Corporate Governance

.. corporate’s to the heavy weights of our society , for developing a purposeful model of governance . Legislative weaknesses The limited liability system initiated by the Companies Acts and other legislation’s , laws formulated by the government and other agencies to impose governance have not been as effective as they should have been, which is a matter of common knowledge and need not be gone into. The Companies Act place the ownership of the company solely in the hands of equity shareholders. Holders of preference shares have no rights of intervention unless their dividends are unpaid, investors of loan capital also have limited rights and the directors have unlimited liability and are appointed by the equity shareholders.

No other parties have rights under the Companies Acts; employees are subject to employment legislation, customers and supplies are subject to commercial contracts and the government exerts its rights. Are all parties involved in the excitement of the rise of businesses in some way implicated in their subsequent failure, so that they share the group hangover that follows the party as an alternative to assaulting their host is another problem that is yet to be addressed. The outcome of trials under law has been very unpredictable. This is due in part to a legal structure which is heavily dependent on case law, and also to the difficulty of securing conviction not to mention the delay in getting results . Accounting standards are issued by the Accounting Standards Board, following a process of discussion through the Accounting Standards Committee based on Exposure Drafts issued by the Institute of Chartered Accountants. This process though is very thorough but, like the ‘mills of God’, it grinds slowly, so that ‘creative accounting’ is invariably one step at least ahead of the regulatory process. Lack of commitment. Stakeholders in a company have always has their individual agendas and have tended to use that company to serve their ends.

Employees were ‘loyal’ to the company while it offered lifetime employment and promotion prospects, but tended to live their real lives outside their working environment. Customers had a growing range of choice and would only remain with the company if it offered exceptional value and service. Directors saw their role as ’empire builders’ in preparation for their next career move. Shareholders, by now predominantly institutions, saw their investment as a ‘punt’ – to be retained while building short-term value and sold at the first sign of difficulty. Considering the problems and issues of corporate governance over time two major approaches to improving corporate governance have emerged, which we may characterize as (a) traditional corporate governance and (b) inclusive corporate governance. The “Traditional Approach” follows the established philosophy underlying the Companies Acts and complementary legislation. It underlines the findings of the Cadbury, Greenbury and Hampel Report and focuses on the work of the Board and its relationship to shareholders.

The basic concern is to improve current practice and avoid further scandals. Shareholders are to be encouraged to be more active. The focus is on process rather than philosophy. The wider approach to corporate governance has been pioneered by the RSA enquiry into ‘Tomorrow’s Company’ and subsequent work to develop a broad strategic approach to corporate governance, involving stakeholder other than shareholders and the Board, which may be called ‘Inclusive Corporate Governance’.The work done has focused on principles as well as processes. The ‘Seven Principles of Public Life’ distilled by the review process are selflessness, integrity, objectivity, accountability, openness, honesty and leadership. The greater complexity of business made it necessary to bring specific skills to the board table and executive directors had to be given wider discretion in order to direct the company. This enabled many boards to concentrate control in their hands, leaving stakeholders to act as mere profit takers.

The rapid expansion and progressive integration of businesses into larger groups led to a diminution in the power of the holding company boards, who were forced to give greater discretion to the managers of business units in order to maintain the impetus of growth. Carl Icahn, T. Boone Pickens and Lord Hanson. These were the first people to dissect living companies and find ‘breakup value’ within them. They developed techniques such as ‘Shareholder Value Analysis’ (SVA) which later evolved into ‘Economic Value Added Analysis’, known as EVA.The use of SVA and EVA techniques has not only helped to restructure businesses but has enabled clear profit and investment targets to be driven down to the lowest operating levels.

This strengthens the hand of group directors in the strategic management process and makes it easier to manage reward systems throughout the group. The role of international law in effecting governance across boundaries has grown steadily, with the increasing globalization of trade in goods and services. The legal structure pivots on The International Court in the Hague for disputes between states, with criminal cases being brought to special tribunals. Countries individually have various acts such as The Companies Act , 1956 and the Income Tax Act have been formulated by our government for effective governance. A new technique which has emerged as a result of growing business empires is based upon a very important paradox in the struggle between integration and devolution. Larger units are expected to be more economic and more homogeneous. Much of the reality of larger units is that they become more bureaucratic and internecine.

The United Nations is an excellent example of this phenomenon; the World Bank has degraded in a similar fashion. To an increasing degree the world’s largest companies have restructured themselves to achieve internal devolution. The bottom line of organisations being : “We are not a global business. We are a collection of local businesses with intense global coordination”. As Jack Welch, CEO of GE very aptly quotes: ‘What we are trying relentlessly to do is to get that small company soul – and small company speed – inside a big company body’.

Issues of corporate governance have been addressed largely from a standpoint of improving controls and board processes rather than from a conviction that continuous improvement in governance can be a powerful competitive weapon. There lie a number of opportunities for better corporate governance which may include: A convergence of governance criteria with the public sector to reflect a more integrated modern world; The change to reach beyond the shareholder/board of directors relationship to include customers, employees, suppliers and other who deliver results for the company; The chance to use good governance to build competitive advantage in the long-term; The chance to widen stewardship to build a platform for a long-term sustainable growth of profits. The responsibilities of executive and non-executive directors for reviewing and reporting on performance to shareholders and other financially interested parties; and the frequency, clarity and form in which information should be provided; The case of audit committees of the board, including their composition and role; The principal responsibilities of auditors and the extent the value of the audit; The links between shareholders, boards and auditors; Traditionally, a company’s directors have been tasked with the role of choosing and monitoring its managers. But this is a moot exercise unless the directors also have the power to effect change. Directors should go beyond a basic “watchdog” role, to foster effective policies and act in a strategic capacity.

Ideally, directors should have a recognized role in governing the corporation. Companies are increasingly reliant on the wider community which surrounds them, which in turn needs the support and resources which few others apart from companies can give. This is a stakeholding relationship which good governance needs to recognise and which can make a company distinctive to those who deal with it. Companies which share values with their wider communities are likely to generate sustainable profitability to share with them also.New structures are needed to reflect new and more complex relationships. Today, at the close of the century, corporate governance is still an important tool for monitoring performance and enhancing value even though the ultimate shape of this tool is in the process of being forged. Business.