the efficiency and the regenerative capacity of personal companies, and to the larger business world. Again, the dynamic business sector needs diversity in ownership with its different investment goals, the risk predisposition and time horizons. Those shareholders who have extensive holdings in the stock market companies should make use of the shareholders meetings to exercise their influences in the company that can be done through their election of the companys board of directors. Their active participation in the meetings promotes a relevant balance of powers between the owners, the board of directors and the company management too. The shareholders who have large holdings in the stock markets tend to have some unique responsibility not to abuse the other shareholders. The shareholders who have minority interest also have a responsibility not to misuse their rights to the other shareholders. Institutional owners and managers especially the pension funds, the life insurance companies, mutual funds, investment companies and the others make their ownership policy public. They then inform the investors about their investment philosophy and the principles that are followed in exercising the voting rights that are attached to their shares. They also provide some information about the conflicts of interest that may arise and affect the exercise of ownership functions. The investors are supposed to have easy access to the information that show how their voting rights have been exercised in each instance. The model used looks to be effective and, therefore, there is no need for adopting a different model. References dArcy, A. (2014). Current issues in European Corporate Governance. FINANCIAL REPORTING, (3), pp.5-11. Dennehy, E. (2012). Corporate governance - a stakeholder model. International Journal of Business Governance and Ethics, 7(2), p.83. Gospel, H. and Pendleton, A. (2005). Corporate governance and labour management. Oxford: Oxford University Press. Haspeslagh, P. (2010). Corporate governance and the current crisis. Corporate Governance: The International journal of business in society, 10(4), pp.375-377. Jones, A. and Thompson, C. (2012). The sustainability of corporate governance considerations for a model. Corporate Governance: The International journal of business in society, 12(3), pp.306-318. Petersen, H. and Vredenburg, H. (2009). Corporate governance, social responsibility and capital markets: exploring the institutional investor mental model. Corporate Governance: The International journal of business in society, 9(5), pp.610-622. Shaw, J. (2003). Corporate governance and risk. Hoboken, N.J.: J. Wiley. Singh, A. (2002). Corporate Governance, Competition, The new International Financial Architecture and Large Corporations in Emerging Markets. Stafsudd, A. (2009). Corporate Networks as Informal Governance Mechanisms: A Small Worlds Approach to Sweden. Corporate Governance: An International Review, 17(1), pp.62-76. Vakkur, N. and Herrera, Z. (2013). Corporate governance regulation. 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