Directors Should Not Be Held Responsible for the Financial Position of a Company - Assignment Example

Number Subject Name Lecturer’s Name Corporate governance Due date Date Submitted Question one Directors are not involved in company operations and hence should not be held responsible for the financial position of a company. Discuss The main responsibilities of the board of directors involve determining the strategic policies and objectives of the company and monitoring the company progress in achieving the policies and objectives. Along with appointing the senior management, they also account for the activities of the company to the relevant parties such as shareholders. Hardi and Buti (2012) by summarizing the work of many others claimed that although the directors are not involved in directly in the company operations, they have the power to influence the operations. Following this, the failure or success of any company directly reflects the ability of the directors in performing their duties in the running of the organization. It is essential for directors to understand that they are subject to statutory duties personally in their capacity as the company's directors. Additionally, companies as separate legal entities are subject to statutory controls, and it is the responsibility of their directors to ensure that they comply with such statutory controls. For instance, Murray Goulburn which is one of the leading milk producers not only in Australia but the world is alleged for misleading the investors. This is after giving financial information that does not reflect the fair value of the organization since there were some material misstatements. Although there are some people who may argue that the directors should not be held responsible for such mistakes, this should not be necessary the case. Directors in every organization have the capacity to influence the process, including the financial reporting and investing decisions. The finance director has the overall responsibility and control on all financial aspects and is anticipated to analyze the figures and make recommendations basing on the findings. Further, it is the responsibility of the Director to lead and manage the team through difficult periods such as month and year end as well as during the annual budgeting. In periods of growth and change, the director should coordinate the corporate finance, at the same time managing the company’s policies on capital requirements, equity, acquisitions, taxation and debt as appropriate. The board of the director should work closely with the managing directors and other senior executives. It is also the responsibility of the board to offer leadership and optimizes the performance and the strategic position of the company. Along with taking control of the company, they should also contribute to the development strategies in all areas. According to the research conducted by Hardi and Buti (2012), the company should maintain adequate financial records which give an explanation of the company transaction and performance as well as its position. Sarah (2016) expressed a similar idea where she claimed that if the directors fail to take the necessary steps to ensure that their organizations are complying with a requirement, they are going against the corporation act. Additionally, the directors are given powers to guide them in delivering their duties as expected. Question two Shareholders have the right to sue companies if they lose money on their share investment. Discuss The shareholders have a right to sue the company over wrongful acts. This involves accounting scandals where the company has overstated earnings purported to give the investors and shareholders an erroneous view of the financial health of the company. Mülbert (2009) by summarizing the work of the many others claimed that the shareholders could not sue the company due to a general loss where the employees or the directors have not committed any error, which contributes to the loss. If the directors were acting in the interest of the organization, and the company makes a loss, they cannot be held liable. To determine if the directors are responsible for the company’s loss, their functions are considered. This is mainly to determine whether they performed what was reasonable and if a diligent person with general skills, experience and knowledge required for someone acting in that position would have performed such steps. As explained by Thomsen and Conyon (2012), this is an objective test, which can be used to determine whether the directors meet the minimum competence threshold required. For instance, in the case of Murray go burn, it is claimed that the company management neglected their duty in reporting the financial statement as they failed to inform the investors and the shareholders that they are not expecting the company to meet the set goals. Further, it is also claimed that the Phil Tracy the chair and the former chief executive Gary Helou had full knowledge that the information provided on PDS representation was misleading. On such grounds, company management and directors can be claimed to be reliable for doing the wrong act. The board of directors should run the company in the best way to ensure that all the rights of all stakeholders are met. By doing this, the directors and managers will reduce the possibility of the company being sued. Sarah (2016) by summarizing the work of many others claimed that at any time when the shareholders file a lawsuit, although they might win in the court, they lose as well. The moment when the public realizes the company has been sued, especially on the matters on losses, the demand for shares goes down. Further, if the values of the company were exaggerated, the true value of the company is reported, and in this case, the company will be devalued. In the case of Murray Goulburn, after revising the forecasted profit, it was much less than the profit which was forecasted there before. To make the matter worse, the value of the share declined from to $2.14 to $1.23, and there was a possibility of it even dropping further. Question three Shareholders who own the majority of company shares should hold the positions of CEO and or Chairman. Discuss Over the past years, there has been a debate on whether the shareholders who have the majority of the shares are the one who should hold top positions such as chair or CEO. In most of the companies, there has been a minimum requirement of shares, which one should have to hold a position of chairman or CEO. The case was not different in the case of James parker’s crown resorts where James Packer, who owned 53 percent of the total shares, was the chairman. However, after he decided to step down after the company had issues in governance and board independence, his successor was Rob Rankin, who was the head a private company that controlled shareholding in Crown. Rose (2007) by summarizing the work of many others claimed that the higher the number of shares a shareholder has in a company, the more the influence. For instance, a shareholder who has 200 shares has 200 more times sway compared to a shareholder who has one share. Rossouw (2009) expressed a similar idea where he claimed that the voting rights of a shareholder are not similar to the democratic rights where you find that one-man one vote. There are several benefits of having top positions being held by the individuals who have more shares. According to the research conducted by Mülbert (2009), this requirement will act as an incentive in guiding the top executives to align their interest with those of the shareholders. In situations where the CEO or the company chairman does not have shares in the company or otherwise he has very minimal shares, the executive can consider taking a decision which has positive impacts on short run neglecting the future of the company. This is because achieving the short-term objective will reflect their performance at the particular time (Hardi and Buti, 2012). Thomsen and Conyon (2012) by summarizing the work of many others claimed that a chairman who owns the majority of the shares is always concerned about the future of the organization. It is clear to him that if the organizations fail in years to come, he will be among the losers even if at that time he will not be among the management. Considering this, all his action will be geared towards building a company, which has a long future. Further, big shareholders have the greater influence when it comes to making the company decisions. This is seen especially where the shareholders are required to vote. For instance, if Crown considers the option of privatizing and decides to vote, James Parker who owns 53 percent of the share will have more sway on the decision. Thus having him as the CEO will not change much, but it will be only for the better of the organization. However, having majority shareholder as the CEO may also influence the company governance negatively. A good example is in the case of Crown where colonial has decided to exit since the crown board of governance seems to lack independence, and they are diversifying too much from the core business. Inferring from Hardi and Buti (2012), in most situations the person who owns more is viewed to be superior to other individuals who owns less. The same feeling is experienced on the board. However, a CEO can influence the company to make the wrong decision because he has a greater sway compared to other board members. Question four Superannuation (Pension) funds have the right and responsibility to influence the company by meeting with the Board of Directors. Discuss Superannuation (Pension) funds have the right and responsibility to influence the company by meeting with the Board of Directors. According to the research conducted by Ross and Crossan (2012) good governance underpin supervision framework and enhances informed and ethical decision-making. The main aim of ensuring good governance of superannuation is to promote stakeholder trust, reduce risk, enhancing clear role definition and to reduce the agency issues whereas increasing the investment performance. The board of the directors is charged with the responsibility of managing these funds, advising as well as approving investment decisions. Along with managing the funds, the board implements company's strategies and executes the design of the organization. Agyemang and Castellini (2015) by summarizing the work of many others claimed that the board requires external advice on issues concerning investment. One way of ensuring that there is efficiency governance on the side of the members is by meeting the board of directors to enquire on how they manage the funds (Hardi and Buti, 2012). Further, the members can give new ideas as well as suggestion on investment issues. Along with giving their views on how the directors should manage the funds they can process some of the important reform that needs to be streamlined to enhance efficiency. In some situation, employees are required to meet the employers to request them to either increase the amount or reduce the amount that they contribute to superannuation, although there is the minimum amount that is set. Lin-Hi and Blumberg (2011) expressed a similar idea where they claimed that such arrangement is referred to as salary sacrifices. Other functions of the board of directors related to the pension funds include establishing the pension fund pursuant and delegating the administration and the management of the funds to the trustees. The board of the directors is also charged with the responsibility of reviewing and approving the appointment of the non-elected observers and trustee to the meeting of the trustees. Along with receiving reports from the trustees chair regarding the trustees meeting, they review and approve the pension plan rules (Hardi and Buti, 2012). As indicated above the board of directors play a crucial role in the superannuation. This explains why it is important for the members to have a meeting with them because they have a significant influence over the whole process. According to the research conducted by Hardi and Buti (2012), another reason why the employees have a right of learning on the governance of superannuation funds is that they are part of the contributing parties. There are also in some situation where individuals make a voluntary contribution without any regulations imposed on them (Hardi and Buti, 2012). Bibliography Agyemang, O.S. & Castellini, M. 2015, "Corporate governance in an emergent economy: a case of Ghana", Corporate Governance, vol. 15, no. 1, pp. 52. Hardi, P. & Buti, K. 2012, "Corporate governance variables: lessons from a holistic approach to Central-Eastern European practice", Corporate Governance, vol. 12, no. 1, pp. 101-117. Lin-Hi, N. & Blumberg, I. 2011, "The relationship between corporate governance, global governance, and sustainable profits: lessons learned from BP", Corporate Governance, vol. 11, no. 5, pp. 571-584. Mülbert, P.,O. 2009, "Corporate Governance of Banks", European Business Organization Law Review, vol. 10, no. 3, pp. 411-436. Rose, P. 2007, "The Corporate Governance Industry", Journal of Corporation Law, vol. 32, no. 4, pp. 887-926. Ross, A. & Crossan, K. 2012, "A review of the influence of corporate governance on the banking crises in the United Kingdom and Germany", Corporate Governance, vol. 12, no. 2, pp. 215-225. Rossouw, G.J. 2009, "The ethics of corporate governance", International Journal of Law and Management, vol. 51, no. 1, pp. 5-9. Perry W,2016, “Colonial Exits James Packer’s Crown Citing Board Independence", Corporate Governance, vol. 12, no. 2, pp. 215-225. Sarah D,2016, “Class Action Filed Against Dairy Giant Murray Goulburn”, Journal of Corporation Law, vol. 32, no. 4, pp. 887-926. Thomsen, S., and Conyon, M., 2012,Corporate Governance; Mechanisms and Systems, McGraw Hill Read More