Corporate Governance Restructuring of Co-operative - Assignment Example

Corporate governance restructuring of Co-operative Background The Co-operative Bank of the UK has remained in financial turmoil ever since it had lost approximately 1.5 million pounds in the financial year of 2013. The financial weakening had forced the organization to sell parts of their banking, pharmacies and farming divisions. The organizational members believed that the board structure and the corporate governance policies are to be primarily blamed for such a massive loss. The changes were first introduced by the minister of the city, Lord Myners. In order to increase the efficiency of operations of the Co-operative Bank, the following provisions were proposed (BBC news, 2014). In the current paper, the implications and the rationale behind the imposed changes upon the Co-operative’s governance structure has been analysed. The paper also gives adequate significance to the roles of non executive directors in the overall success of a firm. Answer 1 The Co-operative remodelling Under the new regulations developed at the Co-operative, a board of 11 members would be set up. The number of members earlier was 20 (BBC news, 2014). Majority of these members would be independent directors. The reduced number of total directors is likely to increase transparency and unity in decision making. In the earlier setting, since the bank had a higher number of members, decision making was seen to be time consuming and the disparity amongst members led to taking decisions in a negotiable manner. This many at times prevented imposing decisions which were most suitable for growth. In the previously existing structure, the number of independent directors was less. It is generally presumed that when the numbers of independent directors are more, it becomes possible to take decisions which are beneficial to all stakeholders. Non independent directors are seen to support the interests of the firm and give less importance to the needs of external stakeholders. Having a higher number of independent directors are likely to reduce biasness and facilitate in achieving transparency (Aguilera, et al., 2006). Under the new regulations, the company will have an independent non-executive chair, 5 independent non executive directors, 2 executive directors which would include the group chief executive and three directors nominated by the member. It has also been decided that a special council would be set up, including members from the board to act as representatives. The council would preside as a guardian and ensure that the board’s responsibilities are carried out in the most effective manner. The council would have 100 members from all the sectors of the organization. The main objective of setting up the council is to ensure that the board’s activities are acceptable to all members. They will be provided with the power to hold the board to account in respect of all administrative matters. The council’s activities would be controlled by a senate. The senate is acts as a medium of interaction between the board and the council. The decision of establishing a council and a senate to preside over, it was primarily for ensuring that the board can maintain their diligence, accountability and integrity while performing different functions (Collier, 2009). Differences with U.K corporate governance policies The group’s corporate governance structure is seen to be slightly different from the general U.K corporate governance rules established for the private sector organizations. According to the U.K governance code, an audit committee is required to be established. The audit committee is required to be composed of non-executive directors. The Co-operative Bank however has not considered establishing an audit committee which manages and leads the functions of the organization. Instead, the bank has established a council and a senate who perform similar functions. The U.K governance code also states that chairman of the board must act as the leader of the non-executive directors. However in case of the bank, it can be seen that the council and the senate also act as leaders of the board and regulate their functioning to a large extend. The governance structure at the Co-operative has been set up in a manner such that the leadership responsibilities have become diversified. There have not been many changes in the remuneration policies. The remuneration policies of the bank are in accordance with the U.K governance code. It is however required to be ensured that the board discloses all types of information regarding pensions and remuneration of both independent and non-independent directors, and the information regarding the same must be send to all necessary parties. The new regulations imposed at the Co-operative are expected to deliver greater transparency and set out enhanced reporting possibilities. Under the new arrangement, it is expected that the bank would be successful in developing stronger relations with shareholders. The bank’s board is expected to continue using the annual general meeting to communicate with stakeholders (Gugler, 2001). By comparing the new and the old structures and corporate governance rules, it can be understood that the bank has mainly changed the number of member of the board and put into place certain bodies to enhance reporting and transparency needs. Administrators of the bank have identified that the prime disadvantage due to which the bank’s efficiency had been lost was due to the lack of transparency. Also it was stated by many that reducing the number of representatives to act as board members is likely to facilitate centralized decision making. The reduced size of the board was also in accordance with the reduce size of the bank. Due to the financial crisis, the bank has had to sell off certain divisions of their organization. Hence the shareholdings of the bank had reduced considerably. This necessitated reducing the number of members in the board so that a proper equilibrium could be obtained (Maclean, Harvey and Press, 2006). Answer 2 Roles of non executive director Non executive directors are able to ensure greater transparency and efficient operation within an organization. The non executive directors ensure that all the organizational decisions and policies are directed towards effecting growth and success. They also play an important role in ensuring that the organization does not practice any corrupt activities. In the last decade it has been observed that the fall of many organizations of the U.K was primarily due to weak corporate governance. Non executive directors are primarily appointed so that the organization is able to take an independent perspective while taking decisions. Executive directors are an important part of the management of a firm and therefore their decisions and approach towards the business is seen to remain focussed upon incurring high profits. Executive directors are more profit centric rather than being stakeholder centric. However, the presence of non executive directors makes it possible for the board to take a neutral perspective (Jones, 2007). While taking important decisions, it is essential that a firm remains dedicated towards meeting the needs of all stakeholders. If the board comprises only of the executive directors, the decisions taken would neglect the needs of many external stakeholders such as suppliers, government authorities and investors. The board would be more interested in enhancing profits for the business and its employees solely. However, the presence of non executive directors facilitates taking decisions which are in favour of all stakeholders. In the U.K corporate framework, there are no legal distinctions between the roles of an executive director and a non executive director. Although the non executive directors cannot remain as equally involved in the management of the company as the executive directors, it is essential that they remain committed to the overall objectives of the firm. The non executive directors are entitled to follow the codified duties as prescribed under the company’s act 2006 in a similar way as the executive directors. Non executive directors, upon their appointment are required to understand the goals and long term objectives of the organization. Accordingly, they are required to integrate their efforts towards taking important decisions which benefits the organization. Often non executive directors are seen to be put into an induction program soon after their joining an organization. This lets them become familiarised with the culture and the manner in which an organization is operated. Acquaintance with the management and other directors makes non executive director gain more insight into what the organization expects from them. Non executive directors are required to not only understand and communicate with the internal organizational members but they are also required to communicate with the external stakeholders. External stakeholders have a prime interest in the success and failure of a firm. It becomes essential that the external stakeholders of an organization are provided with timely and right information’s regarding a firms operation. Non executive directors ensure that the specific needs of the external stakeholders are met. Since the non executive directors are not a part of the organizations management directly, their decisions are considered to be more rational and unbiased by all the parties who are associated with the business. According to the newly established rules of corporate governance at the Co-operative, non executive directors are given greater freedom than before for ensuring transparency and affecting better reporting standards (Desjardins, 2000). Success and failure of non executive directors The U.K corporate governance board requires that organizations are able to establish a balance between executive and non executive members. This facilitates rational decision making. A number of firms like the Co-operative have faced issues in their management and reporting due to lack of proper balance existing in the board and the lower presence of non executive directors. Deloitte in the recent times was accused by the company’s shareholders for misreporting of financial results. The lack of integrity was primarily due the incompetent board structure (Solomon, 2007). The existence of more number of executive directors had made the organization to take biased decisions. They therefore indulged in misreporting to hide their temporary financial weaknesses. Financial misreporting is a serious offence as it not only impacts the shareholders, but also the tax revenue of government and investors who have invested in a number of projects of the organization. It also seriously impacts the manner in which an organization functions in the financial markets. Considering such aspects, it was considered essential that a firm acquires stability in their board (Lee, 2007). Deloitte had subsequently modified their organizational structures to ensure the participation of a higher number of non executive directors. Similar cases of misreporting were also seen to exist at Tesco. Approximately eight executive members were suspended from Tesco due to fraudulent activities. Tesco administrators had argued that the while executive members were responsible for directly administrating the activities of the organization; non executive directors only played the roles of overseeing the activities. Such lack of power vested in the hands of non executive directors had motivated regulatory authorities to introduce changes in the general corporate governance codes of the U.K (Solomon, 2007). As the business frameworks become more and more complicated, it becomes essential to remodel the governance policies set by the government and the regulatory authorities. Individual firms are also required to understand that as dynamic institutions, it is essential for firms to remain accountable to all interest groups. Individual firm efforts also play an important role so that non executive directors can exercise their functions effectively. In case of the Co-operative bank issue, Lord Myners stated that the non executive directors were primarily responsible for majority of the issues. He had held that since the non executive directors failed to fulfil their responsibilities, fraudulent reporting took place. In order to strengthen the role of non executive directors, a complete reformation of the board of the Co-operative was suggested. Answer 3 Comparative study with other nations The U.K corporate governance model is although considered to be an effective model for meeting the need of organizations internal members. However, it lacks in terms of meeting the need of external parties. Also the governance codes of the U.K focuses on the structure of the board. Very less emphasis is given upon describing the role of the directors towards external stakeholders. As per the U.S corporate governance codes both independent and non independent directors are required to remain accountable towards the needs of the external stakeholders rather than meeting the needs of the firm only (Keenan, 2004). Under the U.S corporate governance, organizations members are required to remain committed towards providing equal information not only to the shareholders, but to the public in general. Apart from strategic policies which are related to manufacturing of products and services, all major decisions which alter a firms size, capital structure and financial outcomes are required to be shared with all parties who are directly or indirectly associated with a business. One of the main advantages of the U.S corporate governance codes is that they are largely driven by the needs of the shareholders (Keenan, 2004). Financial regulators understand that the success of a firm depends on the consistent support received from the shareholders. If shareholders withdraw their financial support form an organization, it becomes difficult for it to sustain in the long run. Hence, organizations must frame their corporate governance codes in a manner such that the interests of the shareholders are not neglected. Organizations in the U.S are seen to ensure that lower level managerial executives also develop a sense of accountability of their actions to external stakeholders (Keenan, 2004. As a result, a culture of accountability and responsibility gets developed not only in the upper management levels but also at lower ranks. The U.S corporate governance framework were re-modified after the financial crisis of 2007. During the financial crisis it was observed that there existed a distinctive need for timely and accurate financial reporting. The governance codes were therefore restructured so that timely reporting needs could be achieved. The governance guidelines also lay down specific rules in respect of the manner in which an organization remains ethical towards all interest groups. The role of all members, be it non executive or executive directors are distinctly specified. The codes specifically lay down the manner in which a firm must achieve transparency and disclosure. Such direct and specific guidelines are seen to lack in the U.K corporate governance codes. In case of the corporate governance policies of the U.K, the roles of the chief executive director are given more importance. There is less specification regarding the roles to be carried out by the non executive directors. Hence they are unable to exercise their powers effectively. Since the corporate governance codes in general lack promoting better control, firms such as the Co-operative follow their own restructured governance codes. There also exists less guidelines regarding the qualifications of the directors in the U.K governance policies. However, in case of the U.S policies the minimum qualifications and the experience of the management are clearly specified (La Porta, et al., 2000). Reference list Aguilera, R. V., Williams, C. A., Conley, J. M. and Rupp, D. E., 2006. Corporate Governance and Social Responsibility: a comparative analysis of the UK and the US. Corporate Governance: An International Review, 14(3), pp. 147-158. BBC news, 2014. Co-op Group members vote in favour of reforms. [online] Available at: [Accessed on 23 January 2015]. Collier, P. M., 2009. Fundamentals of risk management for accountants and managers. London: Routledge. Desjardins, J., 2000. Business Ethics and the Environment. New Jersey: Pearson. Gugler, K., 2001. Corporate governance and economic performance. Oxford: Oxford University Press. Jones, T., 2007. For Business Ethics. London: Routledge. Keenan, J., 2004. Corporate governance in UK/USA boardrooms. Corporate Governance: An International Review, 12(2), pp. 172-176. La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R., 2000. Investor protection and corporate governance. Journal of financial economics, 58(1), pp. 3-27. Lee, T. A., 2007. Financial Reporting and Corporate Governance. New Jersey: Wiley. Maclean, M., Harvey, C. and Press, J., 2006. Business elites and corporate governance in France and the UK. Basingstoke: Palgrave Macmillan. Solomon, J., 2007. Corporate governance and accountability. New Jersey: John Wiley & Sons. Read More