A Corporate Governance Report of William Hill Essay

INTRODUCTION

Corporate governance typically describes the way corporate power is exercised within business organisations. Good corporate governance practices are typically defined in terms of practices, processes, and sound economic performance (Turnbull 2010). The present report examines the implementation of sound corporate governance management practices in William Hill, a U.K. sports betting company. Particular attention will be paid to the practices and processes prescribed by the Corporate Governance Code (2014), the leading template for good corporate governance practices in the U.K. The goal of this report is to enlighten Institutional Investors as to a potential investment in the company.

BRIEF COMPANY BACKGROUND

William Hill is a global sports betting and gaming company, and one of the most trusted brands in the sports gaming industry. According to the company’s latest available key financial statistics, total revenue ascends to £1.61 billion, gross profit is £1.32 billion, while EBITDA is £385 million (Yahoo Finance 2015a). The company’s EBITDA is revealing as to the company’s financial soundness. The above-mentioned sound financial statistics are clearly reflected in Figure 1 (Yahoo Finance 2015b), which depicts the 5-year stock price trajectory of William Hill. The company’s share price has almost tripled in value since January 2011. Notwithstanding, it should be pointed out that, for the sub-period between 2011 and 2013, the stock price soared; whereas, for the period 2013-2015, the stock price is relatively stable, which might point to the existence of impending regulatory shifts conditioning a potential demand weakness for its gaming products (e.g., the company is currently being affected by a significant decrease in profits accruing from gaming machines, in view of tougher gaming regulation (The Economist 2014)). Figure 1: Stock Market Price of William Hill (5-year chart) Source: Yahoo Finance; 5-year stock market prices (closing prices A£)

WILLIAM HILL: A CORPORATE GOVERNANCE ANALYSIS

The present section focuses on the following main five (5) topics of analysis that are relevant to the William Hill, where a more thorough examination of its corporate governance structure and practices are concerned. The first topic addresses the composition of the company’s Board of Directors (Leadership); the second topic refers to the company’s governance structures and Boardroom Practices (Effectiveness); the third focuses the reporting to shareholders and/or external audit procedures (Accountability); the fourth topic refers to the pay level of the company’s Directors and Senior Executives (Remuneration); finally, communications and relations with shareholders are also examined (Relations with shareholders). These topics are quite crucial to our assessment pertaining to the implementation of effective and sound governance procedures and mechanisms at William Hill.

Leadership – The Board of Directors

William Hill’s Board of Directors is composed of nine Board members (7 men and 2 women). The current Chief Executive Officer (CEO) is Mr. James Henderson, who heads “the Group’s overall strategic direction, the day-to-day management and profitability of the Group’s operations”(Hill 2015a). Mr. Henderson possesses extensive industry experience, having climbed the company’s corporate ladder through his appointment through several company roles. Moreover, the company’s CEO is seconded by the Mr. Neil Cooper, the Group’s Finance Director. Mr. Cooper possesses extensive finance experience, having performed various roles outside the Group. The Board is also composed by the Chairman, Mr. Gareth Davis, who is responsible for the company’s best corporate governance practices. Finally, the Board is also composed of a set of five independent non-executive Directors and a Company Secretary. The company had, in 2013, a number of female Board members compliant with best practices associated with fair gender treatment at the Board level (The Guardian, 2013). However, in the current year, the number of female members seems to have fallen below best industry practices (Tonello 2010), but care should be taken to further increase the percentage of women on Board beyond the prescribed legislation (according to U.K.’s Governance Code, that minimum percentage should equal 25% of women on Board). This might be a temporary setback, but it currently stands as a non-compliance issue (Financial Reporting Council 2014). The above-mentioned corporate governance structure is compliant with the best practices currently being promoted in the UK, in strict accordance with the UK Corporate Governance Code of 2014 (Financial Reporting Council 2014). The Board’s composition seems to ensure that compliance with the Code is adequately assured. For example, there is a clear division of corporate responsibilities within William Hill, with no function overlap nor unfettered powers of decision held by any specific Board member. Moreover, the percentage of ‘outside’ Directors ensures proper oversight.

Effectiveness – Governance and Boardroom Practice

According to Tricker (2012), there are a number of factors that decisively influence the effectiveness of a company’s governance, the most relevant of which are related to the necessary skillset of the top management team, as well as functional flow of both internal and external communications with stakeholders. On both counts, William Hill possesses the necessary requisites in order to comply with the outlined good practices of governance. As previously described, the company’s composition is quite diversified and experienced so as to effectively pursue the company’s ambitious goals (the previous section describes in more detail the profiles pertaining to the main Board members); at the same time, the inclusion of non-executive Board members vis A -vis the executive members clearly points out to a proper balance of powers within the sports betting group. That is, good governance practice dictates that ‘inside’ (i.e., executive) vs. ‘outside’ (i.e., non-executive) members co-exist, so that the latter typically do not possess a previous link to the company which might jeopardise their autonomous and independent business judgement. On the other hand, the flow of information to outside investors seems to be quite proficient, most notably where the structure of communications through the Internet and social media is concerned. For example, the company’s website provides accurate and in-depth details pertaining to the company’s governance structure, balanced Board composition, the company’s articles of association and the company’s latest available annual accounts (for 2014), and the professional details of the company’s auditor and corresponding Annual Report and Accounts. Online transparency seems to be a major company policy, which thus sustains the argument in favor of an effective and balanced governance practice (Hill, 2015b). It is hoped that this strategy of good corporate governance might also be applicable to the case of institutional investors, who typically require a greater insight into the company’s operations and accounts, information which is normally not available online. This topic might be of importance in the subsequent investment decision making process of institutional investors, insofar as this class of investors typically undertakes a significant proportion of equity into the company and require detailed company information. A major caveat associated with this report concerns the fact that such a subsequent investment position assumed by the institutional investor might be less positively construed by the company’s current management (i.e., it might be seen as a potential takeover of William Hill). Finally, a formal and rigorous annual evaluation of the company’s top management team is also regularly conducted. The Report on Corporate Governance reveals that good corporate governance is linked to the performance of William Hill. The measures ensuring good corporate governance at the company, in compliance with the U.K. Governance Code, are the following: the induction of Board members through a bespoke program; Board members have full access to all the required information about the company; the Board members are subjected to re-election at least every three years (conditional on effective performance); and the Nomination Committee ensures the nomination for the Board constitutes a transparent process (Hill 2015c).

Accountability – Reporting to Shareholders /External Audit

The Financial Reporting Council prescribes that a truly effective corporate governance structure relies on a number of components, namely: accountability to shareholders and their rights; the full availability of information pertaining to the company’s performance and corresponding governance framework; finally, an ethical framework supporting a certain type of irreproachable behavior pattern by the companies, as evinced by either codes of conduct or statutes. In this respect, a distinction is maintained between the law as a stalwart of basic standards of conduct and corporate transparency and statutes or codes that are more efficient in encouraging best governance practice (Financial Reporting Council 2011). Accordingly, William Hill’s website provides accurate and timely information to existing and prospective shareholders. This information is quite detailed in the ‘Investors’ area of the company’s website, a fact that reveals the company’s concern with upholding best governance practices. On the other hand, full details pertaining to the company’s auditor has also been properly disclosed, as well as the company’s latest accounts (Hill 2015c).

Remuneration – Directors and Senior Executives

The company’s levels of remuneration to top executives should be sufficiently attractive to attract, retain and motivate Board members with the necessary quality to manage the company successfully. Simultaneously, the pay level should not be substantially above current market prices. A further point concerns the fact that the latter pay level should be adequately linked to both corporate and individual performance (Tricker 2012). Furthermore, pay levels should be subjected to a transparent and formal procedure, so that the executives involved are not directly responsible for deciding his or her remuneration. According to publicly available information on this topic, the remuneration level of the leading Board members is available through the ‘Directors Remuneration Report’, which has been included in the company’s annual accounts for the latest year. A detailed breakdown of the accrued remuneration benefits is explicitly detailed in the report. This practice of publicly divulging remuneration levels of William Hill’s top management is quite compliant with U.K.’s best governance practices. Moreover, the remuneration decision process, although somewhat complex, is fully transparent as the existence of mechanisms that ensure that the pay level is not determined by the interested party, and is effectively linked to individual performance (Hill 2015c). A potential area of non-compliance resides in the fact that the ‘Remuneration Report’ does not fully disclose the remuneration levels for all the Board members, as well as in the fact that the disclosure of remuneration information pertaining to its CEO, although explained, is not entirely formulated in a simple and effective manner.

Relations with Shareholders

Effective governance practices dictate that relations with shareholders should be adequately based on the mutual understanding between the company’s top management and the heterogeneous set of interests pertaining to existing shareholders. Moreover, a transparent process of communications between these two structures should also be implemented, properly taking into account the pursuit of the company’s organisational goals (Tricker 2012). According to publicly available information, The Board remains strongly committed to maintaining good relationships with external investors, through constant dialogue, presentation of financial results, and adequate availability of top management to discuss governance issues, thus indicating efficient governance procedures (Hill, 2015d).

RECOMMENDATION

Global demand for gaming products is typically growing, as the popularity of both gambling and online entertainment continues its expansion at a truly global level. This global expansion should stand to benefit William Hill, and its long-term growth expansion. There are, however, two caveats (KPMG 2010) that warrant an investor’s attention. First, the online gaming market is undoubtedly a very attractive area of expansion for software developers, casinos and other land-based gambling operators, related suppliers, and industry newcomers and investors alike. This might increase a given company’s operating costs, dragging down future growth, as competitive pressures increase in the industry. Second, there are several quite unpredictable political and legislative hurdles in place in many countries, and those obstacles might also condition future global growth. Nevertheless, online gaming seems to have a promising foothold in many European markets. Under this perspective, an investment in William Hill is also an investment into the future of online gambling, and the risk-return payoff might be quite interesting from a financial point of view. The online gaming industry thus possesses enormous growth potential, especially in advanced markets such the U.S. and the U.K. Notwithstanding, an impending ethical governance issue within the company might be linked to the allegations that the company might be exploiting addicted gamblers, by further enticing them through the advertisement of credit services to problematic gamblers (news.co.au 2015). This might pose a serious legal risk that might ultimately result in the dampening of growth and should be vehemently addressed through the implementation of adequate governance procedures. The present report sustains that an institutional investment in William Hill is thus justified by the company’s sound and promising financial standing, the existence of proper mechanism that ensure that effective and robust corporate governance procedures and mechanisms have been properly implemented, and, ultimately, by the very buoyancy of the sport gaming industry in advanced economies.

CONCLUSION

In view of the analysis provided by this report, it is our assessment that William Hill is quite compliant with the UK Corporate Governance Code of 2014 (notwithstanding the fact that some issues pertaining to the process of effectively communicating remuneration levels to interested external stakeholders should be made more transparent and the number of female members to the Board should be increased). Finally, an investment decision by our institutional investors should be pursued, taking into consideration the company’s financial soundness and its medium to long term growth prospects, notwithstanding the existence of impending regulatory issues that might condition the global growth of the sports betting industry.

REFERENCES

  • Hill, W., 2015a. Board of Directors [Online]. Available: https://www.williamhillplc.com/about/board-of-directors/
  • Hill, W., 2015b. Board and Governance. [Online]. Available: https://www.williamhillplc.com/investors/board-and-governance/
  • Hill, W., 2015c. William Hill Plc Annual Reports and Accounts 2014. [Online]. Available: https://files.williamhillplc.com/media/1832/2014-final-results-accounts.pdf
  • Hill, W., 2015d. Shareholder engagement. [Online]. Available: https://www.williamhillplc.com/investors/board-and-governance/shareholder-engagement/
  • Financial Reporting Council, 2011. Effective Corporate Governance. [Online]. Available: https://www.frc.org.uk/FRC-Documents/FRC/FRC-Effective-Corporate-Governance.aspx
  • Financial Reporting Council, 2014. The UK Corporate Governance Code. [Online] Available: https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf
  • KPMG, 2010. Online Gaming: A Gamble or a Sure Bet? [Online] Available: https://www.kpmg.com/EU/en/Documents/Online-Gaming.pdf
  • News.co.au, 2015. William Hill offers customers $1000 credit. [Online]. Available: https://www.news.com.au/finance/money/william-hill-offers-customers-1000-credit/story-e6frfmci-1227286743077
  • The Guardian, 2013. FTSE 100 companies still 66 female directors short of boardroom target. [Online]. Available: https://www.theguardian.com/business/2013/oct/07/female-directors-boardroom-target-business-cable
  • The Economist, 2015. A risky business. [Online]. Available: https://www.economist.com/news/britain/21598671-gambling-machines-are-controversialand-increasingly-unpopular-risky-business
  • Tonello, M., 2010. Board Composition and Organization Issues. In: Baker, H.K. and Anderson, R., eds. Corporate Governance: A Synthesis of Theory, Research, and Practice. United States: John Wiley and Sons Inc., pp. 195-223.
  • Tricker, B., 2012. Corporate Governance. Principles, Policies and Practices. Second edition. United Kingdom: Oxford University Press.
  • Turnbull, C.S.S., 2010. What’s Wrong with Corporate Governance Best Practices?. In: Baker, H.K. and Anderson, R., eds. Corporate Governance: A Synthesis of Theory, Research, and Practice. United States: John Wiley and Sons Inc., pp. 79-96.
  • Yahoo Finance, 2015a. Key Statistics. [Online]. Available: https://uk.finance.yahoo.com/q/ks?s=WMH.L
  • Yahoo Finance, 2015b. Basic Chart. [Online]. Available: https://uk.finance.yahoo.com/q/bc?s=WMH.L&t=5y&l=on&z=l&q=l&c=

Enron’s View of Corporate Governance Essay

Henry Kravis once said, If you do not have integrity, you have nothing. You cannot buy it. You can have all the money in the world, but if you are not a moral and ethical person, you really have nothing.(BrainyQuote) Integrity can be defined as, doing the right thing in a reliable way. (Vocabulary.com) This means an organization is willing to be obedient to a set of values. Assuming that the reader knows everything about Enron, and individual should speak in terms of business ethics. An individual should discuss on the topics of ethical issues, the stakeholders and their issues in the case, an analysis from a stakeholders’ perspective, Enron’s corporate culture and their commitment to social responsibility, and Enron’s view of corporate governance.

It can be seen that Enron was greedy because of the ethical issues that took place. Some of the issues that took place are fraudulent behavior, financial misconduct, and dishonesty. According to Business Ethics, Fraud is engaging in intentional deceptive practices in order to advance their own interests. Fraud is deceiving people to make money. There are several types of fraud, but accounting fraud can fit perfectly in this case. Accounting fraud, according to (Ferrell, O.C. et. al 76), usually includes an organization’s money related reports in which companies give vital data on which financial specialists and others base choices including millions of dollars. Financial misconduct is when a business does not grasp the knowledge to manage ethical risks that play an important part in a financial crisis. Dishonesty is the intentional act of lacking integrity. Dishonest businesses will be found out. It is better for a business to be honest in all aspects, than to have a harmed reputation.

The second topic that should be discussed stakeholders and each of their issues in the case. Stakeholders are clients, investors, workers, providers, government organizations, and numerous other people who have a “stake” or guarantee in some part of an organization’s items, activities, markets, industry, and results. Stakeholders give assets that are imperative to a long haul achievement. These assets can be unmistakable or elusive. Stakeholders’ capacities to pull back assets gives them control over organizations. There are two kinds of stakeholders: primary stakeholders and secondary stakeholders. Primary stakeholders are those whose proceeded with affiliation and assets are completely fundamental for an association’s survival. These incorporate representatives, clients, and investors and also the administrations and networks that give important framework. Secondary stakeholders don’t commonly connect specifically in exchanges with an organization and are along these lines not fundamental to its survival. These incorporate media, exchange affiliations, and little intrigue gatherings. Both primary and secondary stakeholders grasp particular qualities and benchmarks that direct worthy and inadmissible practices. The stakeholders that were affected in this case were the executive managers, the employees, and the stockholders. Stockholders lost their money when investments were lost. Employees had to involuntarily separate from their positions, and as a result, could no longer rely on their retirement savings from the company. Managers believed in competing in order to be the best and protect their reputation.

The third topic that should be discussed is an analysis from a stakeholders’ perspective, or point of view. There are six steps to applying a stakeholders’ perspective according to Business Ethics. The first step is to assess corporate culture. It is the obligation of an organization to identify norms, values, and missions. An organization can have a plaque that states, Visions and Values, but there are times it does not practice what it preaches parse. The second step is to recognize stakeholder groups. It is important for an organization to identify the needs, want, and desires of its stakeholders. Enron was interested in increasing its own wealth. Stakeholders have power because they can withhold resources from an organization to a certain extent. The third step is for organizations to recognize the issues of its stakeholders. Organizations need to be able to collaborate with several stakeholders in order to solve an issue. The fourth step is for organizations to assess commitment to stakeholders and social responsibility. Once an organization understands this, it will need to use this definition to evaluate practices and select initiatives. The fifth step for an organization is to identify resources and determine urgency. Two key principles can be measured: the degree of monetary and structural funds needed by distinct proceedings, and the importance when giving precedence to social responsibility encounters. The sixth and final step of applying a stakeholders’ perspective is for an organization to gain stakeholder feedback. This can be generated by different means. An example can be a memo. When an organization receives an anonymous memo from an employee predicting of its failure, it (the organization) needs to take action. Enron did not gain stakeholder feedback from its employee. Enron downgraded its employee. (Ferrell, O.C. et. al 48-50)

The fourth topic that should be discussed is Enron’s corporate culture and its commitment to social responsibility. Financial analyst Milton Friedman has contended that it is the social duty of enterprises to extend benefits subsequently putting more individuals to work and paying more charges to bolster programs that advantage the general public. (Silverstein, Ken) Social responsibility is an organization’s duty to raise its encouraging influence on stakeholders and lessen its discouraging influence. Social responsibility can be defined as a contract with society, whereas business ethics involves carefully thought out rules that guide decision making. (Ferrell, O.C. et. al 36) Enron pushed integrity to the side and made their employees believe that risks could increase without being in danger.

The last topic that should be discussed is Enron’s view of corporate governance. Corporate governance involves decisions and activities and decisions by a board of directors. There are two types of corporate governance: shareholder model of corporate governance and stakeholder model of corporate governance. The shareholder model of corporate governance is established in classic financial matters statutes, counting the objective of maximizing riches for speculators and proprietors. For freely exchanged firms, corporate governance centers on creating and making the formal frameworks for keeping up execution responsibility between best management and the firm’s shareholders. The stakeholder model of corporate governance adopts a broader view of the purpose of business. In spite of the fact that a company certainly encompasses a obligation financial victory and responsibility to fulfill its stockholders, it must too reply to other partners, counting representatives, providers, government controllers, communities, and the extraordinary intrigued bunches with which it interacts. (Ferrell, O.C et. al. 44-45) The corporate governance at Enron was weak in every aspect. Lacking in morale character, was the board of directors, who participated in fraudulent behavior. This was the authentic source that led to the organization’s corporate governance collapse. Helpful corporate governance produces an obedience and ethics culture so workers can sense integrity is at the center of its competition. Corporate governance likewise offers methods for recognizing chances and preparing for revival when errors or difficulties happen. Corporate governance creates important procedures and practices for avoiding and becoming aware of misbehavior, and also assists in creating the integrity of associations. (Ferrell, O.C. et. al. 43-44)

Impact of Information Technology on E Governance Essay

[pic] Project Report on Gyandoot Vs E-Mitra Submitted to Prof. Kavitha Ranganathan Prof. Subhash Bhatnagar In partial requirements of the fulfillments of the course Digital Inclusion for Development Chetan Jajoria|Rohit Raj|Suresh K Introduction Many governments all over the world are today embarking on an ambitious e-governance projects aimed at bridging the digital divide between the rich and poor as well as the urban and rural citizens. However a closer look at the statistics at this stage would give us the real picture. According to a World Bank estimate about 85% of the e-governance projects across the developing countries have failed to achieve the desired result either totally or partially. The problem is also compounded by the lack of clear criteria for evaluating the success of such projects. There is little doubt that e-governance increases the efficiency and productivity of government services, thereby reducing the costs involved. However the problem lies in the conceptualization of the project. Any e-governance project should involve the people, process and technology in the said order. However the projects tend to veer of their objectives when they unduly stress on the technology and tend to ignore the people or when they set their priorities in the reverse order. Technology plays a role albeit a very minor one in determining the success of such e-governance projects. Projects should be built on needs of the citizens as the core with processes and technology acting as the supplemental factors. Only the there will significant involvement from the citizens. The other reasons for failure of the e-governance projects could be attributed to tardy implementation, non-consideration of opportunity costs, sustainability, project management skills, short-term and long-term tradeoffs. In this report evaluation of two such e-governance projects from India, Gyandoot of Madhya Pradesh and e-Mitra of Rajasthan have been done. E-Mitra is being touted as the most successful e-governance project in the country. While Gyandoot started off well initially today it is on the verge cessation of its existence. Gyandoot Gyandoot is a rural intranet project in the poor tribal district of Dhar in Madhya Pradesh initiated by the state government of MP with the objective of providing better access to government information and services. The project was conceptualized in January 2000 and became operational within a record two months. Under this scheme computer kiosks also referred to as soochanalayas were set up in each of the 20 village centers initially and were wired through intranet. The latest data shows 40 kiosks to be operational catering to about half million population in 550 villages with each kiosk serving a 5km radius surrounding it. Each kiosk, manned by a trained operator, was set up to serve a population of about 20000-30000 villagers. The entrepreneurs also referred to as soochaks were the local youths who ran the cyber-cafes cum-cyber offices and were chosen by the local community. The project was conceptualized on the basis of people, content, services and server. Goals and Objectives (Roger Harris and Rajesh Rajora. UNDP-APDIP ICT4D Series. A Study of Rural Development Projects in India) • To ensure equal access to emerging technologies for the marginalized society • To create an economically and financially viable, replicable model to take IT to the masses • To promote grass-root entrepreneurial model as well as self employment • To ensure quicker response to the needs of the citizens • To ensure increased community participation in the governance and local affairs through the effective use of IT Services provided by the kiosks After holding discussions with the villagers it was decided that all the content would be in the local language. This was a good move since they had taken the users into consideration before beginning with the project, which in a way assessed their needs and capabilities. Based on this interaction, it was decided that the software which would be developed was to be user friendly and unsophisticated. The operation began with 5 services but within a few months was expanded to cover 22 services which included rates of agriculture produce, land records, Hindi e-mail, rural matrimonial services, application for caste/income certificates, educational, health services, etc. The rates for the services ranged from $ 0. 0 (Rs 4) for ‘ask-an-expert’ service to $ 0. 50 (Rs 20) for matrimonial services. The operator was free to offer services other than those mentioned to increase his revenue. The main services which aimed to bring about transparency and efficiency in the government processes and services include: • Land records: The farmers needed land records to avail a loan, the application for which was made available online and farmers had to just go and collect the documents once their application was processed. • Beneficiary lists: The government provides special facilities to disadvantaged people under various schemes. The list of beneficiaries is made available online so that the villagers can verify whether they have been enlisted or not rather than they going to the government offices. This would in a way decrease the influence the government officials hold over the official information. • Under this initiative registration of grievances against the public servants has been made possible through the kiosks which previously had to be done only at the district headquarters which involved sufficient transportation costs as well as uncertainty over the availability of the concerned complaint-receiving official. The communication which was real-time now has shifted to asynchronous communication thereby increasing the chances of making ones complaint heard. Other than ensuring transparency in government services, it also provided access to information regarding the market prices of the agricultural goods which otherwise would have cost the farmer $0. 50 for traveling to the market as well as loss of income for that duration. Institutional Arrangements and Business model The district council owns the network while it is responsibility of the village councils to manage the kiosks. A project manager who is an IT professional expert along with the help of four assistants maintains the database at the district council. The soochak or the local entrepreneur, selected by the village community runs the kiosk (soochanalaya) on a commercial basis with initial one year contract with the village council. Various government agencies provided the content for databases and logistics support. There are two models which are followed in setting up of a soochanalaya (Centre for E-Governance, IIM Ahmedabad). They are as follows: 1. Panchayat model: The village panchayat makes all investment in the necessary infrastructure. The soochak does not receive any monetary compensation and bears all operational costs on services such as telephone, etc along with a 10 percent commission to the jila panchayat for providing intranet services. The village council takes care of the electricity expenses. 2. Entrepreneurial model: The soochak makes all the investment in the necessary infrastructure as well as pay a fee of Rs. 5000 to the Gramdoot Samithi annually. He bears all the all the related costs as well. Technology The servers, computers and other devices which were installed included: • The central hardware at headquarters ? server with a 450 MHz Pentium III processor ? 128 MB RAM ? 40 GB disk drive ? 2 MB graphics card ? 5″ monitor and 48x CD-ROM. • Client kiosks ? 433 MHz Celeron processor ? 32 MB RAM ? 4. 3 GB disk drive plus floppy ? 4 MB graphics card, 14″ monitor, and 48x CD-ROM ? dot-matrix printer and a UPS with five hour backup capacity • Five 56kbps modems were installed at the district headquarters and one each on the client side for telecommunication purposes which was a combination of oth dial-up and WLL (wireless in local loop) connections The operator at the kiosk operated the system on behalf of the customer since most of the customers lacked the necessary sophistication to operate on their own inspite of the equipments being made user friendly. Most importantly, all the applications were web browser based. Impact Costs and benefits The initial network set up costs was about $50000 with the later expansion involving private parties for the financing. Except a few occasional benefits on the transparency front the Gyandoot project has not delivered the results as intended when the project was conceptualized (Alok Kumar Sanjay and Vivek Gupta). It has helped to reduce the corruption and harassment of the marginalized sections to a certain extent due to reducing the chances of interface between the people and the government officials. The amount spent on transportation as well as the loss on that day’s income due to a trip to the district headquarters for official work has been reduced to a limited extent. For a few services, the response has become quicker. The list of beneficiaries of the government schemes which was made publicly available helped the people to identify missing names from the list and brought transparency into the system. Though the project started of well initially but could not sustain due to absence of automation of back end support and internal operations which meant that the transactions were still being processed manually at the government offices. [pic] Source: Inkroma e-Gov (https://www. egovernance. inkroma. com/Building%20the%20foundation%20Blocks%20Article. pdf ) In the above figure only processes numbered 1, 2, 8 and 9 are online but the rest of the processes are manually operations at the backend exposing the whole system to time lag and corruption which meant that the objective of project Gyandoot was not being met. Also since the internal processes were not automated, the load within the internal system increased manifold times as manual operations were not as efficient as the automated ones made all worse by the introduction of multiple client input points. There was a clear efficiency lag between the frontend and the backend operations. On the corruption front, the villagers felt that opportunities still existed for government officials to extract bribe from them (AK Sanjay and Vivek Gupta). Since the land records obtained or printed in the kiosks did not have an authorized signature, the villagers still had to travel to the government office atleast once to get an authorized signature without which the banks did not identify the documents as authentic. Although this project has reduced the number of such travels to the government office, its objective of disintermediation is still elusive giving rise to corruption. Although it was partially successful in reducing the trips, there was nothing to prevent the backend officials to increase the amount of bribe they seek to process their applications. In the case of public grievances, the system appeared to be functioning merely as a mechanism for appointment –fixing and grievances recording since in most of the cases the complainant had to appear in person. In about 90% of the cases, the complainants had responded that their grievances were not resolved to satisfaction. Infrastructure A significant number of kiosks do not operate as planned. About one-third of the kiosks appeared to be closed always, while some others appeared to be operating for only a few hours in many days. There are list of causes for this situation. One of the main reasons is frequent power cuts and recurring telecommunication problems which poses severe connectivity problems. The UPS batteries which have been provided have a charge up time of about 4-8 hours but in some of the areas the electricity supply is only for 1-2 hours in the entire day. The hardware capacity has been another limiting factor preventing the kiosks to be functioning to their full potential as most of the kiosks try to function to their full capacity during the time when electricity is on. This has led to reduced revenues to the kiosks operators which in turn have reduced their commitment to run the kiosk. Adding to this vicious cycle is the accusation that the Gyandoot services on agricultural rates are unreliable and about one-quarter of them reported losses on their produce due to the out-of-date information provided by the Gyandoot services. This has led to spread of the negative message about the Gyandoot and the usage levels have been reduced to just one user per 2-3 days. In some cases, the villagers have started suspecting the kiosk owners of voluntarily withholding information to seek bribes which in a way have affected their reputation and business. The transfer of senior staff who initiated the project, brought in a set of incumbents who were disinclined to show commitment to a project which they hadn’t initiated. In such projects that aim to bring about radical changes, the commitment of senior team plays a large part and hence it is prudent to involve the initiating team as long as possible. Financial sustainability While the breakeven point as calculated was about $100 per year when the project was conceptualized, the average income of the kiosk was a mere $35 per year making the kiosk highly unprofitable and in turn forcing the operators to choose other avenues to earn their livelihood. Demand for Gyandoot Services According to the study done by CEG, IIM Ahmedabad, the average demand has been found to be about 1-4 users per day (only the actual number of days on which the outlet opened is considered here) with a peak of about 18-20 users per day during the time announcements of examination results. Over a period of two years, the 18 kiosks studied serviced an average of 0. 62 users per day (the number of working days for which the outlets were supposed to be working was assumed to be 250) which was an indication of very poor response to the services by the villagers. Transfer of project champion The officials who were involved in the initiation of the project were transferred within one year of start of the functioning of the project. This could be one of the reasons for its failure as the subsequent officials couldn’t have been more committed in making the backend operations as efficient as the frontend. Revenues from Gyandoot The 18 kiosks studied had earned Rs. 65200 over a period of two years taking the average to about Rs 150 per month per kiosk which is highly unsustainable. Conclusion It is necessary to automate the backend operations as well to make the system completely efficient without any bottlenecks and opportunity for the officials to extract bribe. A binding organization should be established which controls the various service providers. The Gyandoot Samiti didn’t have the authority to question the backend service providers in this case. The project champions should be allowed to function; at least till the project clears all teething problems and becomes sustainable. e-Mitra It is an initiative by Government of Rajasthan to provide government services to residents of Rajasthan in a cost effective manner. -Mitra is a combination of two earlier projects of similar kind started by the state government. Those two projects were LokMitra & JanMitra, which were aiming at two different segment of the society. LokMitra was started by the government to deliver services which can be of some relevance to urban population of Rajasthan. It was first started in Jaipur, Bikaner & Udaipur. JanMitra was the rural version of LokMitra. The difference between the two projects was the business model followed by the government. In JanMitra, government followed PPP (Public Private Partnership) model and engaged people to open kiosks (service center) whereas in LokMitra, everything is managed and maintained by the government. LokMitra As stated earlier LokMitra was a government service delivery system designed and implemented for urban population of Rajasthan. The services which ware offered by it included: ( Source: https://www. emitra. gov. in/eMitra/egovConstruction. jsp) • Payment of electricity bills • Payment of water bills of PHED • Online RSRTC bus ticketing of RSRTC • Issue of of Births & Death certificates Payment of various dues/fee of Jaipur Municipal corporation • Payment of various dues/fee of Jaipur Development Authority • Payment of various dues/fee of Land & Building Tax Dept • Payment of various dues/fee of Rajasthan Housing Board • Payment of Land Line & CellOne bills (BSNL) The project was launched in March 2002, and initially had 9 centers in Jaipur. The project was a success and was replicated in Bikaner and Udaipur. The success of the project could be estimated by the revenue which got collected in the span of 3 years, which was around Rs. 261 Crores and served the population of 1. 2 Million. Project was designed keeping in mind the requirements of urban population. It was mainly used for utility bill payment and most of the payments were made on the real time basis. The project was financially viable also as none of the services being offered was free. JanMitra As stated earlier JanMitra was a government service delivery system designed and implemented for rural population of Rajasthan. The services which ware offered by it included: (source: https://www. emitra. gov. in/eMitra/egovConstruction. jsp) • Public grievance • Online submission of application forms • Access to Land & Revenue Records (ROR) Access to Government information This project was also launched in March 2002. The main objective of the project was to provide relevant information to the rural population. These are the information which are mainly related to land records. Initially it was launched rural areas in and around Jaipur and Jhalawar district. As the project was based on the PPP model, government in turn provided employment to around 350 youth in those areas. None of the services or information provided through these centers was free, so the project was financially viable. In the period of 3 years, JanMitra kiosks served around half a illion citizens living in rural areas. After the success of LokMitra & JanMitra, Rajasthan government thought of building a stronger system. Government picked up the best features of the two projects (LokMitra & JanMitra) and created a single platform named “e-Mitra” with over 60 government services and added some private services later. This initiative gave employment to about 6000 unemployed and educated youth in different areas. Goals and Objectives The initiative was started to reduce the time and money spend by the citizens in rural areas in retrieving information from government repository. On the other hand for urban citizen their utility bill payments and other government related payments were important and time consuming. With the help of e-Mitra, anybody can access information from government repository and can pay their utility bills. It was a single window clearance system and is easily accessible to everybody. Another aspect which made e-Mitra a favorite spot was its timing; earlier citizens had to take leave to pay utility bills from their offices but with the convenient timing of 8 A. M. to 8 P. M. , citizen preferred e-Mitra kiosk over other government offices. Here they can make payments as per their convenience i. e. by cash, cheque, DD and also by using credit cards. Business Model This model was based on PPP (Public Private Partnership) model, in which front office which consists of a facility i. e. a room, computer, internet connection was owned and operated by local service provider whereas back office infrastructure like hardware, database server, routers are owned by government but the application software part was managed and maintained by the technology partner Impact Kiosk owner is responsible of creating a database at his end and is able to carry out this operation in 4 different modes i. e. Off Line, Semi Offline, Semi Offline Delayed and Online. These are the modes used for different kind of services which are being offered. Services like utility bill payments are online whereas services related to land records retrieval from district office can be classified into semi offline due to the form filled and sent to the district office. The most important move by the government is that they provided multi lingual application form, which made the process more transparent. Citizens have confidence about the service they are seeking and the form & details they are filling up. By this they gain some knowledge about which department to contact for which service which is helpful if they would be using different kiosk in the future. This gives a sense of confidence and comfort level to citizens particularly in rural areas. In 2006 e-Mitra had 525 kiosks in 31 out of 32 districts of Rajasthan. These were being operated with the help of six private local service providers. Approximately 6. 0 lakh citizens were being served in a month and total Government revenue generation was around Rs 72 crore per month. These figures clearly show the financial sustainability of e-Mitra which is must for its existence in long run. Infrastructure [pic] Source: https://indiagovernance. gov. in/presentations/E-Mitra. pps The above is the network design established for the e-Mitra. In this the kiosks of local service providers are connected to government administration via a district window. Various district level and state level databases are connected internally and interfaced through user departments. Players involved in the entire network are user departments, District administration, District society, Main center, Sub-centers and kiosks. User Departments provide back end computerization for the services and facilities offered by the kiosks whereas district administration does the vigilance control of all the departments involve in the process, they also provide back-up infrastructure. District Society manages the relationship with the local service providers or kiosks owners. Main center receives all the applications, data and communication from the district. Kiosks are considered to be the service delivery points. Financial sustainability As stated earlier none of the services are being provided free to make the model financially sustainable. Different tariff structures are followed for different services. The rates mentioned below are of year 2005 (Source: https://indiagovernance. gov. in/presentations/E-Mitra. pps) • Utility Bills – Telephone, Mobile (BSNL) – Rs. 5 per bill • Electricity, Water – Rs. 3. 95 per bill • Public Grievances Redressal and Public Information Services (19 departments) – Rs. per transaction • Online Applications (52 Services) – Rs. 9 per application Critical Success Factors of e-Mitra For successful implementation of an e-governance project based on ICT it is necessary to understand the demands of citizens rather than putting emphasis on connectivity through internet. In Jan-Mitra a community network was established using offline and online modes of connectivity but prior to this assessment of rural needs was done and proper selection of village and entrepreneurs were made for effective operations. Similarly in Lok-Mitra assessment of urban needs were done in areas of delivering services and timings of kiosks to make them favorable among urban people. Use of local language at internet portal and kiosk is also a contribution factor in the success of e-Mitra. Because of local language rural people are able to understand the content which has decreased their dependency on others. Before the starting of project extensive training was provided to kiosk owners to make them IT literate and built IT awareness in rural areas. To provide services through ITC it is must to have a sound IT backend support. Therefore backend support in area of software development is being provided by private players through the model of PPP. Automation of data has been done in all Government departments to answer queries from kiosk in minimum time through real time access. Strengthening of demand of e-Mitra was the most critical factor in the success of e-Mitra. This was done through following ways: • It was marketed as a product to people by applying marketing strategies like 4Ps (Price, Place, Product and Promotion). Because for its success it was necessary that people perceived it as a product and demand it. Since services could only be paid if they are perceived as beneficial to citizens. • Communities were involvement to get structured and unstructured feedback of citizens through surveys and workshops. Since feedback is must for continuous addition of new services and to make existing services better. • Awareness was generated in citizens through proactive marketing. Various road shows and stalls in urban and rural areas were established to make people aware of e-Mitra. Since awareness was must to create demand in future and sustainability of e-Mitra was only dependent on this demand of citizens. Conclusion It is necessary to understand the demands of citizens to design a model of e-governance project. In future proper demand assessment at initial stages generates demand for e-services if properly marketed to make people aware of services and benefits. Involvement of various parties and better coordination among them increase the sustainability and smooth functioning of project. Use of PPP model helps in achieving financial sustainability of project and involves of stakes of various parties. People should be made aware of various benefits of e-governance because their awareness is must for demand generation. Change in mindset of government officials and employees should be done to make them believe in benefits of an e-governance project. Since automation and computerization of government offices is required for providing services through ICT in real time manner. Government involvement is necessary in removing hurdles while initial stages of implementation and providing support in form of infrastructure and favorable government services. References: 1. E-Government for Development. eTransparency Case Study No. 11. Gyandoot: Trying to Improve Government Services for Rural Citizens in India. Retrieved November 14, 2008 from https://www. gov4dev. org/transparency/case/gyandoot. shtml 2. Harris, Roger and Rajora, Rajesh. Empowering the Poor Information and Communications Technology for Governance and Poverty Reduction. A Study of Rural Development Projects in India by UNDP. Retrieved November 14, 2008 from https://www. apdip. net/publications/ict4d/EmpoweringThePoor. pdf 3. Centre for Electronic Governance, IIM Ahmedabad. Rural Cybercafes on Intranet. Gyandoot: A Cost Benefit evaluation study. Retrieved November 14, 2008 from https://www. iimahd. ernet. in/egov/documents/gyandoot-evaluation. pdf 4. Dr. Shankara Prasad. Inkroma: What is wrong with e-governance projects in India? Retrieved November 14, 2008 from https://www. egovernance. inkroma. com/Building%20the%20foundation%20Blocks%20Article. pdf 5. https://www. emitra. gov. in/eMitra/egovConstruction. jsp 6. Integrated Service Delivery to Citizens: Rajasthan Experience. (https://darpg. nic. in/arpg-website/conference/jaipurconf/e-mitra-2006. ppt) 7. E-Mitra Project (https://indiagovernance. gov. in/presentations/E-Mitra. pps) 8. ICTD. ICTs for Development: Case Studies from Indias 9. Integrated Service Delivery to Citizens: Rajasthan Experience https://egovonline. et/egovindia/egov%20India%202006%20presentationsegov%20India%2025th%20AugustPlenary%20Integrated%20Service%20DeliveryRohit%20K%20Singh. pdf 10. Capacity Building in Rajasthan: Case Study of e-Mitra https://orissa. gov. in/e_governance/presentationMaterial/PRESENTATION/DAY%202/Day2-Sess1/D2S1%20V%20BADAL. ppt ———————– WAN Kiosks Kiosks Kiosks Kiosks Kiosks Kiosks Kiosks Kiosks Local Service Provider2 Kiosks Local Service Provider1 District Window District Administration State Data Center Divisional Data/Control Center Secretariat LAN User Department User Department User Department

French Colonial Governance and the French Revolution in Pondicherry Essay

By the late 18th century, the French presence in India was on the decline. Once the only serious challenger to British dominance on the subcontinent, by the 1780s l’Inde Fran?§aise had been reduced to a series of demilitarized and economically neutered stations on the subcontinent’s east coast. Though all of these territories had experienced substantial decline since their mid-18th-century peak, none had fallen so far as Pondicherry. What had once been a thriving and cosmopolitan city had declined to a remote outpost with a fraction of its peak population. Largely to blame for this decline were the successive losses of the French during the Seven Years’ War and the resulting political instability in the former possessions of the French East India Company. By 1788, Pondicherry was a marginal backwater of the First French Empire, a sorry remnant of what had once been a thriving French presence in India.

It is in this position that Pondicherry found itself when revolution consumed France in 1789. Already forgotten by Paris and more than two months removed from the French capital by boat, Pondicherry’s French and Tamil inhabitants reacted with anxiety to the news of revolt in the metropole. To the Tamils, the Revolution raised questions as to their relationship with their colonial overlords and the true nature of their status in the French nation. To the small Franco-Indian population, the Revolution brought a chaos that threatened their precarious dominance over Pondicherry’s economic and political life. To both groups, the Revolution threatened to topple what remained of the French Empire in India altogether. The stakes, in short, could not be higher. In a colony where European military and political dominance was so precarious, and where the colonial state had been substantially weakened by decades of war fatigue, one might expect the chaos of the Revolution to have induced a native uprising. Further, stronger French colonial presences in St. Domingue and elsewhere would succumb to similar power vacuums and ultimately be consumed by Revolutionary violence. But in Pondicherry, the Revolution did not produce violence. The uniqueness of La Revolution Pacifique is grounded in the stability of the political and cultural relationships built between the French and Tamil inhabitants of the territory, and the consequent goodwill that existed between the two populations when the news of revolution reached Pondicherry’s shores in 1790.

The Revolution swept the French Empire when Pondicherry was at its weakest, forcing the French and Tamil populations to engage with one another to preserve the territorial integrity of their city in the face of a British Raj at the zenith of its power. However, while the directness of the conversations that took place might have been novel, the interactions themselves were notrather they drew on a tradition of political and cultural engagement between the French and the Tamils that had been developing in Pondicherry since the colony’s establishment in 1674. And though the British would put an end to Revolutionary activities when they occupied Pondicherry in 1793, the three-year long conversation between the Franco-Indian and Tamil populations constituted an exceptional manifestation of what had already been an exceptional relationship in 18th century colonial South Asia. Examining primary and secondary literature regarding the Revolution in Pondicherry, it is clear that the anomalous upswing in peaceful political discourse that took place was due to the stability of the rapport between the territory’s European and Indian populationsa stability that was formed over centuries in the unique conditions that existed at the margin of France’s empire.

The existing secondary literature on this subject is sparse. The vast majority of sources that discuss the nature of French rule in Pondicherryof which there are still exceedingly fewfocus on the tenure of colonial governor Joseph Francois Dupleix in the 1750s and 60s, a period that is widely considered the zenith of French rule in India. The number of historical analyses available declines sharply as one enters the 1780s and 90s, and thus the unique conditions created in the territory leading up to the Revolution have not been as thoroughly analyzed, particularly by English-speaking authors. This is perhaps due to the fact that the vast majority of primary literature on this subject is written by French visitors to and inhabitants of the colony. These sourcesand analyses of themhave been monopolized by a small number of French-language secondary works. The flagship example of such French scholarship is Marguerite Labernadie’s La Revolution Et Les etablissements Francais Dans L’Inde, which remains the only example of French or English scholarship that focuses on the revolution in French India and from which this paper will borrow heavily. However, like other French-language works, Labernadie’s piece does not include references to the small number of crucial Tamil sources from 1790s Pondicherry. In combining analyses of pre-Revolutionary Pondicherry from both the English and French secondary literature with a renewed look at court and personal documents from the Revolutionary period, this paper will attempt to trace the roots of the French Revolution’s peaceful manifestation in Pondicherry.

The Establishment of Pondicherry: La Compagnie des Indes and The Chaudrie Court

The French East India Company began its relationship with Pondicherry in 1674, when the Company made the coastal town the headquarter of their operations. Prior to the arrival of the Compagnie des Indes, Pondicherry had been a minor settlement in a series of great South Asian empires and had most recently fallen under the suzerainty of the Vijayanagar Emperor and the Sultan of Bijapur. At the time of Pondicherry’s establishment as a colonial outpost, the mission civilatrice that would come to dominate the French Empire in the 19th century was not yet a priority for Paris’ imperial projectthe French had established Pondicherry solely on strategic and economic grounds. Though its pre-colonial history and founding have not been thoroughly explored by historians, Pondicherry’s position as a strategic outpost, rather than an economic colony, would prove essential to the nature of everyday life in the city. Unlike in St. Domingue or Quebec, where resource extraction in the form of sugar and fur would predominate, Pondicherry would remain an imperial outposta waystation for the spice trade and other goods flowing out of South and Southeast Asia. Thus, as the city was merely an imperial outpost, King Louis XIV established a Sovereign Council in 1701 to preside over basic municipal governance but excluded from its purview local legal issues. Though we cannot presume to know the exact motivations behind the decision, a pattern of French colonial governance suggests that Paris so completely considered Pondicherry a strategic outpost that the city’s civil administration did not warrant attention or resources.

Though it came from a place of dismissiveness, this decision to procrastinate on the establishment of a local court would eventually lead to a degree of enfranchisement for native Tamils somewhat rare in 18th century imperial history. As Pondicherry began to grow and a spike in local disputes demanded the creation of a more active administration, the Sovereign Council would charter le Tribunal de la Chaudrie. The Chaudrie Court, as it is referred to in English secondary literature, would oversee cases of inheritance, marriage, property, and other disputes through indigenous legal interpretations. And as the colonial government recognized Frenchmen were not well equipped to rule on such cases, the court was made up of native Tamils. The importance of this decision can to be understated: a colonial government empowering indigenous justice is not a common sight in early 18th century global history. Though it might be nice to imagine otherwise, it is unlikely the move was informed by notions of racial equality or civic progressivism. Rather, as the docket of Indian civil cases had already grown dauntingly large, it became clear that local justices were clearly the best equipped to handle the cases quickly and without controversy. Thus the Tamils of Pondicherry experienced decades of devolved judicial administration, interrupted only briefly by English occupations of the territory, and this responsibility likely helped establish goodwill and ease tensions between European and indigenous inhabitants of the territory.

L’Apogee: Joseph Francois Dupleix and the Zenith of French Pondicherry

Such a laissez-faire approach, though its impact on intercommunal relations would be felt for years to come, was not to last. Under the leadership of Joseph Francois Dupleix, the political component of French rule in India took on an increasingly interventionist character. Though the transition from economic to political colonialism in South Asia is often viewed as a British phenomenon, there is bountiful evidence to suggest that the British learned this lesson from the French. Just as it would in the Raj, such an adjustment in imperial priorities during the Apogee, as Dupleix’s tenure is referred to by French historians, demanded increasing intervention in local customs by the colonial authorities. However, it should be stressed that Pondicherry did not figure prominently in Dupleix’s plans for a future French India, as he focused his attention on other cities on the subcontinent, and therefore he did not take pains to completely overhaul the intercommunal system at play in the territory. Further, whatever discontent was caused by increasing French intervention into local administrative affairs was likely offset by a convergence in cultural and religious values between Europeans and South Asians in the territory over decades of exposure and intermingling. By the arrival of Dupleix in the 1730s, there had already been profound social changes under previous administrators that had altered the social life of Pondicherry in a way that was amenable to positive intercommunal relations. Primary among these alterations were the religious transformations that preceded Dupleix resulting from the influx of French missionaries, who had flooded into l’Inde Fran?§aise in large numbers from its founding well into the 18th century.

This influx notwithstanding, the French had displayed remarkable levels of religious tolerance that had helped established goodwill with the local populations over the first half of the 18th century. The relative religious tolerance combined with prolific missionary activity in the early 1700s profoundly impacted Pondicherry society, converting large segments of the lower caste population into casteless Christians, whose new religious affiliation bound them to French culture and custom. This cultural and religious transformation had reverberations in the political relationship between the native populations and their European government. With the Catholic population steadily growing, particularly among marginalized castes, the authority of the Catholic church presented large segments of disenfranchised Tamils with the opportunity to appeal to a supremeand distantauthority in cases of discrimination and segregation. In both 1745 and 1761, lower caste Christians appealed to Rome to intervene on their behalf in caste disputes. Though the papal authorities expressed no sincere interest in pursuing a more equitable policygoing so far as to sanction discrimination in Catholic colonies in 1783the repeated instances of civil disobedience in Pondicherry were significant in the precedent they established if not in their actual effectiveness.

Extensive primary source evidence regarding the motivations behind the 1745 and 1761 unrests does not exist, but one can only extrapolate from their repetitive peaceful resolution that these interactions helped establish a relationship in which civil disobedience and peaceful acceptance of the results became normalized. It was the unique conditions of French Indiawhere caste, Catholicism, and benign neglect coexistedthat enabled this relationship to form over the 18th century. The relationship between the French and South Asians was further improved by the governing philosophy of Dupleix, who allowed for Tamils of all castes, religions and creeds to serve alongside Europeans in the colonial government. On the Eve of the Revolution: British Occupation and the Collapse of the Old Order In order to illustrate the unique character of the colonial project in Pondicherry, it is important to stress that much of these colonial governance strategies existed in direct contrast with the modus operandi of the neighboring British Raja contrast that is easily discernable due to the nature of the British occupation of Pondicherry in the 1780s. In the 1770s, the relatively liberal French colonial government had created a consultative Chamber of Indian Notablesa body that even further empowered segments of the Tamil population in Pondicherry. In 1778, when the British occupied Pondicherry during the Anglo-French war, this chamber was abolished as intercommunal relations were reconfigured along the British model.

This paper by no means intends to paint a picture of French colonial governance as the pinnacle of social progressivism and political liberalism. But such actions taken by the Raj during its brief occupation of Pondicherry at the very least illustrate the relative liberalism of the city’s colonial government and highlight the ways in which the conditions in the city were unique among other South Asian colonies. More than just sharpening the contrast between British and French colonial governing philosophies, the occupation of Pondicherry by the Raj had a lasting impact on life in the colony in that it undermined any sense of security that was still felt among its population. Above all of these currents running through life in Pondicherrythe uncommon cultural exchange, judicial independence of the locals, and unique interplay of faithsit would be this element of instability that would inform Pondicherry’s experience during the Revolution. Beginning in the 1760s, life in the colony would be rendered almost intolerable by a series of military skirmishes with English forces that would reduce the territory to only nominal independence. In 1763, Pondicherry was reduced to ruins by British forces in a conflict that ousted Dupleix and would end the period of L’Apogee. Then, during the hostilities surrounding the American Revolution, the British would occupy Pondicherry for 5 years from 1778 to 1783. Though it was returned to French sovereignty after the conclusion of the war, life in the city would never be the same. While French institutions abolished under British ruleincluding the Chamber of Notableswere restored, the entire city, and the French colonial project in South Asia more generally, had been irreparably traumatized. The total population of the city declined dramatically, with the number of European inhabitants declining even more precipitously. On the eve of the Revolution, only 260 French soldiers remained in the territory.

Government documents from the period show a desperate lack of resources on the part of the French military and government establishment. French primary sources from this period illustrate the dread and discontent among the Europeans who remained in the colony, with colonial administrators reflecting on their critical and unhappy position and disastrous circumstances in the aftermath of the British occupation. The secondary literature on this period draws similar conclusions from the evidence available, calling the conditions of poverty and disorganization nearly impossible to solve. It was in this environment that news of the French Revolution arrived in Pondicherry. Brought to the shores of South Asia by the French vessel La Bienvenue, news of the events in France were met with unease by the European population in particular. Complaints from the period declare that the incomplete and vague stories emanating from France had thrown the colony into the greatest worry, and the Europeans waited with great impatience for news of what sort of kingdom or state would emerge at the end of the rebellion.

Why Corporate Governance is Important in Financial Industry Finance Essay Essay

Corporate governance is most often viewed as both the structure and the relationships which determine corporate direction and performance. The board of directors is typically central to corporate governance. Its relationship to the other primary participants, typically shareholders and management, is critical. Additional participants include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. Whereas the 20th century might be viewed as the age of management, the early 21st century is predicted to be more focused on governance. Both terms address control of corporations but governance has always required an examination of underlying purpose and legitimacy. (James McRitchie, 1999) Corporate governance is important for all organization not only today but has and will always be. However, it is specifically very important for the financial industry due to various reasons which will be discussed subsequently. The Organization for Economic Cooperation and Development (OECD) suggests sound corporate governance of financial institutions need to be in place in order for banking and financial supervision to operate effectively. Consequently, banking supervisors have a strong interest in ensuring that there is effective corporate governance at every bank. Supervisory experience underscores the necessity of having appropriate levels of accountability and managerial competence within each bank. Essentially, the effective supervision of the international banking system requires sound governance structures within each bank, especially with respect to multifunctional banks that operate on a transnational basis. A sound governance system can contribute to a collaborative working relationship between bank supervisors and management. The following are some of the factors that deem it necessary to have very good corporate governance in financial institutions: Financial firms are “opaque” in nature and gives rise to significant information asymmetries. This makes it difficult to assess management performance. Current deregulated nature of financial institutions have made the nature of the activities of employees and managers moved from traditional activities toward decision-making activities. This has created greater potential for risk and results not expected or desired by shareholders and other stakeholders. Governance is an activity in which communal benefits resultant from private supervisory in the finance industry plays a dominant role. Limitations such as on takeovers, ownership concentration, prudent supervision, etc. could weaken product market discipline. This could further lead to weakening of the private sector’s undertaking other governance functions. Financial firms hold equity stakes, grant credit and, hence, examine performance, which facilitates them to make a strong impact on governance of other institutions. Financial innovations potentiality weakens traditional governance processes. The role of banks is integral in any economy. They provide financing for commercial enterprises, access to payment systems and a host of a variety of retail financial services for the economy as a whole. Some banks even have a broader impact on the macro sector of the economy by facilitating the transmission of monetary policy by making credit and liquidity available in different market conditions. The integral role that banks play in the national economy is demonstrated by the almost universal practices of states in regulating the banking industry and providing, in many cases, a government safety net to compensate depositors when banks fail. Financial regulation is necessary because of the multiplier effect that banking activities have on the rest of the economy. The large number of stakeholders, whose economic well-being depends on the health of the banking sector, further depends on the appropriate regulatory practices and supervision. Indeed, in a healthy banking system, the supervisors and regulators themselves are stakeholders acting on behalf of society at large. The primary function is to develop substantive and other risk management procedures for financial institutions in which regulatory risk measures correspond to overall economic and operational risks faced by a bank. Accordingly, it is imperative that financial regulators ensure that banking and other financial institutions have strong governance structures, specially, in light of the pervasive changes in the nature and structure of both the banking industry and the regulation which governs them. In this respect, the role of legal issues is crucial for determining ways to improve corporate governance for financial institutions, such as, the enforceability of contracts, including those with service providers, clarifying governance roles of supervisors and senior management, ensuring that corporations operate in an environment that is free from corruption and bribery and laws/regulations, etc. aligning the interests of managers, employees and shareholders, all help to promote a strong business and legal environments that support corporate governance and related supervisory activities. Further, corporate governance is very important to financial institutions in the present context is post-crises situations. The financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements. When they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial companies. A number of weaknesses have been apparent. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone: information about exposures in a number of cases did not reach the board and even senior levels of management, while risk management was often activity rather than enterprise-based. These are board responsibilities. In other cases, boards had approved strategy but then did not establish suitable metrics to monitor its implementation. Company disclosures about foreseeable risk factors and about the systems in place for monitoring and managing risk have also left a lot to be desired even though this is a key element of the Principles. Accounting standards and regulatory requirements have also proved insufficient in some areas leading the relevant standard setters to undertake a review. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests.

Question – 02

Why do Islamic banks need to give special care to corporate governance and what advantages does it provide to them?

Answer – 02

Very little is written on governance structures in Islamic banking, despite the rapid growth of Islamic banks since the mid 1970s and their increasing presence on world financial markets. There are now over 180 financial institutions world-wide which adhere to Islamic banking and financing principles. These banks operate in 45 countries encompassing most of the Muslim world, along with Europe, North America and various offshore locations. Islamic financing increasingly is a market segment of interest of Western banks and the latest addition to the list of Islamic banks in October 1996 in the City Islamic Investment Bank, Bahrain a wholly owned subsidiary of Citicorp. Islamic banking represents a radical departure from conventional banking and from the viewpoint of corporate governance, it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements from the basis of Islamic financing. Due to the bank dealing in Riba, an Islamic bank cannot charge any fixed return in advance, but rather participates in the yield resulting from the use of funds. The depositors also share in the profits according to predetermined ratio, and are rewarded with profit returns for assuming risk. Unlike a conventional bank which is basically a borrower and lender of funds, an Islamic bank is essentially a partner with its depositors, on the one side, and also a partner with entrepreneurs, on the other side, when employing depositors’ funds in productive direct investment. These financial arrangements imply quite different stockholder relationships, and by corollary governance structures, from the conventional model since depositors have a direct financial stake in the bank’s investment and equity participations. In addition, the Islamic bank is subject to an additional layer of governance since the suitability of its investment and financing must be in strict conformity with Shari’ah and expectations of the Muslim community at large. Islamic financial institutions display key distinguishing features requiring special care when it comes to the corporate governance mechanisms. They are as follows: Stakeholders include large number of depositors and their deposits are not guaranteed. Islamic banks operate on the model of universal banking. This is very close to the deregulated banking system. Financial activities are spread over a large spectrum from the usual customary traditional finance. Islamic financial institutions holding equity would enable them to sit on various companies Board of Directors. Thereby they could influence corporate governance mechanisms of the latter. Corporate governance and ethical standards provides many an advantage to Islamic banks. If an Islamic financial institution practices very good corporate governance, it helps them to build a good and strong brand image. Through this good and strong brand image they are able to attract a higher customer base leading to higher and greater customer loyalty. Once they have captured the customers’ loyalty, there is greater commitment towards the employees. Once the employees are given greater commitment they become passionate and drive with a lot of creativity. Having large amounts of creativity in a very competitive and volatile environment can drive an organization to have immense competitive advantage.

Question – 03

Why do banks need to be regulated and supervised? What are the key tasks facing regulators for creating a level playing field for Islamic banks within a country’s overall regulatory framework that includes the operations of conventional banks?

Answer – 03

A logical first reason is that a strong and adaptable banking system helps the monetary authorities to carry out monetary policy, that is, to implement decisions about money supply and interest rates. In this sense, regulation is a “public good”, because everyone benefits from an effective monetary policy. A second more practical reason relates to the unique nature of the business of a bank. The business of a bank can for argument’s sake be reduced to, on the one hand, the taking of deposits from the public and, on the other hand, the lending of those same funds to others at a profit. The liabilities of banks, namely the deposits held on behalf of clients, are generally short term and certain in amount – the bank must repay the full amount from its resources. The assets of a bank, namely the loans made, are generally longer term in nature, but actually uncertain in value – the bank can never be sure that the debtor will repay the loan over the specified period. The nature of a bank’s business is therefore inherently highly risky, and poor decisions can easily lead to the demise of a bank and the loss of depositors’ funds. When this happens, often the confidence in the banking system is harmed, and, in order to avoid this, public funds are sometimes used to save an ailing bank. Either way, the cost of a bank failure to society as a whole is often higher than the private cost (that is, shareholder losses), which is a compelling reason for supervising banks to ensure that they are always prudently managed by competent, experienced and ethical individuals. Another reason why banks are usually regulated is the asymmetry of information – that is, the unequal availability of information to all interested parties. Depositors do not have sufficient information about the true risks that a particular bank faces, and whether the risk they take in placing their money with the bank is commensurate with the interest to be earned on the deposit. A final reason for the regulation and supervision of banks is to protect depositors against unscrupulous organizations that misrepresent themselves as banks and unlawfully collect “deposits” before absconding. All developed countries, and less developed countries, have a banking supervisory authority. Although the principles are largely the same, supervisory authorities may differ regarding their degree of autonomy, relationships with other financial regulators, and supervisory approaches or methods employed. Central Banks and Regulators could play a crucial role in the development of a framework for Shari’ah compliant monetary policy instruments to operate within a level-playing field. Supervisors are faced with a dual challenge. One hand, they promote financial diversification and consolidation to achieve market development and on the other side they have to position themselves to recognize new dimensions and new types of risks and encourage appropriate risk mitigation plans. Regulators need to practice flexibility and work with Islamic banks such as to become well acquainted with needs of the industry and subsequently develop successful and acceptable regulatory frameworks. Further, regulatory authorities and market participants should be very well-versed with the nature and implications of the rules adopted in jurisdictions where there are heavy constraints on Islamic finance operations. This would facilitate greater market discipline and no undue burden on the Islamic financial institutions. Therefore, regulatory and supervisory authorities operating in dual banking systems, i.e. conventional as well as Islamic, should be mindful of setting up regulatory frameworks, since they should be pragmatic and flexible in internationally accepted prudential and supervisory requirements. According to Shari’ah principles, Islamic banks cannot guarantee repayment of full amount of deposits, in Western countries requiring that deposits have to be returned in full. In Muslim countries separate regulations have been developed to allow banks to share the risk of loss on investments with their clients. The final solution was to structure a Mudharabah agreement whereby savings and deposit/investment accounts in such a manner that FSA was satisfied that the risk of loss of amount deposited by the depositors was minimal. Key features included a bank setting aside reserves earned from investment in special reserve accounts before the distributing of profits to the depositors. This reserve was further to be used to cover any losses that arose from investments. Another feature was allowing depositors decide if they wanted capital losses to be made good. A depositor complying with Shari’ah principles would not require such losses to be made good. The Islamic Financial Services Board (IFSB) was established with the aim to promote the development of a prudent and transparent Islamic financial services industry and provides guidance on the effective supervision and regulation of institutions offering Islamic financial products. The IFSB has produced international standards on capital adequacy and risk management for Islamic Financial Institutions, and has made progress in developing standards on corporate governance. These international standards are intended to assist regulators and supervisors in pursuing soundness, stability, and integrity in the world of Islamic finance.

What is Corporate Governance Finance Essay Essay

Ideally, a responsible corporate governance system would promote shareholder wealth, restrict managerial shirking, protect minority shareholders and minimize controlling shareholders’ misappropriation of private benefits of control In Mauritius, the country has also witness some scandals such as the Air Mauritius saga and this was subsequently followed by the National Pension Fund scandal. Following public outcries, Government took the bold decision to pass the appropriate legislation for parastatal bodies to comply with the Code of Good Governance The Code of Good Governance was published in 2004 following the work of a Committee set out under the chairmanship of Tim Taylor. Although it is code, it has been given legal backing by various enactments such as the Companies Act and the Financial Reporting Council Act.

1.2 Research Background

Government felt the need to require parastatal bodies to comply with the code in view that massive amount of fund are channeled to these organizations for delivering an effective and efficient service to the public. Any shortcoming on the part of these organizations results in the poor utilization of public fund which above all is subject to greater accountability and transparency and is scrutinized by Parliament. It should be pointed out the Director of Audit, has over the years, given unfavorable reports on these organizations and the major issues that keep on repeating are delays in the preparation of the financial statement and the submission of the Annual Report which have to be laid before Parliament, thus openly defying the concept of accountability and transparency. This shortcoming is a pure reflection of the state of corporate practices in those organizations

1.3 Research Problem

Although, Government has established the necessary framework for promoting good corporate governance in parastatal bodies, its implementation and consequently its resulting effects is taking time to materialize. This is substantiated by the fact that there has been only a marginal decrease in non compliance organizations as highlighted in the latest report of the Director of Audit (2011). In addition, the subject of compliance and performance of parastatal bodies is a regular subject of debate in both the parliament and in the Media. Presently there, 146 State Owned Enterprises (SOEs) in Mauritius. Some of them operates within the framework as set out by their respective Act of Parliament while other operates within the framework of the Companies Act.

1.4 Aim of the Study

The researcher’s aim is to investigate into the level and degree of good governance practices in parastatal bodies with a view to identify the cultural, organisational and individual changes and initiative that are required on the part of these organisations. In this respect the study will be carried out at the Mauritius Meat Authority and the Outer Island Development Corporation. The key features between the two organisations is that the MMA has all its operations carried out locally while the OIDC has all its operation being carried out in Agalega islands

1.5 Research Objectives

The objectives of this dissertation are set out below: To assess and evaluate respondents knowledge and awareness of the requirement of the Code of Good Corporate Governance To assess and evaluate the extent that it is being implemented in their respective organizations To identify the factors and conditions that are inhibiting the effective implementation of the Code To make recommendations for the furtherance of good corporate governance in parastatal bodies

1.6 Research Questions

In order to meet the research objectives, the following research questions will be addressed in this study: To what extent respondents are aware about the right and obligations of the Chairman, CEOS, the Board and Secretary as required by the Code? Does the organization have the appropriate framework for implementing good corporate governance? What factors and conditions are inhibiting the effective implementation of the Code

1.7 Significance of the study

It expected that the outcomes of this research will provide practical solutions to the problems presently faced by parastatal bodies in furthering good corporate governance in particular training of board members, setting of audit committees, redefining the role of the internal audit, etc

1.8 Structure of the dissertation

The dissertation report will be organized into 5 chapters. The areas and topics to be covered under each one are summarized below- CHAPTER 1: – INTRODUCTION Chapter 1 states the problem statement, aim and objectives of the research. It gives a brief introduction of the subject under study and the significance of the dissertation. CHAPTER 2: – LITERATURE REVIEW Chapter 2 deals with the literature review on the subject of good corporate governance CHAPTER 3: – RESEARCH METHODOLOGY Chapter 3deals with the methodology used to carry out the survey It describes the objectives as well as the techniques that will be used during the various stages of the research CHAPTER 4: – ANALYSIS OF FINDINGS Chapter 4 deals with the analysis of data. The findings and inference drawn from the analysis will be fully elaborated and these will pave the way for drawing the appropriate conclusions and for making practical recommendations CHAPTER 5: RECOMMENDATIONS AND CONCLUSION Chapter 5 contains the recommendations and conclusions that have been reached based on the results of the survey

2.0 Literature Review

2.1 ntroduction

A number of recent corporate scandals are tainted by fraud. New regulations, as well as recommendations of corporate governance codes intend to reduce fraud and lawsuits have been introduced For example, the Sarbanes-Oxley Act of 2002 resulted in major changes to compliance practices of listed companies in the USA requiring executive, boards of directors and external auditors to undertake measures to implement greater accountability, responsibility and transparency of financial reporting. The main advantages are that good-governed firms are less liable to fraud and lawsuits

2.2 What is corporate governance? Theoretical considerations

Corporate governance is a very general phrase, denoting, as the Cadbury Report (1992), says, “the system by which companies are directed and controlled.” It is concerned with structures and the allocation of responsibilities within companies. More specifically, discussions on corporate governance have concentrated on the relations between the directors and managers of the corporation and other parties. Corporate governance is also concerned with the way in which corporations are governed and in particular the relationship between the management of a company and its shareholders. This focus in corporate governance has continued to underlie the provisions of subsequent corporate governance reports in the UK, including Greenbury Report (1995), Hampel Report (1998), Turnbull Report (1999), Higgs (2003), and Smith Report (2003). The OECD (1999) hints at a wider network of relationships, while maintaining the emphasis on the relationship between shareholder and director, defining corporate governance as: A set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives Shleifer and Vishny (1997) propose a broad definition of corporate governance: corporate governance concerns the ways in which suppliers of funds and the corporations themselves ensure returns on investment. This definition is based on agency theory and the principal-agent relationship, which posits that the delegation of management responsibilities by the principal to the agent creates problems of adverse selection and moral hazard that result in agency costs: Using a similar approach, Picou and Rubach (2006) define corporate governance as the construction of rules, practices, and incentives to align effectively the interests of the agents (boards and managers) with those of the principals (capital suppliers). Kyereboah-Coleman and Biekpe (2006) view the set of legal protections (company laws, stock exchange listing rules, and accounting standards) as a way to both shape and be shaped by the system of corporate governance mechanisms in place An entrepreneur, or a manager, raises funds from investors either to put them to productive use or to cash out his holding in the firm. The financiers need the manager’s specialized human capital to generate returns on their funds. The manager needs the financiers’ funds, since he either does not have enough capital of his own to invest . According to Shleifer and Vishny (1997 the agency problem in this context refers to the difficulties financiers have in assuring that their funds are not expropriated or wasted on unattractive projects In order to minimize these agency costs, a good corporate governance system should provide some kind of legal protection for the rights of both large and small investors Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently. The introduction of other stakeholders raises the question of where exactly the shareholders’ interests rank in terms of directors’ priorities, notwithstanding the emphasis subsequently placed on the primacy of shareholders’ interests in what the OECD perceives as good corporate governance. The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises There are many views on the scope and perspective of good corporate governance .One view assumes that the corporation serves purely as an agency for wealth-maximization for all concerned. The shareholders’ interests are assumed to be synonymous with those of the company (“objectives that are in the interests of the company and shareholders”) and the role and interests of stakeholders are narrowly defined in terms of economic activity (“wealth, jobs, and the sustainability of financially sound enterprises”). Another view is stakeholders are carefully defined in close legal terms: only rights protected by law – whether through contract or by statute – need be respected. Wider, non-statutory or non-contractual relationships are not considered in this framework Some authors have also pointed that corporate governance cannot be dealt with in an abstract model, as it is a product of hierarchal, cultural, and political systems. Also, any model or a governance structure must entail the four basic ingredients namely: accountability, independence, transparency, and integrity. It is evident that these components are interdependent and cannot be isolated or separated. Separation of ownership and control Corporate governance refers to internal and external monitoring mechanisms that have an impact on the decision of managers in the context of separation of ownership and control. Shleifer and Vishny (1997) illustrate corporate governance as how to make sure managers do not shirk or steal capital from the firm or make bad investments. Berle and Means (1932) were of the view that the separation of ownership and control constitutes agency problems between managers and the suppliers of capital Suppliers of capital want to know how managers take care of their money and maximize shareholder wealth and how to prevent them from consuming perks, such as expenses in favor of managers that do not necessarily maximizes shareholders wealth. Jensen and Meckling (1976) consider the firm as a nexus of contracts in which the conflicting objectives of managers and shareholders (and other participants) are brought in equilibrium within a framework of contractual relationships. Within this setting, Macey (1998) establishes the need for corporate governance principles because of the incomplete nature of corporate contracts and the need to control managerial shirking and to control agency costs. Several mechanisms can be used to overcome the problems associated with separation of ownership and control: alignment of shareholders’ interest with managerial interests (compensation plans, stock options, bonus schemes); board monitoring by large shareholders and lenders; legal protection of (minority) shareholders from managerial expropriation through shareholder rights and the market for corporate control as an external device. Practices of good corporate governance Durnev and Kim (2005) analyzed potential determinants of CG practices. They investigated how certain attributes of firms influence their choice of CG practices and how they interact with the legal environment in which they operate. Their theoretical model yields three predictions confirmed by their empirical evidence: The three main attributes that make firms adopt good CG practices are their growth opportunities, their need for external funding, both debt and equity, and their concentration of ownership. The market value of firms increases with good CG practices. The adoption of good CG practices is most relevant in countries where investor legal protection is poor. Anand et al. (2006) empirically examined the adoption of recommended CG guidelines in Canada and found an increasing voluntary adoption and convergence of good CG practices over time. Their results suggest that the presence of a majority shareholder or an executive block holder is negatively associated with good CG practices Legalizing good corporate governance A number of recent corporate scandals are tainted by fraud. New regulations, as well as recommendations of corporate governance codes intend to reduce fraud and lawsuits in the future. For example, the Sarbanes-Oxley Act of 2002 resulted in major changes to compliance practices of listed companies in the USA requiring executive, boards of directors and external auditors to undertake measures to implement greater accountability, responsibility and transparency of financial reporting. The main device is that good-governed firms are less liable to fraud and lawsuits. The main focus of regulators and corporate governance reforms is the constitution and duties of audit committees in order to reduce financial accounting frauds. The International Federation of Accountants (IFAC) recommends that firms should have an independent audit committee that operates independently of management, have financial experience, meet regularly, and review the integrity of financial reports. Corporate governance is concerned with the way in which corporations are governed and in particular in the United Kingdom the relationship between the management of a company and its shareholders. The introduction of other stakeholders raises the question of where exactly the shareholders’ interests rank in terms of directors’ priorities, notwithstanding the emphasis subsequently placed on the primacy of shareholders’ interests in what the OECD perceives as good corporate governance. The OECD to some extent answers this question, in its remarks on the role of stakeholders:

The corporate governance framework should recognise the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

2.3 Need for good corporate governance.

Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently. The introduction of other stakeholders raises the question of where exactly the shareholders’ interests rank in terms of directors’ priorities, notwithstanding the emphasis subsequently placed on the primacy of shareholders’ interests in what the OECD perceives as good corporate governance. The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises There are many views on the scope and perspective of good corporate governance .One view assumes that the corporation serves purely as an agency for wealth-maximization for all concerned. The shareholders’ interests are assumed to be synonymous with those of the company (“objectives that are in the interests of the company and shareholders”) and the role and interests of stakeholders are narrowly defined in terms of economic activity (“wealth, jobs, and the sustainability of financially sound enterprises”).

2.4 Separation of ownership and control

Corporate governance refers to internal and external monitoring mechanisms that have an impact on the decision of managers in the context of separation of ownership and control. Shleifer and Vishny (1997) illustrate corporate governance as how to make sure managers do not shirk or steal capital from the firm or make bad investments. The separation of ownership and control (Berle and Means, 1932) constitutes agency problems between managers and the suppliers of capital Suppliers of capital want to know how managers take care of their money and maximize shareholder wealth and how to prevent them from consuming perks, such as expenses in favor of managers that do not necessarily maximizes shareholders wealth. Jensen and Meckling (1976) consider the firm as a nexus of contracts in which the conflicting objectives of managers and shareholders (and other participants) are brought in equilibrium within a framework of contractual relationships. Within this setting, Macey (1998) establishes the need for corporate governance principles because of the incomplete nature of corporate contracts and the need to control managerial shirking and to control agency costs. Several mechanisms can be used to overcome the problems associated with separation of ownership and control: alignment of shareholders’ interest with managerial interests (compensation plans, stock options, bonus schemes); board monitoring by large shareholders and lenders; legal protection of (minority) shareholders from managerial expropriation through shareholder rights and the market for corporate control as an external device.

2.5 Composition of the Board

The board composition decision allocates board seats over the set of potential board members, which include the stakeholder representatives as well as professional managers and board members. Boards are normally elected by the owners, but in some countries other stakeholders (employees, governments) also appoint board members. Owners delegate many decision rights concerning corporate values to the board. In companies that separate ownership and control this implies that managers play a pivotal role in creating or changing corporate value systems, and that the composition of the board is a key determinant of this process. Legally, board members share a joint responsibility to all shareholders (and creditors), but organizational theorists (Jones and Goldberg, 1982; Evan and Freeman) have argued that board members may also serve as agents for specific stakeholders, a dual role, which may sometimes conflict with their fiduciary duty. For example, employee representatives (which are mandatory in countries like Germany (Charkham, 1994)) may take a special interest in labor conditions.

2.6 The corporate value function

Corporate values can be defined, in a classical sense, as beliefs that help companies make choices among available means and ends (Rockeach, 1973), or more technically, as the weight which corporate decision makers attach to alternative goals when making their decisions. Alternative goals could be accounting profitability, stock returns, customer value, market share, company growth, employee satisfaction, supplier surplus or measures of corporate social performance (like image, environmental impact, tax revenue). They could be present or future values of these variables to capture a trade off between the short and the long run (Fama and Jensen, 1985). They can be probabilistic to capture different attitudes towards risk (Sitkin and Pablo, 1992Effectively, they can even encompass the weight, which managers attach to their personal goals (Jensen and Meckling, 1976). For example, if the managers of a company value empire building, and if this inclination is not checked by shareholders or stakeholders, growth and diversification goals may effectively belong to the corporate value system.and they may be even more important in private corporations. Finally, the board will need to take non-owner stakeholder considerations into account, even if shareholder value remains the overall goal. And again one way to do this is to include representatives from the relevant constituencies.

2.7 Implicit contracts with stakeholders

There is a need for companies to internalize stakeholder concerns is to increase their creditability and trustworthiness through implicit contracts based on reputation (Fombrun and Shanley, 1990; Kay, 1995) and corporate culture (Kreps, 1990) or socialization (Scott and Lane, 2000). Reputation may be built by consistent behavior over a long period of time and facilitated by communication (Fombrun, 1996). Following Kreps (1990), a reputation for honesty is a valuable asset which will be lost if the company is not truthful, which implies an economic incentive to honesty. Commitments to employee satisfaction, customer value and creditor protection may also be a valuable, self-sustainable assets. Arrow (1973), Sen (1993) and others have argued that ethical codes may improve economic efficiency when other social institutions fail to achieve optimal results, in particular, the classic market failures when the firm has access to unique information (Arrow, 1973).

2.8 Corporate Governance and Performance

The shareholder model, the ultimate goal of the firm is to maximize shareholder wealth and corporate governance has to be seen as a mechanism to realize this goal. As a consequence, supporters of this concept expect a positive relationship between corporate governance and firm performance. According to Maher and Andersson, 2002, firms that do not adopt cost-minimizing corporate governance mechanisms are less efficient and will be taken over or replaced in the long-run Conventional wisdom on corporate governance predicts that good corporate governance increases firm valuation and firm performance and reduces the cost of capital and financial fraud. A widely accepted statement is that good corporate governance results in a lower cost of capital. One explanation is that good corporate governance will lead to lower firm risk and subsequently to a lower cost of capital. Using various measures of corporate governance, researchers have examined the extent to which corporate governance environment is related to the firm’s financial performance (Gompers et al., 2003; Bebchuck et al., 2009; Klein et al., 2005; Gupta et al., 2006; Brown and Caylor, 2006) Generally, their results tend to show that good corporate governance practices, as measured by different variables, are positively associated with financial performance although the associations are not very strong. Among the indicators that are significantly related to firm financial performance are: All directors attend at least 75 percent of board meetings Board members are elected annually; Board guidelines are in each proxy statement; The firm has either no poison pill or else a shareholder-approved one; Re-pricing did not occur within the last three years; Average options granted in the last three years as a percentage of basic shares outstanding did not exceed 3 percent; Directors are subject to stock ownership guidelines (Bebchuck et al., 2009; Brown and Caylor, 2006); and The board is more than 50 percent controlled by independent outside directors (Black et al., 2006). According to the shareholder model, the ultimate goal of the firm is to maximize shareholder wealth and corporate governance has to be seen as a mechanism to realize this goal. As a consequence, supporters of this concept expect a positive relationship between corporate governance and firm performance. Firms that do not adopt cost-minimizing corporate governance mechanisms are less efficient and will be taken over or replaced in the long-run (Maher and Andersson, 2002). Conventional wisdom on corporate governance predicts that good corporate governance increases firm valuation and firm performance and reduces the cost of capital and financial fraud. Corporate governance ratings From the literature review, corporate governance ratings seemed to concentrate on the following general categories: board characteristics; ownership structure; compensation plans; anti-takeover devices; financial disclosure; internal controls; and director education (Allen et al., 2004). Corporate governance cannot be dealt with in an abstract model, as it is a product of hierarchal, cultural, and political systems. Also, any model or a governance structure must entail the four basic ingredients namely: accountability, independence, transparency, and integrity. It is evident that these components are interdependent and cannot be isolated or separated. Corporate governance refers to internal and external monitoring mechanisms that have an impact on the decision of managers in the context of separation of ownership and control. Shleifer and Vishny (1997) illustrate corporate governance as how to make sure managers do not shirk or steal capital from the firm or make bad investments. The separation of ownership and control (Berle and Means, 1932) constitutes agency problems between managers and the suppliers of capital. Suppliers of capital want to know how managers take care of their money and maximize shareholder wealth and how to prevent them from consuming perks, such as expenses in favor of managers that do not necessarily maximizes shareholders wealth. Jensen and Meckling (1976) consider the firm as a nexus of contracts in which the conflicting objectives of managers and shareholders (and other participants) are brought in equilibrium within a framework of contractual relationships. Within this setting, Macey (1998) establishes the need for corporate governance principles because of the incomplete nature of corporate contracts and the need to control managerial shirking and to control agency costs. Several mechanisms can be used to overcome the problems associated with separation of ownership and control: alignment of shareholders’ interest with managerial interests (compensation plans, stock options, bonus schemes); board monitoring by large shareholders and lenders; legal protection of (minority) shareholders from managerial expropriation through shareholder rights and the market for corporate control as an external device. Within the paradigm of the shareholder model, the ultimate goal of the firm is to maximize shareholder wealth and corporate governance has to be seen as a mechanism to realize this goal. As a consequence, supporters of this concept expect a positive relationship between corporate governance and firm performance. Firms that do not adopt cost-minimizing corporate governance mechanisms are less efficient and will be taken over or replaced in the long-run (Maher and Andersson, 2002). Most organizations that sell corporate governance ratings refer to this relationship. Larcker et al. (2004) find that corporate governance variables have weak explanatory power for explaining management decisions or firm valuation. Further, they find some unexpected, opposite relationships, such as: firms with large boards, busy directors and anti-takeover provisions are showing better debt ratings. Structural indicators of corporate governance used in empirical research and rating agencies tend to have limited ability to explain managerial behavior and firm valuation. A widely accepted statement is that good corporate governance results in a lower cost of capital. One explanation is that good corporate governance will lead to lower firm risk and subsequently to a lower cost of capital. Although historic financial performance can be factored in predicting future performance but it is definitely not the only factor that must be counted. This necessitated the need for a financial scorecard that gives the investor a guideline on the financial status of an enterprise. As the twenty first century economy can be characterized as a dynamic one, a way to measure adaptability to sustained customer satisfaction is becoming indispensable. Leadership that is courageous, willing to adapt to changing economic environment and equipped with common-sense can be considered the choice of tomorrow’s leading companies Methods of assessment During the last few years, several rating systems have been proposed and implemented. The most recognized of which are the four rating services that provide metrics that rank the quality of the firm’s directors. These rating services are: Institutional Shareholder Services (ISS); Standard and Poor (S&P); Governance Metric International (GMI); and The Corporate Library (TCL). These systems are based what is known as the Scoreboard. The main objectives of the scoreboard system are:to facilitate the work of analysts and investors though a systematic and easy overview of all relevant issues of good governance;enable companies to easily assess the reach and the quality of their own governance situation; and allow to set minimum scores by investors for governance as part of general investment policy. Category 1: Board structure and accountability The pure fact that the board and executives structure exists on the scoreboard rating system is in itself a positive sign as it ensures some kind of improvements and adjustments after each report card is issued for the company. The following topics are considered in this category include: independency of board members; board size; board attendance; chairman/CEO separation; directors serving on boards of other companies; composition of audit committees, nominating committees and compensation committees; annual election of the board of directors; disclosure of corporate governance guidelines and code of conducts and ethics; share ownership of executive directors. Board structure refers mainly to the composition of the board of directors. Rating agencies evaluate firms with more independent (no affiliated) board members higher than firms with less independent board members. Independent board members may be more critical towards ethical and fraud issues, as well as restructuring activities than dependent members. However, it is questionable whether more independent board members would improve firm performance (Bhagat and Jefferis, 2002). For example: Former non-executive directors have the knowledge and expertise in the company and business environment that enable them to advise incumbent management. Other topics in this field are disclosure of corporate governance guidelines and codes of conducts and ethics. More disclosure means a higher ranking. However, a firm that discloses information about corporate governance or codes of conduct and ethics (stated preferences) will not necessary act in favor of these guidelines (revealed preferences). Further, the number of meetings and attendance is counted. A high attendance means that the firm is better governed. However, not the number of meetings and attendance is important, but the content of discussion and items on the agenda are indicators of good corporate governance. Category 2: Executive and director compensation In this category, the following topics are rated: level and form of compensation; performance evaluation criteria; independence and integrity of compensation setting process; shareholder approval of compensation policy; pension plans; option-repricing policy; directors and executives are subject to stock ownership guidelines; presence of company loans to employees. Fixed and variable compensation policies and practices that reward management with little regard to for shareholder interest indicate weak, ineffective board. When long-term compensation is tie to shareholder returns then it is considered good governance. Recently, many CEOs’ salaries exceeded the one million dollars barrier and their compensation plans include bonus and variable pays in form of stocks and stock options. Such conditions are a recipe for bad governance. This category is not examined thoroughly in any of the four systems. In our view, a compensation plan should be related to the corporate performance and performance of peer companies. Category 3: Audit The crucial issue in this category is the audit committee (Yakhou and Dorweiler, 2005). Who appoints it, its mandate, and its authority? Are the members of the audit committee independent and do they discuss financial issues on a regular base with the external auditor? Category 4: Shareholder rights and takeover practice In this category, the following issues are considered: one-share, one vote system; a simple majority vote of shareholders is required to amend the charter or bylaws; shareholders may call special meetings; shareholders may act by written consent; presence of a majority shareholder and staggered board, Interdependences among variables Agrawal and Knoeber (1996) showed the importance of interrelations among different control mechanisms. They examined different corporate control mechanisms, such as insider shareholdings, monitoring by large shareholdings and lenders, independency of boards, external labor market, and the market for corporate control. They mentioned that when alternatives exist, the use of one corporate control mechanism may depend on the use of others. Therefore, empirical estimates of the influence that single corporate control mechanisms have on firm performance will likely be misleading. If variables are endogenous (because of interdependences), the results are not reliable. And that is exactly what happens with the use of a single corporate governance index. Bhagat and Jefferis (2002) argue that takeover defenses, corporate performance, corporate ownership structure are interrelated and should be studied by simultaneous equations. Using a simple index ignores interdependences among different corporate governance mechanisms.

2.9 Corporate Governance in Mauritius

Mauritius has chosen as its economic model a version of the free market economy. The driving force of the model is investment by the Private Sector. Government sets the rules, provides the physical and social infrastructures and it is the private sector that creates wealth employment. A system of corporate governance is required to keep a balance between the interest of the outside investors, the entrepreneurs and the management. Furthermore, there are other stakeholders, employees, customers, suppliers, banks and society in general whose interest has to be taken into account. Governance has been an issue in Mauritius and elsewhere for many years. Mauritius has institutions, some guaranteed by the constitution and others by legislation and rules, which act watchdog against corruption and malpractices to ensure implementation of good governance principles. These include: The National Audit Office and an effective system of internal and external audit for all ministers/departments. The Independent Commission Against corruption (ICAC) which acts as a watchdog against corruption and wrong doings. The Ombudsman Office with large constitutional power to enquire into administrative malpractices. A free and highly critical media gives a large and detailed coverage of all government activities. Public Procurement Laws ensure that there is fair, equitable and transparent mechanism in the allocation of contracts funded by public funds. The newly created Office of Public sector Governance (under the aegis of the Prime Minister’s Office) has a vision of making Mauritian Public Sector organisations become model of good corporate governance. Its mission is to inculcate, advocate and promote good corporate governance practices in the public sector. There is the “Code of Ethics for Public Officers” issued by the Ministry of Civil Service and Administrative Reforms. However, it was in 2001 that Sushil Kushiram, the then Minister of Finance, Economic Development and Financial Services, decided that as part of the modernization of the economy, it was time to create a legal and institutional framework that would give an up o tune and efficient system of governance. A number of initiatives were put in place. The committee of CG was formed, the listing rules of SEM were put in place, a new Companies Act was pressed and International Accounting Standard was introduced. This series continued and we had the Financial Reporting Act which amongst other things provided for the setting up of the National Committee on CG-NCCG, the service commission was set up and in 2009, the Mauritius Institute of Directors was launched. The NCCG, as its first task, prepared the code of Corporate Governance for Mauritius which was launched in 2003.The code is on a “Comply or explain basis” and in 2009, the NCCG commissioned a survey on the state of compliance was high in private companies at 83% but very low in State Owned Enterprises (SOEs) at 44%.SOEs are the stewards of public money and it is very desirable thus levels of governance be improved in these organizations. The NCCG is currently working with the National Audit office and the office for the public sector Governance to find out how this can be improved, Taylor (2011)

2.10 Conclusion

Corporate governance remains a complex and dynamic issue as it deals with cultural, political, technological, and market variations. From the above literature review, it can be noted that the debates on corporate governance is still an evolving issue and that research are being carried out on the various facets of corporate governance.

3.0 RESEARCH METHODOLOGY.

3.1 Introduction

The previous chapter was concerned with a review of current literature to identify the dimensions and to develop a survey questionnaire to collect the primary data to answer the research question and to achieve the aim of this study. This chapter explains in details the methodology used in gathering the necessary information to conduct the research study. It highlights the sources of data, the survey design, and the data analysis method employed. The steps which are necessary to conduct a research have also been highlighted. The overall aims were to plan and carry out the study in a systematic manner so as to achieve a high degree of reliability and validity of the findings.

3.2 Purpose of the Research

As mentioned in Chapter 1, this study is on assessing the implementation of good corporate governance in parastatal bodies. The finding of the research will make a significant contribution toward improving corporate governance in parastatal bodies in particular at the Outer Island Development Corporation and the Mauritius Meat Authority.

3.3 Scope of the Research

The aim of this research is to enhance the good practice of corporate governance in parastatal bodies..

3.4 Research Philosophy

The research philosophy is considered to be critical to any empirical research because the research philosophy dictates the type or research method and strategy to be adopted. Saunders et al (2009) argue that positivism and interpretivism are the two dominant research philosophies in business management. They argue that the interpretivism is about the way people make sense of the world whereas the positivism is into the form of a universal law. For this study an interpretivism philosophy has been adopted because it is considered to be the most appropriate one to answer the research question of the study as it involves the interpretation of a situation involving the human element.

3.5 Research Approach

According to Saunder, Lewis and Thornhill (2007), research can be either inductive or deductive. The inductivism is based on the development of a theory after analysis of the primary data. The benefit of this approach, it takes a holistic view of the situation before the formulation of the theory. However, for the purpose of this study it has been considered most appropriate to adopt a deductive approach where the research started with testing the existing theories. The deductivism is about testing the theories and is more appropriate for the natural sciences. The benefits of this approach for this study are to make use of theories to explain a situation, the cause effect relationship and the data collected is of a quantitative nature.

3.6 Type of Research Approaches

There are three type of research. These are detailed below Exploratory research Exploratory research is a type of research conducted when a problem has been clearly defined. It helps determining the best research design, selection of subjects, data collection method. Secondary research is therefore based on exploratory research. Hence, research that is conducted with an intention to explore is called exploratory research. Descriptive research Descriptive research describes data and characteristics about the population or phenomenon being studied. If the purpose of the research is to describe, then the study is considered to be descriptive in nature. It basically gives the researcher a choice of perspective, terms, levels, aspects, concepts, as well as to observe, register, systemize, classify and interpret. Explanatory research The desire to know ‘why’ to explain is the purpose of explanatory research. Explanatory research is applied when the issue is already known and has a description of it. Furthermore it builds on exploratory and descriptive research and goes on to identify the reasons for something that occurs. Explanatory research looks for causes and reasons.

3.7 Research Methods

The two research methods identified in the literature are the qualitative and quantitative research methods. Both have its merits and limitations but the choice between the two depends on the purpose of the study and the type and the availability of information. The qualitative method is commonly used to measure views, attitudes, feelings and opinions. It has been criticized for its subjectivity in the way data is interpreted. The interpretation is based on the researcher and the instrument used. This study has used the quantitative approach for the analysis of the data. All the dimensions forming part of the study are measured in quantitative terms. The quantitative approach supports the deductive strategy as the theory is placed at the beginning of the research and is tested through set of questions. This approach has been favored for its objectivity.

3.8 Research Strategy

The research strategy presents a plan of how the research question has been answered. There are several strategies that can be adopted to generate the primary data. For this study, a survey method has been adopted because it allows the gathering of a large volume of data in a short time. According to Saunders, Lewis and Thornhill (2007), a research could be explanatory, exploratory and descriptive. This research is both an exploratory (i.e. review of the literature) and explanatory (analysis of data and making conclusion there from) research

3.9 The Research Process

The research process will be completed in six steps are mentioned as under: Identifying the research problem Defining the research problem Determining how to conduct the research or the method Collecting research data before analyzing Interpreting the data Presenting the results

3.10 Data Access

For this study, the sources of data have been primary data to answer the research questions. In the initial phase of the research, the literature review was carried in journals, publications and internet that reflect the topic of the study. The primary data was generated through the self administered questionnaire to trainees.

3.11 Census/ Sample

The population consists of 160 parastatal bodies. However, survey deals with only two parastatal bodies. The rational for choosing the two parastatal bodies is that one has over the years a very good track record, i.e. it has an unqualified audit report. It prepares its account on time as well as its Annual Reports, whereas the other one has been adversely reported by the auditors and there are delays in preparation of its account and Annual Report.

3.13 Questionnaire Design

The questions in the questionnaires (refer to appendix) are designed and adapted on research papers and articles on the QFD models. The questionnaire is based on three factors. The questionnaire was designed in such a way to capture the respondents’ needs and their perception of the quality of the training. Respondents were given a series of statements where they will be required to opine on the degree of agreement and disagreement on each of the statement on a rating scale of 1 to 5 as set out below: 1- Disagree 2- Disagree 3- Neutral 4- Agree 5- Strongly agree

3.14 Pre-Testing

A pre-testing was done prior to launching a full-scale survey. It is important to identify flaws and weaknesses towards improving the questionnaire to ensure the reliability and validity. Even minor mistakes are important as it can cause great changes in meaning and interpretation. A pre-testing was carried out on 6 potential respondents including 2 experts. Suggestion from the respondents were sought which helped to refining the questionnaire. Initially, some questions were removed, as the respondents stated that the questionnaire was too lengthy and time consuming. The questionnaire has been reviewed and amended accordingly prior to launching full-scale survey.

3.15 Data Collection Method

From information available at the MSB , the questionnaires were forwarded by both the internet and by post to the 60 trainees A total of 42 questionnaires were received but only 39 were found valid and reliable. These has been used to conduct the analysis

3.16 Data Analysis

All the completed questionnaire were screened to establish their consistency, reliability, validity, accuracy, uniformity and completeness. The data collected during the survey was computed using the statistical package SPSS 16.0. The data analysis tools used were the mean, standard deviation and the excel for graph presentation.

3.17 Ethical Consideration

The research was conducted by taking into account all ethical issues as there is the involvement of human beings. The risk of injury or health hazard was not an issue as no equipment was used. The confidentiality and anonymity of respondents were assured. They were not asked to relate their names or addresses. The questionnaire carried a covering letter to inform them about the purpose of the research. The approval letter from management was forwarded together with the questionnaire to ensure transparency. In the covering letter it was well stated that the purpose of this survey was for the presentation of a dissertation for a degree award. Moreover, they were informed that, no part of the research will be published without the authorization from management. The respondents act in their free will and there was no personal influence or pressure has been used.

3.18 Conclusion

This chapter has given a detailed description of the methodology used for this research to generate the primary data to answer the research question of this study. The purpose of the research was defined and research methods used (exploratory, explanatory and descriptive). The research strategy has been a survey. The method used is the quantitative to measure the dimensions in quantitative terms. The instrument used was a closed ended questionnaire where respondents were required to express their level of agreement or disagreement with the statements. The next chapter will present the findings of the analysis of the primary data and a discussion will follow on the findings of the study.

Trace and Evaluate the Various Theories of Corporate Governance Finance Essay Essay

Corporate governance in itself is the aggregate of two distinct disciplines of corporation and governance. Corporations that were once viewed as the sole property of its owners refers to the group of individuals intentionally working together to achieve certain goal or the set of goals organized in a specific legal framework. These corporations presently require to be incorporated through certain procedures and work in the broader context of state. Parties responsible for the smooth functioning of these corporations range from shareholders’ to stakeholders. However governance refers to the ways of direction and control .It encompass the ways in which the corporations’ works are being organized and defined. These ways include the rules, regulations and standards set by corporations and government for ensuring governance. Together corporate governance refers to the process, structure and information used for directing and overseeing the management of corporation Development of the subject traces back to 18th and 19th century when the word corporation actually was considered as a body responsible for ensuring public interests .It was managed by a single owner who himself was responsible for all operations and outcomes of this unincorporated business. Running of business raised questions relating to ownership, management and effect on general public of this act. This time period lead to the emergence of certain philosophers and thinkers who gave their insights on the control of the business either in the form of debates or corporate theories. Corporate theories answer the questions of ownership and management of corporations with regard to its formation. They relate to the issues of shareholders relations with the company and the body entitled to own and control corporation. There by in direct link with the subjects of business efficiency and survival. Theories date back to 18th century with their existence in regard to settle certain altercations over the ownership and control of businesses. Broadly corporate theories can be divided in to the disciplines of political, stewardship, financial and stakeholder models that started and ended its debate on being a state property. Every theory presented thereby took its roots from the economic, social and political circumstances characterizing the situation. These theories are:

Political theories

Emergence of corporate theories started from the mid of 18th century in which corporations were created by special legislations for public benefits ranging from churches to schools. These corporations were rarely business corporations in the contemporary sense with state dictating their powers and purpose. It was then that concession and fiction theory were presented defining corporations as state property and making the role of state central to its ownership and control. By making the role of state central to corporations, corporations became a mere vehicle to follow the rules and regulations laid down by the state and to work in the best interest of the state by following the laws and working for state benefit. There by creating a corporate governance environment based on trust and commitment towards benefiting the state. State control actually led to the development of business sector through strengthening the economic makeup whereby people were not fighting for ownership purposes but for giving more and better results to state .More over it was actually this period that led to industrial revolution with advancements in textile, roads, railways along with advancements in the standards of living. Although these theories were replaced by a number of new thoughts but at last ended up to the present century with the same concept with which the debate was started: “state control” i.e. asset partitioning theory.

Financial theories

With the introduction of SEC and other legal regulatory bodies in the 19th century responsible for the incorporation of the corporations, owners became more interested in forming the companies that were actually monitored by its people; appointed as managers. These managers were appointed as people responsible for running and increasing the profits of the company without any interest or share in the corporation. In essence to that aggregate theory was presented which stressed on giving preferences to the shareholders with the sole purpose of corporation being increasing the shareholders’ investment. Besides this Berle supported the claim of aggregate theory by claiming the sole purpose of the company is to maximize shareholders wealth. However, these theories ignore the social, economic and psychological impacts of the corporations. In a way or other they fail to fulfill any safety, belongingness, esteem and self-actualization needs of workers. These passive owners had no interest in the corporation and the workers. Another viewpoint was presented by Lord Deming who said that the court must examine the corporation as a ‘single economic unit’ rather than a strict legal form. With the sole purpose of corporation being profit maximization economic theory supported shareholders but it assumed that the firm has perfect certainty about its activities which somehow is not possible in today’s world because of intense competition, societal and environmental challenges. Financial model was further supported by the nexus of contract theory and agency cost theory which stressed on the contractual and principal agent relationships between the shareholders and the managers. These theories however failed to build the trust environment with in the corporation as agents (managers) were treated as costs to be monitored and controlled for following set policies. The main problem with agency theory being the introduction of methods to reduce agency cost, any manager could be fired on the grounds of increased cost .It was during this decade that the owners got power and the economy suffered in shape of various scandals that resulted in part due to the enhanced self-interest of the owners .However this could also be viewed as a positive remark as this mistrust led to the introduction of various corporate governance committees and acts e.g. OECD plus an awareness towards ethics and CSR

Stewardship model

These theories entitle managers stewardship of the corporation. These theories actually emerged due to the increased awareness and investment by the managerial class in developments such as infrastructure along with the emergence of wealthy middle class and relatively risk free investment due to low competitions. Corporate realism theory viewed managers as the authorities responsible for defining the company’s objectives with the company being a real entity in itself. However it didn’t define the limitations of this power plus managers exercised economic power that could prove harmful for society. Besides this with no authoritative head, managers are not accountable to either their owners or state and the financial bankruptcy could easily result but the positive point being the recognition of the corporation as a real entity separate from its owners. In addition to it the transaction cost theory defined corporation as a body in continuous transaction to the environment/market with resulting costs. These theories view managers as good stewards of corporation that can be trusted to work diligently to attain high levels of corporate profits. While the board serving as advisors the corporations is being controlled other way. These theories put the role of shareholders as passive owners with their function limited to the contribution of equity capital. However this could prove drastic as being trained runners of the corporation the managers can easily draft frauds. Along with this if managers are authorized to exercise enormous power in the corporation the elements of respect and accountability will be completely lost. Hence these theories contribute to corporate governance by way of increasing the interest of the managers in the business. This increased interest may or may not lead to the development of the company but for sure raise the standard of living of these middle class managers.

Stakeholders’ model

Stakeholders model focus on value creation. These theories put corporation’s self-interest ahead of its shareholders by declaring that the corporation is entirely dependent on stakeholders’ resources to create value. Hence firm should exist to work in the interest of these stakeholders’ including public, government, customers, investors and the like. Stakeholder efficiency argument was presented when the shareholder supremacy saw a decline in 1980s.These theories actually focused on strengthening the economy through focusing on creating efficiency. Being the wider sector in front the workers not only lead to enhance the financial sector of the corporation but also enhance performance management of the corporation as the workers get more alert in satisfying the needs of the wider community and providing quality products. Moreover, it follows the utilitarian principle of greatest good for greatest number of people hence fulfilling the core principle of corporate governance by satisfying the legal obligation to all stakeholders and smoothing the relationships between company’s management, its shareholders, board and other stakeholders. Corporations in a sense became more socially responsible. All these theories in way or other contributed towards creating a good corporate governance environment as is evident in today’s prosperous and accountable businesses around e.g. Nike, Addidas, Siemens to name a few. These theories make it evident that corporate governance must adapt to important relationships with uncertain cause-effect influences on matters that range from survival to sustainability. Outcomes of financial theories in the shape of scandals helped in directing and controlling organizational activities by establishing rules, structures and procedures for decision making i.e. a major purpose of corporate governance. Corporate governance is a tool for socio economic development holding balance between economic, social, individual and communal goals as it leads to the minimization of malpractice and fraud. This prevention in my view brought about by control of business by an authoritative body such as state .State control lead to the efficient use of resources by aligning the interests of individuals, corporations and society. It was the creation of this good corporate governance environment that improved the communication within and across border, lead to open and transparent systems along with enhanced performance and better decision making. This good corporate governance environment strengthened the economy, lead to socio economic development and technological advancement of microchip era and raised the standard of living.

The Necessity of Corporate Governance Systems Essay

Corporate governance is a necessary, important and comprehensive overview of what corporate and their directors must do in order to bring the largest benefit for the corporate as it include the structures, processes, culture and systems that engender the successful of the organization. It concerns the relationships among the Board of Director, the management team, the shareholders and stakeholders. As time passes, good corporate governance is a compulsory requirement in today’s corporate world by every stakeholder groups as it has become an important key for a corporate to success. Lacking of efficiency in corporate governance may cause the corporate to collapse. While, by having good corporate governance it may help to reduce the risk of corporate collapse happen, enhance the performance of the corporations yet it creates an environment that motive the manager to maximize the return on investment. Besides, it also helps to ensure long term productivity grows and increase the investor confidence. Therefore, transparency and accountability are the most important element in order to have good corporate governance. This is because it would help the organization to have a clear and creditable decision making. However, there are various theory have affected while developing the corporate governance. The main theories that are greatly influence the corporate governance concept and reformation is the agency theory, transaction cost and stakeholder theory.

2.0 AGENCY THEORY

Agency theory is defined as “the relationship between the principals, such as shareholders and agents such as the company executives and managers” (Abdullah.H, 2009). This theory is usually being use to examine the relationship between the principle and agent in order to determine how the agent (director or managers) archive to maximize the return to shareholders, while at the same time the managers/ director himself/herself does not own the share. However, this theory may not be practical for the director or managers when manage the corporate in real life. This is because; suppose that the director being appointed by the principle is being expected to act and make decisions in the best of principal’s interest and full fill all the their needs. However, the director/managers has his/her own objective too, as they might not be working in the best interest or act partially in the best interest of principle. They might be misuse his/her power and committing “moral hazards” such as shirking duties to enjoy leisure merely to maximize their personal wealth, benefits, self-interest and reputation as they do now own the share of the corporate. Besides, conflict may be occurring between the agent and principle due to different interest being focus. The agent being appointed as director might be only focusing on short term benefit which may bring benefit himself/herself the most, while at the same time the shareholders are more focusing on long term benefit which may bring best interest to the company. Enron scandal is a real life that show that the management’s goals conflict with those shareholders. In this case, the auditor manipulated the financial arrangements among themselves by using the special purpose entities (SPEs) transferred fund to some of the Enron’s director and conceal the large loses that Enron is facing. Ultimately, announced bankrupted and leaving Enron shareholders without anything. However, the agency problem can never be perfectly solved due to divergent behavior of manager but in order to predict such problem happen again, agency theory suggests that a system needs to be carry out in order ensure that the agents are working on the best interest of the principle that they are representing. Jensen (1983) suggested that the principal-agent risk-bearing mechanism must design efficiently and must be monitor though the nexus of organizations and contract. Besides, from Enron case it also highlighted that there is a need to set up an independent non-executive director to monitor the action of executive director in order to ensure that the director is working on the best interest of the shareholder. In short, agency theory has greatly influence the reformation if corporate governance as it is an important set of propositions in the organizational economic discipline so that the employees are responsible for their task or decision has been made.

3.0 TRANSACTION COST THEORY

Besides, transaction cost theory has also great influence in the reformation of corporate governance. The exposition of transaction cost theory is where the organization has become larger and became the market leader; in effect it turns to control the market by determining the allocation of resources. The organization started try to control the production, price movement in the market and the markets coordinate transaction. Therefore, the organization tent to extent their organization by vertical integration either forward or backward integration in order to create a boundary so that the organization could control and determine the price and production of a product. Besides, the organization could also reduce risk as the organization could avoid the risks that there is an increase of price in future yet could avoid the risk of dealing prices with supplier or retailer. Due to there is imperfect market condition, as there is too many buyers and limited resources, transaction cost economic has incurred. According to the theory of transaction cost economics it assumes that some individual are opportunistic, some of the time, at the same time it also stated that mangers are opportunistic by nature. (Soloman, 2007). Due to there is limited resources, there will be an increasing of the market value of a product/ services, and this has created an opportunity for the managers and other economic agent to practice “bounded rationality”. According to Simon, bounded rationality defined as the behavior that was intentionally rational but only limitedly so. The managers will tend to satisfies him/her own self interest rather than maximize the company profit. They would try as hard as to organize transactions for their best interest. At the same time, arm’s length transaction will also occur during the negotiation. This is because the seller and buyers or the supplier and retailer will be acting in their own self interest during the negotiation session as there are limited resources/ substitute and this give an opportunity that bribery and “under table” problem occur. Therefore, in order to avoid these problem occur, the organization should have stuff rotation once a year in order to avoid there is close relationship between the manager and buyers. At the same time, transparent, integrity and openness should be practice among the organization, so that the information are open to disclose and the information give in financial statement is disclosing with honest and completeness and there is no hidden information. Besides, if there is related party transition occurs it has to be stated clearly in the account to avoid any misunderstanding.

4.0 STAKEHOLDER THEORY

The role of organization in the society, the impact of organization on the employees and environment has being highly focused and discusses over decade. Society nowadays has become more concern about organization business activity, the effect to environment and how they treat the stakeholder unethically. Therefore, stakeholder theory has been involved and has great influences on the reformation of corporate governance. The main concept of stakeholder theory is that the organization should concern on more sectors of society rather then only focus on the returns for organization and their shareholder. Stakeholder theory normally being viewed as a conceptual cocktail, as it emphasizes on the dependency of many different groups on the organization’s management, not only the shareholders but also the employees, customers, suppliers, creditors and the general public. There are too many problems rise in the real environment, as the organization nowadays are acting in so unethically way and they are only concern about their self-interest or to increase the organization profitability. It highlighted that the social problem today’s are getting serious as the organization nowadays are acting so irresponsibility; they do not border about the damages and effect that they bring to the environment. Besides, in order to maximize him/her self interest, it causes fraud and cheating problem occur. Due to the organization didn’t act ethically as connected with what they are doing and unable to fulfill their basic responsibilities to their stakeholder. Therefore, corporate social responsibility (CSR) has fallen into as it relies on the separation between the business, social and ethic which the stakeholder theory intends to solve. It has become main issue for the organization, where the organization are being so encourage by the society to improve the way the they treat the stakeholder and the environment , yet it will influence the views of the society to the organization. However a major problem has arise, is there a measurement to measure the stakeholder welfare? Yet, there is no standard accounting measurement or market value measure that could measure the past or current organization decision brings effect on the stakeholder welfare. Besides, when an organization takes into account of all the goals and involved themselves in the stakeholder activities, often there will be bring a higher cost to the organization yet will decrease the business performance. The manager may become ineffective to achieve the company goal in order to achieve “win-win situation” to the society and organization. At the same time, from the China economy performance shows that the society becomes worst when the organization is focusing on social goals.(Kim, 2010) Indeed, the stakeholder theory stated that the organizations should act responsibility and take into account of the stakeholder welfare as it the moral things to do so but it is very questionable to do so. As it is not a well-defined theory and it doesn’t show that by taking into account of the stakeholder welfare it may increase the organization’s stock and operating performance yet there is no prove that maximizing organization profit will bring harms to the society. Therefore, stakeholder theory is very questionable and it depends on the organization how to practice it.

5.0 CONCLUSION

In short, having good corporate governance is a major key in order for an organization to success. The corporate governance conceptual or theory is just providing a guideline for the organization in order to have improvement or being self-regulation. So that the organization would provide better services, bring less harm to the society and protect the environment. However, it maybe not practical and there is difficulty to practice in the real world as many organizations may not follow as what the theory said. An organization may fail in social goal but success in business, but an organization may not be success in social goal yet fail in business. At the same time, the major problem is there are lack of a framework, rules and regulation that every organization has to follow as what corporate governance said. Therefore, it is depends on how organization to practice it in order bring less harm to the society and protect the environment.

The Corporate Governance in the Companies Act, 2013 Essay

The corporate Governance in the Companies Act, 2013 The Companies Act, 2013 reinforces and redresses laws pertaining to companies[1]. The Companies Act, 2013 was passed by the parliament and received Presidential assent on 29th August, 2013. Some of the provisions of the Companies Act, 2013 were notified in the Official Gazette on 30th August, 2013. Many of the provisions of the Companies Act, 1956 continue to be in force[2]. Corporate Governance is an important aspect in the Companies Act, 2013. Under the Corporate Governance, the Board of Director’s report will include disclosures involving payment of directors, service contracts and stock options details[3]. The Companies Act, 1956 existed for more than 50 years and now it is proving to be inefficient when it comes to handling challenges of a growing industry and complexities involving stakeholder interests. Therefore, the new act improves the status on governance and raises the responsibility on the Board of Directors and the Management. There are six crucial aspects to improve corporate governance. First, there must be an increase in the reporting framework. Secondly, there must be a requirement for higher auditor accountability. Thirdly, there must be availability for easier restructuring. Fourth, there must be emphasis on investor protection. Fifth, there must be an increase in the wider directors and management responsibility and there must be an inclusive CSR agenda[4]. Under the Reporting Framework[5], subsidiary, associate and joint venture companies are explained according to section 2(6) and 2(87)[6]. If the holding company owns more than 50% of the total share capital or exercises control over the board, it becomes a subsidiary company while a holding company owns at least 20% of the total share takes business decisions under an agreement, the company becomes an associate company. Also under this scheme, exemptions to a company are given only when the holding of a company is outside India. Under section 129[7], there is a compulsory requirement for “consolidated financial statement” (CFS). CFS is the combination in the financial statements including assets of the parent company and its subsidiaries[8]. Every company has to prepare a CFS if it either has a subsidiary, associate or joint venture companies. However, when it comes to preparing a CFS, there is no exemption given. Under sections 130 and 131, there is a need for revision in the financial statement. Revision of financial statements is either made by the directors of the company when financial statements and the report made by the board contradict each other or voluntary restatement made by the board of directors for at least three years or can be made by the central government when it comes to fraudulent reporting or mismanagement in the financial statements[9]. This scheme also looks into the changes in the depreciation regulation mentioned under section 123(2) and schedule II. This includes useful life which is given preference over other standard compulsory rates. Useful life is generally defined as the time or the duration for which a particular item will be useful to business. When the meaning of useful life is taken, it should not be considered as to how long that item will last[10]. According to section 138 of the companies act, 2013[11]; it requires mandatory internal audit and reports on internal financial controls. It requires adequacy and efficiency of the internal financial controls in the reports made by the directors or the auditors only for listed entities and must be included only in auditor’s reports for other listed entities. It requires internal audit to be made companies which are listed and all other public limited companies. The second scheme for the corporate governance is higher auditor accountability which allows maximum twenty audits for an individual partner of a firm[12]. An individual auditor is eligible for at least five years and for partnership audit firms, it involves another five years. The auditor will also be given a five year cooling time after completion of the previous term. The new auditor cannot be related to the leaving auditor in terms of an associate or a network firm. According to the rules of the draft, the pre-commencement term will apply for calculating the balance validity of the present auditor’s occupancy. A large number of restrictions regarding non-audit services can be supplied by the auditors. Most of the non-audit services have to be approved by the board before itself[13]. Responsibility of the auditor’s report mainly depends on what the auditor report will cover. The auditor’s report will have to cover six sections. First, it must contain observations, comments involving financial transactions. Second, they must cover qualification or the remark regarding the maintenance of the accounts. Third, whether there is adequacy of internal financial control systems and its efficiency. Fourth, it must contain the disclosure of pending litigation on the financial post. Fifth, it must explain the provisions made for foreseeable losses on a long term and sixth it must cover the delays in depositing money into the IEPF. IEPF is the Investor Education and Protection Fund which was established under section 205C of the Companies Act, 1956[14]. Under the second scheme, there must be a report made to the Audit Committee when it is related to fraud committed by the companies own employees against it and must be made to the central government if done frequently. The third scheme involves easier restructuring which refers to rationalizing multilayered structures[15]. Under these structures, it allows at most only two investment SPV company levels which are allowed between the investor company and the invested company. SPV is the special purpose vehicle which is a subsidiary of a company that tries to separate the risk from the parent company by looking after the assets and its liabilities through a separate balance sheet.[16]Exemptions can be given while acquiring overseas subsidiary with multilayers which is allowed by the foreign law and when multi-layering is considered by any law in force. Under this scheme, there is a need for simplifying procedures when it involves a merger which is provided under section 232 of the companies act, 2013[17]. The National Company Law Tribunal (NCLT) can approve the schemes made by the restructuring companies instead of the High Court (HC)[18]. The Auditor must ratify that the accounting treatment mentioned in the scheme made by these companies comply with the accounting standard for either the listed, unlisted or private companies. Also, for the merger to take place there must be consent from the majority of the members. The merger of the company is allowed to be under the unlisted companies only when there is an exit opportunity that is given to the public shareholders and when the valuation is done accordingly by the SEBI guidelines. Section 236 of the companies act, 2013 requires all shareholders owning more than 90% of the share capital will have to declare the intent to buy-out the balance equity shares. Under section 247, exit assessment can be done by the “Registered Valuer”. The registered valuer is to issue mechanisms for the valuation of several assets and liabilities involving the company[19]. Under section 234, cross border merger is allowed which involves merger of an Indian company with a foreign company. Here, the central government has to make rules for consultation with the RBI and it is important that the merger is approved by the NCLT and the consideration can be made only in cash or depository receipts[20]. Under section 233 of the Companies Act, 2013; the merger between two companies without the approval of the NCLT is possible when there are two or smaller companies or when there is a holding and completely owned subsidiary or when there is prescribed types of companies. There must be a declaration of the solvency that has to be submitted. The consent has to be given by members who own more than 90% of the shares owned. Section 66 of the companies act requires that no share capital reduction will be allowed for a company that has overdue deposit. It does not allow buy- back within a year nor does it allow buy-back after three years from rectifying any defaults on deposits or term loans. In case of buy-back or capital reduction, there is a requirement of the auditor’s certificate involving conditions from either section 66 or 68. Buy-back is the repurchase of outstanding shares by a company in order to reduce the number of shares in the market and companies will attempt to buy-back in order to increase the value of the shares[21]. The fourth scheme is on emphasizing investor protection[22]. Section 188 of the Companies Act, 2013 permits transactions to be made in an ordinary course of business on arm’s length transactional basis. Arm’s length transaction is a transaction where there is no control over one another[23]. It is a transaction that is made between the seller and the buyer who act independently and are in no relation with each other[24]. Here there is no requirement to get the approval of the central government. Approval will be required from the board only when there are no transactions made in the ordinary course or is not at arm’s length. A special resolution is required for non- arm’s length transactions and if they are not in the ordinary courses where the share capital is greater than ten million or if the goods acquired, leasing of property transactions exceed 20% of the net worth or appointment to any office involving profits where the monthly payments is more than one lakh. Sections 125, 194 and 195 of the companies act, 2013 requires directors or the Key Managerial Personnel (KMP) to refrain from forward dealing or buying options in shares or debentures of a company. Here, Key Managerial Personnel are the employees of a company who have play as key players in the company and show great responsibility in the functioning of the company inclusive of protecting the interest of the stake holders[25]. Here, the forward deal is a transaction which includes the purchase or sale which comes with a settlement that will arise in the specified future[26]. Debentures hold no collateral and the only source of backing them is through the reputation of the issuer and buyers purchase debentures depending upon the issuer thinking that the issuer will not default on the repayment[27]. No employee or employer including the director and the KMPs having entry to information that is not public should be allowed to have insider trading relationships. Sections 241 to 246 of the Companies Act, 2013 specifies that members or the depositors have to declare to the tribunal if the company conducts have bias for their own interests. In case of fraudulent acts or any other wrongful acts, action suits can be filed on the company or its directors, the auditor or the audit firm and the advisor or the consultant. Only 10% of the members of the total number of members or 10% of the depositors of the total depositors or members who own more than 10% of the issued share capital or depositors who own more than 10% of the outstanding value of deposits are allowed to file an action suit. A company’s stocks owned by the shareholders that include both restricted shares as well as share blocks are the outstanding shares[28]. The Senior Fraud Investigation Officer (SFIO) is made a statutory body with important powers and under this scheme; the idea of fraud risk mitigation requires the compulsory establishment of mechanisms to directors or managers to report any kind of concerns. Under the next theme, it lays down mandatory management responsibility and wider director[29] where under section 149 of the companies act, 2013, there is stricter responsibility and accountability imposed by the code of professional conduct. A maximum of only five more years can be extended by another five years only through a special resolution. The directors can be held liable for acts with knowledge and is extractable from the board and only with his consent. Under this scheme, declaration of independence is compulsory every year and stock options are not permitted when there are fees and commissions made from profits. All independent directors must hold an annual meeting and no non-independent directors or KMP or senior management are allowed. Section 177 of the companies act, 2013[30] explains the composition of the audit committee. It is compulsory for the mentioned companies to constitute an audit committee and there should be more than three directors with the majority being independent directors. Both the chairperson as well as the independent directors must be well efficient in reading and understanding financial statements. Finally, the responsibilities given to the audit committee is to recommend appointment, payment of the auditors and monitor their independence and efficiency. Then, examine the financial statements and the auditor’s report, approve party transactions, undertake asset valuation, assess internal financial controls and risk management systems and finally supervise the use of funds through public offers. Section 134 explains the contents in the director’s report under which all companies require devised proper systems to ensure proper compliance with the laws made in India. Director’s report must also include taking proper and sufficient care for maintaining ample accounting records for protecting assets and preventing and identifying fraud and must include the development and implementation of a risk management policy. In the report, the specified and listed companies must express that the internal financial controls are laid and are functioning efficiently and that the performance evaluation of the board members have been carried out. The final theme included for the corporate governance in the companies act, 2013 is the inclusive CSR agenda[31]. The CSR agenda is the Corporate Social Responsibility which aims to help companies achieve in creating wealth jobs and answers to many challenges faced[32]. The CSR covers all companies if either the turnover is more than INR 10 billion or net worth is more than NR five billion or net profit is more than INR fifty million is fulfilled. The contribution made by the CSR is to be two percent of the average net profit before tax for three years. The contribution made will be listed under schedule VII. The board will appoint a three member CSR committee including an independent director where the committee will devise the CSR policy, recommend CSR activities and monitor CSR expenditure. There must be compulsory reporting on the CSR under section 135. When there is no requirement for companies to appoint independent contractors under section 149 but a company does go to the situation under section 135[33], then it becomes compulsory for the company to appoint an independent contractor. When there is a failure to spend, reasons have to be disclosed and penalties to be imposed for non-disclosures. The Companies Act, 2013 brings about the changes to the structure of the board of directors. The companies act, 2013 requires the board of directors to be differentiated into resident director, independent director and a woman director[34]. The Companies Act, 1956 did not specify that companies should appoint independent directors but under new provisions such as in clause 49 of the Listing Agreement is a document in which the company will sign when it is being listed on the stock exchange and it promises to follow the rules and regulations set by the stock exchange[35].


[1] Ministry Of Corporate Affairs – The Companies Act, https://www.mca.gov.in/MinistryV2/companiesact.html (last visited Nov 29, 2014). [2] Ibid. [3] Companies Act, 2013 2(4) part 2. [4]RAISING THE BAR ON GOVERNANCE – COMPANIES ACT, 2013, https://www.kpmg.com/IN/en/Documents/Companies_Act_2013_Raising_the_bar_on_Governance.pdf (last visited Nov 30, 2014). [5] Ibid. [6]Companies Act, 2013, 2. [7] Companies Act, 2013, 129. [8]Consolidated Financial Statements Definition | Investopedia, https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp (last visited Nov 30, 2014). [9] Supra n(4). [10] Useful Life Definition | Investopedia, https://www.investopedia.com/terms/u/usefullife.asp (last visited Nov 30, 2014). [11] Companies Act, 2013, 131. [12] Supra n(4). [13] Ibid. [14]Investor Education and Protection Fund – Archives – Spotlight: National Portal of India, https://www.archive.india.gov.in/spotlight/spotlight_archive.php?id=21 (last visited Dec 6, 2014). [15] Supra n(4). [16] SPV financial definition of SPV, https://financial-dictionary.thefreedictionary.com/SPV (last visited Dec 2, 2014). [17] Companies Act, 2013, 232. [18] Supra n(4). [19] Registered Valuers Under Companies Act, 2013, https://taxguru.in/company-law/registered-valuers-companies-act-2013.html (last visited Dec 2, 2014). [20] Supra n(4). [21]Buyback Definition | Investopedia, https://www.investopedia.com/terms/b/buyback.asp (last visited Dec 2, 2014). [22] Supra n(4). [23] Arm’s Length Legal Definition, https://www.duhaime.org/LegalDictionary/A/ArmsLength.aspx (last visited Dec 2, 2014). [24] Arm’s Length Transaction Definition | Investopedia, https://www.investopedia.com/terms/a/armslength.asp (last visited Dec 2, 2014). [25] Key Managerial Personnel – Companies act 2013, https://www.corporate-cases.com/2012/07/key-managerial-personnel.html (last visited Dec 2, 2014). [26] What is Forward Deal? definition and meaning, https://www.investorwords.com/2062/forward_deal.html (last visited Dec 2, 2014). [27] Debenture Definition | Investopedia, https://www.investopedia.com/terms/d/debenture.asp (last visited Dec 2, 2014). [28] Outstanding Shares Definition | Investopedia, https://www.investopedia.com/terms/o/outstandingshares.asp (last visited Dec 2, 2014). [29] Supra n(4). [30] Companies Act, 2013, 177. [31] Supra n(4). [32] European Commission – PRESS RELEASES – Press release – Corporate Social Responsibility: a new definition, a new agenda for action, https://europa.eu/rapid/press-release_MEMO-11-730_en.htm (last visited Dec 4, 2014). [33] Companies Act, 2013, 135. [34] Companies Act 2013: Greater Emphasis On Governance Through The Board And Board Processes – Corporate/Commercial Law – India, https://www.mondaq.com/india/x/319480/Corporate+Governance/Companies+Act+2013+Greater+Emphasis+On+Governance+Through+The+Board+And+Board+Processes (last visited Dec 6, 2014). [35]What is Listing Agreement? definition and meaning, https://www.investorwords.com/10199/Listing_Agreement.html (last visited Dec 5, 2014).

The Combined Code about Corporate Governance Essay

Corporate governance is the system or process by which companies are directed and controlled(Cadbury,1992,p.2) Good corporate governance should contribute to better company performance by helping a board discharge its duties in the best interests of shareholders; if it is ignored, the consequence may well be vulnerability or poor performance. Good governance should facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term. The Combined Code on Corporate Governance (‘the Code’) is published by the Financial Reporting Council (FRC) to support these outcomes and promote confidence in corporate reporting and governance The Code is not a firm set of rules. Rather, it is a guide to the components of good board practice distilled from consultation and widespread experience over many years. While it is expected that companies will comply wholly or substantially with its provisions, it is recognised that noncompliance may be justified in particular circumstances if good governance can be achieved by other means. A condition of noncompliance is that the reasons for it should be explained to shareholders, who may wish to discuss the position with the company and whose voting intentions may be influenced as a result. This ‘comply or explain’ approach has been in operation since the Code’s beginnings in 1992 and the flexibility it offers is valued by company boards and by investors in pursuing better corporate governance. The Listing Rules require UK companies listed on the Main Market of theLondon Stock Exchange to describe in the annual report and accounts their corporate governance from two points of view, the first dealinggenerally with their adherence to the Code’s main principles, and the second dealing specifically with non-compliance with any of the Code’s provisions. The descriptions together should give shareholders a clear and comprehensive picture of a company’s governance arrangements in relation to the Code as a criterion of good practice The reason for selecting this combined code on corporate governance as topic of research is that researcher is having a past experience of working with the organization and knows about the prows and corns of the business.

1.2 INITIAL REVIEW OF THE LITERATURE:

Corporate governance is an institutional arrangement by which suppliers of finance to corporations assure themselves of getting a proper return on their investment(shleifer and vishney ,1997,p.737). Transparency and accountability are the most significant elements of good corporate governance.A  This includes: the timely provision by companies of good quality information; a clear and credible company decision-making process; shareholders giving proper consideration to the information provided and making A considered judgements. The origins of the current Revised Combined Code stem from the report of the Committee on the Financial Aspects of Corporate Governance (the Cadbury Report, 1992) to which was attached a Code of Best Practice. This was further developed through a series of reworkings including those of the Greenbury Committee, which made recommendations on executive pay and a Code of Best Practice. It was then decided that previous governance recommendations should be reviewed and brought together in a single code. The work was carried out under the chairmanship of Sir Ronald Hampel and culminated in the Final Report: Committee on Corporate Governance with its Combined Code on Corporate Governance in 1998.In 2002 Derek Higgs was asked to report on the role and effectiveness of non-executive directors. His report, published in January 2003, suggested amendments to the Combined Code. At the same time a committee under Sir Robert Smith reported on guidance for audit committees. The revised Combined Code which was issued in July 2003 by the Financial Reporting Council (FRC) took into account both reports. The 2003 Code has been updated at regular intervals since then, most recently in June 2008. The 2008 edition applies to accounting periods beginning on or after 29 June 2008.The FRC undertakes regular reviews of the impact and continues to work effectively.According to Christine mallin(2007),

Main principles of the Combined Code are:

Directors

1 The board Every company should be headed by an effective board which is collectievely responsble for the success of the company 2 Chairman and chief executive There should be a clear divission of responsbilities at the head of the company between the running of the board and the executive responsbility for running of the companys business No one individual should comprise imaginative powers of decision. 3 Board balance and independence The board should include a balance of executive and nonexecutive directors (and, in pariticular, independent nonexecutive directors) such that no individual or small group of individuals can dominate the boards decision taking 4 Appointments to the board There should be a formal, rigarous and translucent procedure for the appointment of new directors to the board 5 Information and professional development The board should be supplied in a timely manner with information in a form and of a quality apropriate to enable it to discharge its duteis. All directors should be given induction on joining the board and should regularly update and refresh their skills and knowledge. 6 Performance evaluation The board should undertake a formal and thorough annual evaluation of its own performannce and that of its commitees and individual directors 7 Re-election All directors should be submited for re-election at regular intervals, subject to continued satisfactory performance. The board should certify designed and progresive refreshing of the board

B Remuneration

1 The level and make-up of remmuneration Levels of remuneration should be sufficcient to attract, retain and motivate directors of the quality required to run the companys succesfully, but a company should avoid paying more than is neccessary for this purpose. A significant proportion of directors remmuneration should be structured so as to link rewards to corporate and individual performance 2 Procedure There should be a formal and transparent procedure for developing policy on executive remmuneration and for fixing the remmuneration packages of individual directors. No directors should be involved in deciding his or her own remmuneration

C Accountability and audit

1 Financial reporting(Andrew tylecote and francsca visintin,2008) The board should present a balanced and understandable asessment of the companys position and prospects 2 Internal control The board should maintain a sound system of intarnal control to safeguard shareholders investment and the companys assets 3 Audit committee and auditors The board should establish formal and translucent arrangements for considering how they should apply the financial reporting and internal control principals and for maintainning an appropriate relationship with the companys auditors

D Relations with shareholders

1 Dialogue with institutional shareholders There should be a discussion with shareholders based on the mutual understanding of objectives. The board as a whole has a responsbility for ensurring that a satisfactory dialogue with shareholders takes place. 2 Constructive use of AGM The board should use the AGM to communicate with investors and to encourage their participation.

E Institutional shareholders

1 Dialogue with companies Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives. 2 Evaluation of governance disclosures When evaluating a companies governannce arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relavant factors drawn to their atenttion. 3 Shareholder voting Institutional shareholders have a responsbility to make considered use of their votes.

1.3 RESEARCH PURPOSE:

The research purpose is to analyse the impact of failures and weaknesses in corporate governance on the financial crisis, including risk management systemsand executive salaries. It concludes that the financial crisis can be to an significant level attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to preserve against excessive risk taking in a number of financial services companies. Accounting principles and regulatory requirements have also proved insufficient in some areas. Last but not least, remuneration systems have in a number of cases not been closely connected to the strategy and risk craving of the company and its longer term interests. The article also suggests that the importance of qualified board oversight and robust risk management is not limited to financial institutions. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries. The current turmoil suggests a need for the OECD to re-examine the adequacy of its corporate governance principles in these key areas.( FINANCIAL MARKET TRENDS – ISSN 1995-2864 – A© OECD 2008) All the UK reports and codes, including the 2003 Combined Code (the Code), have taken the ‘comply or explain’ approach. Although only quoted companies (those with a full London Stock Exchange listing) are obliged to report how they apply the Code principles and whether they comply with the Code provisions and, where they do not, explain their departures from them. The Code has had a noticeable wider impact on governance of organisations outside the commercial corporate sector where parallel codes of governance are emerging. For a quoted company reporting on its application of the Code is one of its continuing obligations under the Listing Rules published by the UK Listing Authority (UKLA). If quoted companies ignore the Code, then there will be penalties under the Listing rules. The Code is divided into main principles, supporting principles and provisions. For both main principles and supporting principles a company has to state how it applies those principles. In relation to the Code provisions a company has to state whether they comply with the provisions or – where they do not – give an explanation. It is the Code provisions that contain the detail on matters such as separation of the role of chairman and chief executive, the ratio of non-executive directors and the composition of the main board committees. The first principle of the Code states that: “Every company should be headed by an effective board”?. The board’s effectiveness is widely regarded as a prerequisite for sustained corporate success. The quality and effectiveness of directors determines the quality and effectiveness of the board. Formal processes for appointment, induction and development should be adopted. Effectiveness of the board and its individual members has to be assessed. The Code states that no one individual should have unfettered powers of decision-making. It sets out how this can be avoided by splitting the roles of chairman and chief executive, and specifies what the role of the chairman should be. The Code offers valuable guidance on the ratio of non-executive to executive directors and definitions of independence.( https://www.frc.org.uk/corporate/combinedcode.cfm) .

1.4 OBJECTIVES:

In the process of research the researcher has to find out the answers for the following questions:

To understand how critical governance issues in a established organisation can be solved with optimized corporate governance

To formulate an effective method of governing corporates especially at the time of crisis

To find out how the country can overcome financial crisis in future with good corporate governance practice?

1.5 SCOPE OF THE STUDY:

This research has some limits as the researcher has constraints of time and money. The information provided is of sample size. The research is done in India where the economy is developing. So the results vary from Indian developing economy and any other developed economy. The research is mainly concentrated in Hyderabad city so the research result would vary from that of any other city like Chennai, Mumbai, etc. The research is based on the information provided by SATYAM COMPUTERS on how it was bankrupted during financial crisis due to lack of proper governanace and financial reporting. So the result at the end of research will be useful for other companies inorder to benefit from the combined code of corporate governance.

1.6 RESEARCH STRATEGY:

‘Research’ the word basically means search for information or data compilation. It mostly means to gather information concerning firm question and to build up a certain approach for that question. If there was no word called research all the scientific and social projects would have been resulted in deduction work and approximated data The approach the researcher would be using in this research is qualitative with an inductive outlook. Qualitative research is concerned with the growth of explanations, in order to know the reasons and motivations of social occurrence (Hussey & Huseey 1997). The motto being to know the world in which we live in, by taking into account individual opinions, experiences and feelings According to Saunders et al (2003), in an inductive way; theory will pursue data rather than vice versa in the deductive approach. Induction emphasizes on attaining an understanding of the meanings human attach to events, it approves in the gathering of qualitative data and at last, unlike deduction which is a highly prearranged process, induction is a more supple structure which permits changes as and when the research progresses

. Case study :

A case study is research method to investigate the phenomenon of topic of research. In this case the researcher is looking at SATYAM COMPUTER SERVICES LTD.which is an IT firm and Collapse of SATYAM COMPUTERS at Indian Stock markets due to lack of proper corporate governance practice. In this research the researcher want to apply the combined code of corporate governance to other companies like SATYAM

Grounded theory :

Grounded theory is a procedure that is designed to generate a theory around the central theme of data. So this theory would help the researcher in doing his research.

1.7 DATA COLLECTION:

Secondary Data

The information that is previously available is called secondary information. It is using the study previously undertaken in a particular field so that one does not replicate it while conducting primary research. It is also very cost efficient and useful as this being a student project there are no funds at our disposal to conduct the research. It offers handiness and is easily accessible on databases and also on company websites (Wright and Crimp, 2000). It will be used widely while reviewing the literature on the recommended topic. Some of the secondary sources that will be used are academic journals like HR journals. Also with online information coming to age EBSCO Host and Keynote research reports and statistics issued by the Corporate Governance team in India will also be used. Finally, a number of accomplished authors have written ample on this subject, these books will also be consulted. The secondary research will be used effectively to provide a good background to instigate a good primary research.

Primary Data

Primary data will be collected through a sequence of recorded semi-structured interviews conducted by the researcher. Prior official authorization would be taken from those who would be interviewed. Semi-structured interviews are interviews where the interviewer would ask a set of questions to interviewees; these questions differ from person to person depending on that person’s position with respect to the research. Though the general topic remains the same, some questions will be omitted and some others might be counting depending on who is being interviewed. For example, questions to an HR manager would revolve around how to cope with abrasion and the management view on how they are looking at this problem, on the other hand in an interview with the software engineers.

1.8 DATA ANALYSIS:

The researcher understands all the data he would obtain would be based on meaning expressed through words, this kind of information is called qualitative data. The process of qualitative study involves the development of information categories, allocating units of the original information to apt categories and developing and trying hypotheses to produce well grounded conclusions. Now it is enormously important that all this rich data must be transformed to information the researcher could Comprehend and manage Integrate related data from different transcripts and notes Identify key themes or patterns from them to further explorationDevelop or test hypothesis based on these apparent patterns Draw and verify conclusions (Saunders et al, 2003) This researcher would be using Computer Assisted Qualitative Data Analysis Software, (CAQDAS), to assist him with making good sense of the data, there are various softwares available which would help the researcher, quantifying qualitative information if need be, thus making a hypothesis and arriving at a conclusion.

1.9 VALIDITY AND RELIABILITY:

The question of reliability and validity of information in any research study is of highest importance. Unless the data obtained is consistent, correct conclusions cannot be drawn. In this study, the validity and reliability issues are associated to access to the correct people for interviews and to get the right information out of them. This will mean that the information should be balanced and unprejudiced. Interviewees should be able to provide the correct information linked to the subject without personal opinions or beliefs. This problem can be conquered to a certain extent by asking to the point questions and framing them up in such a way that eliminates capacity for bias. For this purpose, the researcher will spend quality time on designing good interview questions and will get them checked from a senior supervisor. The issue of access to the correct people for the data is also very important since the research will be based on the answers obtained from them. Another matter related to validity and reliability is the use of precise sources for obtaining secondary data. The researcher should gain contact to the right books, journals and articles for getting quality information about the topic. For this purpose, scholarly articles will be obtained from the library and internet.

2.0 ACCESS:

The researcher was providential to have some significant contacts in the IT sector back in Hyderabad, India, this was partly because he was born and brought up there and also because he comes from a strong IT background both academic and professional. The researcher intends to conduct semi structured interviews with the following people. Ms. Pratyusha gogineni (HR Team, Satyam computers, Hyd) Mr. suma Kirthi (HR Team, Satyam computers, Hyd ) Mr. Madhusudhan Santhana (Project Manager, Satyam computers, Hyd) Mr. Prabhakar Govind (Analyst, Satyam computers, Hyd) Mrs. Amruta devi ( MD, HND Recruitment, Hyd ) The first member, Nandini is an old friend who had grown quite fast in the organization has been handling recruitments since the past four years; through her the researcher had got in contact with Mr. Kirthi, a senior HR manager who also assured official access. To get the other side of the story, the researcher has got in contact with Mr Santhana, who also is the researcher’s ex manager who used to work with SATYAM computers before. Mr Santhana promised he will do all he could to aid me with this research. Mr Govind along with a few of his colleagues would help in giving me the required information. The researcher intends to leave ‘no stone unturned’ and would contact more people if need be to help him with this research.

2.1 GNATT CHART:

Activity February March April Week Number 1 2 3 4 5 6 7 8 9 10 11 12 1.Holiday 2. Read Literature 3.Finalise Objectives 4. Draft Literature Review 5. Read Methodology Literature 6. Devise Research Approach 7. Draft Research Strategy and Method 8. Develop Questionnaire 9. Pilot Test and Revise Questionnaire 10. Administer Questionnaire 11. Enter Data into Computer 12. Analyse Data 13. Update literature read 14. Complete remaining chapters 15. Submit to tutor and await feedback 16.Print, bind 17. Submit

Summarise the Aspects of Corporate Governance Finance Essay Essay

INTRODUCTION

The present stage of economic cycle we will see more companies to get delisted from ASX due to corporate failure and due breach of duty from director side. With amid fear from global recession Director must be worried that their duty will be scrutinised and they have to perform their duty with proper and intelligent manner. Australian Security exchange acknowledged the best governed companies and according to Australian Security Exchange company who lack in corporate governance or in performing director duties can collapse any time. In this project I’m summarising an aspect of corporate governance and legal provision which are necessary for the control of corporation. Here I will provide information about two companies which were listed with Australian security Exchange. One of the companies is Cazaly Resources Limited and other one is Clive peeter’s . Cazaly is still listed with Australian Security Exchange, but Clive peeter’s is now delisted due to corporate governance failure. Therefore we will summarise the aspect of corporate governance in this report and analysis the importance of director role their duties.

COMPANY OVERVIEW

https://t2.gstatic.com/images?q=tbn:epnu1WF9JrHSgM:https://www.cazalyresources.com.au/images/cazaly_resources.gif Cazaly Resources Limited is an Australian based diverse mineral resource company which was listed with Australian Security Exchange in October 2003. Company controls the large number of Gold, Iron ore, Uranium and base metals which are grounded in Western Australia. Cazaly Resources Limited in total control 1500 square kilometres of ground and successfully performing the project which they think will be significant in the future. According to Cazaly there company Key assets include;

PARKER RANGE IRON ORE

PILBARA IRON ORE

WESTERN KALGOORLIE GOLD

THERE POSITION IN ASX LISTED COMPANIES

THERE MANAGEMENT TEAM AND CORPORATE GOVERNANCE

There Equity position in ASX listed companies

There for according to Cazaly following the Corporate Governance is significant to achieve the objectives in future.

CORPORATE GOVERNANCE

Corporate Governance does not have any legal term, but it describes the rule and practices put in place within the company to deal with its board of directors. The main aim of corporate governance is to ensure Board accountability towards its Shareholders and management accountability towards its directors.

PREAMBLE OF CORPORATE GOVERNANCE

Incentives for board and management

Economic monitoring within the company

To encourage lower capital in company

Resources can be used more effectively

Cazaly resources limited are following good corporate governance wit in their company.

CORPORATE GOVERNANCE PRINCIPLES

RECOGNISE AND MANAGE RISK

Cazaly resources limited are performing the principle of Recognise and manage risk in proper manner. Financial internal controls are managed in such a manner that company can cope with financial crisis in 2009. They are so strong from the point of view of their fund handling and performing it really well. Company has made Insurance such as: Worker Insurance Liability Insurance Travailing Insurance IT sector is also protected by backed up functions and can be solved by backed up files.

LAY SOLID FOUNDATION FOR MANGEMENT AND OVERSIGHT

Operational Management The company has such a project that if there is any problem the managing director is approachable at any time to solve the problem. Safety in standing items will be addressed by managing director to the board. This report is review by board of directors every year. Management is given the power to overcome any non profit making objectives and to make decision which will take company towards future benefits so that they can give their opinion to the directors about what future changes should be done to make Cazaly resources limited toward profit making company in future as well

SAFEGUARD INTEGRITY IN FINANCIAL REPORTING

Financial status of Cazaly resources is not complex; Equity funds have been raised and exploited for the project they are performing or project them will perform in future. With these funds they will perform the business development in future. The managing director monthly report includes details of monthly spends, companies actual spend to budget and show month end cash balance, Board handles all major projects and calculate their expenditure. Financial reporting should also give the clear picture of benefits being derived from current money making project and future money making projects.

RESPECT THE RIGHTS OF SHAREHOLDER

Cazaly resources limited says that the right of share holders are being the most important aspect of their company and directors are the one who are liable to answer the shareholders. Disclosures of balance sheet or future projects or market criteria are being address to shareholders by the board of directors. Directors are also giving the current market criteria and share market as share holders are depends upon the share of the company.

MAKE TIMELY AND BALANCED DISCLOSURE

Management in Cazaly resources limited make timely disclosure to board about the projects which are going on or about the market criteria, what changes showed is done to overcome the problem. Board has a duty to tell their stakeholder about the current situation of the company.

STRUCTURE THE BOARD TO ADD VALUE

In Cazaly resources limited the board has an effective composition and the discharge their duties in proper manner company director Mr David McMahon has adequate responsibility toward the company. He makes joint venture with other companies to make company pillars more solid. Mr Jones managing director operation is making such adequate role in company which is helping Cazaly resources limited to grow. He is the one who help Cazaly resources limited to get listed with Australian security exchange.

PROMOTE ETHICAL AND RESPONSIBLE DECISION MAKING

Cazaly resources limited have made such environment in the office that there management act with due care and responsibility and that their management should comply with law and work with in standard of law. The management of comply share trading rules in proper and respective codes of conduct. The best part of this company is that there is never a conflict between the management and the board of directors. Directors of this company are obliged in their judgement to be independent and they also ensure steps to be taken reasonable to ensure soundness to board of directors.

REMUNERATE FAIRLY AND RESPONSIBLY

Executive directors receive fixed remuneration such as salary, even superannuation are given to directors. Board set the salary for management within the aggregate limit approved by shareholders. Reward for performing work with time and well manner is also given to the management by the directors.

CORPORATE GOVERNANCE FAILURE

Clive peeter’s was first listed with ASX in 22 /09/2005.Clive PEETER’S is the company which got suspended from Australian Security Exchange On Wednesday 19th May, 2010 Steve Peteers’ was suspended from ASX due to fraud.

COMPANY OVERVIEW

See full size image Clive Peeter’s opened their first store in Melbourne in 2003 they where retailers in electrical and computers. After opening their store in Melbourne they opened their store in Brisbane and Sydney they were ash rival to JB HI FI and HARVEY NORMAN. Clive peeter’s stores carry more than 140 brands and having model of each product once they were having more than 20000 models in their store. The chairman of Clive Peeter was Mr Brain Pollock and Mr Greg Smith was appointed as managing director of the company. Company operates under two names Clive peters in Queensland, Sydney, and Melbourne, Victoria and in Western Australia as Rick Hart. The staff work for Clive Peeter’s was around 1300, and revenue of $535 million FY 2008. Success behind Clive Peeter’s is their innovation in products, commitment towards customers, customer satisfaction and growing brand recognition. Buying power of this company was very strong which was their biggest plus point. Their warehouses were located across whole Australia there for the delivery time was minimum. Their main business was building industries, Government, Education, Hospitality, Real Estate and many more. If we take their sales revenue it was $457.2 million in 2007 and gone up +17% in 2008 to $534 in 2008, and gross profit from $120.5 in year 2007 to $141 in year 2008.

REASON BEHIND CLIVE PEETER’S COLLAPES

The reason behind collapse of Clive Peeter’s was its failure to cope up with corporate governance. In the year 2009 it was discovered that the Clive Peeter’s payroll manager, Sonya Causer has inflated company payroll expense falsely to her account. She had done this by using company online banking system. Sonya has stolen around $20million from company account and by that money she purchased 43 properties and 3 cars. Under ASX corporate governance Clive peeter’s failed the duty of corporate governance which was structure the board to add value Structure the board to add value means: Companies should have board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. In this board was failed to cope the duties of there. As the fraud was done this should not done as directors should perform their duties well. Each principle of corporate governance is important in his on aspect.

DUTIES OF DIRECTORS

Directors have fiduciary relationship with their company and their management there for any fraud is being in company in any level director of the company is responsible for that. Directors has power to solve any problem related to management and company. The duties of directors come under sec 180-184 of corporation act and this sec also imposed to the officers of the company. Employees of the company also come under sec 182.

SEC181 of director’s duty

GOOD FAITH AND PROPER PURPOSE

The main aim of this duty is that director should follow the duty of their in good faith and in best interest of the company and proper purpose. With good faith directors should take into consideration that stake holders of the company which specially are share holders are dependent upon their good faith and company is working well due their good faith. Bribes should not be taken or given for the purpose to increase the profit of the company.

SEC182 OF DIRECTOR’S DUTY

IMPROPER USE OF POSITION

This sec states that officers and employees should not take advantage of their position to gain profit. They should not take advantage of their lower rank officer or employees. Therefore it is very important that this duty should be performed by officer in proper and legalised manner.

SEC183 OF DIRECTOR’S DUTY

IMPROPER USE OF INFORMATION

Directors should not use information against the company, as any important material of the company should not be given out to its competitors. Therefore it is important that companies should follow the proper criteria of this sec.

SEC 180 OF DIRECTOR’S DUTY

DUTIES OF CARE, SKILL AND DILIGENCE

Directors should exercise the duty of care and diligence, this means that directors should in this sec 180(1) should be taken into consideration will performing the duty of care. If we take a case example of Daniel v Anderson of (1995) 37B NSWLR 438, this case makes it clear that directors should perform their duties in care and diligence.

SEC 184 OF DIRECTOR’S DUTY

DUTY TO PREVENT INSOLVENT TRADING

By this we mean that director should not indulge with any traction if he thinks that company is going toward insolvency. Sec 588 says insolvent trading is against the ASX rule and the director of the company is liable for insolvent trading even if he knows the company will be liquidised at any stage. Unsecured creditors ask director of the company about the compensation for the damaged suffered by the company. And directors are liable for the civil penalty order pursuant to Pt 9.4 B or criminal offence under Sec 588 G(3)and director at time of insolvent trading is liable for penalty.

Clive Peeter’s case comes under section 182 of director’s duty

In this Clive Peeter’s manager Sonya causer made a fraud of $20 million as she made improper use of her position, there for she is liable for the delisted of company from Australian Security Exchange.

CASE REFERENCE

IN REGAL HASTING LTD V GULLIVER

In this case directors made use of their position to make profit from the company for there personal use there for it was a breach of the sec 182. Court in this suggested that directors or any officer working for the company cannot make profit from organisation for its personal use.

MISUSE OF COMPANY FUNDS

Even in Clive peeter’s case misuse of company funds was also there. In this director cannot use the company funds for their personal use, officer of the company cannot mix company funds with their own fund. But Sonya Causer mix the company fun with her own funds even she use the funds for her personal needs like purchasing of the property and cars.

CASE REFERENCE:

IN TOTEX-ADON PTY LTD V MARCO (1982) 1 ACLC 228

In this case director’s uses the funds of company for their personal use and even mix company funds with their own funds.

IN PAUL A DAVIES (AUST) PTY LTD V DAVIES [1983] 1 NSWLR 440

The director’s makes fraud and use money for their own interest and from the company funds made assets for themself.

CONCLUSION

From this case study we have discussed the importance of corporate governance. Importance to learn lesson from both the companies why it is necessary to work according to the corporate governance. ASX rule and regulation should be followed to insure that company is going towards right path and direction. If we take Cazaly resources limited it is an Australian based company which work as company with all corporate governance acts and directors duties are also being followed by board of directors as well as the directors of the company, manager and officer perform their duties with good faith and due care which is necessary for a good corporate governance. In case of Clive peeter’s, one of the biggest retailing company was for Electronic and computers got liquidised due to improper communication. The corporate governance of the company lacked in many ways and breach of duty from manager was the main issue which lead the down fall of the company. One of the manager of Clive Peeter’s once said that “Drop of price of product in Clive Peeter’s lead to drop of salary of management in the company”.

Study on Corporate Governance in the Middle East Finance Essay Essay

Middle East and North Africa (MENA), Region, state-owned enterprises (SOE), Gulf Cooperation Council (GCC) ,International Federation of National Associations for Accountants and lawyers(INSOL

Introduction:

Good corporate governance is essential for modern, well-managed corporations. Many Middle Eastern enterprises have reached a stage in their corporate life where improving transparency, professionalizing board practices, and reinforcing shareholder rights have become crucial to their future growth and competitiveness. Recent interactions in the Middle East clearly revealed the importance of governance, with people recognizing both international governance principles and how such principles fit within their individual cultures. Board functions, board and management relations, and directors’ responsibility to act in the best interests of the company they serve (rather than of those who elected them) were all apparent principles. Fundamental to democracy is citizen participation, the freedom to assemble and the freedom to petition the government. A high level of interaction and dialogue between the state and the private sector on issues of concern increases effectiveness. Business organizations and business leaders must be able to share their positions with the government officials who respect their views. When the private sector advocates for legislative reform to improve the business environment and the country’s economy, and the government responds positively, governments in the Middle East and elsewhere are recognizing the positive benefit to society as a whole. Governance is a journey, not a destination. With the participation and voices of the public and private sectors of all countries, in the Middle East and around the world, we all continue to grow together, positively affecting our companies and our countries. Corporate Governance has been practiced for as long as there have been corporate entities. Yet the study of the important crucial subject is less than half a century old. Indeed, the phrase ‘corporate governance’ was randomly used until the 1980s.The 19th century saw the foundation laid for modern corporation: this was the century of the entrepreneur. The 20th century was the century of management: the phenomenal growth of management theories, management practices, management consultants, management institutions, management teaching, and management gurus, which all simultaneously reflected a pre-occupation with different styles of management. Now the 21st century promises to be the century of thinking on the subject of governance: As the focus swings to the legitimacy and the effectiveness of the wielding of power over corporate entities worldwide. Governance issues arise whenever a corporate entity acquires a life of its own, and the basis of ownership of an enterprise is separated from its management. A much quoted comment by Adam Smith shows that he understood the issue of corporate governance,

” The directors of companies, being managers of the people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartners frequently watch over their own” (smith 1776).

New concepts of corporate governances:

Overall, corporate governance continues to evolve. The metamorphosis that will determine the bounds and the structure of the subject has yet to occur. Present practice is still rooted in a 19th century legal concept of the corporation that is totally inadequate in the emerging global business environment. Present theory is even less capable of explaining coherently the way that modern corporate organizations are governed and worked. The recent financial crisis prompted by the securitization of sub-prime mortgage loans in the United State, which led to the collapse, takeover and, in some cases, nationalization of banks and other financial institutions around the world raised some fundamental corporate governance issues. There are few questions rise up in my mind: Where were the directors of these failed institutions, particularly the independent directors who were supposed to provide checks on overenthusiastic executives? Did the boards understand their firm’s exposure to strategic risk? Will those who designed and encouraged the derivative products and securitization systems be held to account? Did the auditors ensure that their clients’ exposure to risk was reported? Were any of the companies, financial institutions or financial intermediately activities illegal? The global economic and financial crisis is also affecting the MENA region, and threatening its capacity to attain the necessary level of economic growth in order to meet the demands of citizens in search of improved welfare, without destroying natural resources. One of the fundamental lessons to be learned from the global financial crisis is that future strategies cannot be adopted without coordinating public policies at all levels of governance, and without the participation of government, local authorities, legal advisor, civil society and the media at different levels. Around the world, in large and small corporate, in the public and the private sectors, governance has become the focus of attention. The exercise of power over corporate entities, the legitimacy of companies and their directors, the effectiveness of governing bodies, and their accountability in society have become crucial topics. The innovative field of corporate governance is expanding and changing dramatically at very fast pace. Twenty-five years ago the phrase ‘corporate governance’ was not used in corporate sector but now, it is frequently and prominently being used in corporate world.

Corporate Governance in Middle East region:

For the past few years a corporate governance movement has been sweeping through the Middle East and North Africa (MENA). Practitioners from capital markets, banks, the public and private sectors, and other civil society groups have accepted the need to address corporate governance reform as one of the crucial aspect affecting the international competitiveness, the investment climate and the development of the capital markets of the MENA region. This collaboration is crucial because corporate governance ultimately depends on public-private sector cooperation to achieve the goals of creating a competitive market system and the development of a law & justice based society. Recent research and experience show that certain key corporate governance arrangements are critical to private-sector which has led economic growth, enhanced welfare activities, increased flow of investment, development of capital market, financial market efficiency and corporate sector performance. MENA countries, in their efforts to stimulate growth, employment and investment, increasing acknowledge the talent and has improved corporate governance for the success of the economic reforms. MENA countries in co-operation with the OECD working group and other multilateral or bilateral association is also working on governance in order to highlight priorities and possible suggestions and recommendations for reform to improve corporate governance frameworks, promote legal changes and progress with reforms of the corporate governance of state-owned enterprises (SOE). In Middle East region, businesses are classified as having: Concentrated ownership, with strong family ownership of both private and listed, companies with state ownership. Dominant family oversight and control, with leadership from the head of the family, entrepreneurial decision making, opaque communications, and relationship base trading. Debt financing in which bank financing is often more than shareholders’ equity. Banking sector equity investment, with banks holding significant shares in companies. The states are typically grouped together as the Middle East and North Africa (MENA). The MENA region includes: Table: A

The MENA states

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Algeria Jordan Iraq Morocco Syria Bahrain Kuwait Iran Sultanate of Oman U.A.E. Egypt Lebanon Israel Qatar Tunisia Djibouti Libya Malta Saudi Arabia West Bank and Gaza

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Sources: https://go.worldbank.org/ Broadly, some of these countries have relatively low GDPs and slow industrial growth. In recent years the oil producing countries, benefiting from rising oil prices, have generated large surpluses, which have been invested abroad. Banking reforms have attempted to channel some of these saving into local growth, but domestic financial markets were not so emergent. States also appreciate the need to attract foreign direct investment (FDI) and, therefore, recognize the importance of sound corporate governance. Since the capital markets are not so emergent characterized as small size therefore facing liquidity. Consequently the market does not offer opportunities to investors. Of course there are exceptions to such aforesaid general observations, like Dubai & Abu Dhabi (UAE) are making massive investment in tourism and property, whilst attempting to become an international financial centre. Recent evidence shows in UAE, ‘ Burj Khalifa’ is not a just a building, it is a global icon. As the tallest free-standing man-made structure in the world, the gleaming tower reaching to 828 meters in the sky is an example of courage and man’s ability to realize the dreams. The MENA region is an economically diverse region that includes countries with a common heritage and significant distinctions in levels of per capita income. Mostly is single-commodity (oil) economy dependent, despite the continuous and tremendous efforts done to diverse the economies. The countries’ region can be categorized in three distinct economic statutes. The first are the early reformers such as Egypt, Jordan, Morocco and Tunisia which embarked on economic reform programs since mid-1980s opening up their economies to foreign investments, privatizing state-owned enterprises, reducing budget deficit and inflation and liberalized their trade. Securities markets in these countries were established and revitalized5 to be the main vehicle for implementing the privatization program. The second are the oil exporting states mainly the Gulf Cooperation Council (GCC) in which their economies heavily dependent on producing and exporting oil. They achieved relatively macroeconomic stability mainly for the continuous increase in oil prices and despite of the recent Iraqi war. Despite the strong fundamentals of these economies, securities markets role, in most of GCC countries, yet minimal in growth. The third category are countries still hasn’t achieved economic stability yet either due to political instability such as in West Bank & Gaza and in Iraq, or they are in their early stages of reforms such as Lebanon, Syria, Algeria, Sudan, Libya and Yemen. Securities markets in these countries are either relatively small or doesn’t exist. The MENA region GDP, in terms of current U.S. dollars, is near US$ 600 billion, about 2% on average of the World’s GDP in 2001 and 20027. Due to the substantial increase in oil prices, national savings -especially in the oil producing countries- exceeded investments resulting in substantial accumulation of financial assets abroad. Saudi Arabia and Kuwait constituted 3.3% and 2.4% respectively of total global export of capital flows in year 2001, while in 2002, Saudi Arabia share declined to 2.2% and for Kuwait was below 1%9, which might explains the outstanding performance of both markets recently. Market capitalization of MENA region markets amounts for US$ 209 billion in 2002, about 1% of world market capitalization10 and about 35% of MENA’s GDP. Saudi Arabia is the largest in terms of capitalization with 36% of total market capitalization of MENA markets in 2002, followed by Kuwait and Egypt with share 17% and 12% respectively. The most active during year 2002 was Kuwait Securities Market with 61% turnover ratio11 followed by Saudi Arabia and Egypt with 41% and 24%, respectively. Six of the eighteen MENA countries (Algeria, Egypt, Jordan, Morocco, Tunisia and the United Arab of Emirates) undergone the exercise of Report on the Observance of Standards and Codes (ROSC) of the World Bank and International Monetary Fund (IMF). The exercises covered four main areas out of ten. Egypt, Jordan and Morocco are represented in the S&P/IFC indices and in the MSCI EMF indices. Saudi Arabia and Bahrain are represented only in the S&P/IFC indices. With exception of Egypt, Jordan and Morocco which opened their markets to foreign participation since they embarked on economic reform programs, still some shared a main characteristic of restricting foreign participation and ownership, mostly in GCC countries. In GCC countries, access to their capital markets was restricted to GCC nationals and residents only. However under the pressure to diversify their economies and the attempt to be immune from volatile oil prices, regional markets commenced on allowing gradually foreign investment in their market. Bahrain was one of the earliest GCC countries that opened up its market to foreigners. According to an Amiri decree, non-GCC residences have been allowed to own up to 49% of capital. Also, Bahrain Stock Exchange was the first to list non-GCC Company. Oman opened its market to foreigners since 1998 with the issuance of Royal decree number 80. As for the Kuwaiti market, currently foreigners are allowed to participate in the securities markets. Under the new Foreign Direct Investment Law issued in April 2001 foreigners are allowed to own up to 100% of Kuwaiti companies subject to some conditions. As for portfolio investments, Portfolio Foreign Investment Law issued in September 2000 allowing foreigners to own and trade shares of joint-stock companies listed on the Kuwaiti Stock Exchange condition on neither an individual nor group of foreigners may own more than 5% of capital of a Kuwaiti bank unless approved by Central Bank of Kuwait. Saudi Arabia allows foreign investors to participate in the securities market through investing in open-end mutual funds. In 1997, the first special purpose vehicle (SPV) was established to facilitate foreign portfolio investment in equities. Qatar, recently, allowed GCC citizens and expatriates to invest in the Doha Securities Market as an initial phase to introduce new law that will allow foreign investments.

Dubai Declaration on Corporate Governance:

The Dubai Declaration by Hawkamah’s first MENA conference in Dubai formulates a road map and key corporate governance initiatives for the region, writes Bhaskar Raj “Good corporate governance is a vital key factor in sustaining economic growth and development in the Gulf region. Policy makers are taking the lead and committing to secure significantly higher standards of corporate governance in the member countries of the GCC”. Policy makers, regulators, representatives from regional and international organisations, and business leaders from across the Middle East and North Africa, representing countries of Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia and the UAE, gathered in Dubai to jointly issue the Dubai Declaration on Corporate Governance. This was a landmark event for the region, and they agreed upon following initiatives for reforms in governance: The criteria of two taskforces: one focusing on the corporate governance of banks; and a second focusing on the corporate governance of State-Owned Enterprises. The issuance of two policy briefs: one for banks; and a second for SOEs; both to be approved by the relevant taskforces. The consideration of issues relating to the corporate governance of Shariah compliant banks and financial institutions and the importance of ensuring that regional corporate governance frameworks and standards are in line with international codes and the key standards, whilst at the same time remaining consistent with Shariah rules. The preparation of a corporate governance survey of SOEs, to be developed on a consultative basis with the cooperation of key organizations and governments. The recognition of a need to tackle issues surrounding insolvency and corporate restructuring.

The Hawkamah

Hawkamah, the Institute for Corporate Governance, is a regional entity whose mission is to assist countries and companies of the wider MENA region in developing sound and globally well-integrated corporate governance frameworks, policy and practices. It supports regional and international initiatives to develop open and transparent markets and sound corporate governance regimes. The OECD and Hawkamah works with INSOL and the World Bank and invite ministries, financial institutions, the judiciary, representatives of OECD countries and other regional and international bodies, to meet and to discuss these issues during the first half of 2007. Executive Director of Hawkamah Nasser Saidi outlined “Whilst there is still a need for raising awareness and capacity building in this field, we have made significant headway in terms of taskforces, policy briefs, addressing corporate governance in Islamic banking and finance, corporate restructuring and insolvency, family-owned enterprises and small & medium enterprises. We now move towards concrete actions and direction resulting from these principles, facilitating the design of a comprehensive roadmap for corporate governance in our region. This will enable us to achieve our ultimate goals of encouraging investment, project finance, job creation and the development of sound financial markets.”

Need for successful corporate governance:

The values of corporate governance: transparency, accountability, and responsibility offer the key for the modernization of the countries of the Middle East and North Africa. The private sector business community can play a leading role in economic, political, and social reforms in the region. In fact, reforms led by the private sector provide the greatest promise for meeting the challenges caused by the region’s tepid economic growth and surging youth demographic. Sound corporate governance practices will attract new, much needed investment to the Middle East and North Africa because they improve their management of firms and reduce risk. National institutions, laws, regulations, and practices based on international norms and standards would enable the countries of the region to modernize their corporate sectors, enabling them to attract technology and foreign investment and become internationally competitive. Furthermore, political and sovereign risk would be reduced and economic performance and outcomes would be de-linked from ruling political regimes and a dependence on oil and gas resources. Perhaps more importantly, the process of designing and implementing the basics of corporate governance-transparency and regular reporting, independent auditing, removal of conflicts of interest, ethics, protection of minority shareholders’ rights-provides a foundation for meaningful reform in the economic sector and elsewhere in society. It is clear that there is no one ideal structure for corporate governance. Many alternative structures can work well in the appropriate context. In fact, despite all the commentary on governance structure-unitary and two-tier board, the proportion of INEDs, the separation of chairman and CEO, board committees and the rest, the issue of effective governance is not really about structure but about process. As we have seen some of the different ways countries and cultures apply in the corporate governance, we can now identify the few thrust areas that are needed to support successful governance. These include: Accounting and legal professions that are internationally respected, able to discipline their members, and ensure compliance with accounting standards, and legal requirement. A company’s registry that facilities comprehensive disclosure, with high levels of transparency. Always vigilance regulatory authorities including securities and future market regulators. A stock market with sufficient degree of liquidity, standing on international norms and foreign and institutional investors. Auditing firms that are professionally managed, reliable, and independent of their clients. A reliable legal system including an independent judiciary, courts that are bias and corruption free, and judgments those are enforceable, free of state or other political pressures. Accountability fix for financial institutions, including brokers, sponsor for new issues, and financial advisors. Professional organizations such as director and company secretary qualifying and disciplining bodies. Accountability also given to educational institutions to develop education standard and train for relevant qualifications require for corporate governance. Consulting agencies able to advice companies and its directors. With the support of private and public organization, seminars, workshop to be conducted or organized on different platforms, and conclusion report to be sent to competent authority for taking decisions. Research institution making research on different aspects of corporate governance according to the need of region. Research publications, international conferences and professional journals play a significant contribution to the convergence of corporate governance thinking and practice. Formulate corporate governance codes of good practices. Just implementing Western rules and standards will not improve corporate governance and accounting quality in MENA region. Standards alone do not help. There need to be more disclosure on key government variables and related party transactions. They are more important than accounting. Other important changes include building the right market infrastructures and systems for companies to operate, as well as leveling the playing filed between government-owned and privately-owned firms.

Conclusion:

The paper attempted to provide an overview on corporate governance in the MENA region’s markets.. It is evident that MENA markets in the recent decade undergone number of reforms and restructuring on legislative and infrastructure fronts. However, cautious should be taken while adopting and implementing measures of reform. Moving towards a self-regulatory organization (SRO) model without matured institutions is dangerous. Limited institutional capacity, overlapping regulatory functions among authorities and lack of fast track dispute settlement are impediments for SROs. Maturity is not only in terms of laws and regulations but also in terms of practice and enforcement. Thus, adopting self-regulatory organizations (SRO) model remains a future challenge to regional markets. Market discipline, with its various tools, still not yet developed to an extent that improves corporate governance practices; markets are either inefficient or utmost weakly efficient. Thus proper valuation and realized premiums are not really reflective to the soundness corporate governance practice. Thus, market discipline is an element that will not be observed until markets efficiency improves and investors’ culture develops. Market discipline is both a result and supplementary of massive reforms towards better governance which is only observed in matured efficient markets. Thus, reformers should work on allowing appropriate and even environment for both systems. Which of either system are best for regional markets? Is a question imposes itself. Fundamentally, traditions and cultures should be allowed implicitly to choose their acquaintance with one of the two systems and not vice versa. Using the opposite direction might result in institutional failure, market crises and the collapse of the investors’ wealth. Previous emerging market crises were good evidence. The key issue is that sound corporate governance practices are reached when trust and confidence is observed. Policy makers and reformers should realize that better corporate governance practices is function of the soundness of the total system and that this parameter is significant and influential given the characteristics of the regional markets.

Relationship between Corporate Governance Score and Firm Performance Essay

Limited liability company structure is the most preferred structure for a large business. In this structure, a large number of investors provide the risk capital. They are called shareholders, the deemed owners of the company. They delegate the power to manage the company to board of directors. The board delegates the same to managers while retaining its role to monitor and control the executive management. Shareholders are viewed as the principal and the manager as their agents and this relationship is described as ‘principal-agent relationship’. The shareholders, of a widely held firm, practically do not have any control on the managers. They are only informed of the financial results on a periodical basis while the managers controls the firms’ assets. This structure provides an opportunity to the managers to expropriate shareholders’ wealth and misappropriate the funds by way of transfer of money as loans to his own companies, or sale of the company assets to themselves at a lesser price or pay themselves more perks. The divergence of interest between the owners and the managers, due to the separation of ownership from control, results in the agency costs. It is not just separation of ownership and control that gives rise to the agency problem between shareholders and managers; but also the atomistic or diffused nature of corporate ownership, which is characterized by a large number of small shareholders. In such ownership structure, there is no incentive for any one owner to monitor corporate management, because the individual owner would bear the entire monitoring costs, yet all shareholders would enjoy the benefits. Thus, both the magnitude and nature of agency problems are directly related to ownership structures. The fundamental theoretical basis of corporate governance is agency costs. The core of corporate governance is designing and putting in place disclosures, monitoring, oversight and corrective systems that can align the objectives of the shareholders and managers as closely as possible and hence, minimize agency costs. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. There are two kinds of mechanisms to overcome the agency problem and hence, improve corporate governance viz., the internal control mechanisms and the external control mechanisms. Internal control mechanisms are internal to the functioning of a company and broadly consist of the board composition, the board size, the leadership structure and the managerial compensation. External control mechanisms are the mechanisms that are external to the functioning of the firm over which the firm has no control. An increasingly important external control mechanism affecting governance worldwide is the emergence of institutional investors as equity owners. Although the role that the institutional investors can play in the corporate governance system of a company is a controversial question and a subject of continuing debate. While some believe that the institutional investors must interfere in the corporate governance system of a company, others believe that these investors have other investment objectives to follow. The group of observers who believe that institutional investors need not play a role in the corporate governance system of a company, argue that the investment objectives and the compensation system in the institutional investing companies often discourage their active participation in the corporate governance system of the companies. Institutional investors are answerable to their investors the way the companies (in which they have invested) are answerable to their shareholders. And the shareholders do invest their funds with the institutional investors expecting higher returns. The primary responsibility of the institutional investors is therefore to invest the money of the investors in companies, which are expected to generate the maximum possible return rather than in companies with good corporate governance records. While the other group strongly believes that if the corporate governance system in the companies has to succeed then the institutional investors must play an active role in the entire process. By virtue of their large stockholdings, they have the opportunity, resources, and ability to monitor, discipline and influence managers, which can force them to focus more on corporate performance and less on self-serving behavior. Most of the reports on corporate governance have also emphasized the role that the institutional investors have to play in the entire system. Given the increasing presence of institutional investors in financial markets, it is not surprising that they have become more active in their role as shareholders. Activism by institutional investors has been both private and public, with the public activism being most visible in many countries. The role of institutional investors is visualized in two perspectives, the corporate governance and the firm performance.

7.2 Objectives of Study

In light of the above discussion, the present study attempts to achieve the following objectives: To construct the corporate governance score To establish relationship between institutional holdings and corporate governance score To establish relationship between institutional holdings and firm performance To establish relationship between corporate governance score and firm performance In order to achieve the objectives stated above, the present study conceptualized the following null hypotheses for the validation of positive relationship between institutional holdings, corporate governance and firm performance

7.3 Hypotheses:

H01: Institutional/its components Holdings and Corporate Governance score are very closely related in a manner as to depict a positive relationship between the two H02: Corporate Governance Score and Institutional/its components Holdings are also very closely related in a manner as to depict positive relationship between the two H03: Institutional/its components Holdings and various measures of firm performance are very closely related in a manner as to depict positive relationship between the two H04: Corporate Governance Score and various measures of firm performance are very closely related in a manner as to depict positive relationship between the two

7.4 The Sample Design and Data:

To achieve the above objectives, a sample of 200 companies has been taken. The present study is based on the secondary data. It covers a period of five financial years from 1st April 2004 to 31st March 2008. Institutional holdings are further segregated into three constituents. The mutual funds being the first one. The second constituent includes various public and private sector banks, all the developmental financial institutions (like IFCI, ICICI, IDBI, SFC) and insurance companies like the LIC, GIC, and their subsidiaries. The last constituent comprise of foreign institutional investors. Data has been collected on the institutional holdings in total as well as on different constituents of institutional holdings from nseindia.com. The secondary data regarding annual reports to construct the corporate governance score have been collected from respective company websites and sebiedifar.com. . The firm performance measures have been divided into two categories, one being the accounting measures while others are based on market returns. The accounting return measures include (%) return on networth, (%) return on capital employed, Profit After Tax, (%) Return on Assets, Net Profit Margin and Earning Per Share. Whereas, market return based measures include Tobin’s Q, (%) Risk Adjusted Excess Return and (%) Dividend Yield. Data for the study period on financial performance measures have been collected from Prowess Database.

7.5 Statistical Tools:

Simple linear regression analysis has been used as a statistical tool to investigate the relationship between different variables. An attempt has been made to ascertain the causal effect of one variable upon another. Data has been assembled on the variables of interest and employed regression to estimate the quantitative effect of the causal variables upon the variable that they influence. The study also typically assesses the “statistical significance”? at 5 percent level of the estimated relationships, that is, the degree of confidence that the true relationship is close to the estimated relationship.

Section A

7.6 Construction of Corporate Governance Score

Review of Literature

Some researchers have used board characteristics as an effective measure of corporate governance as Hermalin and Weisbach (1998, 2003) have used board independence, Bhagat, Carey and Elson (1999) have used stock ownership of board members and Brickley, Coles and Jarrell (1997) have used the occupation of Chairman and CEO positions by the same or two different individuals. Whereas, Gompers, Ishii and Metrick (2003) have constructed a governance measure comprising of an equally weighted index of 24 corporate governance provisions compiled by the Investor Responsibility Research Center (IRRC), such as, poison pills, golden parachutes, classified boards, cumulative voting, and supermajority rules to approve mergers. Bebchuk, Cohen and Ferrell (BCF, 2004) created an “entrenchment index”? comprising of six provisions – four provisions that limit Shareholder rights and two that make potential hostile takeovers more difficult. While the above noted studies use IRRC data, Brown and Caylor (2004) used Institutional Shareholder Services (ISS) data to create their governance index. This index considered 51corporate governance features encompassing eight corporate governance categories: audit, board of directors, charter/bylaws, director education, executive and director compensation, ownership, progressive practices, and state of incorporation. In the present study, Corporate Governance Score has been developed on the basis of key characteristics of Standard and Poor’s Transparency and Disclosure Benchmark. Standard and Poor’s provides a range of corporate governance analyses and services, the crux of which is the Corporate Governance Score. Corporate Governance Scores are based on an assessment of the qualitative aspects of corporate governance practices of a company. Information has been collected on the attributes from the latest available annual reports of sample companies. The methodology, with 98 questions in three categories and 12 sub-categories, is designed to balance the conflicting requirements of the range of issues analyzed and the tractability of the analysis. Transparency and Disclosure is evaluated by searching company annual reports for the 98 possible attributes broadly divided into the following three broad categories: Ownership structure and investor rights (28 attributes) Financial transparency and information disclosure (35 attributes) Board and management structure and process (35 attributes)

Resume

Various researchers have considered alternate measures of corporate governance. Some of them have used single measure, while others have used the multiple measures in the form of indices. In the present study, Corporate Governance Score has been developed on the basis of key characteristics of Standard and Poor’s Transparency and Disclosure Benchmark because two broad instruments that reduce agency costs and hence improve corporate governance are financial and non-financial disclosures and independent oversight of management. Improving the quality of financial and non-financial disclosures not only ensures corporate transparency among a wide group of investors, analysts and the informed intelligentsia, but also persuades companies to minimize value-destroying deviant behavior. This is precisely why law insists that companies prepare their audited annual accounts, and that these be provided to all shareholders is deposited with the Registrar of Companies. This is also why a good deal of effort in global corporate governance reform has been directed to improve the quality and frequency of disclosures.

Section B

Relationship between Institutional Holdings and Corporate Governance:

Review of Literature

Coombes and Watson (2000) on the basis of a survey of more than 200 institutional investors with investments across the world showed that governance is a significant factor in their investment decision. McCahery, Sautner and Starks (2009) have relied on the survey data to investigate governance preference of 118 institutional investors in U.S. and Netherlands. The study found that the majority of institutions that responded to the survey take into account firm governance in portfolio weighting decisions and are willing to engage in activities that can improve the governance of their portfolio firms. Chung, Firth, and Kim (2002) hypothesized that there will be less opportunistic earnings management in firms with more institutional investor ownership because the institutions will either put pressure on the firms to adopt better accounting policies. Hartzell and Starks (2003) provided empirical evidence suggesting institutional investors serve a monitoring role with regard to executive compensation contracts. One implication of these results, consistent with the theoretical literature regarding the role of the large shareholder, is that institutions have greater influence when they have larger proportional stakes in firms. . Denis and Denis (1994) found no evidence to suggest that there is any relationship between institutional holdings and corporate governance. They stated that if companies that create shareholders’ wealth are the ones with poor corporate governance practices, and then one really cannot blame the institutional investors for having invested in such companies. For, after all, a fund manager will be evaluated on the basis of stock returns he creates for the unit holders and not on the basis of the corporate governance records of the company he invests the money in. If however, one finds that companies with poor corporate governance practices are the ones, which have consistently destroyed shareholders’ wealth, then the contention that the institutional investors need not look at corporate governance records cannot be justified. David and Kochhar (1996) provided empirical evidence regarding impact of institutional investors on firm behaviour and performance is mixed and that no definite conclusions can be drawn. They argued that various institutional obstacles, such as barriers stemming from business relationships, the regulatory environment and information processing limitations, might prevent institutional investors from effectively exercising their corporate governance function. Almazan, Hartzell and Starks (2003) provided evidence both theoretical and empirical that the monitoring influence of institutional investors on executive compensation can depend on the current or prospective business relation between the institution and the corporation. They concluded that the monitoring influence of institutions is associated more with potentially active institutions (investment companies and pension fund managers who would be less sensitive to pressure from corporate management due to lack of potential business relations) than with potentially passive institutions (banks and insurance companies who would be more pressure-sensitive). Davis and Kim (2006) found that mutual funds with conflicts of interest (based on management of pension assets) more often vote with management in general. On the other hand, mutual funds have more incentive and power to oppose management in firms in which they have a larger stake. Marsh (1997) has argued that short-term performance measurement does work against the active monitoring by institutional investors. The performance of fund managers is evaluated over a shorter time period. Hence, they act under tremendous pressure to beat some index. So, when they find a case of bad governance, they find it economical to sell the stock rather than interfere in the functioning of the company and incur monitoring costs. Ashraf and Jayaman (2007) examined mutual funds’ trading behavior after the release of voting records. The study found that funds that support shareholder proposals reduce holdings after the release of voting records. Since the time of releasing voting records could be very far from the shareholder meeting date, mutual funds’ trading behavior after the release of voting records may be unrelated to the votes cast in the meeting. Aggarwal, Klapper and Wysocki (2003) found that U.S. mutual funds tend to invest greater amounts in countries with stronger shareholder rights and legal frameworks (controlling for the country’s economic development). In addition, within the countries, the mutual funds also discriminate on the basis of governance in that they allocate more of their assets to firms with better corporate governance structures. Payne, Millar, and Glezen (1996) focussed on banks as one type of institutional investor that would be expected to have business relations with the firm’s in which they invest. They examined interlocking directorships and income-related relationships, and noticed that when such relations exist; banks tend to vote in favor of management anti-takeover amendment proposals. When such relations don’t exist, banks tend to vote against the management proposals. Brickley, Lease and Smith (1988) found evidence supporting the hypothesis that firms with greater holdings by pressure-sensitive shareholders (banks and insurance companies) have more proxy votes cast in favor of management’s recommendations. Moreover, firms with greater holdings by pressure-insensitive shareholders (pension funds and mutual funds) have more proxy votes against management’s recommendations. The authors differentiated between the different types of institutional investors, noting the difference between pressure-sensitive and pressure-insensitive institutional shareholders and arguing that pressure-sensitive institutions are more likely to “go along”? with management decisions. Dahlquist et al. (2003) analyzed foreign ownership and firm characteristics for the Swedish market. The study found that foreigners have greater presence in large firms, firms paying low dividends and in firms with large cash holdings. Haw, Hu, Hwang and Wu (2004) found that firm level factors cause information asymmetry problems to FII. It found evidence that US investment is lower in firms where managers do not have effective control. Foreign investment in firms that appear to engage in more earnings management is lower in countries with poor information framework. Choe, Kho, Stulz (2005) found that US investors do indeed hold fewer shares in firms with ownership structures that are more conducive to expropriation by controlling insiders. In companies where insiders are dominating information access and availability to the shareholders will be limited. With less information, foreign investors face an adverse selection problem. So they under invest in such stocks. Leuz, Lins, and Warnock (2008) found that foreign institutional investors prefer to invest in firms with better governance practices.

In the present study, the analysis has been conducted in three perspectives:

Dynamics of institutional holdings and its composition (2) Relationship between Institutional Holdings (explanatory variable) and the Corporate Governance Score (dependent variable) (3) Relationship between the Corporate Governance Score (explanatory variable) and Institutional Holdings (dependent variable) The major findings of the present study on the above aspects are summarized as under: The results outputs of the first segment depict that the institutional investors have increased their proportional holdings in the companies over the years. The number of sampled companies with higher institutional holdings has increased where as the number of companies with lower proportions of institutional holdings has decreased over the study period. Hence, institutional holdings have shown an increasing trend of investment in the sampled companies over the study period. As far as the dynamics of components of institutional investors is concerned, no specific trend is observed in investments of mutual funds. On the other hand Banks, Financial Institutions and Insurance Companies have shown declining trends of investments over the same period. Where as, foreign institutional investors have shown the increasing trends of investments in line with institutional holdings. The results outputs pertaining to the analysis of relationship between institutional holdings and corporate governance state that the larger proportions of institutional holdings have higher corporate governance scores in sampled companies and the smaller proportions of institutional holdings have lower governance scores in the sampled companies over the study period. Thus, very strong and positive relationship is established between institutional holdings and corporate governance. Hence, H01 is accepted. The results outputs of the section analyzing the relationship between corporate governance score and institutional holdings describe that the companies with higher governance scores have larger proportions of investments from institutional investors than the companies with lower governance scores. Therefore, very strong and positive relationship also exists between corporate governance score and institutional holdings. Hence, H02 is accepted. The inference can be drawn that institutional holdings pre-empts good corporate governance still at other times, good corporate governance endues institutional investment in the firm. The results outputs pertaining to the analysis of relationship between mutual funds and corporate governance reveal out that smaller proportions of mutual funds holdings have higher governance score in the sampled companies and larger proportions of mutual funds holdings have lower governance scores in the sampled companies over the study period. Therefore, weak relationship exists between mutual funds holdings and corporate governance score. Hence, H01 is rejected. Alternatively, the results outputs pertaining to the analysis of relationship between corporate governance and components of institutional holdings reveal out that the companies with lower governance scores have larger proportions of mutual funds holdings to the companies with higher governance scores over the study period. Hence, weak relationship also exists between corporate governance score and mutual funds holdings. Hence, H02 is rejected. It can be inferred from the above outcomes that mutual funds companies do not observe good governance practices in companies and simultaneously, good governed companies also do not attract higher mutual funds investments. The results outputs as to the relationship between Banks, FIs and ICs and corporate governance depict that larger proportions of Banks, Financial Institutions and Insurance Companies holdings have higher governance score and smaller proportions of holdings have lower governance score in the sampled companies over the study period. Therefore, very strong and positive relationship is established between Banks, Financial Institutions and Insurance Companies holdings and corporate governance score. Hence, H01 is accepted. Similarly, the sampled companies with higher governance scores have larger proportions of Banks, FIs and ICs holdings to the companies with lower governance scores. Thus, very strong and positive relationship also exists between corporate governance score and Banks, FIs and ICs holdings. Hence, H02 is also accepted. The inference can be drawn on the basis of above results that Banks, FIs and ICs consider governance practices in companies while taking investment decision and alternatively, good governed companies also attract these investments. The results outputs pertaining to the relationship between FII holdings and corporate governance reveal out that the companies in which FIIs have larger proportions of holdings have higher governance score to the companies in which FIIs have smaller proportions of holdings. Therefore, very strong and positive relationship is observed between FII holdings and corporate governance score. Hence, H01 is accepted. Likewise, the sampled companies with higher governance scores have also larger proportions of Foreign Institutional Investors holdings. Thus, very strong and positive relationship also exists between corporate governance score and FII holdings. Hence, H02 is accepted. It can be inferred on the basis of above result that foreign institutional investors prefer to invest in firms with better governance practices and their investment do improve the governance practices in the companies.

Resume

The theoretical and empirical literature provides mixed evidence as to the relationship between institutional holdings and corporate governance. Some of the studies put forth the evidence that corporate governance is the significant factor for institutional investment decision and their significant investment improve the governance practices in companies, while the other studies state otherwise. Where as the research findings of the present study further validate, support and enrich the literature on positive association between institutional holdings and corporate governance. Likewise, the studies provide inconclusive evidence as to the relationship between mutual funds holdings and corporate governance. But the findings of present study state that neither the mutual funds care about the governance practices of companies or their presence improve them. Similarly, the empirical literature provides indeterminate evidence on the relationship between Banks, FIs and ICs and corporate governance. But the findings of present study observe very strong and positive relationship between the two. The empirical studies observe consistent results as to foreign institutional investors invest in better-governed companies but lacks evidence that their significant presence result in better governance. The findings of present study indicate that FIIs do not care for the corporate governance only, rather their higher stake ensure better governance too.

Section C

7.8 Relationship between Institutional Holdings and Firm Performance:

Review of Literature

Pound (1988) explored the influence of institutional ownerships on firm performance and proposed three hypotheses on the relation between institutional shareholders and firm performance: efficient-monitoring hypothesis, conflict-of-interest hypothesis, and strategic-alignment hypothesis. The efficient-monitoring hypothesis says that institutional investors have greater expertise and can monitor management at lower cost than the small atomistic shareholders. Consequently, this argument predicts a positive relationship between institutional shareholding and firm performance. Holderness and Sheehan (1988) found that for a sample of 114 US firms controlled by a majority shareholder with more than 50% of shares, both Tobin’s Q and accounting profits are significantly lower for firms with individual majority owners than for firms with corporate majority owners. McConnell and Servaes (1990) found a strong positive relationship between the value of the firm and the fraction of shares held by institutional investors. They found that performance increases significantly with institutional ownership. Majumdar and Nagarajan (1994) found that levels of institutional investment are positively related to the current performance levels of firms. However, a less-stronger, though positive, effect is established between changes in performance levels and changes in institutional ownership. The results are based on a study investigating U.S. institutional investors’ investment strategy. Han and Suk (1998) found (for a sample of US firms) that stock returns are positively related to ownership by institutional investors, thus implying that these corporate owners are actively involved in the monitoring of incumbent management. Douma, Rejie and Kabir (2006) investigated the impact of foreign institutional investment on the performance of emerging market firms and found that there is positive effect of foreign ownership on firm performance. They also found impact of foreign investment on the business group affiliation of firms. Investor protection is poor in case of firms with controlling shareholders who have ability to expropriate assets. The block shareholders affect the value of the firm and influence the private benefits they receive from the firm. Companies with such shareholders find it expensive to raise external funds. Studies examining the relationship between institutional holdings and firm performance in different countries (mainly OECD countries) have produced mixed results. Chaganti and Damanpour (1991) and Lowenstein (1991) find little evidence that institutional ownership is correlated with firm performance. Seifert, Gonenc and Wright (2005) study does not find a consistent relationship across countries. They conclude that their inconsistent results may reflect the fact that the influence of institutional investors on firm performance is location specific. The above studies generally consider institutional investors as a monolithic group. However, Shleifer and Vishny’s (1986) as well as Pound’s (1988) theorizations and later empirical examinations by McConnell and Servaes (1990) suggest that shareholders are differentiable and pursue different agendas. Jensen and Merkling (1976) also show that equity ownerships by different groups have different effects on the firm performance. Agrawal and Knoeber (1996), Karpoff et al. (1996), Duggal and Miller (1999) and Faccio and Lasfer (2000) find no such significant relation between institutional holdings and firm performance.

In the present study, the analysis has been conducted in two perspectives:

Institutional Holdings and Firm performance (b) Constituents of institutional holdings and Firm performance The major findings of the present study on the above aspects are summarized as under: The results outputs of the first segment indicate that there is no conclusive evidence as to larger proportions of institutional holdings in sampled companies have higher average return on networth or average net profit margin and smaller proportions of institutional holdings in sampled companies have lower average return on networth or average net profit margin over the study period. To the contrary, strong and positive relationship is observed between institutional holdings and return on capital employed as well as institutional holdings and earning per share. As the average return on capital employed and average earning per share are higher in the sampled companies with higher proportions of institutional holdings and lower in the sampled companies with lower proportions of institutional holdings over the study period. Therefore, it is stated that institutional holdings and two accounting returns (return on capital employed and earning per share) are significantly correlated where as institutional holdings and other two accounting returns (return on networth and net profit margin) are not related. Hence, there is no clear evidence that institutional holdings and accounting returns are related. Likewise, strong and positive relationship is observed between institutional holdings and Tobin’s q. But on the other hand, weak relationship is observed between institutional holdings and risk adjusted excess return. Therefore, institutional holdings and one market-based return are significantly correlated while the institutional holdings and another market-based return are not. Thus, the findings depict contradictory results as to the relationship between institutional holdings and market-based return too. In nutshell, strong and positive relationship has been observed between institutional holdings and only three (return on capital employed, earning per share and Tobin’s Q) out of six measures of financial performance. Hence, the results are mixed as to establish the relationship between institutional holdings and firm performance. The results outputs of the second section exhibit that there is no relationship between mutual funds holdings and none of the accounting or market-based return. Hence, mutual funds holdings and firm performance are not related at all. Results outputs pertaining to the analysis of relationship between Banks, FIs and ICs holdings and firm performance come out with the similar findings. There has not been found strong and positive relationship between the above holdings and any of the returns except for earning per share. The findings as to the relationship between FII holdings and firm performance are consistent with the other components as FII holdings do not observe strong and positive relation with none but one of the performance measures. Hence, there is no relation between components of institutional holdings and firm performance.

Resume

Various studies have focused on different aspects/levels of ownership and their effects on firm performance. Similarly, different performance measures have also been taken as some of them have considered accounting measures but others, stock market indicators. As a result, various arguments have been put forward both in support and against the notion of the effects of ownership structure on the firm performance. While some researchers denied the direct correlation between ownership structure and firms’ economic performance while the others argued that there exists such a relationship for certain. Amongst those who establish such causality, some provide evidence that there is a negative relationship, while others plead a positive relationship between the two. The present study focused on shareholdings of institutional investors as whole and also of its different components. Various accounting returns and market-based returns performance measures have been considered. The findings of present study are indeterminate as to the relationship between institutional holdings and firm performance but strongly plead a negative relationship between constituents of institutional holdings and firm performance.

Relationship between Corporate Governance and Firm Performance:

Review of Literature

Lipton and Lorsch (1992) found that limiting board size improves firm performance because the benefits by larger boards of increased monitoring are outweighed by the poorer communication and decision-making of larger groups. Eisenberg et al. (1998) found negative correlation between board size and profitability when using sample of small and midsize Finnish firms, which suggests that board-size effects can exist even when there is less separation of ownership and control in these smaller firms. Vafeas (1999) found that the annual number of board meeting increases following share price declines and operating performance of firms improves following years of increased board meetings. This suggests meeting frequency is an important dimension of an effective board. Core, Holthausen and Larcker (1999) observed that CEO compensation is lower when the CEO and board chair positions are separate. It is further shown that firms are more valuable when the CEO and board chair positions are separate. Fich and Shivdasani (2004) based on Fortune 1000 firms, asserted that firms with director stock option plans have higher market to book ratios, higher profitability (as proxied by operating return on assets, return on sales and asset turnover), and they document a positive stock market reaction when firms announce stock option plans for their directors. Gompers et al. (2003) examined the ways in which shareholder rights vary across firms. They constructed a ‘Governance Index’ to proxy for the level of shareholder rights in approximately 1500 large firms during the 1990s. They found that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. Brown, Robinson and Caylor (2004) created a broad measure of corporate governance, Gov-Score. Gov-Score is related to operating performance, valuation, and shareholder payout for 2,327 firms, and found that better-governed firms are relatively more profitable, more valuable, and pay out more cash to their shareholders. All the eight categories underlying Gov-Score are most highly associated with firm performance. It is evidenced that good governance, as measured using executive and director compensation, is most highly associated with good performance. Bhagat and Bolton (2007) contributed to the literature as the consistent estimation of the relationship between corporate governance and performance, by taking into account the inter-relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. The study found that better governance as measured by the GIM and BCF indices, stock ownership of board members, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance. Board independence is negatively correlated with contemporaneous and subsequent operating performance. Klein (1998) studied whether the existence and staffing of board committees affects the firm performance. She found little evidence that monitoring committees-audit, compensation, and nominating committees, usually dominated by independent directors-affect performance, regardless of how they are staffed. Bhagat and Black (1997) undertook the first large sample study (957 large public US corporations), with long time-horizon (1983-95), of whether the proportion of independent or inside directors affect firm performance and found no consistent evidence that the proportion of independent directors affects future firm performance, across a wide variety of stock price and accounting measures of performance. Dalton et al. (1998) showed that board composition had virtually no effect on firm performance, and that there was no relationship between leadership structure (CEO/Chairman) and firm performance. Ellstand and Johnson (1999) indicated that board composition-whether measured by proportion of inside directors, affiliated directors or interdependent directors-is unrelated to corporate financial performance. The results are invariant when moderated by firm size. Moreover, these results are invariant when moderated by the nature of performance indicators, that is, accounting returns (for e.g. return on equity, return on investment, return on assets) as compared to market returns (a series of measures all based on share value). Bhagat and Black (2002) found no linkage between the proportion of outsider directors and Tobin’s Q, return on assets, asset turnover and stock returns.

In the present study, the analysis has been conducted in two perspectives:

i) Corporate Governance Score and accounting measures of firm performance ii) Corporate Governance Score and market-based return measures of firm performance The major findings of the present study on the above aspects are summarized as under: The results outputs of first segment state that the sampled companies with lower governance scores have higher average return on networth and with higher governance scores have lower average return on networth in most of the years of study period. Hence, corporate governance score and return on networth are not correlated. Similarly, corporate governance score and net profit margin are also not related. Likewise, no relationship is evident between corporate governance score and earning per share. The average earning per share is higher in the sampled companies with lower governance scores and lower in the sampled companies with higher governance scores. To the contrary, strong and positive relationship is observed between corporate governance score and return on capital employed. The average return on capital employed is higher for the sampled companies with higher average corporate governance scores and lower for the sampled companies with lower average corporate governance scores over the study period. Similarly, the average profit after tax is also higher for the sample companies with higher average corporate governance scores and lower for the sample companies with lower average corporate governance scores. Hence, there also exists very strong and positive relationship between corporate governance score and profit after tax. The research findings observe the same strong and positive relationship between corporate governance score and return on assets as well. In nutshell, it is found that corporate governance score and three accounting return measures (return on capital employed, profit after tax and return on assets) are correlated whereas corporate governance scores and the other three accounting return measures (return on networth, net profit margin and earning per share) are not related. Thus, the findings are mixed as to establish the relationship between corporate governance scores and accounting return measures of firm performance. The result outputs of the second section are rather more inconclusive as to the relationship between corporate governance and firm performance. Strong and positive relationship is observed between corporate governance score and Tobin’s q. Hence, the companies with greater governance scores have higher Tobin’s q and the companies with lower governance scores have lower Tobin’s Q. But on the other hand, weak relationship is observed between corporate governance score and dividend yield inferring that companies with higher governance scores do not always have higher dividend yield and the companies with lower governance scores do not always have lower dividend yield. No relationship has been observed between corporate governance score and risk adjusted excess return as well. The results outputs show that sampled companies with lower governance scores have higher risk adjusted risk return to the returns of sampled companies with lower governance scores. Thus corporate governance score and Tobin’s Q are related where as corporate governance score and dividend yield as well as risk adjusted excess return are not related. Hence, the findings of results outputs are mixed as to establish the relationship between corporate governance scores and market-based return measures of firm performance.

Resume

The empirical studies have considered limited board size, frequent board meeting, independent board committees and CEO compensation as the proxies of corporate governance where as others constructed governance index or score comprising of comprehensive measures. Similarly, various measures of firm performance has been considered as proxied by Tobin’s q, market to book ratios, operating return on assets, return on sales and asset turnover, sales growth, accounting returns (for e.g. return on equity, return on investment, return on assets) and market returns (a series of measures all based on share value). The literature on the relationship between corporate governance and firm performance provide mixed and inconclusive evidence as some studies observed strong relationship between the two variables and the others lack that evidence. The present study constructed corporate governance score on the basis of key characteristics of Standard and Poor’s Transparency and Disclosure Benchmark. Proxies for firm performance consist of accounting return and market-based return measures. The findings convey the mixed results as strong and positive relationship is observed between governance score and some of the accounting and market-based return measures (return on capital employed, profit after tax, return on assets and Tobin’s q) where as no relationship is observed between governance score and other measures (return on networth, net profit margin, earning per share, risk adjusted excess return and dividend yield). Hence, the results fail to achieve the objective of establishing relationship between corporate governance and firm performance.

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Recent Financial Scandals Exposed Questions of Corporate Governance Essay

Introduction

The latest financial scandals of Adelphia, Enron, WorldCom, and some other providers uncovered a whole lot of issues of the company governance, which produced company governance acquired significantly interest and became a incredibly hot subject matter once more the two in the educational and money entire world. Corporate governance is defined by the OECD (2004) as a set of marriage amongst a company’s directors, its shareholders and other stakeholders. It also supplies the construction via which the aims of the corporation are established, and the signifies of attaining individuals objectives and checking functionality, are determined. Accountability is just one of the most crucial sections of corporate governance, the Cadbury Committee (1992)s phrases about the company governance ended up to critique those people features of company governance particularly associated to fiscal reporting and accountability Charkham (1998) also mentioned that good company governance usually means a right stability among business and accountability. As a result, with the objective of obtaining a fantastic knowing of the company governance, this paper sets out to talk about the romance between accountability and organization. In order to meet up with the reason, the paper fist explore of a variety of governance mechanisms and their results which is followed by an evaluation of two alternative versions, insider and outsider products. The 3rd portion is heading to explore no matter whether superior corporate governance can enhance corporate efficiency or not. It will make some recommendations in the fourth section about how to increase the corporate governance mechanisms. The very last two pieces are concerned with the long term of company governance and attract a summary about the subject matter. The performance of various mechanisms John and Senbet (1998) proposed a much more in depth definition of corporate governance that it specials with mechanisms by which stakeholders of a company workout handle around corporate insiders and management such that their interests are guarded. In diverse countries, corporate governance mechanisms are unique. Even so, Filatotchev and Nakajima (2010) instructed that company governance has the two internal and external areas. Inner facets contain possession structure, the board of directors and committees, interior command, risk management, transparency and money reporting Exterior areas can possibly be industry-oriented, or can take the type of credit history ranking, and/or social demands. Accounting and finance scientists have centered on a variety of company governance mechanisms, specifically the inside mechanisms relating to boards and board functionality. Non-executive administrators and audit committee are the most representative two crucial mechanisms in the corporate governance, which can improved board success and to insert worth to shareholders. Kirkbride and Letza (2005) researched of non-govt directors and their purpose in checking company administration, on behalf of shareholders. Exploration has commonly showed there is a good connection amongst the number of non-govt administrators and corporate overall performance (Ferris et al., 2003). The heart of the governance is the board of administrators, the governance procedure depend on the board of administrators. Higgs report (2003) provides a useful define of the job of non-executive administrators: For starters, non-govt directors really should incorporate to and dispute the pattern of method. Next, non-govt administrators really should inspect the functionality of government professionals and examine the cure of effectiveness. Thirdly, non-government directors ought to make monetary info truthful and make certain the economic controls and danger management are success. Last but not least, non-executive administrators really should resolve on the remuneration for executives and use and remove the senior administrators. In a phrase, the successful non-govt directors can source the handy advices to information the company procedure. They can also formulate a substantial regular extended-time period method approach and monitor the manager’s habits. Audit committees are board mechanisms to enhance accountability all-around the economical reporting and accounting features, and have been extensively investigated (Turley and Zaman, 2007). Also, Gramling et al. (2005) furnished an overview of the function of inside audit in a corporate governance context. Audit committee is a key mechanism in the space of accountability. The Smith report (2005) pointed out that the part of audit committee ought to consist of five pieces: To begin with, the audit committee must assessment a company’s inner monetary command and risk management. This allows the danger management a lot more productive and limitations hazards. Next, the audit committee should really monitor and evaluation the inner audit. Thirdly, the audit committee ought to give some recommendations to the board on the shareholders basic conference. It also ought to control the exterior audit on the remuneration and engagement part. Fourthly, the audit committee need to choose the money reporting which manufactured by inside accountants. Finally, the audit committee should watch and evaluate the exterior audit. Immediately after recognize the role of the audit committee, it can be drew out that, if the audit committee operates proficiently, it has a great deal of added benefits. When it assessments the financial reporting, it can make improvements to its good quality and the executives can make the proper conclusions. When it displays the inner control and danger administration, it can decrease the pitfalls and seize the opportunities. It also allows the non-executive directors make an independent judgment and engage in a good position. In the exterior audit part, it can improve the situation of the exterior auditor and make them more independence. Scientists have also investigated the relationship amongst government remuneration and fiscal functionality (Main et al., 1999). A superior government remuneration can make staffs really like their get the job done and improve doing the job performance. To sum up, the good governance mechanisms can affect the company’s strategy and hence boost the enterprise functionality. But Rediker and Seth (1995) also pointed out that, a single governance system can’t perform an powerful role above the organization general performance. The use of multifaceted bundles of governance mechanisms as perfectly as equally accountability and enterprise can impact the company general performance. Option models: Insider product and outsider design Franks and Mayer (1996) distinguished two versions from the company governance procedure, which are insider design and outsider product. In outsider techniques, these as the United kingdom and US, shareholders r are in essence buyers, even so, in insider devices, this kind of as Germany and Japan, shareholders are those people individuals intently related to the corporation. Insider model: In this product, the professional financial institutions are generally the company’s key shareholders and it has limited shareholder regulate mechanisms to handle and supervise the operation of the business. This pattern is conducive to the company’s extended-phrase advancement. This is a proactive and beneficial product. If shareholders are not content with the company’s operators, they can right via the “hands vote” to convey their sights. The downside of this design is that the securities current market is fairly backward. Financing is mostly by means of banking institutions, corporate credit card debt ratio is fairly higher and controlling above the marketplace is underdeveloped. On top of that, the details disclosure and insider investing command are significantly weaker than outsider product. Outsider design: This product signifies that the intention of company governance is to safeguard the shareholders advantage the shareholders are in the dominant situation in company governance. In truth the implementation of its corporate governance composition is the single-board framework. Firms only set up the board of directors and no board of supervisors. It has well-created and effective cash marketplaces, improved the financial audit method, strict info disclosure program, very well-created current market and company supervisors are closely linked to effectiveness reward system. Under this model, formulated and effective money marketplaces promote the rational allocation of social sources, so that the competitiveness of enterprises can be improved. But it also has some disadvantages: 1. Operators ignoring extensive-phrase passions in purchase to satisfy buyers in the small-term returns and price-helpful need 2. the company frequently ignores the interests of other stakeholders. Franks and Mayer (1995) argue that both insider product and outsider design might be ideal in unique contexts. Insider model might be finest acceptable to corporate actions with very long-expression pay-offs, but may possibly be sluggish in undertaking important remedial motion. Outsider model may perhaps be greater suited to riskier investments demanding huge quantities of new cash financial investment, exactly where it includes nicely-diversified general public proprietors, but corrective motion might be taken impulsively. In a term, a corporation need to pick the acceptable model to greatly enhance the corporate overall performance. Fantastic company governance OECD (2004) outlined that excellent company governance is a significant stage in developing marketplace confidence and encouraging much more stable, prolonged-phrase financial commitment flows. Many countries regard fantastic corporate governance techniques as a far better way to boost financial efficiency. Company Governance Code released by Fiscal Reporting Council (2008) mentions that superior company governance really should add to superior organization effectiveness by serving to the board to conduct their obligations very well and it also can provide value to shareholders. Excellent company governance can lower the possibility of a organization and enrich the shareholders and stakeholders prosperity. The good company, thus, can strengthen the efficiency of the organization. Suggestions for bettering corporate governance Superior corporate governance improves market place self confidence, integrity and performance, so endorsing economic growth and fiscal balance. A process of corporate governance desires a accountable board of directors, at the exact time allowing the board to make revenue for the shareholders (Brief et al, 1998). Even though determining those people two aims of superior corporate governance, the Cadbury Report’s tips were being directed in direction of challenges of accountability and handle thus, a company can make improvements to their corporate governance by means of the pursuing a few ways: To begin with, bolster the board of structure. In the corporate governance construction, the board can proficiently carry out the final decision-earning and check the management. As a final result, the reinforce board of composition can secure and optimize stakeholders wealth. Next, enhance the transparency. If the company can make improvements to the transparency of the operation, it can strengthen the staff’s determination, enhance the status in the social and make improvements to the functionality. At last, fork out focus to hazard administration. The business need to emphasis on hazard administration, due to the fact of it can enable administrators decide on the very best threat response, lower shock and losses, determine and control challenges throughout the organization and seize chances. The long run of corporate governance There are two tendencies in the corporate governance in the upcoming: To begin with, the company may be a lot more emphasis on social obligation. These days, the operation of a enterprise is not only linked to the stakeholder’s interests but also influence the social pursuits. On the other hand, the purpose of corporate governance will not only to increase stakeholder prosperity but also emphasis on social obligation. Next, make folks-oriented organization lifestyle. This type of organization culture needs change regular command, checking, instructions, management method to a new 1, and thoroughly respects the employees in the firm. The company will need to create a great interpersonal atmosphere for employees and, signify whilst, strengthen the transparency of company governance to arousing the enthusiasm of organization employees of the organization, so realize the company’s goals. Summary Specified the length of this paper it appears inappropriate to give a comprehensive dialogue concerning the relationship amongst enterprise and accountability. Nevertheless, some transient conclusions can be manufactured. In distinct, if a enterprise wishes to boost the performance, it need to look at the partnership amongst company and accountability. In the element of mechanisms, a business really should also get advantage of a variety of mechanisms to make the company governance far more helpful. Furthermore, a organization should also opt for a suited model to enrich its overall performance.

Public Policy and Decentralised Governance in India Essay

Public Policy and Decentralized Governance Panchayat Raj Act and its relevance for democratic governance in rural India. Introduction:- In this term paper, I have been discussed the basic concept of Panchayat raj, democratic governance etc. To understanding the idea of panchayat raj, it is necessary to know the historical background of the panchayat system in India. The roots of the panchayat raj system are in the ancient religious text. The Britishers through enacting the various acts in this regard have institutionalized the panchayat raj system. Actual status has got to the panchayat raj system in India by the provisions of constitution. Initially the constitutional provision was obligatory on the states to form a panchayat raj system in the respective states. After 73rd amendment of the constitution it has became mandatory to establishment of the panchayat raj institutions in the respective states. The main aim of the creation of panchayat raj institutions was to participation of the people in the local governance and devolution of power. Basic Concept: – ‘Panchayat’ means assembly of five wise and respected elders chosen and accepted by the village community. Traditionally these assemblies were settling the disputes between individuals and villages. ‘Panchayati Raj’ means the system of governance in which gram panchayat are the basic units of administration. ‘Democratic governance’ means the system of administration, which runs through the elected representative and people’s participation in the process of governance. (A.K. Mishra, Naved Akhtar & Sakshi Tarika, June, 2011) Historical background:- The concept of panchayat raj system is not new for India, its root in ancient Vedic texts. In Ashoka’s regime there were the Greek ambassador Megasthanises who has described about the ‘city council’ in patliputra, which consisted the six committees with 30 members. Similarly participatory structure were also existed in south India in the regime of Chola Kingdom i.e. village council and ward committees. The Britishers have formed the present structure of the panchayat institutions in 1688 through establishment of Municipal Corporation at Madras. The Britishers made changes in this system by time to time; they enact a Bengal Local Self Governance Act in 1885. Then Morley-Minto reform came in 1909 and Montague Chelmsford reform in1919 through these reforms the people’s participation in the process of governance has increased. (INDIA, 2007) Constitutional History:- Indian constitution is the document of the social contract which purposefully mend for the administration and the involvement of the people in the process of governance. Directive principles of state policy under article 40 part IV of the constitution of India provides the provision for establishment of the panchayat raj institutions but this provision was obligatory on the states before 73rd amendment in the constitution of India. Implementing the provision of article 40 of the constitution, Government of India had launched the program of community development in 1952. In 1956 second, five-year plan has recommended that interlinking the panchayat raj with higher-level institutions. For this purpose, Government had appointed a committee under the headship of Balvantrai Mehta in 1957. Based on recommendation of the Mehta Committee various state legislatures had enacted the panchayat raj system in the territory of the state. (Alok, 2012-13) Rajasthan and Andhra Pradesh took the first initiations towards the establishment of panchayat raj system in 1959. Thereafter other states and union territories had started to take a step in that regard. In 1969, the first Administrative Reforms Commission had recommended that the main executive body of the panchayat raj system should be in the place of district i.e. “Zila Parishad” and not in the place of Block i.e. “Panchayat Samiti”. Government has formed a committee under the headship of Asoka Mehta in 1977, whose view on the concept of panchayat raj was like the democracy at national and state level. However, the numbers of various committees were established in the period of 1978 to 1986 for studying the different aspects of Panchayati raj institutions for strengthening them, but only minor suggestions came forward. Thereafter 64th and 65th constitutional amendment bill came in July 1989 by the government of Rajiv Gandhi. The basic purpose of this bill was to set up the panchayat raj system in every state. At last in 1992 after combining the above all committee’s recommendations, Government drafted and produce the 73rd and 74th amendment bill in the parliament. This bill was passed in 1993 by adding new part IXA in the Constitution of India consisting with the article 243A to 243O. (INDIA, 2007) 73rd Amendment in the Constitution: – The 73rd Amendment Act 1992 came into effect from the 24 April 1993. All states enacted legislation by 23 April 1994. The Panchayat previously were a mere suggestion in the Directive Principles of State Policy whereas the 73rd Amendment resulted in the Panchayati Raj Institutions (PRIs) being conferred constitutional sanction. Through this amendment, government has inserted a part IX A with article 243A to 243O in the Constitution of India. By the provision of this amendment made mandatory to the every state for establishment of the panchayat at village level. This amendment made a provision for reservation of Scheduled Castes, tribes, and women representation in the Panchayat raj institutions. It made structural changes in local self-governance system by this amendment. (Alok, 2012-13) Although the political empowerment was not the main purpose of this amendment, but the devolution of powers and responsibilities upon panchayats at appropriate level. It means that the legislations empowered panchayats with powers and responsibility have a special and predominant status. The major focus was to ‘empower them with certain functional mandates, give them a significant degree of autonomy and impart to them an element of self-reliance and self-sufficiency through fiscal transfer’s taxation powers and tax assignments’. Resultantly Panchayati Raj Act has been passed by the parliament in 1994.This Act proposes the three tire form of government. (i.e. District Panchayat, Mandal Panchayat and village Panchayat.) (Alok, 2012-13) After first decade, the 73rd Amendment saw very little change in the way that central and state departments dealt with Panchayat. In June 2004, the Government of India created a Ministry of Panchayati Raj (MOPR), to primarily overseen the implementation of Part IX of the Constitution. The gram sabha can be a powerful instrument of downward accountability, if it would be properly empowered and convened regularly. Gram sabha will have powers to approve plans, program, and projects before the Panchayat at the village level takes them up for implementation. (Alok, 2012-13) Provisions under Panchayati Raj Act 1994: (Zakir, March 2011)

  • Gram Sabha shall consider the following matters and make recommendations and suggestions to the gram panchayat.
  • The report in respect of the development program’s of the Gram Panchayat relating to the preceding year and development program propose to be undertaken during the current year.
  • Promotion of unity and harmony among all sections of the community in the village. Such other matter may be prescribed (sec. 4)
  • President of Gram Panchayat. In absence of the President, the Vice President or any person selected by the majority of the Gram Panchayat Members.
  • Convening of the gram Sabha –

-By the secretary of the gram panchayat with approval of the president and in consultation of the BDO. -The gram Sabha shall meet regularly but the period of three months shall not intervene between any two meetings.

  • Publicity: – wide publicity should have to give 15 day before the gram Sabha.
  • Quorum:-One tenth of the total members or 100 numbers of voters of the village/villages whichever is less should be present.

The Gram Sabha has formed to enable all individuals voter of the village to participate in decision making at local level. Though the Eleventh Schedule of the Constitution gives a list of 29 activities, or functions, intended to be transferred to the local bodies, covers a broad spectrum of development activities ranging from activities in the social and economic sectors i.e. education, health, women and child development, social security, agriculture and non agricultural activities etc. Despite that, the important role play by local bodies in the democratic process and in meeting the basic requirements of the people, the financial resources generated by these bodies fall far short of their requirements. Because financial resources were insufficient with them, they were depend for the financial aid on the state government or centrally sponsored schemes. PESA Act, 1996:–The 73rd Constitutional Amendment had excluded to the adivasi, tribal people; except for reservations and Scheduled Areas from the Act. However, through Article 243 M (4) it had kept open the possibility that Parliament may enact the provisions to these areas. Therefore the Rao Government set up the Bhuria Committee in 1994 to formulate a law for extending the provisions of Part IX of the Constitution to the Scheduled Areas and to suggest modifications in other Acts relevant to the Fifth Schedule in order to strengthen institutions of local self- government in the Fifth Schedule Areas. The recommendations of ‘Provision of the Panchayats (Extension to the Scheduled Areas) Act 1996 came into effect from 24 December 1996. This act has given the special power to the gram sabha for protecting the socio economic culture of the tribal community and their participation in the process of governance. Democratic governance in rural India:- India’s 70% population are living in the rural area. Since ancient period, there were the panchayat raj systems for local governance of villages. After Independence India have a Constitution for the administration of the whole nation. In that, there is a provision for the Local governance under article 40, which was obligatory to the state to make panchayat raj system in their territory. Moreover, some states had made an effort in that regard but that was only name shake, the actual powers were envisage on the state assembly. When 73rd amendment came, the enormous change has happened in respect of democratic nature of the panchayat raj system in India. The main aim of this act was to involve the people in the process of governance. To hold Panchayat elections regularly every 5 years, to provide reservation of seats for Scheduled Castes, Scheduled Tribes and Women, to appoint State Finance Commission to make recommendations as regards the financial powers of the Panchayats and to constitute District Planning Committee, to prepare draft development plan for the district. Therefore, there is a notion that India has a largest democracy in the world. However, the rural development is broad and inclusive concept, which covers the socio, economic and political development of the rural areas. This strengthens the democratic structure of the panchayat raj institutions as well as improves the rural infrastructure, income of village households, education, health etc. (Zakir, March 2011) To removing the corruption at Gram Panchayat level, there is a law of investigation against Pradhans, Deputy Pradhans and the members. a) The complaint along with affidavit and relevant proofs can file to the district magistrate. b) The investigation of the complaint will have done by the district level officers only. c) A Charted Accountant will have to appoint for the completion of the accounts of Gram Panchayat. d) The audit of Gram Panchayats will do by the Chief Accountant. e) Gram Sabha can resituate the Pradhan by passing a no confidence resolution if there is any grave charge against the Pradhan. (A.K. Mishra, Naved Akhtar & Sakshi Tarika, June, 2011) Responsibilities of the people:- (a) Coordinating the meetings Public should get the information regard the works and planning of Gram Panchayat and the usage of received funds. Public should elect the deserving candidate for different schemes. (b) Checking Cleanliness All the families should have to built and use the toilets. Toilets should have to build keeping in view the convenience of women and elders. The cleanliness of drains and surroundings should have to take care of (c) Security of Gram Panchayat Assets Public should check the illegal cutting of trees, illegal possession of land of Gram Sabha and maintenance of community buildings. (d) Increase Public Coordination Public should share hand in development and construction works, periodic cultural activities should promote. In the democracy, people are more responsible for governance of the panchayat. They have power to elect their representative as well as to keep watch on the functions and the process of governance of panchayat. They can directly involve in the process of governance through gram sabha and ask the question to the members regarding the progress of the work of development of the village. Critics view on the Panchayat Raj system:- (Board, June 2013) Dogra (2009) commented the gram panchayat that pradhan assembles a few people whom he knows and passes that off, as a gram sabha meeting. This is not rare in the Indian village scenario dominated by discriminations and caste politics. In many villages, Gram Sabha members did not even know that they were present in any meeting and if so in what committee meetings those were anyway rarely held. Even today, Khap Panchayats are prevalent in Haryana, western Uttar Pradesh and Parts of Rajasthan. The Khap Penchant imposes its writ through social boycotts and fines and in most cases end up either killing or forcing the victims to commit suicide. This is the big failure of the Panchayat Raj Act in India. (Ahluwalia, Srividya Kaimal & Manik) Panchayati Raj was indeed one of the most remarkable social and political reforms since independence. However, PRIs today face a number of daunting challenges. Across all states, there is a lack of genuine devolution of funds, functions and functionaries in Panchayati Raj. Added to that are social challenges that work against the emergence of leadership from marginalized sections of society, such as women, Dalit’s and tribal’s. Further, there is a lack of role clarity among Gram Panchayats, Block Panchayats and District Panchayats. The grass root democracy in India still suffers from three limitations- federal constraints, a resistant bureaucracy and local elite capture. (Menon) Vyasulu (2000) finds that State governments have devolved little finances and fiscal powers to the Panchayats. Instead, many have established ‘parallel bodies’ as a channel for development funding. Self-help groups (SHGs) connected to the Janmabhoomi programme in Andhra Pradesh and the Rajiv Gandhi Watershed ‘Missions’ in Madhya Pradesh are two illustrations of this trend (Section 4). (Johnson) Panchayat Raj Act as a tool of the devolution of power:- This act provides the provision for Fund, function and functionaries, it means the devolution of power to the panchayat raj institutions. However, there are some criticisms on the implementation of this act but it has achieved a great success in the Indian democratic system. It provides an idea about democracy, which is at national level. This act enables people for the active participation in the democratic institutions. This act as a tool for the marginalized group of people, they got protection by this act. Similarly, this act provides a means/ tool for the central or state government to implement the policies through panchayat raj institutions. E.g. MGNREGA, IAY etc CSS has implemented through Panchayat Raj Institutions. Apart from this, Panchayat raj institutions have all power to decide their own agenda of village development programme. People are more willing to participate in panchayat election rather than lok sabha or vidhan sabha election. (Banerjee, july 27, 2013) Conclusion:- On the above discussion, the conclusion can be drawn as the panchayat raj system is not new in India. It was rooted in ancient Indian text Vedas and puranas as well as it can be looked into the history of Ashoka. In the realm of British, there were systematic changes in this system. They made various Acts in this regard. The main problem with the panchayat raj system was Indian village panchayat became arbitrary, due to prevalence of caste system in India, in medieval period of Indian history. The father of constitution knew these facts; therefore, they did not given much importance on the establishment of the panchayat raj institution in India Primarily. They made provision regarding this under part IV of article 40, which was not enforceable by law. When 73rd amendment came, through which it became mandatory to establishment of panchayat raj institutions. Important point of this act was it has given representation to SC, ST and women in the panchayat raj system. It was the major effect on the caste system, who were denied by the social ladder, they got chance to raise their voice and involve in the process of village governance. The main purpose of this act is to devolution of powers to local body. This act has given administrative power to the gram panchayat. The idea behind that to strengthening the democracy, because it involves people in the administration of village directly through the gram sabha. It increases the responsibility of the people towards the local governance. This act has penal sanction, if any one violets the provision of this act who will be liable for punishment. Finally, I would like to say that, though there is no proper implementation of this act in each state because of rigid tradition and caste system but it has brought enormous changes in the Indian democracy. People became aware about their rights and they are becoming more conscious about constitution and constitutional institutions on which the whole democracy is dependent. Thus, I can say that through panchayat raj acts rural India becoming the democratic governance structure, which was absence in the medieval period even in the rule of Britishers.

Bibliography

A.K. Mishra, Naved Akhtar & Sakshi Tarika. (June, 2011). ROLE OF THE PANCHAYATI RAJ INSTITUTIONS IN RURAL. Ahluwalia, Srividya Kaimal & Manik. (n.d.). Alok, V. N. (2012-13). Strengthening of Panchayats in India:. New Delhi: The Indian Institute of Public Administration. Banerjee, R. (july 27, 2013). What Ails Panchayati Raj? Economic & Political Weekly, 173-176. Board, E. A. (June 2013). Journal of Politics & Governance. Journal of Politics & Governance, 203-376. INDIA, G. O. (2007). SECOND ADMINISTRATIVE REFORMS COMMISSION. Johnson, C. (n.d.). Decentralisation in India:. Menon, S. V. (n.d.). Zakir, A. M. (March 2011). Strengthening Panchayati Raj. Guwahati: State Institute of Rural Development(SIRD).

Income Inequality and Unemployment Governance in Nigeria Essay

The unique human funds shares that each individual person in a society has makes disparity in possibility, specifically in the living natural environment. As the educational level of persons raises, the potential for maximizing prospects and, in return, revenue also generally improves, Muller, (2002), OECD, (2000) Abdullah et al, (2015), Yang and Qui, (2016). On the other hand, an boost in the education and learning of an individualr’s involvement in the labor pressure presents them much more edge in the labor sector. Thus, Park, (1996), argued that an enhance in training amount eliminates earnings inequalities in the labor current market by for an individualr’s more prospects of employment. However, as extended as education providers are rendered to individuals in a state similarly and quite, very well-educated men and women can lengthen their cash stocks and gain larger incomes, but people with less amounts of instruction will have to settle for a lot less income.

This predicament, observed mostly in underdeveloped nations around the world, to separates the income distribution distinct to the schooling factor and leads to injustice in the context of the labor natural environment relatively than the production industries Ferreira, (2001) Afonso et al, (2010). In a analyze performed by Fields, (1980) examining cross-sectional knowledge collected from Latin The usa, Asia, and Africa. The outcomes uncovered that schooling level generates differences in the poverty charge at the rural and urban level. Sylwester, (2000) also indicated that public training expenditure boosts earnings inequality by cutting down brief-term financial progress, but that schooling expenditure influences economic growth and earnings distribution are positively considerable in the long-time period. Also, yet another analyze executed by Sylwester, (2002) inspecting data from 50 international locations in between 1970 and 1990. He concluded that public education expenditure positively decreases to income inequality hole. Ferdi Celikay, (2016) executed a review of 31 European nations for the time period 2004-2011. The benefits revealed that a a single % enhance in education and learning raises the income inequality (Gini coefficient) by .20 p.c in the shorter-run and cut down it by .20 p.c in the lengthy-operate.

Thus, an maximize in the amount of education has an effect on revenue inequality negatively. Palaz et al, (2013) also verified that owning major instruction negatively affects revenue inequality but increased school schooling reduces the damaging effects on earnings inequality. Various empirical scientific studies have indicated that instruction expenditure or an raise in schooling degree lower the degree of money inequality. This research will include the training amount in its model for the second aim in pinpointing the results in of money inequality in Nigeria in both the short- run and very long-run.

Impact of Corporate Governance on Firm Performance Finance Essay Essay

There is a large body of empirical research that has assessed the impact of corporate governance on firm performance for the developed markets. Studies have shown that good governance practices have led the significant increase in the economic value added of firms, higher productivity and lower risk of systematic financial failure for countries. The studies by many researchers and philanthropists who a significant importance of Corporate Governance. Most of the empirical work for exploring possible relationship between corporate governance and firm performance is done for single jurisdiction.

Shleifer and Vishny (1997), John and Senbet (1998) and Hermalin and Weisbach (2003) provide an excellent literature in this area. It has now become an important area of research in emerging markets as well.

There are many empirical studies that analyse the impact of different corporate governance practices in the cross-section of countries.

Mitton (2001) has done a noteworthy research with sample of 398 firms Korean, Malaysian, Indonesian, Philippines, data Thailand have found that the firm-level variables are related to corporate governance has strong impact on firm performance during East Asian Crisis in 1997 and 1998. The results suggests that better price performance is associated with firms that have indicators of higher disclosure quality, with firms that have higher outside ownership concentration and with firms that are focused rather than diversified.

Brown and Caylor (2004) have measured the Corporate Governance’s impact, he analyze it with 51 factors, 8 sub categories for 2327 US based firms with the help of Institutional Shareholder Service (ISS) dataset. They infer that the firms having better governance are more profitable, more valuable and they were very good in their payout to to their shareholders.

Gompers, Ishii, and Metrick (2003) use Investor Responsibility Research Centre (IRRC) data. They indicate that firms with fewer shareholder rights have lower firm value and lower ROE. They classify 24 governance factors into five groups: tactics for delaying hostile capture, selection civil rights, principal/official guard, other conquest suspicion, and position law. Most of these factors are anti-takeover measures so G-Index is effectively an index of anti-takeover protection rather than a broad index of governance. Their findings show that firms with stronger shareholders rights have higher firm value, higher profits, higher sales growth, lowest capital expenditures, and made fewer corporate acquisitions.

Lipton and Lorsch (1992); Jensen (1993) conduct an extensive research on the Corporate Governance. They concluded that, It is expected that by limiting board size firm performance could be improved. but the benefits attained from larger boards were outweighed by the poorer communication and decision-making of larger groups.

Yermack (1996) conduct a study and provides an inverse relation between board size and profitability, asset utilization, and Tobin’s Q. According to him with the increase in the Board size the firm performance reduced and resultantly the profitability and payout to shareholders reduced.

Anderson, et al. (2004) analyze and present their result as the cost of debt and board size has the inverse relationship, according to them the cost of debt is lower for the firms having larger boards, because financers view these firms as they are having more effective control and decision making of their financial accounting processes.

Brown and Caylor (2004) show an extensive research and add to this literature by showing that firms having board sizes between 6 to 15 were performing very well and those firms have higher ROE and higher profitability as compare to other firms having different board size. They also conclude that independent audit committees are positively associated with dividend yield, but negatively related to the operating performance or firm valuation. They also find that the consulting fees paid to auditors less than audit fees paid to auditors are negatively related to company performance and company policy of auditor rotation is positively related to return on equity.

Fosberg (1989) study the relationship between the proportion of outside directors, a proxy for board independence, and firm performance. He concluded that there is no relation between the proportion of outsider directors and various performance measures.

Hermalin and Weisbach (1991) also find no association between the proportion of outsider directors and Tobin’s Q; and Bhagat and Black (2002) find no linkage between proportion of outsider directors and Tobin’s Q, return on assets, asset turnover and stock returns.

In contrast, Baysinger and Butler (1985) and Rosenstein and Wyatt (1990) show that if the firm appoint outside directors then the stakeholders trust them more and that’s why bankruptcy cost theory and trade off theory is in the favor of outside directors, which resulted into low cost, better competitive position and profitability.

Brickley, Coles, and Terry (1994) find a positive relation between the proportion of outsider directors and the stock market reaction to poison pill adoptions; and Anderson, Mansi and Reeb (2004) show that the cost of debt, as proxied by bond yield spreads, is inversely related to board independence. Studies using financial statement data and Tobin’s Q find no link between board independence and firm performance, while those using stock returns data or bond yield data find a positive link.

Hermalin and Weisbach (1991) and Bhagat and Black (2002). Brown and Caylor (2004) do not find Tobin’s Q to increase in board independence, but they come up with the result that ROE of the firm increases with the independent boards, along with that independence of board is closely associated with the higher profit margins, larger dividend yields, and larger stock repurchases. They concluded that board independence is associated with almost all other important measures of firm performance except Tobin’s Q.

Klein (2002) finds a negative relationship between earnings management and audit committee independence, and Anderson, et al. (2004) conclude that entirely independent audit committees have lower cost of financing.

Frankel, et al. (2002) come up with a negative relationship between earnings management and auditor independence (based on audit versus non-audit fees). Whereas, Ashbaugh, et al. (2003) and Larcker and Richardson (2004) come up with a contradictory evidences.

According to Kinney, et al. (2004) there is no association between earnings and fees paid for monetary in order system plan and achievement or inside audit services.

Agrawal and Chadha (2005) come up with similar conclusion, he state that the financial performance is independent of quality and expensiveness internal control and Internal Audit.

Yermack (1996) by analyzing a sample of 452 U.S. public firms between (1984 and 1991) shows that firms in which CEO and chairman are two separate individuals, those firms perform better as compare to those firms in which both positions were hold by the same person. Same person sitting on both seats will cause higher agency problem affects firms’ performance negatively. Firms were more valuable when the CEO and board chair positions are separate.

Core, et al. (1999) finds that CEO compensation is lower when the CEO and chairman of the board are separate. Brown and Caylor (2004) conclude that firms are more valuable when the CEO and chairman of board are separate.

Botosan and Plumlee (2001) find a material effect of expensing stock options on return on assets. They use Fortune’s list of the 100 fastest growing companies as of September 1999, and compute the effect of expensing stock options on firms’ operating performance.

Fich and Shivdasani (2004) find that firms with director stock option plans have higher market to book ratios, higher profitability and they document a positive stock market reaction when firms announce stock option plans for their directors.

Brown and Caylor on the other hand come up with a contradictory conclusion and find no evidence that operating performance or firm valuation is positively related to stock option expensing. They also concluded that operating performance does not relate to the executive compensation, or to directors receiving some or all of their fees in stock.

Omran M.M, Bolbol A, Fatheldin A. (2008) analysis a sample of 304 firms from different sectors of the economy, from a representative group of Arab countries (Egypt, Jordan, Oman and Tunisia). They concluded that ownership structure has no significant effect on the firm performance they state that ownership concentration is an endogenous response to poor legal protection of investors, but seems to have no significant effect on firms’ performance.

2.1. Overview of Pakistan’s Corporate Governance Regime

During the ancient period little time, corporate governance has turn into an important area of research in Pakistan. In his noteworthy work Cheema (2003) suggests that corporate governance can play a significant role for Pakistan to attract foreign direct investment and mobilize greater saving through capital provided the corporate governance system is compatible with the objective of raising external equity capital through capital markets. The corporate structure of

Pakistan is characterised as concentrated family control, interlocking directorships, cross-shareholdings and pyramid structures. The concern is that reforms whose main objective is minority shareholder protection may dampen profit maximising incentives for families without providing offsetting benefits in the form of equally efficient monitoring by minority shareholders. If this happens the reform may end up creating sub optimal incentives for profit maximization by families. They argue that a crucial challenge for policy makers is to optimize the dual objectives of minority shareholder protection and the maintenance of profit-maximising incentives for family controllers.

There is a need for progressive corporations to take a lead in the corporate governance reform effort as well.

Rais and Saeed (2005) study the Corporate Governance Code 2002 in the light of narrow Impact Assessment (RIA) structure and its enforcement and request in Pakistan in arrange to recognize the dynamics of public decision making and charge the efficiency of the directive policy of SECP in the ground of corporate governance. The study shows that although the listed company are gearing themselves up to take on the Code, there are a number of constraint, and reservations regarding the method it was draft and implement.

Ghani, et al. (2002) examine business group and their contact on corporate governance in Pakistan for non-financial firm listed on the Karachi Stock Exchange of Pakistan for 1998-2002. Their proof indicate that investor view the business-group as a device to appropriate marginal shareholders. On the other offer, the relative financial routine outcome suggest that industry groups in Pakistan are well-organized economic planning that alternate for missing or wasteful outside institution and markets.

Ashraf and Ghani (2005) analyzes the start, increase, and the growth of accounting practice and disclosure in Pakistan and the factor that unfair them. They certificate that lack of shareholder protection (e.g., minority rights defense, insider trade protection), judicial inefficiencies, and weak enforcement mechanisms are more dangerous factors than are civilizing factors in explanation the state of accounting in Pakistan. They close that it is the enforcement mechanism that are supreme in improving the excellence of accounting in developing economies.

There is an growing interest in analysing concern of corporate governance on stock market in Pakistan but many issue in this area are exposed. In particular, firm-level corporate governance score and its affect on the assessment of the firm which is inner issue of this region needs in strength research. It is in this viewpoint this study aims to make giving in the literature on corporate governance.

Before proceeding further, it would be pertinent to have a macro-level glance over the multifaceted corporate governance regime in Pakistan, that is to say, the laws that impact the issues of good governance of a company. Such laws may be categorized as follows:

The corporate laws, i.e., the general laws relating to companies and their business;

The rules and regulations made under the corporate laws;

The listing regulations and the byelaws of the stock exchanges;

A body of general civil laws, i.e., enactments providing remedies forseeking declarations, enforcement of claims and recovery;

A body of general criminal law, i.e., legislations outlining prosecution and trial for criminal breach of trust, fraud etc.; and

Special prosecution under the National Accountability Ordinance, 1999 for corporate frauds and misappropriation.

In view of the above legislative spectrum, a consolidated review of the relevant laws would offer the foundational perspective to understand Pakistan’s superstructure of corporate governance. Transforming this understanding, along with SECP’s vision,15 can truly envision the future of corporate governance in Pakistan- as isolated reforms with regard to any one of the above legislative spheres is not likely to ensure the expected results.

The Code is a first step whereby principles of good governance are envisioned to be systematically implemented in Pakistan. According to the project report published by the SECP after the formulation of the Code:

“The Code of Corporate Governance mainly aims to institute a system whereby a company is directed and controlled by its director in compliance with the best practice enunciated by the system so as to safeguard the welfare of diversify stakeholders. It propose to restructure the work of the board of director in order to begin symbol by minority shareholders and broad-based sign by executive and non-executive directors. It seek to achieve the objectives of good corporate governance by recommend rise of corporate working, internal manage system and outside audit requirements. The Code emphasizes openness and clearness in corporate relationships and the decision-making process and requires directors to release their fiduciary tasks in the better notice of all stakeholders in a clear, up to date hard-working, and timely manner.”

Following the enforcement of the Code of Corporate Governance (the “Code”) in March 2002, reluctant corporations consider the implementation of the new regime not only expensive to comply with but also practically difficult to implement. While on one hand there is a regulatory pressure to enforce the Code, on the other, there is, among others, an admitted lack of relevant expertise that can assist in the enforcement of the essence of corporate governance in Pakistan. In the present work, recommendations for future indigenous reforms will remain in focus, as against the discussion in respect of the evolving international practices. Such recommendations include:

effective grievance and redress mechanism for minority shareholders;

best practices for the frontline regulators; and

expansion of the audit committee to include the legal expertise, etc.

2.2. Current Challenges and Suggested Measures

2.2.1. Challenges

a) Effective Grievance and Redress Mechanism

The Companies Ordinance, 1984 and the Code do not recognize minority shareholders with a shareholding below 10%. The minimum threshold for seeking remedy from the Court against mismanagement and oppression requires initiation of the complaint by no less than 20% of the shareholders.28 Shareholders representing 10% can apply to SECP for appointment of inspector for investigation in to the affairs of the company.29 No effective redress is available to shareholders representing less than the 10% of the shareholding (the “minority shareholders”) upon being aggrieved.

The minority shareholders are left with the sole civil remedy to sue for the tortious loss in accordance with the general laws for enforcement of a claim. There is a visible increase for bringing such actions especially in the wake of increasing shareholders’ activism. In routine, such claims seek interim and permanent injunctive relief against the management. Pending final adjudication of the matter, interim relief is invariably granted, resulting in the hindrance of a company’s business.

To channelise shareholders’ activism in a direction that provides the minority shareholders with an effective remedy with no or minimal hindrance to the company’s business, an internal grievance and redress mechanism should be considered for listed companies. In this regard, SECP may formulate a list of maintainable grievances with a direction to listed companies to establish a ‘grievance and redress committee’ consisting of executive and independent directors. The minority shareholders may have an appellate remedy before the relevant frontline regulator, and thereafter to SECP. This will essentially entail expansion of quasi-judicial functions of the stock exchanges and SECP.

b) Reporting Noncompliance

In order to make the reporting and disclosures more reliable, SECP should encourage the minority shareholders to report any noncompliance with the applicable laws directly to the Audit Committee, with a copy to the relevant stock exchange.

c) Frontline Regulators

We recently experienced an unprecedented surge of investment in the public stocks. Unfortunately, it was followed by a sudden market crash. Huge market losses triggered a public debate on a more active role for the frontline regulators. The best practices set out in the Code are expected to ensure a self-sustaining mechanism that provides financial transparency to, mainly, safeguard the investments.

A better-governed stock exchange would, thus, ensure safer investment opportunities. Accordingly, SECP should consider introducing appropriate guidelines for the stock exchanges so as to ensure their better governance, or applicability of the Code thereto.

2.2.2. Remedial Measures

Expansion of Audit Committee-Legal Expertise

Introduction of internal and external audit mechanism can be considered as one of the most prominent achievements in the evolution and development of global corporate governance initiatives. The SECP has benefited from and enriched the Code with the international experience in this regard.

In general, the main function of the internal audit committee is to assist the board of directors whereas the external audit committee addresses the concerns of the shareholders at large. In both respects, it is only the financial and accounting expertise that is being made available to a company. The concern that the business and affairs of a company should be run and managed in accordance with the applicable laws cannot be adequately addressed either by the internal or external auditors due to unavailability of professional legal expertise with them.

The Code requires not only compliance with the Code and the Companies Ordinance, 1984 but also requires certification in relation thereto.32 Although, the existing provisions in the Code do not require a company’s certification for compliance with other applicable laws, however, a proper certification as to the compliance with the Companies Ordinance, 1984 and the Code can only be done on the basis of professional legal advice.

Additionally, a deficiency in the Code for requiring compliance with law, and its certification, should be made good. Although such compliance would expand the corporate governance regime but, for all intents and purposes, would be in consonance with the purposes for which the issuance of the Code was considered appropriate. Such certification will lead to the company’s (somewhat partial) adherence to the Corporate Social Responsibility (“CSR”). Accordingly, the Code may become instrumental in introducing CSR for the listed companies, and thereby making them more attractive for local and international investments. In addition, the compliance with law certification would, inter alia, help to discourage the transaction between the associated companies.

In order for the Code to achieve the above, SECP should consider expanding the scope of internal and external audit to include the legal expertise for evaluating the company’s business and the affairs with the legal perspective. In this respect, the following initiatives may be taken:

One of the independent non-executive directors may be a professional lawyer. In this regard, the companies may consider retaining services of their legal advisors appointed pursuant to the Companies (Appointment of Legal Advisors) Act, 1974 and may alternatively, be deemed to be a member of the board;

One of the non-executive directors on the audit committee34 should be the professional lawyer/legal advisor;

With the assistance of the professional lawyer/legal advisor, the audit committee should certify company’s compliance with the applicable laws; and

Upon availability of the legal expertise, the Audit Committee should be empowered to entertain (and decide) the grievances lodged by the minority shareholders, as discussed above.

Additional Measures

Fiduciary Duties

The code requires the director to “bring out their fiduciary duty with a sense of purpose judgment and freedom in the best benefit of the corporation”. However, the expression “fiduciary duties” is not defined in the Code. SECP may consider listing out the fiduciary duties to make this provision more certain and, thus, effectively enforceable. In this regard, SECP may include the list of fiduciary duties from the Manual of Corporate Governance,36 which SECP does not consider to be a legal document.

Statement of Ethics and Compliance

As has been suggested earlier by an expert,38 the non-compliance “should be strictly followed in the process of a “comply or explain principle”. Accordingly, the companies should be strictly required to ensure compliance with their ‘Statement of Ethics and Business Practices’,39 in addition to the existence of such statement. In this regard, SECP should provide a general specimen setting out the minimum contents for ‘Statement of Ethics and Business Practices’ and, additionally, require the companies to expand their own Statement on the basis thereof.

Audit Committee’s Terms of Reference

In addition to the above, the Audit Committee’s “Terms of Reference” should expressly provide for review of the company’s outsourcing policy, so as to ensure that the company is getting the best available services at the most competitive rates.

2.2.3. Future Challenges

The most profound challenge that the corporate governance regime is likely to face is the vindication of penal liability for non-compliance of mandatory disclosure and certification requirements by senior executives against the constitutional touchstone of self-incrimination. The contemporary drive to integrate ethical codes of corporate governance into legislative instruments incorporating punitive sanction, the best example of which is the Sarbanes-Oxley Act, though are hailed as a quantum leap in structuring a transparent governance regime, if examined in the rich constitutional tradition of upholding civil liberties, may appear hollow in the corpus. Concerns like uplifting of “standards of financial reporting and accountability”40 to boost the business growth are supplemented today by considerations of curbing money laundering and white-collar crimes. It may not, perhaps, be farfetched to expect a paradigm shift enabling detection of flow of funds, particularly to eliminate financing of terrorism.

Expansion of the scope of corporate governance regimes appears inevitable, thus, creating an unprecedented jurisprudential challenge to extant constitutional notions. The above and several other aspects require in-depth examination and analysis, including: what would be the repercussions of over-institutionalising internal corporate structures (by forming committees and sub-committees)? Would externalization of the board result in cost overruns and otherwise cause greater administrative and organizational expense and what alternatives may be recommended to minimize such costs without compromising due effectiveness, transparency and similar underlying considerations? Would good faith presumption in favor of the management be reversed? Would corporate jurisprudence evolve other ethically tested modes of corporate conduct, including a new corporate vehicle in place of the existing structure of a corporate entity? With the incorporation of the Pakistan Institute of Corporate Governance and SECP’s continued strive to reforming the capital market in Pakistan, we hope to have a more effective response to the challenges highlighted above, and to those that would follow

How is the Corporate Governance Affected by Globalization Finance Essay Essay

Corporate governance appears to be a particularly important topic nowadays, when ownership rights and control over assets in corporations are separated, and the top management of corporations might not act in the interests of stakeholders. There are numerous corporations all over the world, and their effect on the world economy is quite substantial. Corporations as one of the most complicated structures of a firm appear to be also the most powerful regarding its influence on economic development and political decision-making process. Considering the importance of corporations to the national economies and shareholders’ concern over level of protection of their investments, it is particularly relevant to be well aware of the governance systems inside corporations, their policy of shareholders’ treatment and their level of subordination to the state.

These paper aims to explore, how entering the international market affects the corporate governance of corporations. Our research question is “How is the corporate governance affected by globalization?”

The research that we conducted will be useful for exploration of globalization effect on the world economies, and it is as well relevant for those, who have interest in topics related to corporate governance and its dependence on exogenous conditions.

To answer our research question we will rely on the following institutional economics approaches: agency theory, transaction costs theory, business ethics theory. We opted these four institutional theories, as they are the most relevant to explain the current changes in corporate governance of German companies as they enter Ukrainian market. In our research, we focus on the effect of Ukrainian market conditions on the governance system of foreign corporations that enter the national market, in our case we analyze German corporations. Both of these countries are in the continental Europe, thus Germany adopted the European type of capitalism. However, it is rather hard to determine what kind of capitalism Ukraine adopted after the break- down of the Soviet Union. We will use real examples of corporations operating in these countries to evaluate the changes in the corporate governance brought by the differences of the background, and to show the consequences the globalization in these cases led to.

The paper contains six main chapters. Chapter 2 provides reasoning for the choice of the countries that are analyzed in the paper. Chapter 3 is a review of four institutional economics theories that we use to analyze the corporate governance in Ukraine and Germany in further chapters. In chapters 4 and 5 we describe and explain main changes in corporations and corporate governance in Ukraine and Germany correspondingly. In these chapters we also focus on the particularities of corporations operating in these countries from the perspective of state of economy, level of political stability, state intervention in private sector and social factors. Chapter 6 is a study case of few German corporations (METRO AG, Henkel etc.) operating in Ukrainian economy. This chapter is an empirical proof of the differences in corporate governance, corporate legislations and their effects in two chosen countries with our comments and advises on possible changes, relying on material provided in previous chapters.

2. Germany and Ukraine. Reasoning for the choice of the countries.

Germany and Ukraine are for the time period one of the most unique economies in the world. Both based on heavy industry those two countries are one of the wealthiest countries in Europe. The time during the Germany’s division and the occupation of Ukraine is a “black-spot” in economic history, regarding both those countries. However, in late 1980s and early 1990s, after the break of Soviet Union, many countries regained their independence thus allowing them to choose their own economic path.

Germany, was separated in year 1961, when the soviets built a wall, which divided Berlin into Eastern and Western parts, thus part of Germany as well, into two economic blocks; one of which was “Western” or capitalistic, and the other one “Eastern” or communistic.

On the other hand, Ukraine shared rather similar destiny in historical perspective. In 1922 Ukraine became a part of USSR (The Union of Soviet Socialist Republics), thus determining their fate for socialistic regime, under control of Soviet Russia.

Both, Ukraine and Eastern Germany, managed to escape the Soviet control in late 1980s (1989 for Germany and 1990- Ukraine), thus allowing them to be independent and choose their own paths and make their own decisions.

“The term corporate governance is used in two distinct ways. In Anglo-Saxon countries like the US and UK good corporate governance involves firms pursuing the interests of shareholders. In other countries like Japan, Germany and France it involves pursuing the interests of all stakeholders including employees and customers as well as shareholders” (Allen, F., & Gale, D. (2002). A comparative theory of corporate governance. Social Science Research Network, Http://papers.Ssrn.com/sol3/papers.Cfm).

The economic paths that Ukraine and Eastern Germany chose were rather different. The main differences were the corporate governance control. The united Germany adopted the continental European corporate governance model, whereas for Ukraine, a rather young and inexperienced country, they chose to adopt Anglo- Saxon corporate governance.

The main differences about those two corporate governance systems were noticed by WladimirAndreff :”In Continental Europe corporate governance, there is no domestic external market for executive talent and, thus, when a German (or any other continental European) CEO is appointed there is no negotiation (about salary, stock options, performance bonus, retirement provision and the like). The second difference is in wage negotiations between the enterprise union and managers. Anglo- Saxon firms behave in both cases as properly capitalist; continental Europe firms, by contrast, are more seen like communities. The latter employee- favoring firm opposes the former shareholder-favoring firm”(Andreff, W. (2002), Journal of international business studies, Vol. 33, No 1, pp.195- 197, accessed on 23/10/2010).

The industries both countries chose were similar. Germany and Ukraine are both famous for their heavy industries, such as machinery industry, and the IT business. However, the main exporting areas of the countries differ greatly. Ukraine still bases most of its economy on Russia. Not only it exports most of its goods there, but also imports the most of country’s energy (gas, oil, electricity) from Russia. Whereas, Germany, is internationally well known for its car industry and home technic. Therefore, the German corporate governance is in relationships with many other different countries, which have different institutional systems, thus making German governance system to adopt in its own way.

On the other hand, Ukraine, basing its main relationship with Russia, had to adopt other meanings of doing transactions. Corruption and government incompetence made the cooperation between western countries and Ukraine rather difficult. According to MSI (Management Systems International):”Ukraine can be categorized as a closed insider economy A¢”â‚¬ a country strongly influenced by elite cartels” (MSI, (February 10, 2006), Corruption Assessment: Ukraine).

In conclusion, both countries have their own similarities and differences. Ukraine and Germany share rather similar historic background until the 80-90s of XX century, however, after both countries escaped the influence of USSR, affected by globalization, they took different paths following different choices, as an example governance structure. Neither of their choices were wrong. Out of these reasons this paper will be analyzing the corporate governance particularly in these countries.

Institutional economics theories used in the analysis of the corporate governance (Agency, Transaction, Business Ethics).

There are many different approaches, which are possible analyzing countries. The theories this paper will be focusing on are: Transaction cost, Agency and business ethics. Those theories were chosen due to several reasons.

Firstly, transaction cost theory would be particularly interesting to apply to German corporate governance, as German corporations have transactions with different firms in different countries, as for Ukraine corporations, it mainly deals with Russia and other post Soviet countries, such as: Belorussia, Lithuania, Latvia, Kazakhstan.

Secondly, agency theory would show how different agents and principles manage the transactions. In Germany’s perspective, they have many branches of their companies around the world, thus making it rather hard to rule. More over, the difference in chosen corporate governance in Ukraine and Germany makes it interesting to analyze how are firm’s agents treated and rewarded in both these countries

Lastly, the business ethics part will mostly concern Ukraine, as the level of corruption in the country is rather high, thus making it rather difficult for international corporations to take part in Ukraine’s economic development. As for Germany, it will interesting to see how do the branches of corporations situated in different countries, where corruption level is higher/high, avoid the corrupt structures.

3.1. Transaction cost theory

The transaction cost is a cost incurred in making an economic exchange/ or participating in a market (Wikipedia.org, accessed on 23/10/2010). There are many different ways to calculate transaction costs. Also, the transaction cost mostly wants firms to cooperate, as lower the transaction costs lead to higher profit, thus making long-term contracts applicable and wanted. As Hanna Kuittinen argues, “The inter-A¬Arm cooperation is more efA¬Acient than the use of open markets or hierarchies when it minimizes the difference between the A¬Arm’s transaction and management costs (i.e. the governance costs) at the same time as the value of its dynamic governance beneA¬Ats is maximized”(Kuittinen, H., Jantunen, A., Kylahenko, K., Sandstrom, J. (13 September 2008) Cooperation governance mode: an extended transaction

cost approach , pp. 307). However, making contracts with other party, needs trust, therefore, the reputation and uncertainty part starts to play an important role in reducing the transaction costs. Especially when long term relationships are being on stake, the reputation determines, whether the contract will be made or not. Moreover, even if the contract is made, uncertainty still might determine the relationships between the firm, as Hanna Kuittinen reasons: “Uncertainty about future outcomes makes it difA¬Acult to specify contracts ex ante, and behavioural uncertainty complicates the coordination during the transaction and evaluation of the performance ex post “(Kuittinen, H., Jantunen, A., Kylahenko, K., Sandstrom, J. (13 September 2008) Cooperation governance mode: an extended transaction

cost approach , pp. 310)

3.2. Agency theory

Agency theory “treats the difficulties that arise under conditions of incomplete and asymmetric information” (Wikipedia.org, accessed on 23/10/2010). The most important part is the asymmetric and incomplete information in these days economy. Principle hiring a new agent for its company is never certain about the validity of his documents or experience. So how should principles determine the agency costs? If they would over evaluate the agent it might come out that the new employee does not sufficiently do his job as expected, however if the agent is under paid, he might start shirking and not try do his best. As Claudia Keser and Mark Willinger argue “low incentives can affect participants in a contradictory way because of a possible conA¬”šict between intrinsic motivation and A¬Anancial reward. Furthermore, it can be concluded from a vast survey of experiments that in some cases incentives improve performance, and in other cases they have no effect, or even worse, hurt performance. “(Keser, C., Willinger, M., (2 October 2006), Theories of behavior in principal-agent relationships with hidden action, pp. 1527).

3.3. Business Ethics

“Business ethics I can either be institutional or personal in scope. Institutional business ethics deals with broad, somewhat impersonal and abstract issues of the ethics of corporations as institutions. An example of this is corporate social responsibility”(Pattan, E., J. (1984), The Business of Ethics and the Ethics of Business, pp. 1). As stated by John E. Pattan, personal or institutional, in this paper we will try to concentrate on the institutional point of view. “We make ethical judgments every time we feel that our interests or opinions are promoted or attacked, our rights respected or violated, or ourselves catered to or threatened” (Pattan, E., J. (1984), The Business of Ethics and the Ethics of Business, pp. 3) The main purpose of business if not a secret, every businessman wants to maximize his profits. But what moral costs does it involve? In some cases it might involve corruption, stealing sometimes even taking lives of others. Therefore, it will be studied, how do institutions deal with each other and how are ethics implied to their decisions.

Corporate governance Ukraine

Introduction to the corporate governance in Ukraine.

In the given paper we regarded the period of the economic development of Ukraine, starting from 1990 year. That time was remarkable for the fall of the Berlin Wall and the collapse of the central planning and command structures that had been in forces for 70 years. The country started implementation of reform programs aimed at market economy and globalization (Holmstrom, & Smith, 2000).

The leading enterprises and companies in Ukraine realized the importance of effective corporate governance. The reason is that it is the key factor determining the microeconomic efficiency of the enterprise sector and the quality of investment climate of the country.

According to A. Kostyuk ‘ the German model is getting spread in the Ukraine from year to year (Board Practices; An International Review’2003). The main evidences are small quantity of independent directors on the board, rare meetings of the board, not big number of committees on the board, the management board affects the supervisory board. There are nearly 35 thousand joint stock companies in Ukraine that is comparatively more than in many developed countries. Every year the state commission on securities and stock exchanges states about over 12 thousand of cases of breaking the principles of corporate governance in the country. In this case, it is significantly to regard the role of ownership structure in corporate governance. It is important to know why owners purchase shares and what corporate mechanisms they use. (A Kostyuk 2002).

The cause of closing of board practices in Ukraine is the rise in concentration of ownership, which results in rise in corporate control, violation of minority shareholders’ rights, rise in number of disputes, conflicts of interests and decrease in transparency of the Ukrainian joint stock companies. A  A A 

‘Database provides annual financial statements in total for 14356 companies, in particular 2215A corporations in 1998, 8325 corporations in 2000 (out of 11850 registered), 7735 corporations in 2001A (out of 12039 registered) and 10213 corporations in 2002 (out of 12010 registered). For the empirical testing we use the dataset of 10313 observations on manufacturing open joint-A stock companies in total, in particular 4337 firms in 2000, 3385 in 2001 and 2591 in 2002. Thus theA sample covers around 37%, 28% and 21% of all open joint-stock companies in Ukraine in 2000, 2001A and 2002 respectively. The data is collected from publicly available information, in particular, fromA annual financial statements of Ukrainian joint-stock companies (Source: PFTS ñ First Trading StockA System, Istock database:A www.istock.com.ua), (Corporate governance in Ukraine ‘ Vitaliy Zeka ).

Nowadays corporations in Ukraine are divided into joint stock companies founded pursuant to Law of Ukraine ‘On business association’:

Open Joint Stock company

Close Joint Stock Company

Ukrainian Joint Stock Company

Ukrainian Private Joint Stock CompanyA 

The biggest companies in Ukraine are:

Company Profit Sector – Naftogaz Ukraine Ukraine 6.126.451(Energy/Commodities), Mariupolskij Metkombinat Ukraine 2.382.034(Industry), Azowstal Ukraine 2.059.265(Industry) , Linos Ukraine 1.923.149(Energy / Commodities), Mittal Steel Kriwoj Rog Ukraine 1.836.833 (Industry), Industrialnyj Sojuz Donbasa Ukraine 1.750.239(Industry), Ukrtatnafta Ukraine 1.460.350(Energy/ Commodities), Zaporozstal Ukraine 1.325.41(Industry).

Directors can be nominated by the supervisory and the management boards independently.

At least 25 % of Companies with where controlling block of shares (50 percent +1 share) belongs to one owner, have boards with 5-6 members. They represent interests of the controlling shareholder. (A Kostyuk 2002)

In accordance with Article 118 of the Commercial Code of Ukraine, basic shareholder rights are established by law. The width of shareholders rights in Ukrainian firms may vary and depends on whether the joint stock company has free circulation of shares (an open type) or its shares are distributed among the founders and cannot be traded on stock exchange( a close type) . Companies controlled by the foreign institutional investors or Ukrainian investment companies have 7 or 9 members on the board (see the Commercial code of Ukraine).

Supervisory board members at Ukrainian joint stock companies meet every quarter. Boards at the companies, where the ownership is strongly concentrated, hold meetings less frequently than at those companies, where the corporate ownership is spread. This is because of controllers have a chance to have both the supervisory and the management boards under their control.

The procedure of nominating new directors in Ukraine is plain and chaotic. Shareholder may nominate committees by themselves. In order to do this, they must possess enough stake in enterprise. Each shareholder who possesses shares of the enterprise above 2 % of shareholders equity can offer his own candidate on the supervisory board. As we see from the chart, 44% of elected directors were nominated by shareholders. 31 % of elected directors were nominated by the management board. Only 25% of directors were nominated by the supervisory board.

(A. Kostyuk 2002).

In other words, shareholders wish to be controllers through electing directors and executive who would represent their interests.A 

Groups of the director nominators and their efficiency in nomination

Supervisory boards at Ukrainian joint stock companies are not independent. Some of them possessA largeA share of equity of the companies. The researches show that only about 8 % of board directors are independent.A There is evidence that 42 % of Ukrainian joint stock companies have no independent directors on supervisory board. About 31 %of researched companies in Ukraine have not more than 1 independent director .Companies have policy committee, which are under control of foreign institutional investors.A Directors can be nominated by the supervisory and the management boards indecently. The companies with dispersed ownership structure have a practice of nominating directors by governing corporate bodies. All candidates must be shareholders . A 

Definition of Corporate Governance.

The term ‘corporate governance’ can be interpreted as ‘the system of legal and economic institutions that create formal and informal regulatory system, which determines behavior of enterprise. (Piotr Kozarevswski 2009).

Mechanism of concentration of corporate ownership structure in Ukrain during 1998-2001 is illustrated by next figure.

(Kostyuk, 2007)

The researches ofA Saul Estrin, Adam Rosevear, AlexA Krakovsky, Alex PivovarskyA helped usA  greatly A to understanding theA issue of corporate governance mechanisms in Ukraine. All these expertsA considered that many corporate governance mechanisms, such as the boardA of directors, financial reporting etc, hardly work in Ukraine.A According to Alexander N. Kostyuk (“Corporate Governance in aA transition economy” 2007) “One of the well-known reasons is the absenceA of an Act of Joint Stock Companies.” The draft of this Act had beenA presented in 2001. However, the Act has not been approved by theA Ukrainian parliament, where a strong political lobby protects theA rights of large owners, named “oligarchs”. Therefore, joint stock companies in UkraineA have to work with reference to “The Act of Enterprises”, which does notA explain the nature of many corporate governance mechanisms, such as boardA committees,A executive directors,A executiveA monitoring, etc. As the result, corporate governance in Ukraine allows violation of minority shareholders rights, weak transparency and inadequateA corporate social responsibility. Under such circumstances, one of theA ways out is through developing a set of internal statements to makeA all these corporate governance mechanisms work.

Evidences of corporate governance in Ukraine.

There is evidence on corporate governance, which we observed while studied the statistical data on corporate governance in the country. “Our survey reveals that performance at the enterprise level has also not been improving, average output, employment, and productivity in Ukrainian firms have fallen every year since 1990 and profitability has been uniformly low, if not negative. Moreover restructuring has been very modest, although rather more differentiated across enterprises. For example there has been little increased trade with the West on average only 2%of enterprise sales in 1996 went to OECD countries, up from 0.5 % in 1999. Investment has also been low, so capital stock is largely obsolete.” (Saul Estrin & Adam Rosevesr, 1999)

This is another example we may apply for. In the average firm in Ukraine , the number of managers holding shares is around 15 , while the number of employees is 599 and former employees is 302. Holdings by Ukrainian citizens and companies are also highly dispersed at 1065 and 616 shareholders on average respectively. However, the typical number of shareholders, which are banks, foreign individuals and foreign firms, is one and investment fund is two.

The basic conditions for fundamental structure change in company corporate governance in Ukraine are still weak and need for radical policy changes and capital market development to make company corporative governance more effective (Saul Estrin & Adam Rosevesr, 1999).

After we studied the supervisory board practices in Ukraine, we may conclude the following: they are small in size, lack of legal employee participation in the corporate governance, rare meeting of board, small number of committees on board, management board influences, supervisory board, small number of independent directors.

Analysis of corporate governance in Ukraine from the approach of agency theory.

The Principal- Agent relations exist when one person called the agent acts on behalf of another, called principal. The welfare of the principal is affected by the choice of the agent.A In companies it is the shareholder who acts as the ‘ principal ‘ and company directors act as the ‘agent.’ A 

This interaction works well when the agent is a professional at making the necessary decisions, but contrary doesn’t work well when the interests of the principal and agent differ. A ‘There is possibility of opportunistic behavior on the part of the agent that works against the welfare of the principal’ (Baza Oba, 2004 ).

Most of agent’s actions in the companies are unknown to the principal or expensive to obtain.A A As applied to corporate governance in companies in Ukraine the second practice is common. The absence of accounting and audit norms in Ukraine as we mentioned above, leadsA to corruption and bureaucracy. All these prevent the Ukrainian companies from ‘ bringing simultaneous capital, access to Western ‘, technology, markets and managerial expertise’ ( Estrin & Rosevear, 2003 ).

Analysis of corporate governance in Ukraine from the approach of transaction costs theory.

In order to be able to transact at all and to transact safely, actors have to incur costs to find out how and where transaction opportunities occur, and about the possibilities the possible risks and uncertainties involved. These expenses are called transaction costs. Market transactions consist of several aspects:

1. Search and information costs (who offers the product? Is the seller the owner? What are the conditions?)

2. Costs to draft, to negotiate and to conclude the contract.

3. Monitoring costs and enforcement costs. These are the costs that are incurred to make sure that the other party commits to an agreement, whether this is of a private nature or a public nature (John Groenewegen, 2010).

According to Vladimir Andreff ( 2006), along with ‘ contract’ corporations (enterprises, established on the basis of the contract) there are a large number of corporations formed to address public authorities – ‘public’ corporations typically, in business practices of Ukraine. These corporations are successors of the reorganized ministries, state committees, departments and state enterprises to unite industry, or other principles.

(Inna Pidluska, 1998)

Analysis of corporate governance in Ukraine from the approach of business ethics theory.

It’s of common knowledgeA that no universal model ofA corporate governance exists. However,A there are generally accepted standards of good corporate governance. They may be applied in the frames of legal, economic and political aspects. InternationalA principles of corporate governance appeared as a result of increased public interest in corporate governance, which was generated by the globalization of financial markets and the capitalization of capital flows.A 

Ukraine is notoriously famous for engagingA inA corruption openly and freely. Ukraine’s President Leonid Kuchma has identified the main obstacle to business development as bureaucratic abuse of power, bribery and extortion. He also admitted that the government has failed to create conditions for conducting business honestly. (Inna Pidluska, 1998)

After the Orange Revolution the government of Ukraine has seen itA fit to sell business off to rich elite. It leads to the rise of the business oligarchs who have taken over the exercising state power into their own hands. So calledA ”shadow economy” was flourishing (Egger and Winner (2005).

In modern Ukraine giving a bribe is a regular everyday routine. To give a bribe to an inspector who checks the required norms in the company, or win a tender using special privileges, became a norm in Ukraine.

Average Ukrainian manager spends two days per week on inspection issues.A (Inna Pidluska, 1998)

The facts of double accounting and money laundering is a widely spread practice in a ‘shadow ‘economy of the country.

The size of Ukraine’s informal sector, or “shadow economy”, reflects the high degree of corruption. It is currently estimated that seven out of ten enterprises work in the shadow economy. These companies have no protection from corruption and are open targets for bribery and other forms of graft. (Inna Pidluska, 1998)

Nowadays, UkraineA is making a concerted effort to improve corporate governance at the national level. This goal can be achieved through the implementation of national Code of corporate governance. Problems of corporate governance in Ukraine must be addressed through introduction of standards of ethics and a code of practice for corporate governance. Business ethics is mainly aimed at promoting good reputation of the company at the market. TheA most important principles areA responsibility andA freedom. Employees and partners are individuals. They should beA honest, reliable and trustworthy. All the employees of the company with good will aim at high results, which improve quality of business itself and stuff’s lifeA (World Bank Group, 2009).

Nowadays corruption and bureaucracy widespread among the business community and judiciary itself is subject to political interference and corruption (Adam Mycyk & Elizabeth Cook, 2007 ).

Conclusion to the chapter.

An absence of progress in corporate governance in Ukraine can be explained by insufficiently deep character and consistency of institutional reforms realization.A The functioning of the new global economy is based on an effective management mechanism, implementation of the international accounting and audit standards and professional culture formation in corporate governance.

In general, the corporate governance practices, which were adopted by Ukrainian companies, fail to reflect the high levels set byA more developed European market economies and the United States.

5. Corporate governance in Germany

5.1 Introduction to the corporate governance system in Germany.

History of corporate governance in Germany:

In the 19th century, Germany’s typical form of business organisation was the “Kommanditgesellschaft” (“limited commercial partnership”). A “Kommanditgesellschaft” always had at least one member with unlimited liability whereas the other investor’s liability was limited to their contribution. In 1861, the General Commercial Code was enacted which devoted a section to joint stock companies and allowed incorporations with limited liability. Companies could choose between a single board of directors and a two tiered board system, involving shareholders appointing a supervisory board, which in turn elected the management board. This changed in 1884 when a reform was introduced which mandated that companies have a two-tier board that allowed free registration without a system of state concession. Thus a supervisory board was needed to take over the state’s monitoring role. For members of the supervisory board it was not possible to be a member of the management board but it was possible for a shareholder to directly elect member for the management board.

In the early 20th century, formal acts of corporate law led to the abandonment of mercantilism and the rise of classical liberalism. Corporations increasingly became public and private entities free from government control. Under the Nazi government of Adolf Hitler then, companies became less democratic in a reform of 1937. From then on, shareholders could not elect managers directly, and managers could only be removed “for an important reason”, directors were elected for terms of five years and were under the duty to serve the “Gemeinwohl” or “general good” which was manifested by the state officials to be of higher priority than maximizing the company’s revenues. After the war, new laws and changes all over the world led to more participation for workers within the corporations.

Corporate Governance from 1980-2010 in general

In the 1980’s, many countries privatized large state-owned corporations. Deregulation – reducing the regulation of corporate activity – has often been accompanied by privatization and is part of the laissez-faire policy. Another major post-war shift caused the development of conglomerates, meaning that large corporations purchased smaller corporations to expand their industrial base. Especially more concentrated and owner-controlled firms had high returns during the 1970s and early 1980s but this turned in the late 1980s and1990s. Increasing international competition could be the cause. In the mid-1990s, Germany adopted a series of legal and regulatory reforms related to corporate governance.

In 2002, the German Corporate Governance Code was created. The aim of the German Corporate Governance Code is to make Germany’s corporate governance rules transparent for both national and international investors, thus strengthening confidence in the management of German corporations. The Code addresses all major criticisms – especially from the international community – levelled against German corporate governance, namely

* inadequate focus on shareholder interests;

* the two-tier system of executive board and supervisory board;

* inadequate transparency of German corporate governance;

* inadequate independence of German supervisory boards;

* limited independence of financial statement auditors.

Each of these five points is addressed in the provisions and stipulations of the Code, also taking into consideration the legal framework. Of course the Code cannot cover every detail of every single issue; instead it provides a framework which the individual companies will have to fill in.

5.2 Analysis of corporate governance in Germany from the approach of agency theory

Corporate governance is about the way suppliers – who finance corporations – get a return from the managers on their investment. How can be ensured that managers do a good job and do not free-ride? How do suppliers of finance control the managers? These are principal-agent problems which have the essence that ownership and control – or separation of management and finance – are separated. Suppliers of finance give money to firms; the managers run the firm by using this supply of money and return some of the profit to the investors. Although this mechanism works out most of the time, the corporate governance problem is not yet solved.

In Germany, a top manager even with poor performance is usually only removed after extreme circumstances as the boards are quite passive.

There are large differences in legal protection of investors around the world. In Germany, at least some suppliers of finance have their rights protected and have them enforced by law through the courts, in contrast to many other countries. But still in Germany, managers are in most of the cases not liable.

In Germany, over a quarter of all votes in major companies are controlled by large commercial banks. The banks also have smaller but still significant influence as direct shareholders or creditors. As studies estimate, do about 80% of the large German companies have a non-bank shareholder who owns a share of over 25%. Family control through majority ownership or pyramids is the norm in smaller German companies. A pyramid means that the owner controls 51% of the company which controls 51% of its subsidiaries. The function of pyramids is to enable the ultimate owners to control the assets with the least amount of capital.

In Germany, large shareholders are associated with a higher turnover of directors.

The effectiveness of large creditors and large shareholders depends on the legal rights they have. In Germany, banks have much power because they vote significant blocks of shares, sit on boards of directors, play a dominant role in lending and work in a legal environment favorable to creditors. In Germany, banking governance is very effective.

German banks are relative to their lending power and control over equity votes not as active in corporate governance as one could expect. Large investors such as banks often fail to terminate unprofitable projects they have invested in when continuation is preferred to liquidation. A large investor often maximizes private benefits of control rather than wealth because he is rich enough. He will not internalize the costs of these control benefits to the other investors, large investors fail to force managers to maximize profits and pay them out.

Germany has a successful corporate governance system relying on a combination of concentrated ownership and legal protection of investors.

Compared to the United States, German creditors have stronger rights but shareholder rights are weaker. Germany has a system of

governance by both permanent large shareholders, for whom the existing legal

rules suffice to exercise their power, and by banks, but it does not have participation of small investors in the market. As Germany has a system of permanent large investors, hostile takeovers are rare. The advantage is that firms with long-term investors go through crises with less economic distress and better access to financing. Takeovers limit the planning for future for the managers and reduce the efficiency of investment. Permanent large shareholders and banks that dominate corporate governance in Germany are able to influence corporate management through informed investors who are better able to help firms.

A large investor-oriented governance system discourages small investors from participating in financial markets.

Germany has a successful corporate governance system that combines significant legal protection of at least investors with an important role for large investors. This combination is very different from the governance systems in most other countries which provide limited legal protection of investors and are stuck with family- and insider-dominated firms receiving little external financing.

5.3 Analysis of corporate governance in Germany from the approach of transaction costs theory

The degree to which a firm can switch or differentiate its governance mechanisms depends on the legal jurisdiction in which it operates. German law accords greater bargaining power to labour unions than other countries do. This tends to create a stronger degree of governance inseparability. Governance inseparability means that a firm’s choice of governance mode for a transaction is constrained by the governance choices it made for prior transactions. Governance inseparability can also be created by contractual commitments. Most German firms are efficiently engaged in long-term exchange relationships which require long-term contractual commitments. These contractual commitments cause governance inseparability because they are costly and sometimes even impossible to reverse. The flexibility of a firm is restricted for the future through contractual commitments.

Changes in bargaining power of other parties -e.g. employees, suppliers or customers – to a firm’s contractual commitments can also lead to governance inseparability. Changes in bargaining power can for example emerge from changes in law and regulations. Parties that gained bargaining power unforeseen, try to use this circumstance to improve their own positions but forcing the firm to adopt locally suboptimal governance mechanisms in the future. The German government does not change its regulations constantly giving security to firms and private actors, but there are still other factors that could affect bargaining power and thus make changes in bargaining power to a constant risk in Germany.

As German firms engage in long-term transactions, no firm can entirely avoid making contractual commitments and are thus always aware of the risk of governance inseparability. Governance inseparability constrains most firms over time because of their existing arrangements which limit their scope and flexibility.

5.4 Analysis of corporate governance in Germany from the approach of business ethics theory.

Germans in general are pessimistic about the introduction of an ethical code. Businessmen in Germany think that ethical codes are not effective. In their view, ethical codes do not provide aid for executives in refusing unethical requests and do not give a clear definition of acceptable limits of conduct. But over the years, there is a growing acceptance of business ethics among German executives. Managers like former Nestlé chairman Helmut Maucher, who are fed up with such “moral poppycock” have given way to an increasing number of corporate members of the German branch of the European Business Ethics Network, including well-known German companies, such as Daimler Benz, Bayerische Hypo Bank, Siemens, together with German subsidiaries of transnationals like Procter & Gamble and IBM.

5.5 Conclusion to the chapter.

The German corporate governance system is one of the best in the world. Of course it has some disadvantages and it still can be improved but it already works more efficient than most other corporate governance system and is one of the most advanced ones.

Case study.

Corporate governance in Ukraine and Germany differs in many ways. Ukrainian corporate governance system is younger and less developed, it has many weaknesses yet, comparing to the OECD standards of corporate governance and German Code of Corporate Governance (GCCG). This gap between the corporate governance systems in the two countries becomes especially obvious when globalization enters the picture. Due to the internationalization of the markets, foreign (German in our case) corporations with their own systems of corporate governance involve in the economy (Ukrainian in our case) with completely new to them conditions. Such changes have a double effect on both foreign corporations and domestic market. To show this, we will focus on how different are German corporations’ headquarters from their branches in Ukraine.

1). Metro AG was formed in Germany in 1996 through a merger of retail companies Asko Deutsche Kaufhaus AG, Kaufhof Holding AG and Deutsche SB-Kauf AG. The same year the company entered the list of 20 largest publicly listed companies in Germany and since then it started expanding to foreign markets as well. (Official website of METRO Group, https://www.metrogroup.de) METRO AG has established its branch in Ukraine in 2002. One of the main changes the company implemented was decentralization of its structure in order to improve performance of each separated sales division, this way METRO Cash & Carry was formed in Ukraine. Further on METRO Cash & Carry launched a new strategic performance improvement program “MCC 2012 – Committed to Excellence” in Ukraine. The program is built upon two cornerstones: the re-positioning of METRO Cash & Carry’s business focus and the optimization of the company’s structure with the introduction of a regional organization. METRO Cash&Carry Ukraine established an “Inter-corporation university” to provide practical managerial education to potential employees. (Official website of METRO Cash&Carry Ukraine, https://www.metro.ua)

The company had to adjust to a number of particularities with regard to Ukrainian economy, political state and geographical specialties; weather conditions, different consumer preferences and available labour market supply were taken into consideration, and few alterations in the company’s strategy, structure and logistics were made. A substantial problem was the process of negotiation in the beginning of business in Ukraine, the reason for that was lack of unity between the state national level authorities and city level authorities and inconsistency of their activity. Another substantial problem was caused by the difference in business ethics, written contracts are of the highest value in Ukraine, whereas METRO relies on the agreements with suppliers that regularly has contract proof, and therefore a number of trials on that account took place in Ukraine.

As a matter of fact, METRO Cash&Carry was performing successfully in Ukrainian market, since they cooperate with mostly domestic suppliers, with national authorities and launch special projects for Ukrainian market, they employ national specialists as company managers, the company also focuses on the exchange of experience between the international branches and attempts to adjust the most to the country they operate in.

2). Henkel corporation has its headquarters in Dusseldorf, Germany. Henkel has business lines: Laundry & Home Care, Cosmetics/Toiletries and Adhesive Technologies. The company management is committed to such principles: value creation as the foundation of our managerial approach; sustainability as a criterion for responsible management; transparency underpinned by an active and open information policy.

Henkel corporation was established in Ukraine in 1998. The company is centrally managed, a range of products is not presented in Ukraine due to a lower level of demand for these products in Ukraine. The company succeed in Ukrainian market by employing Ukrainian specialists as top managers, although they would dedicate German specialists marketing and financial reporting functions, as the corporation required accounting to be done by its standards. Strong system of detailed planning for 5-years periods and experience of Ukrainian specialists in the domestic economy helped the company to get itself a strong position on the market. (Official website of Henkel corporation, https://www.henkel.ua/SID-AE091F88-63C2EB69/about-henkel-85.htm).

Conclusion.

The most essential factors in formation of a national model of corporate governance in Ukraine are:

The structure of ownership of shares in corporations;

Specificity of financial system as a mechanism of transformation of savings into investments;

Ratio of sources of corporate investments;

Macroeconomic and economic policy in Ukraine;

Political system;

History of development and modern features of legal system and culture;

Traditional Ukrainian ideology;

Business relations practice;

Traditions and level of government intervention in economy and its role in regulating of legal system.

References

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How do Corporate Governance Mechanisms Influence Firm Performances Essay

Corporate governance has grow to be a big matter of discussion and policy improvement in the worlds of business enterprise, politics, and academia, in the British isles and all over the environment. These debates and coverage outcomes have critical implications not only for company, but the broader overall economy and modern society. New occasions of the economical disaster uncovered materials shortcomings in the governance and hazard administration of firms, especially in just the economic sector Led to the enhancement of Walker Review – gives the foundation for the examination. Essential Regions of Company Governance Position of Board of Directors Compensation issues Monitoring by exterior greater part shareholders All earlier mentioned are alternatives that aid to mitigate conflicts of passions – see agency charges.

Critical Literature:

Community Plan

In order to increase corporate governance techniques and the efficiency of company governance mechanisms, a selection of initiatives have been made in latest a long time to increase the transparency and quality of corporate financial and non-fiscal disclosure, to maximize stages of shareholder engagement, to enhance the usefulness and accountability of boardrooms, and to foster a extensive-time period expenditure lifestyle. Define – developments of codes – e.g. Cadbury Code, Walker Assessment and so forth The educational literature suggests that info flows are a elementary prerequisite, cornerstone, or driver of company governance and that in change the informational environment of the organization impacts method and general performance. The setting up stage for most evaluation is that ‘information asymmetry’ (Akerlof 1980) is pervasive in corporations and has unfavorable consequences in terms of uncertainty, adverse range, ethical hazard, and opportunism. In convert, this prospects to greater transaction expenditures, the phony pricing of assets, the misallocation of sources, and reduce liquidity. Because of market place failures and fears of competitive drawback, the point out has intervened with guidelines to make firms disclose.

Agency Conflicts

Perhaps not incredibly, no universally recognized consensus exists as to what ‘good’ company governance usually means. The economics and finance literature is concentrated on the issues of agency relations concerning shareholders and professionals which end result from the separation of ownership and management, specifically in huge companies. Facts asymmetry – Akerlof (1980) Berle-Usually means (1932) paradigm.

Board of Directors

Company theory: This stream of analysis identifies circumstances in which shareholders’ and managers’ goals are possible to diverge and examines mechanisms that can mitigate managers’ self-serving conduct (Shleifer and Vishny 1997). Boards of administrators explained as “the apex of the interior command system” (Jensen 1993: 862) Board’s core purpose as a checking and command mechanism, A overview of company governance literature reveals that a conflict of goals between a firm’s CEO and its shareholders typically revolves about 3 most important underlying concerns: CEO payment, risk to the agency, and corporate regulate. Board Composition and general performance Agency principle – which addresses inefficiencies that crop up from the separation of ownership and command (Fama 1980 Fama and Jensen 1983Jensen and Meckling 1976) Higher engangement in Board procedures Board Independence From the company theory point of view, boards of administrators (and especially independent or outdoors associates) are set in spot to check managers on behalf of shareholders (Lynall et al. 2003) Steady with agency principle, a board comprised of impartial directors (e.g., board members who are not dependent on the present-day CEO or organisation) is far more probable to present an productive oversight of the firm’s CEO and other govt administrators. Unbiased directors are normally thought to be much more effective in preserving shareholders’ passions, resulting in higher organization functionality (Baysinger and Butler 1985 Baysinger and Hoskisson 1990). Different CEO and Chairman Numerous scientists believe that the dual board leadership structure severely compromises the independence of the board. The tenets of agency principle would recommend that such centralised leadership authority will lead to management domination of the board and consequence in poor effectiveness (Fama 1980 Fama and Jensen 1983 Lorsh and MacIver1989 Molz 1988 Shleifer and Vishny 1997). Schooling/encounter Extra modern source-dependence, behavioural and socio-cognitive views on company boards have extended agency analysis by suggesting that pro-lively behaviour by non-government administrators is dependent not only on the extent of board independence, but also on the strategic perspective and foundation of encounter they provide to the organisation. (Carpenter 2002 Carpenter and Westphal 2001) In addition to handle features, the board could also enjoy services and strategic roles in the determination making method (Pfeffer 1972 Pfeffer and Salancik 1978 Provan 1980), Pye (2001) indicates that in buy to ‘add value’ to the board, non-executive directors are expected to provide a background of govt practical experience of jogging other companies. Boards that are composed of lawyers, fiscal associates, prime management of other firms, public affairs experts, etc. may perhaps be extra successful in phrases of bringing crucial experience, working experience and capabilities to aid tips and counsel. This research emphasises that board structural qualities (e.g., the proportion of impartial administrators, independent CEO and Chairperson) are significantly less pertinent compared to the good quality of the board’s cumulative human cash. A variety of experiments argue that board variety in terms of directors’ skilled ordeals really should lead to more productive service/experience/counsel roles of the board and, as a final result, to better overall performance (Carpenter 2002 Baysinger and Butler 1985 Baysinger and Hoskisson 1990 Kaplan and Reishus 1990 Wagner et al. 1998 Westphal 1999). Board Dimensions Walker Review – Financial institution board measurements have risen disproportionately in modern decades. In reaching the ideal equilibrium in between skills and independence, the board dimensions need to not be obliged to expand when the recruitment of economic market skills is considered not to be impartial. Contrasting sights Larger sized boards will be involved with better concentrations of business functionality (Dalton et al. 1999 Pfeffer 1972 Pfeffer and Salancik 1978 Provan 1980). Daily et al.(2002), and Day by day and Dalton (1992 1994) find constructive impact of board dimensions on economic efficiency in substantial samples of corporations in the United states. Golden & Zajac (2001) and Andres & Vallelado (2008) obtain a non-linear (inverted U-form) partnership among board dimensions and organization performance. However, agency researchers are much more sceptical about the results of board sizing on the checking ability of impartial directors (Jensen 1993). When boards come to be also huge, company troubles (this kind of as director free-riding) increase inside the board, and it results in being much more symbolic and considerably less section of the administration course of action (Hermalin and Weisbach 2003). Yermack (1996) stories that there is a significant destructive marriage amongst board dimensions and Tobin’s Q. Decide and Zeithaml (1992) report that large boards are much less most likely to be included in strategic determination building, a obtaining also supported by Goodstain and Boeker (1991). Therefore organisational outcomes of board size continue to be an empirical issue. Tenure (Administrators Deal size) Age?? Boeker (1992), Pfeffer (1983) and Finkelstein and Hambrick (1996) argue that better tenure of board associates is linked with greater rigidity, elevated dedication to proven techniques and strategies, and amplified insulation to new concepts. Nonetheless, Hambrick and Mason (1984) and Hambrick and D’Aveni (1992) counsel that for a longer period tenure presents directors with a great deal more detailed accessibility to a richer stock of remembered information and facts, relative to what amateur can access. Golden and Zajac (2001) in their review of strategic alter in U.S. medical center obtain a curvilinear relationship in between the typical tenure and strategic restructuring: as common board member tenure increases, its outcome on strategic transform is optimistic for boards with decreased amounts of tenure, and destructive for boards with bigger ranges of tenure. Typically, present investigation considers board diversity and restrictions on board members’ tenure and age as ‘good’ company governance motorists. Share Possession – institutional buyers A huge selection of scientific tests grounded in company concept advise that big-block shareholders have the two the incentive and influence to guarantee that managers and administrators function in the passions of shareholders (Day-to-day et al. 2003). As a result, their presence among the firm’s investors provides an significant driver of ‘good’ company governance that should direct to effectiveness gains and improvement in overall performance Hoskisson et al. (1994) demonstrate that big block shareholders enable mitigate towards inadequate system, this sort of as diversification, to evolve into poor general performance, thus lowering the magnitude of restructuring. Hill and Snell (1988) discover that possession focus is positively correlated with R&D expenses, specialization and relatedness in a sample of 94 corporations in research intense industries. Some researchers have indicated, on the other hand, that concentrated shareholding may perhaps make a tradeoff involving incentives and entrenchment (La Porta et al. 2000a Quick 1994). In certain, absence of diversification and restricted liquidity imply that huge shareholders are influenced adversely by the company’s idiosyncratic hazard (Maug 1998). To compensate for this hazard they may well use an prospect to collude with managers or shift prosperity from minority shareholders to by themselves. For instance, Pound (1988) argues that big institutional investors and unaffiliated blockholders are possible to side with management (the strategic-alignment hypothesis). Likewise, blockholders may well be motivated by other present organization associations with administration (the conflict-of-interest speculation) Possession concentration for every se could negatively have an effect on the worth of the firm when the greater part shareholders have a probability to abuse their situation of dominant command at price of minority shareholders (Bebchuk 1994 Stiglitz 1985).

Remuneration – Executive Shell out

Specially fascinating in gentle of recent fiscal crisis This area is concerned with the impact that company governance initiatives have had on the remuneration of British isles executives. Over the late 1980’s and early 1990’s, the levels of executive pay had been felt by numerous to improve significantly and unjustifiably (Smith and Szymanski 1995). Even though the Cadbury Report (1992) built quite a few suggestions on good exercise, the general belief was that it did not go significantly plenty of with regards to government pay out. The implementation of incentive strategies to endorse shareholder worth is underpinned by agency idea. Vintage company idea exhibits a romantic relationship where by the proprietors (principals) of providers, particularly the shareholders, delegate the management of the enterprise to employed folks (agents) (Jensen and Meckling 1976 Fama 1980). These agents take the variety of administration and in particular the increased echelons of enterprise administration, i.e. the board of directors. The separation of ownership from regulate potential customers to information and facts asymmetries, and leaves room for self-serving opportunist conduct by the agent (Berle and Indicates 1932). Inside the company principle literature, executive pay is a vital system for supporting to minimize agency expenses in buy to align the incentives of professionals with the pursuits of shareholders. (Eisenhardt 1989). In reaction to this and in get to recruit and retain proficient executives, businesses inside the British isles design and style compensation approaches to integrate prolonged-phrase incentives (Conyon et al. 2000b Conyon 2000). These compensation techniques include the use of two major sorts of incentives, specifically the govt share alternative plan (ESOS) and the extensive-phrase incentive approach (LTIP). The Combined Code (2003, p 12) states that: “A major proportion of govt administrators pay out need to be structured so as to backlink rewards to corporate and personal performance”. Absence of disclosure

Economic Sector

Distinguish fiscal sector from normal firms Cash composition – Banking companies maintain illiquid property and problem liquid liabilities therefore develop liquidity for the economic system. Dependent Variable: Tobin’s Q (proxy for agency performance)

Impartial Variables:

Board Measurement Board structure/composition – % of independent administrators Board performance Separation of CEO and Chairman Level of instruction of non-executive directors – proxy for monitoring good quality of board customers Share possession Remuneration – inventory options Threat – inventory price tag volatility Regulation – money audit

Hypothesis

Board size has an impression on firm general performance?

Time Time period

Comparison sample, in purchase to incorporate money disaster into empirical exploration Is failure in company governance definitely to blame for monetary crisis?? 2006 – Evidence of corporate governance 2007/2008 – Firm Overall performance Lagged influence cuts down difficulty of two way causality

Regression Examination

Will regression present that company governance mechanisms carried out in 2006 positively/negatively influence business overall performance in 2007/08? Cross-sectional regressions for British isles money sector business general performance from July 2007 to December 2008 company governance mechanisms measured at the end of fiscal 12 months 2006 A cross-sectional regression is a type of regression product in which the explained and explanatory variables are involved with a person period or issue in time.

Governance Without Government: Blockchain Technology Essay

It is claimed that each and every generation experiences just one revolution in their life time, but usually are not even aware of it. My generation is standing confront to encounter with technologies that has the likely to change the environment buy as we know it. The blockchain is the jogging power driving the up coming Online revolution that transforms the ability constructions in area, altering all the things, from the way we connect, do company to the way we offer with politics. In this essay, I will endeavor to examine the implications of such technological know-how on an specific and societal stage, checking out the alternatives of the following political method which overcomes the constraints of the existing one particular – nation-state.

The Internet has 3 generations so far (Jain, 2006), the initial wave – the internet of info (Google), the second – the web of company (Fb, Amazon), and the last, third a single, that is now intended to introduce technology never found ahead of – Net of benefit. Internet of value is major on so a lot of stages, but primarily it is supposed to give users the possibility to make transactions by means of Web only. You need to be thinking if your PayPal account is a part of this particularly precious notion, and the reply is – no. What tends to make this type of know-how as innovative, is that it would totally cross out any current middleman in any kind of exchange, and in this case – your financial institution.

This provides out a very significant concern – what tends to make us will need and use financial institutions in the first spot? What makes us give out private data to random social media platforms? What tends to make us get in a car or truck with a stranger when using community transport? The remedy to this is, in a way, painfully basic and intuitive – we do it mainly because we rely on these establishments. We have confidence in the financial institution to give us money when we inquire for it, we rely on the media platforms to make our interaction easier and we belief the general public transportation businesses not to hire sociopaths, but drivers who are heading to get us from point A to level B. Based on this trust that we have set up, we make certain perceptions of these establishments. Our perceptions give them validity and reason. The same is with nations around the world we stay in. We rely on the government to keep us safe, to acquire and redistribute tax revenue, to educate our young children and do so a lot more. Trusting the institution of a nation-condition, embodied in our governing administration, we enable them to workout the energy of highest authority in the state, as a result structuring people’s actuality based on how they understand the institution of a state. This usually means that any transform in our perception would radically transform the reality we live in. The World wide web has so much transformed the way we perceive come across and use information and the way we connect. Now, it’s about to

This inevitably details to the raison d’etre [reason for being] of the country-state and Anderson’s do the job (1983) on them in his e book Imagined communities. He describes country states to be a item of so-known as print capitalism- the principle he utilized to describe how folks variety these imaginary communities dependent on usually comprehended medium of conversation (language).

Governance and Management Structure of Islamic Finance Essay Essay

A series of world wide fiscal crisis and financial economic downturn for the previous 3 decades have really encourage economists planet-vast to consider for an option monetary remedy. Globally this has captivated consideration to concentration on Islamic banking and finance as an option design. Nonetheless, according to Chapra and Ahmed (2002) the principal of the new architecture that has been given highest emphasis so far at worldwide boards, is enhanced corporate governance bolstered by prudential regulation and supervision. Although these will certainly assistance in boosting the soundness and steadiness of the financial method, they will not be ample.

The amplified globalization of economic and Islamic solutions marketplaces has raised the interest of both equally market place contributors and regulators in the good quality of economic reporting worldwide. As a end result, Islamic money establishments are expected to increase the corporate governance (CG) and disclosing these kinds of steps in their yearly studies due to the fact it might decrease the details irregularities among the administration of the Islamic banks and the shareholders. In accordance to Kothari (2000), lowered facts asymmetry has desirable outcomes on the expense of funds and the volatility of stability costs. These rewards motivate regulators all over the entire world to try for high top quality.

In addition, with additional governance similar disclosure aids mirrored in the economic reviews would foster additional clear and accuracy in the current and upcoming effectiveness of the respective Islamic financial institutions. Disclosure aids in the financial reviews will support all stakeholders to monitor the Islamic banks effectiveness and to stay clear of present issues keep on being unnoticed and which could direct to monetary failure in the future.

1.1 Problem Statement

Troubles of corporate governance specifically on the principal/agent conflict of interest with a watch to market the passions of all the stakeholders as very well as the soundness and security of the Islamic Fiscal Technique. This issue has been an inherent weak spot in most conventional and Islamic banks due to the fact the arrival of the fiscal process in Malaysia. Thus, this has eroded the trustworthiness of the Malaysian Economical Institutions throughout the earlier economic disaster. According to McLennan (2007), great governance allows economical and effective assistance shipping and delivery, and it also makes certain high stages of accountability and transparency. These difficulties can be categorised as the best of checklist problem parts in the Malaysian Monetary Establishments, and the major result in is difficulties around corporate governance.

1.2 Significance of the Research

Because of to the bigger press Internationally by Accounting and Audit Firm of Islamic Fiscal Institutions (AAOIFI), the Islamic Economic Services Board (IFSB) and area regulatory such as the Central Lender of Malaysia (BNM) and the Securities Fee Malaysia (SC) to make improvements to the corporate governance reinforced by prudential regulation and supervision. This examine examines the seriousness of Malaysian Islamic Economic Institutions and Foreign Islamic Fiscal Institutions complying with these suggestions. In particular, this analysis will study the CG disclosures claimed in their fiscal reviews in Malaysia collectively with the present Malaysian Code on Corporate Governance 2012 (MCCG 2012) issued by SC focuses on strengthening board construction and composition recognizing the purpose of directors as active and dependable fiduciaries. According to Malaysia Code of Company Governance (2012), they have a obligation to be successful stewards and guardians of the business, not just in location strategic direction and overseeing the perform of company, but also in making certain that the organization conducts by itself in compliance with regulations and ethical values, and maintains an effective governance structure to make sure the appropriate management of risks and degree of internal controls.

On top of that, this research is intended to contribute to the applicable literature facets in long run. This features by institutionalizing the ideal procedures from the Islamic monetary establishment and operational issues throughout all monetary institution beneath the government connected corporations (GLCs) in Malaysia in tandem with the Finance Ministry of Malaysia to have the GLCs to maintain in their performance and fulfill the transformation programme aims by 2015. (Be sure to refer to Determine 1)

Figure 1: Transformation Goal by 2015

Resource: GLC transformation programme. Yellow Reserve âA¢”šA¬” Constant Business Method Improvements GII âA¢”šA¬A…“InnovationâA¢”šA¬A Circle Meeting 2. 2012

2.1 Main Exploration Questions

The corporate governance recommendations issued by the respective dependable bodies as mentioned above may well improve the governance tactics of IFIs and for this reason boost its transparency and accuracy documented in the economic reviews. This examine makes an attempt to study the extension of Malaysian Islamic Fiscal Establishments and Overseas Islamic Financial Establishments complying with these pointers. Particularly, the subsequent research queries will be made for research:

1. Were there sufficient info similar to corporate governance offered in the fiscal studies disclosure aids to safeguard the fascination of all stakeholders?

2. Was there any regular resources obtainable for the earning the Board and the Management a lot more effective and accountable for Malaysian Islamic Economical Institutions and International Islamic Financial Institutions?

3. Have been there adequate information and facts linked to the overall performance readily available to all the stakeholders mirrored in the monetary studies disclosure for Malaysian Islamic Fiscal Institutions and Overseas Islamic Monetary Institutions?

2.2 The Aim of the Exploration

The key intention of this analyze is to analyze the contributing things by each board of directors and management for Malaysian and Foreign Islamic Money Establishments of the Islamic monetary establishments So, the objectives of this examine are:

To study the Board of Directors and Management rules, responsibilities, duties and procedures Malaysian Islamic Financial Establishments and Overseas Islamic Money Institutions complying BNM and SC new corporate governance suggestions.

To analyze the overall performance actions for board of administrators and administration for both of those Malaysian and Overseas Islamic Financial Establishments.

ii) To take a look at the corporation composition and features for equally Malaysian and Foreign Islamic Financial Institutions.

The review seeks to have an understanding of the disclosure of company governance and management determination earning reflected in the fiscal reports among Malaysian and Foreign Islamic Monetary Establishments.

3. Theoretical Framework

The likely theoretical framework of this analyze will basically concentrate on the excellent of the CG information and facts disclosure in the money reports for Malaysian Islamic Fiscal Institutions and International Islamic Economical Establishments. The research will concentration on the inspecting the extension of CG information disclose by IFIs and the distinction of CG disclosure excellent among local and international owned IFIs in conditions of their preference to prioritize on whether certain or common variety of governance details in their yearly report in calendar year 2012. Additional exclusively, the principal goal of this study is so to study the high quality of CG disclosure provided by IFIs in Malaysia in their yearly report.

Following conducting interviews, finishing literature critique and defining troubles, the genuine theoretical framework can be create. Having said that, the researcher may well discover probable theoretical framework related to this investigation. The stewardship theory may perhaps be picked as a framework for this examine on account of the contextual traits of IFIs. (You should refer to Determine 2)

Determine 2: Reveals the Probable Research Framework

4. Methodology

For this review the main information and secondary info will be utilized. The secondary data will be collected from the central bank once-a-year report, articles from journals and information papers and financial evaluation. The previously mentioned are the primary investigation thoughts that framed the semi-structured interviews, paperwork investigation and conversations during details assortment. In addition, this research intended to analyze CG disclosure methods of IFIs in Malaysian and Foreign Islamic Economical Establishments employing two stages. The very first phase is the growth of comprehensive CG index. Dependable with prior studies, the index functions as a proxy for disclosure excellent. The comprehensive company governance disclosure (CGD) index used in this analyze centered on governance rules and codes disseminate by AAOIFI, BNM and SC. This CG index produced is then employed to assess the high-quality of CG of Malaysian Islamic Financial Establishments and Foreign Islamic Money Institutions. This will represent the 2nd phase of the research which will focus of this paper. According to Walter and Kenneth (1986), the affiliation in between the compounded index which captures each the importance of information and extends of disclosure, and attainable determinants of disclosure is in comparison with utilizing easy disclosure index.

4.1 Constraints

The researcher may well encounter road blocks although conducting this research. The hurdles occur in lots of varieties. The to start with opportunity obstacle would be on the information accumulating through interview, exactly where all bankers are needed to abide by the policies and rules spelled out in the Banking and Financial Establishment Act (BAFIA) 1989 which stops the interviewee from revealing particular specifics to a third social gathering even for the gain of this exploration. Even so, to be as private as attainable and to steer clear of any doubts or dispute as to the authenticity of the knowledge, respective events within the University may well have verified the aspects and examination computed. In addition, the researcher also faced some constraints as some the staff members of the Malaysian and International Islamic Economic Institutions could not want their names to expose in the investigation report centered on the interviews performed by the researcher.

5. Findings and Conclusions

By possessing the researched the investigation issues and issues outlined over by the researcher, it is proposed to deliver the conclusions and to suggest suggestions to the respective functions such as regulatory human body in Malaysia. With jointly and cooperative affords from all the parties to construct up Malaysian Islamic monetary establishments a globe course for Islamic banks by handling perfectly in their asset quality and to raise the circulation of profits.

Financial Scandals: the Implementation of the UK Corporate Governance Code Essay

Introduction Financial scandals of a enterprise would come about as a result of advanced procedures of misusing funds or offering incorrect data to mislead community and many other people way. The prevalence of financial scandal had introduced big effects to the economy, the income of the economic system was diminished dramatically, escalating unemployment charges and regional governments endure large losses prior to these fiscal scandals. The self-assurance in the small business program has been weakened by these incidents and men and women broached thoughts with regard to the usefulness of corporate governance. A superior do the job was accomplished by Cadbury Committee to introduced Uk Company Governance Code in yr 1992 to guide the organization as a guideline to complete successful, entrepreneurial and wise administration to produce a long expression results for the corporation. British isles Company Governance Code is also implemented broadly by many organizations to establish an productive administration for sustainable achievement of the business. Fiscal Scandals Tyco There will be explore about 3 circumstances of money scandals that took place in the globe 1 of the monetary scandals was scenarios of Tyco. There was a typical belief that Tyco was a trustworthy blue chip expenditure, fabricating electronic parts and basic safety products and solutions. The scandal transpired in the year 2002 as CEO Dennis Kozlowski and CFO Mark Swartz ended up noted for siphoning off large sum of money from Tyco. $170 million was attained by Swartz in unapproved loans and Kozlowski fraudulently sold 7.5 million shares of unauthorized stock, for a described $450 million. The income was stolen from the conglomerate, generally hid as executive bonuses. The cash was made use of by Kozlowski to more his lavish lifestyle, which provided a birthday get together of his spouse which expense him 2 million. The executives received caught as questionable accounting techniques ended up exposed. Tyco scandal could be prevented with the compliance of the current version of British isles Company Governance Code. Kozlowski was the former chairman of Tyco’s board of directors. A person of the main rules of the Code that could be apply to this situation is leadership. In accordance to the theory of leadership area A.2, the obligations amongst the procedure of the board and the executive must be divided plainly. No particular person need to have unlimited powers of final decision. The identical individual ought to not take on the roles of chairman and chief govt. The distribution of responsibilities in between the chairman and main government should be plainly founded, offered in creating and accredited by the board. Tyco could prevent the took place of scandal by adopting this principle. It is incumbent on the board to observe the managing of the enterprise and to ensure that it is being operated alongside one another with the mandate of the company and the wish of the shareholders. Considering that the CEO is the government place accountable for facilitating all those operations, possessing an integrated role prospects to checking oneself. The CEO may abuse his or her situation. As these types of, the capability of CEO to vote on his or her own payment offers rise to a conflict of interest. In addition to, the principle of management A.3 states that it lies with the chairman to guide the board and be always effective on all respects of its part. Tradition of debate in the business should really be inspired by the chairman by way of stimulating the non-government directors to add properly and making sure constructive relations amongst executive and non-government administrators. The chairman need to also provide correct, plain and opportune facts to the directors. Not only is that, as a chairman there are responsible for communicating properly with shareholders. Tyco should really meet the significant requirements that established out in A.3.1 which states that a chief executive should not continue to just take on the part of chairman of the same company. If the board tends to make final decision to appoint the chief executive as chairman in strange instances, the board is necessary to inquire the main shareholders for information in advance and existing the grounds of the appointment to shareholders in the appointment and what is extra the next yearly report. By implementing this basic principle into exercise, conflict of fascination could be averted by Tyco. An independent personal ought to be the chairman of the board ought to not be the CEO of the enterprise it would be less complicated for Tyco to detect unethical actions of the directors and professional misconduct. In addition, the theory of leadership part A.4 states that the non-government administrators who consider section as the part of the users in unitary board need to aggressively interrogate and lead to the advancement of proposals on method. They really should do the job out to ensuring the reliability and transparency of financial information and facts and that economical administration and techniques of risk manage are powerful and ideal. It is incumbent on the non-government directors to established right stages of remuneration of government directors and they have a essential role in appointment and removal of the govt administrators. There is no getting absent from the simple fact that providers with inexplicable money buildings are more risky and worthless investments because the buyers are not in a position to estimate the money situation of the providers and their individual bankruptcy danger. With no location the appropriate degrees of remuneration, Kozlowski could abuse the cash of organization to enhance his life-style. On top of that, Tyco should fulfill the integrity conditions established out in C.3.5 which states that the audit committee need to reassess the considerations elevated by the workforce of the company about possible dishonesty in money reporting difficulties. Impartial investigation of this sort of troubles need to be carried out by the audit committee. Tyco could avoid the scandal by booking the transactions at the degree higher than what the exterior auditors examined and internal auditors need to take portion in reassessing capabilities of the headquarters. Bayou Hedge Fund Team Up coming of the scandals that will be talking about is the case of Bayou Hedge Fund Team scandal. It was a cash team and founded in by Samuel Israel 3, $450m was elevated from buyers but the funds had been misappropriated for personal use. The investors had been conceal about the fund’s returns, to go over up their misdeed a faux accounting company was set up to deliver faux auditing effects by Samuel Israel 3 and CFO Daniel Marino. In July 2004, the officers have been began inform about the organization when an abnormally massive transfer of $99 million was made into a Wachovia account in New Jersey, prompting the initial investigation and adhere to by the demise of Bayou. Both equally of them ended up pleaded responsible in 12 months 2005 simply because the company began a pretend accounting agency to carry out an audit to themselves. Sam Israel led the Bayou hedge fund, and had stolen estimate all around $300 Million from its investors. He persuaded his purchasers that the fund was undertaking well by creating bogus accounts, when they ended up beneath performing. According to the Uk Corporate Governance Code, beneath portion C accountability in the theory of C.1, it stated that monetary and business enterprise reporting the board must existing a good, balanced and understandable assessment of the company’s placement and prospects. It is the board’s responsibility to existing a accurate evaluation. They experienced intention to conceal their traders considering the fact that the beginning, by overstating gains, understated losses. The principles of economic and organization reporting point out that the board really should build preparations to ensure that the details introduced is reasonable and understandable. Also the annual report should really also incorporate the accurate determine of the financial gain and loss of the firm. If Bayou Corporation obeys the principles, there would not be materialize that hiding the reality from the investors when they are producing a misplaced. In addition to that, if Bayou Corporation obeys the procedures that underneath area C accountability, a proper n good assessment can be exhibit to the directors and also their buyers, so that a monetary criminal offense could possibly be prevented. On top of that, less than section B effectiveness, part B5, info and guidance reveal that the board should really be provided in a well timed manner with facts in a sort and of a top quality suitable to enable it to discharge its responsibilities. For example the chairman is accountable and really should be certain that the administrators get correct well timed and apparent data. Administration has obligation to supply accurate details but directors must search for clarification or amplification exactly where necessary. In this case we can clearly see that Bayou Hedge Fund team did not obey the ideas, the director Samuel Israel 3 did not present accurate info to administrators. He declare that the business is creating financial gain while it is struggling drop. He also provides a pretend account to cover it from the administrators, but the precise is the enterprise had never ever built any funds.Israel has consistently sent out efficiency studies to buyers and at one position claimed the fund was worthy of $450 million. He funneled all of thehedge funds trades by means of Bayou Securities, reaping massive commissions given that hedge funds trade tens of millions of dollars’ value of stocks every single day.So even as the hedge fund lost funds, Israel still banked by means of his securities company. If the director doesn’t creates a phony accounts the traders will not surfer these kinds of a good get rid of. Subsequent, in accordance to part A, A.1 the function of the board mention that every single firm should really be headed by an effective board which is collectively liable for the very long term good results of the business. Bayou Hedge funds does not have an helpful board for the reason that of Samuel Israel 3 and James Marquez, they did not give entrepreneurial leadership of the organization and evidently did not have helpful manage of the company which guide to high possibility substantial reduction of the firm. Danger has to be assessed and managed by acquiring productive control of the corporation by the leaders. From our viewpoint, it demonstrates that they are the two ineffective leaders and the firm will end up generating decline and have to make bogus accounts to trick the directors is since of both of those of them which have no good strategy and immediate course of their organization. This can be prevented if they obey Uk corporate Governance Code area A leadership A.1 the part of the board. Enron Last of all, the last scenarios that would be reviewed in this investigate is the scenarios of Enron Company. Enron business scandal cases experienced make a noise in the world, it contemplate is 1 of the most really serious scandal in the earth and also United States background. Soon after merging of Natural Fuel that primarily based at Houston and InterNorth, Enron was shaped in yr of 1985 by Kenneth Lay, and the scandal was uncovered in Oct 2001. The most important players of the scandals include things like the former CEO Kenneth Lay and the CEO of Enron, Jeffrey Skilling, the fraud situation had influence fiscal problem of Enron Organization and guide to personal bankruptcy in December 2001. In the Enron fiscal scandals, they experienced tried to conceal the fraudulent of their financial report to continue get pleasure from the profits from the buyers that are doesn’t know about the real monetary situation of Enron. Because of to the fraudulent earnings report that report to community, it had attracted lots of new buyers that are wanted and eager to delight in the clear monetary gains. The motion of hiding the legitimate of the economical problems of Enron not only prompted a huge decline to Enron it also affected all of the buyers shed their funds and countless numbers of employees misplaced their careers. Arthur Andersen, auditors of Enron Enterprise also founded responsible by giving inaccurate facts and hiding the fact for Enron Organization. The introducing of United kingdom Corporate Governance Code could very likely aid to protect against these financial scandals, Enron as the illustration to detailing how the British isles Company Governance Code may possibly be prevented transpired of the incident of Enron. Primarily based on the most important principle of performance of United kingdom Company Governance Code, beneath the B.1 the composition of the board, it mentioned that the board and the committees should have suitable and acceptable balance of abilities, practical experience, independence and information of the organization to enable them to execute their duties and accountability successfully. With the compliance of this ideas, the board ought to be include things like with an suitable mixture of govt and non-executive directors to protect against there are individual or compact team of persons can management the board’s decision making. In the case of Enron, majority of the final decision most likely typically taken Mr. Skilling, the likelihood of Enron to hiding the reality will be lower if the organization compliance this ideas. In addition to that, code provision had even more discussed that the board should detect the once-a-year report of just about every non-govt independent director and indicate that the reasons if it is identified as independent human being. If Enron obey the rules, there could hardly be hiding any truth from the public. Moreover that, in the principal ideas of usefulness, there is a idea of re-election. Re-election should really be submitted for re-election for all directors at typical moments to carry on working the organization with a satisfactory general performance. Shareholders ought to consider discover with the once-a-year election for all administrators all administrators must be matter to the elections immediately after the initially annual typical assembly. The re-election really should no more than three many years. This could aid to avoid there is administrators or CEO attempting to play a role of one particular person exhibit to go over or hiding some fact these as Enron business. In additions, primarily based on the rules of C3, audit committee and auditors, it said that formal and clear preparations ought to thinking of by the board on how they ought to implement to reporting the danger administration and interior manage. It also said that the board must preserve an suitable connection with the company’s auditors. One of the code provisions states that part and responsibility of audit committee must be created in phrase of references. If Enron Company has preserve an ideal romance with auditors, Arthur Andersen the auditors will not assistance Enron to protect and disguise information and facts. Importance of United kingdom Corporate Governance Code In yr 1992, the to start with edition of the United kingdom Corporate Governance Code experienced introduced by Cadbury Committee. The goal that Uk Company Governance Code introduced by Cadbury Committee is to present productive, entrepreneurial and prudent management that drives the firm for the prolonged-phrase success. The Uk Corporate Governance Code divided into 5 primary principles these kinds of as management, efficiency, accountability, remuneration and also relations with shareholders. Management is where an successful chief is essential so that the operation of the firm can movement nicely. The leader is liable for the long time period good results of the business. Aside from that, usefulness is in which each and every staff including the board and its members need to have equilibrium of techniques and know-how regarding the firm in get to balance the procedure of business. Furthermore all administrators need to allocate some time and routinely update expertise to their business. Upcoming of the major ideas of Uk Corporate Governance code is accountability, which is how important the board is in a organization where they have to existing a apparent evaluation of the company to the administrators and to figure out the chance and strategic the company have to use. In additions, remuneration is the place a major proportion of reward is desired time to time to the staff in order to appeal to and motivate directors to operate the enterprise, but no director can make a decision their very own remuneration. Last of all, marriage with shareholders mentioned that shareholders ought to have a dialogue in between them and converse well wherever it is the board’s duty to make sure that a satisfactory conversation requires spot and assists the corporation operate easily. This not only supported by enterprise and the shareholder, it also experienced been imitated by internationally. From the comprehending about the United kingdom Company Governance Code, one of the most significant codes for the small business is principles of accountability. In the code of accountability, it has 3 sections it is financial and organization reporting, threat management and internal control and also audit committee and auditors. From the segment C1: money and company reporting, it claimed that a good, accurate and comprehensible report should really be present by the board of administrators. When getting ready the yearly experiences, directors must be responsible to look at the important information about the company efficiency, company and method. If company comply this basic principle, firm will a lot more responsible to offer an yearly report that involve rationalization of the foundation and fair, balanced and comprehensible about their business facts. Secondly, area C2 is about the chance management and internal manage. This is about the dependable of the board to come across out the character and the worth of the risk that will be occurring in obtaining organization techniques goals. Not only that, the board should really also control and maintain the management and inner command methods. A evaluation of the effectiveness chance administration and interior regulate method of the enterprise really should report to the shareholders yearly. Review will have to be fair and very clear which consists of all components control such as fiscal, operational and compliance controls. Without this code, the directors will be blurring about the company’s procedure and consequence whether it is generating earnings or reduction. The board should advise the shareholders about the danger of company will be going through yearly so that they can make a decision no matter if to proceed devote in the business or to obtaining other way to lessen the threat of firm. In part C3, audit committee and auditors mentioned a formal and transparent arrangement must build for firm to take into account how to implement the report of business and possibility administration and interior management concepts for preserving an acceptable connection with the company’s auditors. Most important role and the dependable of the audit committee are to keep track of the monetary statements and the formal announcement about the company’s financial functionality and the assessment of the considerable economic reporting judgement. If a business can retain an proper connection with auditors so that a knowing and clear info can be existing in the corporate annually report. Total, though accountability may possibly are the considerable concepts in organization, but to run and set up a company there are lots of dimension that ought to be appear soon after to attain a improved functionality, so that the other rules these as leadership, remuneration also actively playing an important part in business. Company is encouraging that to comply and demonstrate the Uk Company Governance Code to attain a superior long term. Summary In this investigate, we experienced assessments some firm had failure in administration process operate by the substantial standing corporations, we also had reviewed that the important components of the code which can guide to the avoidance of the scandals. In the British isles Company Governance Code, we experienced study that there are numerous importance and usefulness of the code these types of as success of the boards of directors, the part of audit committee, integrity of economical details, division of duties at the head of the business are crucial to the extensive-time period achievement of the enterprise. As a result, the probabilities of avoiding instances of fiscal scandals these types of as falsifying economic statements and embezzlement of funds will be outstandingly substantial if just about every institution complies with the Uk Company Governance Code. This is because the Code plays a critical job in upholding the ethics that could make everlasting good results of the corporation. An overarching summary of this overview, not astonishingly, is that the serious conflicts of fascination result in the failure of company governance.

Examining Corporate Governance Initiatives in Malaysia Essay

In an energy to restore community assurance of the Malaysian cash marketplaces, next the East Asian monetary crisis in the late 1990s, the Malaysian government intensified many initiatives to endorse awareness, advocacy and actions (S. Susela Devi, 2003) to enhance corporate governance in Malaysia, with prioritized aim on the capital market place. Table 1.1 in Appendix I delivers a chronological record of corporate governance initiatives in Malaysia.

According to Abdul Hadi bin Zulkafli et al. (2000), the major sources of corporate governance reforms agenda in Malaysia can be traced back again to a few formal documentations, particularly, the Malaysian Code on Company Governance, the Money Marketplace Grasp Plan (CMP) and the Economical Sector Grasp Prepare (FSMP). While the situation of the Malaysian Code of Company Governance, with the advocate of Bursa Malaysia, effected an first company governance regulatory framework to the general public sector, the launching of the Funds Market place Program (CMP) charts the direction and corner-stones of the Malaysian cash marketplaces for the future ten several years (2001-2010), marked the starting of a ten years of corporate governance reform to the Malaysian Banking Sector. Figure 1.1 in Appendix II supplies an illustration of the reform strategy in accordance with the Money Sector Prepare (CMP). Subsequent initiatives by the Financial institution Negara Malaysia (BNM), from the launching of the Monetary Sector Master Program (FSMP), issuance and revision of prudential laws recommendations to new liberalization of the banking sector, have been observed to be in accordance with the guidelines established forth by the Cash Current market Prepare (CMP).

Pursuing a 10 years of company governance reform, amidst harmful global problems, this sort of as the financial and economic turmoil in sophisticated nations, the domestic banking establishments has occur a extensive way in embracing corporate governance as a norm in the carry out of the business enterprise of banking. Yet, Financial institution Negara Malaysia (BNM) has created wonderful strides by the advancement of a complete and strategic Financial Sector Grasp Strategy (FSMP) and updating of prudential suggestions that could stand up to the switching complexity of the money and banking setting (Lum Chee Soon et. al., 2006).

Along with the authority’s vigorous efforts in advertising and marketing awareness, advocacy and steps to enrich corporate governance in the Malaysian banking sector, Malaysia has also been through arduous company governance assessments from different corporations focused in embracing company governance. In 2005, Malaysia underwent company governance assessment by the Environment Lender less than the Company Governance Report on the Observance of Specifications and Codes (CG-ROSC). Although the assessment commended on major key reforms highlighted in Desk 1.1, it discovered the next vital problems in company governance tactics as nonetheless to be enhanced, specifically,

Significant government possession

Directors’ Accountability

Safety of minority shareholders

Purpose of institutional traders and shareholder activism in company governance framework.

Out of the four crucial problems discovered for corporate governance reform in Malaysia, only directors’ accountability was organization-degree system which can be mitigated by way of legal and regulatory or voluntary discipline at the organization-stage. The other three issues were being institutional-stage constraints in which even legal and regulatory willpower has very little command above. The evaluation prompted the revision of the Malaysian Code of Company Governance (MCCG) in 2007 to further reinforce the legal and regulatory system to increase corporate governance procedures in Directors’ accountability and audit through making sure powerful discharge of the roles and obligations of directors and audit committee.

This exploration paper aims to study numerous styles of corporate governance mechanisms that decide company governance excellent with specific emphasis on the Malaysian domestic establishments. This exploration paper will, first of all, conduct overview of literature to glance for an set up theoretical framework for company governance excellent pertinent to the Malaysian banking sector and next conduct an impression study to discern community perception on company governance top quality in the Malaysian banking sector.

Issue Assertion

Next a 10 years of corporate governance reform, amidst harmful world wide problems like the fiscal and financial turmoil in highly developed nations, the Malaysian domestic banking institutions have come a prolonged way in embracing corporate governance as a norm in the perform of the business enterprise of banking. At the final period of Malaysian CMP with liberalization of the banking sector on observe, there was an urgent need for Malaysia banking sector to evaluation and get ready for the subsequent evolution of company governance reform in the next decade to handle any extended-standing challenges of company governance in the Malaysian banking sector these as to be certain its competitiveness and sustainability in the at any time additional aggressive banking sector in Malaysia.

All over the 10 years, there have been volumious literature composed about company governance good quality in the context of Malaysia as effectively as its banking sector in wonderful specifics. Nonetheless, just as there was no definition or conventional for corporate governance that can be applied universally (Stephen Y.L.Cheung et. al., 2004), there have been no common set of measurements that establishes company governance quality in which prior literature can comply with. As with the suggestions of Entire world Bank’s Report of Observance of Standards and Code (ROSC) with regards to challenges of corporate governance reform in Malaysia talked about in the introduction section, mechanisms that impact the top quality of company governance can be seen from different perspectives. For example, when Abdul Hadi B. Z, M. et. al.(2000) considered company governance mechanisms from interior and external perspectives, Inessa Love (2010) considered corporate governance mechanisms from the standpoint of the agency and its ecosystem. As Stijn Claessens et. al. (2002) concludes, despite development of empirical study in excess of the many years, theoretical function on the connection among institutional frameworks, financial sector growth and firm actions have received minimal analytical focus. Far more of such perform will assistance to provide a much better point of view on some of the empirical conclusions to date.

1.3 Research Objectives

As suggested by Cyril H. Ponnu (2008), the erosion of trader self confidence in Malaysia was brought by the country’s weak company governance requirements in the money method (Noordin, 1999b). That is analogous to declaring that trader self-confidence is formed by public notion on company governance excellent in the context of Malaysian financial system. In the gentle of the above analogy, this study was influenced to carry out an opinion study to solicit the general public notion of corporate governance high-quality in the Malaysian banking sector.

The standard aim of this investigation was so to discern community notion of company governance mechanisms necessary to enhance company governance high-quality of the Malaysian banking sector.

Especially, the general objective can be broken down into the following:

to look for an established theoretical framework that depict the connection amongst institutional framework and company governance excellent at business-degree in the context of the Malaysian banking sector

to establish many mechanisms that impact company governance good quality, at business-degree, relevant to the Malaysian banking sector

to detect numerous mechanisms, in the institutional framework of the Malaysian banking sector, that affect the high quality of company governance of Malaysian domestic banking institutions

to conduct an opinion study to discern general public notion of corporate governance high quality in the Malaysian banking sector

to discern just one mechanism, in the institutional framework of the Malaysian banking sector, that is very important to the following stage of reform and

to discern 1 system, from the firm-degree, that is crucial to handle in the next period of reform.

1.4 Research Questions

In watch of the over analysis targets, this study paper addresses the next study questions:

What is the romantic relationship in between the institutional framework of the Malaysian banking sector and company governance excellent of Malaysian domestic banking establishments?

What are many mechanisms used to guage corporate governance excellent of the Malaysian domestic banking institutions?

What are a variety of mechanisms, in just the institutional framework of the Malaysian banking sector, that help company governance top quality of domestic banking establishments?

How does the Malaysian public perceive of company governance top quality in the context of the Malaysian domestic banking establishments?

What is the most essential mechanism, inside of the institutional framework of the Malaysian banking sector, which would increase the general public notion of corporate governance good quality in the Malaysian banking sector?

What is the most vital system, at business-amount, which would strengthen the community perception of company governance quality in the Malaysian domestic banking institutions?

1.5 Significance of Study

While there is theoretical consciousness of many forms of mechanisms, exists the two in just the institutional framework and at firm-level, which influences corporate governance good quality of banks, prior literature discusses these mechanisms with no theoretical or conceptual illustration of the romance between the two. This paper put collectively results of prior experiments relating to corporate governance good quality in the Malaysia banking sector next a theoretical framework adapted from Faizul Haque et. al.(2008) to supply a much better standpoint on the discussion of various empirical results to date.

In the mild that investor self-assurance to Malaysian banking sector is formed by general public perception of its company governance top quality, this study review also conducts an belief study to solicit public perception on the top quality of company governance of the Malaysian domestic banking establishments.

1.6 Scope of Research

This analysis study aims to discern general public perception of company governance good quality of Malaysian Banking sector. Though the Malaysian Banking sector includes equally domestic and international banking institutions, given the significant belongings ownership (70% of belongings) of the Malaysian banking sector as perfectly as its unique ownership structures , this study limit its coverage only to those of Malaysian domestic banking institutions. In the light-weight of the higher than, the scope of the Malaysian banking sector, in this research, will be confined to domestic banking establishments outlined in the Kuala Lumpur Inventory Trade (KLSE).

In an try to discern general public perceptions of company governance good quality in Malaysian domestic banking institutions, this research was carried out in two principal phases. To start with, a assessment of educational and skilled literature, retrievable from publicly available sources, was carried out to deliver insights into company governance features with immediate relevance to Malaysian domestic banking establishments. Next, this study conducts a questionnaire study to give guidance and examination the theoretical framework for community perception of company governance good quality in the context of the Malaysian domestic banking establishments.

1.7 Summary

In an work to restore community self-assurance of the Malaysian funds markets, next the East Asian economical disaster in the late 1990s, the Malaysian governing administration intensified a number of initiatives to advertise awareness, advocacy and steps (S.Susela Devi, 2003) to increase company governance in Malaysia, with prioritized concentration on the funds market place. The launching of the CMP in 2001, which charts the course and cornerstones of the Malaysia money markets for the following ten decades (2001-2010), marked the beginning of the company governance reform in the Malaysian banking sector. Subsequent ten yrs of company governance reform, this research paper aims to place collectively the findings of prior scientific studies relating to corporate governance in the Malaysian banking sector on the foundation of the theoretical framework made by Faizul Haque et. al. (2008). An belief study is also carried out to gauge public notion of corporate governance quality in the Malaysian domestic banking establishments soon after ten a long time of company governance reform.

The remaining of this paper is set out as follows. In the upcoming chapter a assessment of the pertinent literature is provided while the third chapter illustrate the theoretical framework employed in this review and establishes the key propositions to be investigated along with dialogue on methodology employed in this analyze. Chapter 4 described the outcomes of the evaluation and finally Chapter 5 delivers a discussion of the findings, its limits and summary of this review.

Does Corporate Governance Drive Financing Decisions of Saudi Arabian Companies Finance Essay Essay

Abstract

This paper contributes to the corporate governance literature by examining the effect of corporate governance characteristics on financing decisions in Saudi Arabian listed companies. In particular, we examine the effect of board size; ownership concentration and corporate governance reporting on the debt-to-equity ratio. We use a multiple regression model to examine how corporate governance variables affect the extent to which Saudi Arabian companies use debt to finance their activities.

We use a sample of 37 companies listed in Saudi Stock Market in January 2006 which is based on a recent paper by Hussainey and Al-Nodel (2008) who collected their sample from Saudi listed companies’ websites between October 2005 and January 2006 representing a total number of 77 companies. This helps us to focus on a group of firms that report corporate governance information on their websites

After controlling for companies’ profitability and their growth opportunities, we find that both board size and ownership concentration are positively associated with debt-to-equity ratio. The findings seem to suggest that managers are likely to choose higher financial leverage when they have stronger corporate governance (large number of directors on the board and higher ownership concentration). However, the empirical results of the relationships are statistically insignificant in the case of corporate governance reporting. This suggests that firm’s asymmetric information is not an important driver of the financing decision of Saudi Arabian companies. This might be due to the nature of the Saudi business environment.

1. Introduction

Capital structure decision is a well established part of the accounting and finance research related to determinants of corporate capital structure. Modigliani and Miller (1958) is the first to study this area of research. They find that capital structure decision is unrelated to firm value. They also relax the prefect market assumptions and consider corporate tax into their models (Miller and Modigliani, 1963). Consequently, they find that firm value will be enhanced if the level of debt increases. They explain their findings by the fact that interest rate is a tax deductible and consequently companies would enjoy debt tax shield when funding their activities by long-term debt. However, Miller and Modigliani (1963) don not taken into account the bankruptcy related costs. A natural area of extending these lines of research is to explore other drivers of corporate capital structure decisions.

Previous studies offer evidence that corporate governance variables affect firms’ capital structure decisions (Wen et al., 2002; Du and Dia, 2005; La Rocca, 2007; Driffield et al., 2007; Al-Najjar and Hussainey, 2009a, 2009b). However, there are a very limited number of studies that have examined determinants of capital structure in developing countries and even fewer such studies may be found in the Middle Eastern countries. To the best of our knowledge, no study yet has examined the influence of corporate governance on capital structure decision in Saudi Arabia or Middle Eastern countries. Consequently, this paper is the first to examine the potential corporate governance factors that might drive Saudi Arabian firms to use debt as the main source of finance.

This paper is also motivated by the fact that SACMA issued a guidance in 2006 that recommends all listed companies to disclose corporate governance information to the public. Therefore, it would be worthwhile examining the attitude of companies to volunteer report corporate governance rather than being enforced to do so.

The paper proceeds as follows. Sections 2 and 3 review prior research on the determinants of capital structure and develop the research hypotheses. Section 4 discusses the research method. Section 5 is the data description. The main regression results are presented in Section 6. Finally, Section 7 concludes and suggests areas for future research.

2. Literature review

For placing the findings of this study within its context, as well as other environments with similar characteristics this section provides a general description of the environment of the Saudi business practices.

Several environmental factors affect Saudi business practice, this section, however, will summaries some of the most important environmental factors, as suggested by the literature such as the political, economical, and social systems and the 1965 Company Law that regulates the practice of Saudi businesses and the guidance of corporate governance issued by SACMA in 2006.

As similar to most countries in the Middle Eastern region, the early stage of the political, economic and social development in the country makes the environment of the Saudi audit practice significantly different from that in developed countries.

The political system of Saudi Arabia is a monarchy, headed by the King. Within the political system, there are three legislative bodies, which have the authority to initiate and/or approve policies, regulation or rules: the Council of Ministers, the Consultative Council, and various individual Ministries. There are various groups within the political system influence major policy issues and the development of new regulations. The main groups are the royal family, Islamic scholars, state officials, liberal elites, academics, tribal leaders and businessmen; all of whom have different interests and different powers depending on the importance of the issue to its interests and affairs (Al-Amari, 1989; Al-Rumaihi, 1997; Aba-Alkhail, 2001; Economist Intelligence Unit, 2003; Al-Nodel 2004). The Basic Law of Government which was introduced in 1992 is considered to be the constitution of the KSA (Economist Intelligence Unit, 2003).

As an Islamic country, the legal system of Saudi Arabia is derived from Islamic law (Shariah; Alqur’an Alkareem and Sunna Alsharifah), and coded laws for a number of specific fields, such as commerce, tax and labour. Al-Amari (1989) reported that Islamic law, however, prevails in legal disputes.

Saudi society is heavily influenced by its Arabic heritage and Islamic values (Al-Rumaihi, 1997; Aba-Alkhail, 2001; Al-Nodel 2004). All Saudis are Muslim, and the Arab Peninsula is the birthplace of Islam. Al-Rumaihi (1997) described Saudi society as characterised by the impact of the personality and power of particular individuals, the role of family and friend relationships over regulations, privilege given to personal relationships over tasks, and the existence of a high level of secrecy.

The economy of Saudi Arabia is an oil-based economy and government exercises strong controls over major economic activities. It possesses 25% of the world’s proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC. Worldwide oil prices and production volumes strongly affect Saudi economy. Since the discovery of oil in 1938, oil revenue represents the biggest contribution to the economy. In 1990s, it accounted for around 35% of nominal GDP, about 75% of government revenues, and 85% of export receipts (Economist Intelligence Unit, 2003). Table 2 presents the country’s budgetary revenues, expenditures and net surplus or (deficit) for the last three years.

Insert Table 1 here

Noticeable features of the current practice of Saudi companies are the domination of family businesses, the deep involvement of the government in the private sector, and the existence of a number of foreign-owned and controlled companies based on joint venture agreements with domestic companies.

The domination of family businesses type in Saudi Arabia is argued by Al-Nodel (2004). He explained that joint-stock companies represent only 1.14% of the total number, and account for less than 40% of the total capital of the registered businesses.

The existence of a number of foreign-owned and controlled companies based on joint venture agreements with domestic companies and the involvement of government in businesses represents another significant feature of the Saudi private sector (Presley, 1984; Aba-Alkhail, 2001).

The 1965 Company Law regulates the practice of businesses in Saudi Arabia. It sets conditions for establishing businesses, describes the legal framework for business, and requires the publication of annual financial statements audited by an independent party (see also Al-Rehaily, 1992; Aba-Alkhail, 2001 and Al-Nodel 2004). Articles of the 1965 Company Law sets conditions for several aspects of businesses such as legal frameworks through which business companies can be established, the registration requirements, minimum capital to be maintained, number of partners, number of directors, accounts, the annual audit of the accounts, and so on. Shinawi and Crum (1971) asserted that the origin of the 1965 Saudi Company Law goes back to the British Companies Act of 1948. The similarity between the 1965 Saudi Company Law and the UK acts issued in 1948, 1967 and 1976 was also reported by Kahlid (1983).

The main features of the 1965 Company Law are the legal frameworks of businesses and the reporting requirements. It provides several legal frameworks through which business companies can be established such as general partnership, joint venture, joint-stock company, limited liability company, and cooperative company [1] .

The 1965 Company Law also sets the reporting requirements of businesses. It requires the issuance of a balance sheet, a profit and loss account, and a report on the company’s operations and financial position every fiscal year. It further stipulates that all corporations, and limited liability companies must issue annual financial statements audited by an independent auditor licensed to practice by the Saudi Ministry of Commerce and Industry.

The stock market of Saudi Arabia is underdevelopment. In 1984, the Royal Decree No. 81230 was issued as an attempt to officially regulate the stock exchange (Abdeen and Dale, 1984; El-Sharkawy, 2006). Under this Royal Decree, the Saudi Arabian Monetary Agency (SAMA) was given actual control over the stock exchange through national commercial banks.

The significant change was in 2003 when the Saudi Arabian Capital Market Authority (SACMA), which took responsibility from SAMA to oversight the exchange of Saudi stocks, was established (Ramady, 2005). This period observed significant changes with respect to the number of listed companies or market value. Table (3) compares some key numbers of the Saudi stock market between 1996- 2005.

Insert Table 2 here

In 2006 SACMA intensifies its efforts to provide fairness in the trading of the Saudi stocks. Among these efforts was the issuance of the draft of corporate governance for listed companies in 2006. The draft provides recommendations of the criteria for the best corporate governance practice that should listed companies counsel. It has covered to some extent the main five principles issued by the Organization for Economic Co-operation and Development (OECD): the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency, the responsibility of the board of directors.

According to the recommendations of SACMA, listed companies are required to report to SACMA about their compliance with the criteria of corporate governance as issued by SACMA or reasons for uncompliance if any. The disclosure contains, for example, the board of directors’ functions, responsibilities, formation, committees of board of directors; audit committee; Nomination and Remuneration Committee; Meetings of the Board and Remuneration and Indemnification of Board Members [2] .

Finally, SACMA asserted that the criteria for the best corporate governance practice mostly constitutes the guiding principles for all listed companies unless any other regulations, laws or rules require such requirement.

Although, corporate governance has been the subject for an extensive research in developed countries [3] , limited research has been carried out to investigate the issue of corporate governance in business environment of developing countries. Furthermore, those limited research studies approach the issue whether to describe the state of corporate governance from an official perspective or from the perspective of what should the practical applications of its principles be.

For example, Al-Motairy (2003) explores the state of corporate governance practices in Saudi Arabia. He concludes that there is a vital need for (1) a review of these regulations to reflect the current practices of corporate governance, (2) the issuance of guidance for best practices for management and financial affair in corporations and (3) the establishment of an organisation to accelerate the adoption of best practices of corporate governance.

Similarly, Fouzy (2003) evaluates the practices of corporate governance’s principles in Egypt. He recognises the development in Egyptian official regulations toward the application of best practices of corporate governance. He then argues that these developments are not met enough by Egyptian companies in their practical applications.

Another example is the study which was carried out by Oyelere and Mohammed (2005) investigating the practices of corporate governance in Oman and how it is being communicated to stakeholders. They recommend enhanced regulation and communication for the Omani stock market to keep pace with the international developments.

Finally, a research paper by the Centre for International Private Enterprise (CIPE, 2003) examines the corporate governance practice in four Middle Eastern countries (Egypt, Jordan, Morocco, and Lebanon). It finds that corporate governance practice is approached differently by each country. This is depended on the sophistication of the financial market in each country. The research paper further provides several recommendations to improve the application of the principles of corporate governance in the region as a whole.

In conclusion, research studies that investigated the issue of corporate governance assert the importance of better regulations of the corporate governance in the region in order to increase the public confidence in financial markets

3. Research hypotheses

Although the relationship between corporate governance and capital structure has been the subject for an extensive research in developed countries, limited research has been carried out to investigate the issue in business environment of developing countries. In the subsequent paragraphs we formulate three research hypotheses.

Board size hypothesis

The association between board size and capital structure decisions have been well established in prior accounting and finance research. In particular, Mehran (1992), Berger et al. (1997), Wiwattanakantang (1999), Wen et al. (2002), Du and Dia (2005), Abor and Biekpe (2005) and Al-Najjar and Hussainey (2009a and 2009b) examine the association between board size and corporate capital structure decision, but the results are mixed.

Mehran (1992), Berger et al. (1997), and Abor and Biekpe (2005) find a significant negative association between the size of the board of directors and debt-to-equity ratios. However, Jensen (1986) finds a positive association between higher debt ratios and larger board size. Other researchers (Wiwattanakantang, 1999; Wen et al., 2002; Al-Najjar and Hussainey, 2009) find that there is no significant association between board size and debt-to-equity ratios.

Given the above mixed results, we also revisit this research area and examine the association between board size and capital structure for Saudi Arabian companies. We set the following first research hypothesis for the impact of board size on capital structure:

H1: Ceteris paribus, there is a relationship between board size and debt-to-equity ratio.

Ownership concentration hypothesis

Ownership concentration is considered as one of the key determinants of capital structure decision. Wiwattanakantang (1999) finds that managerial shareholdings have consistent positive influence on family-owned firm leverage. In addition, Al-Najjar and Hussainey (2009a) find that insider ownership is positively and significantly associated with the debt-to-equity ratio. However, Al-Najjar and Hussainey (2009b) did not find the expected significant results.

Given the above results are – to some extent – mixed, we also revisit this research area and examine the association between ownership concentration and capital structure for Saudi Arabian companies. We set the following second research hypothesis for the impact of ownership concentration on capital structure:

H2: Ceteris paribus, there is a relationship between ownership concentration and debt-to-equity ratio.

Corporate governance reporting

A new and growing number of studies have investigated the association between asymmetric information and corporate decisions (see Li and Zhao, 2006 for more details). In a recent paper, Bharath et al. (2009) use a novel information asymmetry index and examine the extent to which information asymmetry is a determinant of capital structure decisions. They found that information asymmetry affects capital structure decisions of US companies. In particular, they found a significant positive association between information asymmetry and debt-to-equity ratio. In other words, their results suggest that firms will higher levels of information asymmetric are more likely to use debt in financing their activities than equity.

Based on the above results, we explore the role of the information environment on capital structure decision in Saudi Arabian companies. We use a corporate governance voluntary disclosure index as a measure of a firm’s information environment. Prior research finds that voluntary disclosure is negatively related to asymmetric information. For example, Hussainey et al. (2003) find higher levels of voluntary disclosure reduce information asymmetry between the firm and investors and hence increase investors’ ability to better anticipate future earnings. We set the following third research hypothesis for the impact of corporate governance reporting on capital structure:

H3: Ceteris paribus, there is a negative relationship between corporate governance reporting and debt-to-equity ratio.

4. Model Development

In order to test the above hypotheses, we regress debt-to-equity ratio on some corporate governance characteristics and some control variables. The study will investigate the following model:

= ++

Where:

is defined as long term debt to equity ratio; is the intercept. is the slope coefficient estimates of regressors. is the corporate governance variables (and control variables) for firm i at time t.

Dependent variable:

The dependent variable () is defined as the long term debt to equity ratio.

Independent variables:

We have three independent variables and two control variables. We identify three types of corporate governance variables:

(1) Board size (BOARD): This represents the number of executive and non executive directors on the board.

(2) Ownership concentration (OWNERSHIP): This represents the total percentage of the company’s shares that owned by owners.

(3) Corporate governance reporting (DISCLOSURE): This is calculated as the number of sentences that include at least one corporate governance related information.

Control variables:

(1) Profitability (PROF): we use return on total assets as a measure for firms’ profitability.

(2) Growth opportunity (MB): we use share price to book value ratio as a measure for firm’s growth opportunity.

5. Data

Our data collection is based on a recent paper by Hussainey and Al-Nodel (2008). This helps us to focus on a group of firms that report corporate governance information on their websites. Hussainey and Al-Nodel (2008) collected their sample from Saudi listed companies’ websites between October 2005 and January 2006. At that time, the total number of companies listed in the Saudi Stock Market was 77 representing eight sectors: agriculture, services, cement, industrial, banks, electrical, telecommunication and insurance. They used TADAWUL website (www.tdwl.net) and Google website (www.google.com) to access every company’s website. They deleted some companies from their analysis for a number of reasons. These include 11 firms without websites; one firm with a website under construction and one firm with a restricted website. This reduced their sample to 64 companies. We also further 27 firms because of missing corporate governance and accounting information. This leads to a sample of 37 listed firms for the current study.

Data on debt-to-equity ratio, Board size, ownership concentration, profitability and price-to-book value ratio are collected from TADAWUL website. Following Hussainey and Al-Nodel (2008), we use the content analysis approach to measure the number of sentences that contain corporate governance information. Accordingly we use the corporate governance disclosure index developed by Hussainey and Al-Nodel (2008) to analyse the content of every company’s website.

6. Empirical Results

This section discusses the descriptive analysis, the correlation analysis and the empirical results.

Descriptive analysis

Table 1 shows the descriptive analysis (mean, minimum, maximum and the standard deviation). It shows that on average the number of directors on board in Saudi Arabia companies is around 8, with a minimum of 4 members and a maximum of 11 members. Mean ownership concentration is 35.6 and the mean corporate governance disclosure is 5 sentences with a minimum of zero corporate governance sentence and a maximum of 21 corporate governance sentences.

A broad range of variation in financial variables is also evident in our sample. The debt-to-equity ratio ranges from 0 to 97 with a mean of 24.52 and a standard deviation of 32.576. The return on total assets ratio ranges from -37.3 to 71.74 with a mean of 8.8535 and a standard deviation of 13.81767. The share price to book value ratio ranges from 0 to 21 with a mean of 5.03 and a standard deviation of 5.336.

Insert table 3 here

Table 2 shows the correlation analysis. The correlation between each of the independent variables is not too high. The highest correlation found between corporate governance disclosure and share price to book value ratio (MB) is 43.5, which is acceptable. This confirms that no multicollinearity problem exists between the independent variables.

Insert table 4 here

Table 3 shows our empirical results. It shows that the coefficient estimate on board size is positive significant with a p-value of 0.059 (see model 4). This is consistent with Jensen (1986) who also finds a positive association between higher debt ratios and larger board size. Our finding indicates that larger board size puts Saudi Arabian firms in a good position to finance their activities by using debt. This is consistent with the fact that higher quality of corporate governance improves companies’ financial performance (Bhagat and Bolton, 2008) and hence leads increase the ability of the company to obtain debt. Liang and Zheng (2005) provide an explanation for this positive sign. They argue that boards with a large board size are more likely to have a difficulty in getting an agreement because of different and conflict opinions and views. Accordingly, firms with large number of directors on board might not choose equity financing which requires high transaction cost to resolve communication and coordination dilemma. In addition, they argue that directors would choose debt for financing their activities because this source of finance will not dilute the equity of current shareholders and change their current position. This leads us to accept hypothesis 1.

Table 3 also shows that the coefficient estimate on ownership concentration is positive significant with a p-value of 0.005 (see model 4). This result is consistent with Wiwattanakantang (1999) Al-Najjar and Hussainey (2009a). This indicates that when the total percentage of the company’s shares is concentrated internally, managers will prefer to use debt to finance their companies’ activities. This is because – as mentioned in Liang and Zheng (2005) – debt will not dilute the equity of current shareholders and change their current position. This leads us to accept hypothesis 2.

Finally, corporate governance disclosure as a proxy for asymmetric information between managers and investors is expected to be negative and statistically significant. However, Table 3 shows that the coefficient estimate of DISCLOSURE variable is positive, indicating that firms with higher levels of corporate governance disclosure (less information asymmetry) has higher debt-to-equity ratio. This finding is statistically insignificant and not consistent with prior research. This leads us to reject hypothesis 3.

7. Conclusion

The aim of this paper was to examine the effect of corporate governance mechanisms on capital structure for Saudi Arabian listed companies. Our results show that the corporate capital structure decisions in Saudi Arabia is driven by some of the same corporate governance determinates suggested in prior research. Based on a sample of 37 Saudi Arabian listed companies, our results show that the number of directors on boards and ownership concentration are the main drivers of Saudi companies for capital structure decisions.

As mentioned in Hussainey and Al-Nodel (2008), the main limitation of the study is that it did not cover the whole market so the sample may not be representative of the population of Saudi companies. This, however, is justified by the nature of the study, which relied on the availability of companies’ websites. So companies that are not included in our study are more likely to have either no website, with a website under construction or the access to the information in their website is restricted. This is evident by checking the type of companies, which are not included. We found that these companies are in general small and less likely to use the online reporting. Nevertheless, a study with a large number of companies is needed for future research.

Different Types of Corporate Governance Structures in Market Essay

Corporate governance structures today in most market based economies apply the separation of ownership from control model in large corporations and firms. This can be said to occur where ownership has been progressively diluted from complete ownership to minority control (Clarke, 2007). Much of this concept, particularly with regard to large corporations, directly results in an agency relationship between the owners (shareholders) and the controllers (managers) and it is from this concept that the agency theory in corporate governance arises. The practical reality today is that even smaller companies employ this same model in order to improve their efficiency as more shareholders (owners) prefer to engage others to run their businesses not on the basis of filial relationship but on the strength of qualifications, competence and experience although they usually retain ultimate control. Needless to say, there are inherent problems and challenges that also arise as a result of this sort of relationship. The most significant being the ultimate divergence of interest between the principal the agent as the latter may not always act in the best interest of the former or may only act partially in that interest (Mallin, 2010). Indeed a substantial and significant amount of literature has been developed in the agency theory in corporate governance and it has not been without its criticisms. While some contemporary assessments of corporate governance today note that this diffused ownership model (separation of control from ownership) was to a larger extent, a purely Anglo-Saxon phenomenon which does not necessarily reflect the governance system of corporations in other parts of the world (Coffee, 2000), others have criticised the agency theory as over-simplifying the intricacies of corporate governance by reducing its scope to merely a term of contracts between principal and agents (Tricker, 2009). This essay will attempt to critically analyse some of the more relevant literature with the aim of first of all exposing the rationale behind the emergence and development of the separation of ownership from control, and how instrumental it has now become in ensuring proper corporate governance framework in today’s global economy. In doing so, there will be extensive discussions on the agency theory in corporate governance in a bid to highlight the common problems and challenges that are inherent in this theory and identify ways by which these problems may be mitigated.

The emergence of agency relationship in corporations: Separation of ownership from control.

There exists a general consensus by academics and practitioners alike that market development and the era of industrialisation in the early to mid 19th century brought about a ‘diffusion of ownership’ in many large corporations as individual or family owners were unable to, on their own, provide adequate capital to match and sustain the expansion of their businesses. The resultant implication of this situation, as identified by Berle and Means (1932) was the ‘separation of ownership from control’. They described this diffusion of ownership as ‘the dissolution of the old atom of ownership into its component parts: beneficial ownership and control’. Sorenson (1974) opines that this steady separation of ownership from control can be directly linked to the growth of corporate capitalism. It therefore followed that as the number of shareholders increased, their influence and corporate control progressively diminished leaving control in the hands of what has now developed into ‘extensive salaried managerial hierarchies’; professional managers (Dignam & Galanis, 2009). This heralded the origin of the agency relationship between the parties and it is within the context of separation of ownership from control and this agency relationship between the parties that the agency theory in corporate governance was developed. This diffusion of ownership was however subject to a precondition that the shareholders retained ultimate control so as to protect them from ‘stealth raiders’ with this protection formalised by statute (Coffee, 2000).

Agency Theory

Jensen and Meckling (1976) explained the theory of the agency relationship as a contract under which one party (the principal) engages another party (the agent) to perform some service on their behalf. In order to achieve this, the principal will delegate some decision-making authority to the agent. Thus the agency theory sees the corporation as a ‘nexus of contracts’ which are constantly re-negotiated by individuals each aiming to maximise his own utility (Alchian and Demsetz, 1972). This notion of a multiplicity of constantly renegotiated contracts is borne out of the fact that it would be practically impossible to have a single contract with the capacity to holistically capture interests of both the principal and the agent (Mallin, 2010:17).

The agency theory in corporate governance is a particularly dominant governance structure employed in large corporations and firms particularly in advanced economies like the UK, the US and in most other common law countries. Mallin (2010) posited that unlike countries that operate under a civil law system and are restricted by legal codes/rules which are merely administered without the flexibility to adapt to changing circumstances, the common law jurisdictions operate a legal system that consists an independent judicial system that employs the doctrine of judicial precedents with heavy reliance on case law and other legal principles that have afforded them the opportunity to make significant advancements and develop the codification of various laws/rules/principles that have over time, increased the level of protection for minority shareholders thereby encouraging a more diversified shareholder base within those jurisdictions.

Dilemma of the agency theory

The inherent dilemma within the agency theory was identified as far back as the 18th century. According to Smith (1838),

” the directors of companies however being the managers of other peoples’ money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance as they would their own….”

This quotation simply summarises the problem with the agency theory. Tricker (2009) further notes that the real challenge is ensuring that the agent acts solely in the interest of the principal. However, these agency problems arise largely due to the impossibility of contemplating for every future action of an agent, whose decisions are sure to affect both his own welfare and the welfare of the principal (Brennan, 1995). It is at this point that we can clearly point out the divergence of interests between the principal and his agent as they both aim to maximise their respective aspirations. It is given that an agent will act with rational self interest and cannot be expected to act in the interest of the shareholders thus the need for them to be monitored to ensure that the interest of the principal is best served (Calder, 2008). In a sense, it is safe to assume that an agent will not act in the best interest of the principal and such matters in which he may display self interest may include a situation where an agent misuses his delegated authority for pecuniary advantage by remunerating himself disproportionately to his performance, taking hazardous and uncontrolled corporate risk or on the other hand refusing to take certain risks as both principal and agent may have developed different attitudes to risk in line with their respective interests. Thus certain corporate governance mechanisms for example, the board of directors, is seen as an institutional instrument of control and an essential monitoring device in corporate governance to ensure that the conflicts brought about by this divergence of interest between the shareholder and the managers (principal and agent) are kept to the barest minimum. Other mechanisms by which this divergence of interest is minimised include an assortment of codified rules both domestic, regional and international which seek to regulate transparency, disclosure, accountability etc. discussed later on in the essay.

In identifying the inherent problems within this concept, it is also important to identify where this conflict arises within the context of the firm. Although there are various instances where a conflict between the parties may present itself, McColgan (2001) has been able to identify 4 key areas where extensive theoretical and empirical research has been conducted, from which these agency conflicts emanate. He has identified these areas as ‘moral hazard conflicts’, ‘earnings retention conflicts’, ‘risk aversion conflicts’ and ‘time-horizon conflicts’.

Moral hazard conflict as proposed by (Jensen) follows the notion that as the ownership stake of a manager decreases within a company, it raises the tendency to increase consumption of perquisites. This mainly applies to large corporations with dispersed ownership with an insignificant amount of the company shareholding held by the manager(s). According to Shleifer and Vishny (1989), a manager may, instead of objectively selecting investments or projects to be undertaken by the company, this selection may be done with a leaning towards areas directly aligned with the managers’ skill set. This increases his value to the company and vice versa and allows room for increased demands on remuneration. Another factor that may be responsible for the risk of moral hazard conflict is cash flow as Jensen (1986) is of the opinion that high cash flow level will also increase the likelihood of moral hazard as managers who are under no immediate obligation to make investments are more likely to increase consumption of perquisites due to the added difficulty in supervising corporate expenditure. A lack of managerial effort also applies here because the smaller the equity held by a manager, the more his motivation to work will dissipate and this is detrimental to company value.

The ‘earning retention hazard’ moves the focus away from one of ‘aversion of effort’ as argued by (Brennan, 1995b) or lack of motivation or objective investment as espoused by the moral hazard conflict theory but instead sees the source of conflict in this case as resulting from the preference of managers to retain earnings for driving growth rather than cash distributions which is preferred by shareholders. A relative association has been determined connecting the size and a company and the compensation of managers thus creating an inducement for managers to focus on size growth and neglect growth in term of returns to shareholders.

A third area identified as a potential originator of conflict is one related to timing. In general, shareholders are more concerned with the company’s performance in terms of cash flow as projected into an indefinite future as opposed to managers who are seemingly only interested in cash flow projections for the period of their employment or contract. As a direct result of this, the managers have an inclination to engage in mostly short term projects at the expense of long-term projects. The problem becomes more visible in the build up to when the senior management personnel draw nearer to their disengagement or retirement. A typical example is the significant decline in research and development involvement which is a long term investment that usually has a negative impact on management compensation. A study by Dechow and Sloan (1991) indicate that there is a decline in this sort of investments as top management reach disengagement and explains their findings to be linked to the fact that the manager will not be available to partake in the benefits of such investments.

Risk aversion conflicts arise as a result of managers being overly cautious of involving in projects that may put their self interest at risk.

The Costs of Agency

As explained in preceding paragraphs, the agency theory proposes that as a result of widely dispersed shareholdings, the stockholders are left with no choice but to delegate executive and other decision making authority to professional managers hired for purpose. However, these managers have a tendency to pursue their own interests which conflict with those of the stockholders who are more interested in avoiding firm specific risks. This conflict or divergence of interest most times results in the owners taking out certain measures to minimise the effect of this conflict. The costs of providing these checks and balances to ensure that managers do not abuse their authority or even the costs of managers allocating to themselves excessive perquisites at the expense of shareholders and the cost of monitoring and dealing with any such infraction can all be classified as equity agency costs. As succinctly put by McColgan (2001), ‘Agency costs can be seen as the value loss to shareholders, arising from divergences of interests between shareholders and managers.’ Agency costs are a sum of various parts and as posited by Jenson and Meckling (1976), monitoring costs, bonding costs and the cost of residual loss are the sum parts of this cost. I will further expatiate on these three sub groups as in my opinion, they satisfactorily cover the main heads under which agency costs are incurred.

Monitoring Costs

Where a principal delegates decision making authority, particularly executive or financial, to his agent it is important that there a mechanisms in place to check any excessiveness, misuse of authority or bad decision making. In other words, the agent is monitored. These monitoring costs are thus, the expenses incurred by the principal in the process of evaluating, examining and even ‘managing’ an agent’s activities. Such costs may include but are not limited to the cost of conducting regular audits, the cost of developing reporting lines along the hierarchy of managerial staff, sometimes the hiring of external consultants and will even include the cost of disciplining erring managers. The burden of paying these costs is on the principal. However, Fama and Jensen (1983) have submitted that this burden is eventually passed on to the agent as the monitoring costs will have a direct impact on the agent’s remuneration. Asides these methods mentioned above, there are other self-regulatory monitoring mechanisms that are imposed by statute. For example, domestic regulations under various sections in part 16, chapters 1 and 2 of the Companies Act UK 2006 stipulate the mandatory requirement for company accounts to be annually audited. Similarly recommendation contained in the Cadbury report of 1992 (reporting and control mechanisms) and the Greenbury (1995) reports on corporate governance are usually also employed. The requirement under the Combined Code 2010 dubbed ‘comply or explain’ means that a company, in the event of non-compliance must disclose and explain its reasons for not doing so which in itself is capable of attracting to the company sufficient attention from regulatory bodies to provide a certain level of monitoring. Within a corporate structure, probably the most effective monitoring mechanism over the agent (managers) is the board of directors. The board is usually made up of individuals who possess the necessary skill and expertise required to carry out this duty. They must also be properly incentivised. Denis, Denis and Sarin (1997) are of the opinion that for monitoring to be effective, the mechanism employed must prove a formidable challenge to management’s control of the company. However these mechanisms must be deployed in such a manner as to strike a perfect balance with regard to the peculiarities of the firm’s working environment as too much interference or ‘over-monitoring’ will invariably restrict managerial independence and may have an adverse effect on the company’s’ performance Burkart, Gromb and Panunzi (1997).

Bonding Costs.

As posited by Fama and Jensen (1983), the notion that agents eventually bear the burden of monitoring costs makes it more likely that they will initiate internal framework to ensure an alignment of interests between the agent and the principal or recompense for any eventual divergence if not. The cost of setting up structures of this nature and implementing them are known as bonding costs. Examples may include developing enhanced marketing strategies towards set profit targets, improved dispersion of information to the principal or even budgetary considerations and expenditure that are in sync with the principal’s objectives. These costs are borne solely by the agent, but are not always financial as they usually involve a re-alignment of corporate strategy to realise the principal’s interests. The relationship between monitoring costs and bonding costs are relative as a marginal increase in bonding costs will invariably lead to a marginal reduction in monitoring and its associated costs. Denis and Kruse (2000) are of the opinion that the optimal bonding contract should aim to entice managers into making all decisions that are in the best interests of the shareholder’s. This is the most desirable outcome which would lead to a drastic reduction, or even wishfully, an elimination of the agency problem itself. However a more realistic outcome would be that bonding provides a means of making managers actually meet the expectations of shareholders to a certain extent even if not completely. McColgan (2000) remarked on a particularly interesting bonding structure popular in the UK which is imposed upon management; the requirement of closely held companies to distribute all income after allowing for business requirements (declaration and distribution of dividends) and was of the opinion that it presented the problem of retention of earnings in UK companies. He however concluded that the effectiveness of bonding structures may be treated with scepticism as it is a mechanism utilised at the discretion of management.

Residual Loss

As we have noted earlier in this essay, it is practically impossible to prepare and guard against all conflicts that may emerge between shareholders and managers, thus the development of the notion that their relationship consists a multiplicity of constantly renegotiated contracts. Therefore, it is an acceptable conclusion that regardless of the outcomes of monitoring and bonding, a divergence of interest between managers and shareholders would still exist and any expenditure made in the resolution of these remaining conflicts are still reflected under the costs of the agency relationship. These remaining costs are known as residual loss. These costs remain because enforcing contracts between the principal and the agent is as mentioned earlier, very costly and in practice; far outweighs the advantages to be achieved from enforcement. It is practically impossible to fully contract for every contingency by way of conflict that may arise as a result of the agency relationship therefore a balance must be struck between over monitoring of management which leads to restricted initiatives, and enforcing contractual mechanisms designed to reduce agency problems in order to achieve the optimal level or residual loss.

The Mitigation of Divergence

The main challenge arising from this agency problem is how to induce the agent to act in the best interests of the principal or, in the context of corporate governance, how to mitigate the divergence of interest between shareholders and managers. Empirical and theoretical research has shown that a principal can limit the agent’s divergence from his interest by incurring both monitoring costs; designed to restrict deviant activities of the agent, and bonding costs; designed to ensure the agent does not take any action detrimental to the principal. So in mitigating this divergence, both monitoring and bonding costs are necessarily incurred by the principal. The common solution is usually to provide sufficient incentives for managers that would align their interests with that of the shareholders but it must be noted that asides the advantage of mitigating the clash of interest, this policy carries along with it, a secondary negative effect in the sense that managers would now only look to the short term benefit they would stand to gain based on the incentives offered them and will not look into engaging in long term projects. This can be detrimental to business activity.

There however arises the issue of effectiveness with regard to these mechanisms. The test of effectiveness propagated by Denis and Kruse (2000) is simple and constant in determining the relevance of any of these mechanisms in the context of the corporation and is in two parts. First, does it effectively narrow the gap between the interests of managers and shareholders? Secondly, does it have a significant positive impact on corporate performance and company value? If these two questions are answered in the affirmative then the issue of effectiveness is resolved.

There are several different methods that may be employed to mitigate issues of divergence. Here we will focus on three of the more prominent methods that were highlighted by Crutchley and Hansen (1989). The first method is by increasing the manager’s equity ownership in the firm which would directly result in an alignment of interest between the shareholder and the manager. This method can be particularly effective because where the manager now has an equity stake in the firm; he would share the same expectations as other shareholders thus closing the gap of divergence. Monitoring costs would also be invariably reduced as a direct consequence. This method is however in itself not costless and the increase in a manager’s equity stake is relative to reduced diversification of his personal wealth and the balance would be an increase in remuneration.

The second method proposed to assist in mitigating divergence is to increase dividend payments. This may seem unrealistic and maybe even unrelated to mitigating the divergence of interest but according to Easterbrook (1984) the rationale behind this is that the lower the financial resource available to the managers, the higher the chances of the company having to seek external equity capital. This would entail venturing into the capital market to raise funds either by way of private placement or public offer. In this case, the company would become subject to rules regulating capital market operators and therefore managers would be more closely monitored by relevant stakeholders including prospective or new investors and relevant government agencies like the Securities and Exchange Commission. This increased monitoring would motivate managers who are intent on retaining their positions to redirect their actions to be more in line with the interests of shareholders. Another method of reducing the costs of agency to result in diminishing divergence of interest is the use of debt financing. Jensen and Meckling (1976) indicated the importance of this method by explaining that using more debt finance reduces total equity financing, which has a diminishing effect on the level of the manager-stockholder conflict. In what was referred to as the ‘control hypothesis’ he submits that by replacing dividend payments with debt issue managers are bound to apply future cash flow to shareholder recipients of this debt in ways otherwise unachievable by dividend payments. The controls are increased in this case because where the agreement to repay principal and interest is not maintained, shareholders reserve the right to initiate insolvency proceedings. Debt financing also reduces the cash resource available to be fritted away at the discretion of the managers. It further enhances efficiency as the constantly looming threat of redress as a result of failure to service debt payments also act as a sufficient motivational tool in making the firm more efficient. In this case the managers are more concerned with policy behaviour that will further the interest of creditors which in turn reduces the likelihood of incurring agency costs. However, debt financing may give rise to certain debt agency costs which may include the cost of contractual protection and insolvency proceedings or bankruptcy.

Conclusion

In conclusion we have looked at the concept of separation of ownership from control and the notion of an agency relationship that develops as a direct result. The agency theory and its inherent problem being that of an ultimate divergence of interest between the shareholders and managers, the control of which leads to expenditures termed the costs of agency have also been summarily discussed with suggestion proffered to assist in the mitigation of this divergence. It is however a contrasting outcome that despite the existence of a myriad of problems afflicting this agency theory imbibed in the separation of ownership from control, the model still remains very popular within today’s modern firms and corporate governance structures. The simple explanation is that popularity of this corporate governance structure can in any case be ascribed to the continuous development of institutional control mechanisms both internal and external which are specifically targeted at resolving or minimising these conflicts as they arise.

Corporate Social Responsibility, Corporate Governance and Ethics Essay

Corporate Social Obligation is an integral section of a small business now times since the customers anticipate the businesses to act in a sustainable and moral way. This evolves the requirement of ethical promoting and Company Social Duty for doing a business enterprise globally. All the expanding corporations are now attempting to enter into professional collaborations with non-earnings organizations, or work entirely to do their part in direction of society (Cunningham 1997 Mescon and Tilson 1987 Ross, Stutts and Patterson 1991). As Dell is one of the greatest corporations accomplishing enterprise globally, Corporate Social Responsibility is comprehended and has been practiced effectively because previous ten years. Dell has executed several activates about this thought and is continue to looking to enrich these pursuits in buy to act their portion towards culture. There are numerous social plans which have been introduced in the course of final decade and several a lot more to arrive. Some of these applications are talked about under:

Dell Social Innovation Levels of competition

Dell had structured the competitions for bringing concepts to transform the globe. Lately, Dell has awarded a single college team with $50,000 in seed funding. In the complete method of these competitions, hundreds of new strategies had emerged and enhanced.

Forest Safety and Logistics

Dell is working with two-sided method to minimize the virgin tree fiber use and has enhanced forest pleasant paper use. In 2009, Dell collaborated with a person of the very best transportation and logistics companies who are keen to deliver problems free and well timed deliveries.

Dell YouthConnect

Dell is nervous to prepare technology composed of younger persons from all above the world for possessing a pool of talented children to provide the firm and modern society as a result of instructional initiatives. To make this vision practical, Dell has launched a signature program “Dell TM YouthConnect”. This system would be concentrating upon creating partnerships with nonprofit and nongovernmental businesses. With the spending plan of over $8 million, 350,000 college students would be focused in 26 businesses in eight international locations. These 8 international locations include things like India, Mexico, Brazil, China, South Africa, United Kingdom, Morocco and France.

Dell TM YouthConnect

Greener Goods and Packaging

Dell has emphasised on greener merchandise and their packaging and have pressured on the use of bamboo as a uncooked content for this goal. The primary reasons at the rear of picking out bamboo are its neighborhood availability, means to grow speedily (24 inches a working day), its energy and toughness and it advertise wholesome soil. In addition to the previously mentioned attributes, bamboo packaging is accredited as compostable and is verified by Soil Manage Lab.

Dell’s Greener Items and Packaging

The bamboo is utilized in about half of the Inspiron Models and Dell Streak. 25 percent put up-buyer material is employed in packing containers. In addition, Dell is operating with Unisource World Answers which is bamboo packaging provider, to ensure the meeting of maximum criteria for all the processes. Dell has aimed to decrease its wastes of packaging with a pounds of 20 million lbs by shrinking its quantity of cube up to 10 % and 40 percent boost in recycling contents inside the packaging. Dell is fully commited to environmental problems so substantially that it has topped the ranking for Newsweek’s Greenest Firms in America for 2010. Dell was at amount 2 position final yr but its tough efforts and motivation to social activities have designed it feasible to major this classification. There was a study carried out by Boston Faculty Middle for Corporate Citizenship and Name Institute and it was released that in a public notion study (U.S. organizations), Dell was among prime 50 organizations.

Simple Recycling for House and Organization

Dell presents dependable and secure recycling solution for men and women and businesses. There are unique choices for disposing aged machines and are supplied certainly totally free. These options are to drop off, to donate or to prepare a choose up. Dell is the initial organization in United States who banned the export of non-doing work electronics to building nations to avoid overall health, security and environmental concerns. By coordinating with Dell in recycling, we can control electronic wastes by preserving these wastes absent from coming into landfills as very well as cleaning our places from the equipments that we do not have to have by disposing or donating responsibly. Shoppers have some other choices while picking out Dell for recycling their equipments as small business shoppers can have some confidential knowledge, Dell give them Asses Recovery Expert services so that they can guard their delicate information.

Efficient Carbon-Neutral Functions

Dell is operating of developing operations that are carbon-neutral operations. The notion is to lower the use of electrical power and emissions of GHG from operations, maximize the purchases of inexperienced electrical power and offset the remaining GHG emissions responsibly. Dell has taken care of ISO 14001:2004 certification for production its functions globally that is backed by solution advancement and recycling globally which are also qualified by way of ISO 14001. Dell is a person of the most secure place of work with an outstanding health amount (superior than ordinary wellness level in the marketplace).

Electrical power Economical Solutions

Dell aimed to make their desktop techniques and laptops extra productive as up to 25 p.c. To catch their goal, Dell has released a marketing campaign ‘green by design’ for all of its products and solutions. These solutions will be composed of this sort of factors that are most electricity successful i.e. integration of Electricity Intelligent and Vitality STAR as very well as exceeding the environmental standards. Dell’s various displays like E1909WDD, E207WFP, and G2410 etc have 25 percent recycled material in chassis plastic. LED laptop displays are introduced into the marketplace since they take in 43 percent a lot less energy even at highest brightness which has resulted in remarkable charge as very well as carbon cost savings.

Dell TM Eco-friendly Retail store

It is a 1 halt remedy that has aimed to facilitate in getting electrical power efficient solutions, waste reduction and minimizing the environmental effects. This retail store combines smaller and medium solutions covering diverse types i.e. desktops, servers, laptops, screens, workstations, printers and equipment that are crafted by contemplating environmental effect.

Drinking water Conserving and Treatment method

Drinking water is not employed in Dell’s production procedures, but they use h2o in cooling programs, relaxation rooms, landscaping and general cleaning. Dell has remarkably improved water use by strengthening irrigation methods and changing aged equipments with the productive ones. One breathtaking element of Dell’s operational process is that its assembly procedures are free of excreting industrial wastewater. In addition, Dell has situated its output amenities in suburbs that give municipal sewer remedy. Even on-web site sanitary sewage remedy is finished at some creation facilities.

Workforce Variety

There was an announcement on diversitybusiness.com about major 50 companies for perform force range. On-line elections had been transpired and over 500,000 variety business owners received the possibility to be a section of this election. Dell stood at very first position in the checklist of year 2010 and is named as the variety one particular enterprise in Unites States furnishing multicultural opportunities. Dell aims to develop a culture that can get them access to very gifted workforce, retaining them and provides progress alternatives to them. Dell also sponsors a variety of recruiting gatherings pertaining to range.

Proportions of Diversity

Supply: Workforce America!:Handling Worker Range as a Important Resource,by Marilyn Loden and Judy B. Rosener

Human Rights and Workplace Protection

Dell admits that Business can do a purpose in preserving human rights but navigating this position is a sophisticated point to do. Dell tradition has a central concentration on comprehension nationwide legislation, values, and diverse cultures. Place of work security is an integral portion of human legal rights in Dell society. It includes some vital initiatives discussed down below: Conduct based protection whose primary concentration is on preventions from accidents by means of particular person to particular person actions observations, changing unsafe conduct as a result of beneficial reinforcement and building proactive actions in human useful resource. Worker-led safety and crisis response groups which are manufactured below the disorders of Occupational Wellbeing and Safety Evaluation Collection (OHSAS) and systems based on Voluntary Safety Courses (VPP). Ergonomics programs which are made use of to recognize the troubles and give methods to motion linked actions to avert accidents in excess of time. Office wellness and security training plans to deliver instructions pertaining to instruments, ergonomics and unexpected emergency responses. Stretching at operate shifts get started in production places so that muscles strains can be prevented through workday.

Partnerships with Academic Establishments

Dell generally recruits talent from universities and schools that have minority populations. Dell has sustained a potent romantic relationship with United Negro University Fund (UNCF). Dell presents graduate and undergraduate learners paid internships, economic help, arms-on coaching and housing journey as a element of successive preparing for Dell’s approaching human useful resource. Dell experienced prolonged assistance for Howard University in provide chain administration programs. Additionally, Dell has collaborated with GLBT local community in College of Texas to perform an on-web page data session for graduate and write-up graduate learners.

Corporate Governance: a Case of Kuwait Finance House Essay

Corporate Governance: A case of Kuwait Finance House Contents Summary: Chapter 1: Introduction: Background of the study: Research objective: Research problem and question: Research source of data: Scope and limitation: Significance of study: Chapter 2: Literature review: Chapter 3: Research design: Sources of data: Purpose and research questions or null hypothesis: Sample size: Assumptions: Questionnaire: Bibliography

Summary:

In this study we are going to have a look at the corporate governance of Kuwait finance house. As a market leader, it envisaged the revolutionary Financial Mall conception, placing partners such as credit card providers, telecommunication and insurance needs under one roof. The Financial Malls are providing customer-convenient services, personal financial advisors and queue beating automated systems. The paper aims to talk about the major impediment faced by Kuwait finance house and the conflicting interest of the shareholders with the interest of the managers became one of the main causes of the rise of need for corporate governance. The study can define its economy as it is an important edifice or pillar of Bahrain Economy. In the planned study descriptive research get used . Descriptive research studies are conducted when the characteristics of certain groups are to be described. In the study we will try to get at least 25-30 fully completed questionnaires. Many employees, customers and shareholders having many types of accounts are current, saving, loan, debit and credit card. Loan facilities, O/D facilities, and ATM facilities are following facilities is given more importance. It conducted recreational facilities for its customers or employees. The study recommends the banks to involve customers or customer representatives before investing on any internal growth. The bank recently added various technological upgrades with a view to give high level and latest upgrades service as required in the changing world of today. The study recommends the banks to involve customers or customer representatives before investing and the aim is to figure out the possible causes of conflict between the managers and shareholders and why there actually exist the need of corporate governance. Thus the bank has a separate clause in their objective mission statement that clearly defines the creation of wealth for the shareholders. The possible causes of conflict between managers and shareholders will eventually affect the growth of total assets, shareholders equity and customer deposits, all are extremely important financial indicators for financial institutions.

Chapter 1:

Introduction:

In this study we are going to have a look at the corporate governance of Kuwait finance house. It has developed to become the largest commercial bank in the Kingdom of Bahrain. For the past 35 years, it has introduced cutting-edge technologies providing customers with a wide variety of products ranging from individual banking services, treasury and investment, to innovative commercial-focused solutions.

Background of the study:

The Corporate governance is key need of present day world. The different interest of the people in the companies and expectation for the appropriate actions by the companies has led to the rise of the concept of corporate governance. Thus the conflicting interest of the shareholders with the interest of the managers became one of the main causes of the rise of need for corporate governance. In this case study we will take into view the Kuwait Finance House. Kuwait Finance house is one of the leading and respectable banks in the Kingdom of Bahrain. The bank offers commercial and investment banking facility. The bank was established in year 2002 as a wholly owned subsidiary of Kuwait Finance house, Kuwait. The bank became fully accomplices with the rules of Sharia and offers a variety of products and service as per the rules of Sharia. History shows that in the past decade it has seen an amazing transformation with development across all spheres be it technology, industry, education, health; as well as in the quality of life itself. We can hence summarize that in the world of finance, it have emerged as a truly world-class bank incorporating next generation technology, with an international presence and a wide local network. The bank recently added various technological upgrades with a view to give high level and latest upgrades service as required in the changing world of today. Thus the bank has the following objectives as mission.

  1. To provide customers with the latest technological upgrades and support to assist they well.
  2. To provide products and services as per the Sharia rules and principles.
  3. To create a wealth and asset for the shareholders.

Thus the bank has a separate clause in their objective mission statement that clearly defines the creation of wealth for the shareholders. (Kuwait Finance House, 2014)

Research objective:

The aim of the research is to figure out the possible causes of conflict between the managers and shareholders and why there actually exist the need of corporate governance. Thus the objectives can be stated as below.

  1. Identifications of possible causes of conflict between managers and shareholders.
  2. Stating how corporate governance helps in decreasing the level of conflict between the managers and shareholders.
  3. Showing the importance of corporate governance.

Research problem and question:

The research questions include the questions regarding the interest of managers and shareholders in the company. Thus the following questions can be reached.

  1. How efficient is the corporate control in Kuwait finance house?
  2. How the conflict between interests actually rises in Kuwait Finance House?
  3. What factors affect the corporate governance effectiveness at in Kuwait finance house?

Research source of data:

The data will collected from primary sources in the form of a questionnaire that will be circulated on the managers and shareholders of the Kuwait finance house. The Secondary sources will include previous studies and researches, book and magazines, and online resources and other secondary sources which will also be utilized.

Scope and limitation:

The scope of the research is to identify the possible causes of conflict between the managers and shareholders and why there actually exist the need of corporate governance. The study will be conducted on Kuwait finance house. No other sample shall be used to conduct this research. The main limitation is that the researcher must submit the study results before the end of the course to pass the course requirement. The limitations of the study are summarized in the following:

  1. Small population and sample size utilized in the study.
  2. A short period during which the research must be done and submitted (one semester period).
  3. No funds to be utilized to conduct the study.

Significance of study:

The significance of the study is for the corporate governance of Kuwait finance house. That is it can understand the reason behind the trend of using the services. While it can identify their flaws and work together to end the drawbacks and bring back the common people for whom the service was actually started. The study is also significant for research for the academic students so that they can help officials identify their mistakes and work to improve them.

Chapter 2:

Literature review:

Corporate governance is actually the allocation of ownership, its incentive schemes, and concerns regarding board of directors and consists of various market competitions. Thus it consists of all those matters that are related with the company. (Becher & Campbell, 2004) Another definition is that corporate governance is a set of mechanism that helps the outsider that is the shareholders protect their interest from the insiders that is the managers. Thus it is a method through which the shareholders can safeguard their interest and thereon investment in the company. These way objectives are set, performance is monitored and preferred outcome is achieved by the shareholders. Literature has shown that there exist a number of challenges and issue related to corporate governance that should be addressed. Reviewed the presentation of non-financial corporation in United States and Asia which were non efficient enough to show their commitment and transparency toward corporate governance. They found that the modern concepts related to the separation of management from the ownership have made the corporate governance an important issue in the present day world. There exist a big difference between those people who control the company and the one who finance it. Thus the organization system, practice and rules all together can help determine the relation between the two parties. The balance that is created will help in bringing the optimal outcome where both the investors and the managers would feel that their interests are accomplished. (Farinha, 2003) Found that the reason for conflict between the investors and the managers is due to the ownership mechanism. The value of a firm is of a great concern for the investors. Whereas achieving sales target and growth are some of the few objectives of managers. Thus the difference in the objectives results in the clash of the interest between the two groups of the company. The earlier tries to increase their wealth through the investment they have made, while the latter tries to accomplish company goals and achieve sustainable growth. Mentioned, that the publically listed companies and family controlled firms in Taiwan are among the best example which shows the conflicting interest of the investor and managers through corporate governance. Although these firms were run for the growth objective they showed lesser conflict among the owners and managers. Reason being that the work environment in Asia and Eastern countries is much different from the European and American markets. The increase in the number of foreign financial institutions in the local market increased the competition. Many banks ventured into lending business that are too perilous only to maintain their standing in the competitive market. John M. Mason (2012), Banks: How Safe Is the Banking System? The writer speaks about the commercial banking system prevailing in USA. The commercial banking system which prevails in USA does not found to be “out-of-woods” due to the fact that 15 largest banks out of the 19 largest banks have passed a stress test which was conducted by the Federal Reserve. The authors also insist that the gap between the estimated capital and the Federal Reserve’s capital must be understood by the healthy financial institutions. This gap identification was suggested by the customers of the banks. Mark to market accounting is the real problem faced by the financial institutions. Mark to market accounting is not preferred by the executives in the commercial banks. The basic reason behind this is the executives do not like to accept that they have done a mistake or they do not want to take high risks or they want to stay away from the cluttered issues. When the sourness of the loan, change in the interest rates and decline in the securities market value are the factors which leads to decline in the value of bank assets. In order to identify the performance, the banks should mark their assets to market so that they would get the real pictures about the performance of bank and its solvency. (Mason, (2012)) H Reddy (2004), Global business and innovation in banking The author cites that the banking sector is known about the uncertainty, adopting the changes in the technology for developing their product and services to satisfy their customers. The opportunities of arbitrage are found everywhere which includes cheap settings and strategies which are related to business. The retail banking sector was examined in this study to find out how some banks earn sustainable profits than the other banks. The author suggests as banking is emerging as a commodity business it would be suitable to analyze the business strategies found in this dynamic sector. A study was set out to find the different positioning of a Delta Model and also to find the effect of fundamental interactions. The right business strategy is put into operation by analyzing customer targeting and operational effectiveness. (Reddy, (2004)) The author mentions that the banks which invented this method of doing business tasted greater success due to their preliminary success. The author further adds by luring away the customers they have become a successful player in the competitive market. In order to exhibit their ability in the big market some of the banks made clients to go for off shore deposits. The value of a firm is of a great concern for the investors. (Piesse et al., 2004)

Chapter 3:

This chapter emphasizes various research methods and tools used in the study. It also discuss about the data collection methods, tools used to gather data, research methodology and data analysis.

Research design:

The research is designed as a qualitative research type in the form of the questionnaires and other secondary sources of data. The attempt was made to keep the secrecy and clarify the questions to the respondent before the filling of the questionnaire. Moreover a questionnaire format will be built to get answers to the questions related to our topic corporate governance. Also the interview questions were designed to maintain secrecy of the identity of the person. In this research the researcher will use objective and subjective method both to analyze the present day situation in the KFH. Also an attempt will be made to know more about the corporate governance system working in the Bank. The intention here is to find out the causes of conflict and suggest a possible method to resort to the peaceful out comes. Thus the research is based on the concept of finding out various objectives of the company if accomplished through the corporate governance and if the peace is resorted between the conflicting interest of the managers and shareholders.

Sources of data:

There are two types of data in any research, primary and secondary data. In this report the researchers have used the primary source of data through distributing questionnaires along with a secondary source of data is used. Primary data: This is gathered through primary data research. In this paper the researcher held a survey via distribution of questionnaires of the study sample. This consists of original information collected for specific purpose. A researcher collects the data to study a particular problem. These data are the raw materials of the enquiry. Secondary data: This is gathered through secondary data research. In this paper the researcher used journals, survey reports, books and online resources. For instances, data collected during census operations are primary data to the department of census and the same data, if used by a research worker for some study are termed as secondary data. Here it deals with the research design, data sources, instrumentation, procedure for gathering data and the data analysis.

Purpose and research questions or null hypothesis:

The purpose of the study is to figure out the possible causes of conflict between the managers and shareholders and why there actually exist the need of corporate governance. Thus the research question and Hypotheses are: Questions of the study

  1. How efficient is the corporate control in Kuwait finance house?
  2. How the conflict between interests actually rises in Kuwait finance house?
  3. What factors affect the corporate governance effectiveness at in Kuwait finance house?

Hypotheses:

  1. There is an invert relationship between the effectiveness of corporate governance of the KFH and conflict of interest between managers and shareholders.
  2. There is a positive relationship between the effectiveness of corporate governance of the KFH and conflict of interest between managers and shareholders.
  3. There is a negative relationship between the effectiveness of corporate governance of the KFH and overall performance of KFH.
  4. There is a positive relationship between the effectiveness of corporate governance of the KFH and overall performance of KFH.

Sample size:

In the study we will try to get at least 25-30 fully completed questionnaires.

Assumptions:

The study measures the corporate control in Kuwait finance house; the conflict between interests actually rises in Kuwait finance house; the factor affect the corporate governance effectiveness at in Kuwait finance house and also looks at the challenges which the banks face. Questionnaire is the main instrument used to obtain primary data through a survey which provides an off-centre view of corporate governance of Kuwait finance house. To a certain extents the survey verifies the limitations and drawbacks faced by the corporate governance of Kuwait finance house. A subjective view point is obtained from the primary data. The facts get validated and the data from the internet acts as the secondary data.

Questionnaire:

Dear SirMadam, I am as a student doing a research on corporate governance of Kuwait finance house. It will be highly appreciated it you can help me find out the real cause behind the shift by responding to following questionnaire wisely.

  1. Gender:
  1. Male (b) Female
  1. Age:

(a)19 to 25 years (b)26 to 35 years (c)35 to 50 (d)51 years and above

  1. Education:

(a)Under Graduation (b) Masters (c) Higher

  1. Do you consider it as customer friendly?
  1. Yes (b) No (c) Not Aware
  1. Rank the major consumers?
  • Institution/companies
  • Individuals
  • Building promoters/construction companies
  • Government agencies
  • Small contractors
  1. Do you have an account with KFH?

(a) Yes (b) No

  1. What kind of account do you maintain? (a) Savings (b) Current (c) Credit card (d) Demit (e) Loan a/c
  1. What kind of facilities is given more importance? (a) ATM (b) O/D (c) Loan
  1. Does it conduct any recreation facilities for its customers or employees? (a) Yes (b) No
  1. Do the customers have the core banking facility?

(a) Yes (b) No

  1. Do they charge unnecessarily for not maintain minimum balance in your account? Does it offer competitive service charges? (a) Yes (b) No
  1. Does it offer competitive interest rate? (a) Yes (b) No
  1. Do you prefer the service of alternative bank? (a) Yes (b) No
  1. What do you feel about overall service quality? (a)Excellent (b) normal (c) good (d) average (e) poor
  1. Would you recommend it to your friends, relatives, associates? (a) Yes (b) No
  1. When do you think of it what comes first in your mind? (a) Personal service (b) network(Wide branch) (c) Customer service (d) computerized banking (e) Core banking
  1. What would you like to suggest for the changes or improvement in any of the services provided by it?

Thank you.

Bibliography

Becher, D.A. & Campbell, T.L., 2004. Corporate governance of bank mergers. Journal of Financial Economics Volume 51 no. 3, pp.371-406. Farinha, J., 2003. Corporate Governance: A survey of the literature. Journal of Economics 118, pp.107-55. Kuwait Finance House, 2014. About us. [Online] Available at: https://www.kfh.bh/en/kuwait-finance-house/about-us.html. Mason, J.M., (2012). Banks: How Safe Is the Banking System? [Online] Available at: https://www.bullfax.com/?q=node-commercial-banks-how-safe-banking-system [Accessed 15 March 2014]. Piesse, J., Lien, Y. & Filatochev, I., 2004. Corporate Goverance and Performance in Publically listed, Family controlled Firms: Evidence from Taiwan. London.: King’s College of London. Reddy, H., (2004). Global business and innovation in banking. [Online] Available at: dspace.mit.edu/bitstream/handle/1721.1/17882/56657909.pdf?. [Accessed 15 March 2014].

Corporate Governance Scandals Essay

1.1 Introduction

The aim of this thesis is to examine the evolution of Corporate Governance in the United Kingdom and the affects which corporate scandals had on it. This aim is achieved through the following objectives:

The development of Corporate Governance in the United Kingdom.

The affect of corporate scandals on stakeholders.

Corporate scandals and Corporate Governance.

Corporate Governance has been a source of discussion among investors and entrepreneur and it has gone through many changes in recent years. It is defined as the structures and processes for the direction and control of companies (World Bank, 2005). The importance of Corporate Governance came into enlightenment after the collapse of high profile organisation such as Robert Maxwell (Parkinson & Kelly, 1999). These corporate failings lead to UK Corporate governance being improved (Iskander & Chamlou, 2000). The Dramatise change in Corporate Governance affected many big organisations with a number of challenges. But the key aspect of Corporate Governance is Risk-taking is fundamental to business activity (Spira & Page, 2003), which means risk taken by the organisation must be controlled properly and from here Risk Management comes in.

To select Corporate Governance as a dissertation topic large amount of research activities with many sources of literature is being used. One of the major problem realised with this topic was, there was ample amount of literature available and that to is very difficult to select the most appropriate one. But problem was solved by concentrating on academic literature, which is mentioned in brief in this dissertation.

The structure of this dissertation is as follows, chapter one will focus on literature review, which will provide some basis knowledge for this dissertation. The main aim of the literature review is to highlight the various factors associated with the evolution of Corporate Governance. This section will also include Corporate Governance in the USA which will only give some idea how the legislation is different in two countries. Secondly we will discuss some scandals (Arthur Andersen and Robert Maxwell). The purpose of choosing these two case is to show by which Corporate Governance reached the stage of maturity. Robert Maxwell scandal which occurred in the UK and Arthur Andersen scandal occurred in the United States, which will be the second chapter of this dissertation which actually gave the birth to Corporate Governance. And the last part of the dissertation which is third and final chapter will describe some limitation and conclusion.

Chapter 1

Literature Review

The aim of this section is to provide an overview in order to analyse different aspect of Corporate Governance and scandals which are linked with the aim and objective of this dissertation. This part of the dissertation will describe about, what Corporate Governance actually is, discussing definitions. Further it will present back ground, development of Corporate Governance in UK, need for Corporate Governance and Corporate Scandals.

What is Corporate Governance?

“Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return”, www.encycogov.com, Mathiesen [2002].

Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment, The Journal of Finance, Shleifer and Vishny [1997, page 737].

Some commentators take too narrow a view, and say it (corporate governance) is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the expression as if it were synonymous with shareholder democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edge. Corporate governance as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers and indeed for the reputation and standing of our nation and its economy Maw et al. [1994, page 1].

Corporate Governance is ‘the structures and the process for the direction and control of companies’ (World Bank, 2005). This definition only explain the involvement of Corporate Governance, however it fails to explain in depth about Corporate Governance.

The other definition says ‘the system by which companies are directed and controlled’ (Cadbury, 1992, Coyle, p4). The Organisation for Economic Co-operation and Development (OECD, 1998) explain Corporate Governance in more details it says ‘A set of relationships between a company’s board, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’ (United Nations, 2003, p1).

If we look at the definition provided by the OECD (1998) we can say Corporate Governance involve number of parties such as stake holder, share holder and board, and the goal of an organisation can be achieved by using Corporate Governance. And lastly we can say Corporate Governance measures the performance of the company.

Background

Many large organisations in UK suffered because of the Corporate Governance and this was the main reason for the number of changes in it throughout the years. One of the secondary reasons for this change was the economy and society as well. In this section we will focus on this area, the change occurred in this area and the impact of these changes on corporate world.

Dubbed the Enron of England, the South Sea Bubble was one of history’s worst financial bubbles (Stock Market Crash! 2006). This was started in 1711, when a war felt Britain in arrears by 10 million pounds. And this debt was financed by the South Sea Company at 6% interest. A part from the interest, Britain also gave the right to trade exclusively in the South Seas. The failure of the South Sea bubble was the expectation of the directors lying about the profits, as the South Sea Company issued stock to finance its operation. Interested Investors quickly realised that company is having monopoly in the market, so the share price increased drastically from the scratch. Speculation became rampant as the share price kept skyrocketing (Stock Market Crash! 2006). And after certain period the management realized that the company share was overvalued. Well we can say that this point in time this happened because there was none of the guidance documents which are available today.

Cadbury Committee told this initiative and they produce the first guidance document in the UK, which was chaired by Adrian Cadbury (Cadbury, Report, 1992). The Cadbury Committee Report included a number of financial aspects of corporate governance i.e. the role of the board, auditing and reporting of financial information to shareholders (Cadbury Report, 1992).

Cadbury Committee Report was structured in such a manner that the organisations can easily follow it. Here are some outlines of Cadbury Committee Report, Section 4 deals with the structure of board, and there should be executive directors and independent non-executive directors. Section 4.11 explains the purpose of having non-executive directors. The responsibilities of directors which are mentioned in section 4.28. Internal control is discussed in section 4.31 of the Cadbury Report (1992) which provided guidance on keeping records of accounts and reducing the chance of fraud (Cadbury, 1992). Section 4.33 which explain about Audit committee and there relationship with the board members and the appointment of external auditors. However Cadbury Committee report fails to unveil director’s remuneration, which leads to the introduction of the Greenbury Report.

The chartered Institute of Management Accountants (1999) explains the purposes of having Greenbury Report, to encourage more transparency with the organisation. It provides guidance on director’s salaries, bonuses, and also accountability (Chambers 2002).

Section A of the Greenbury Report discusses about the director’s remuneration and director’s remuneration should be decided by a remuneration committee. This committee should include non-executive directors who will decide upon the remuneration of the director’s (Greenbury, 1995, section A1). The remuneration committee should provide report to shareholders which are discuss in Section B of the Greenbury Report disclosure and approval provisions (Greenbury, 1995, section B). Section C of the Greenbury Report discuss the performance of the company with there director’s. The performance- related component of remuneration should be plan to align the interest of Directors and shareholders and to give directors enthusiastic incentives to execute at the highest levels (Greenbury, 1995, section C). Section D of the Greenbury Report discusses service contracts and compensation (Greenbury Report, 1995, Section D). This part focus on, how much compensation a director is entitled in the event of leaving the company before his/ her contract expires. This means that shareholders know accurately how much it would cost them if they are firing any one of there director or director’s.

Hampel and the Broadening of ‘Control’

Hampel’s Committee on Corporate Governance (1998) resulted in both a step fore and a step back from the earlier Cadbury report. Hampel elaborated the concept of internal control ‘business risk assessment and response, financial management, compliance with laws and regulations and the safeguarding of assets, including the minimising of fraud’ (Hampel, 1998, pp. 53-54). The authors clearly stated that ‘They are not concerned only with the financial aspects of governance’ (Hampel, 1998, p.53). Hampel took a broad view of internal control, stating that it is the responsibility of directors to establish a robust system of risk management, to recognize and appraise potential risks in every aspect of the business operation. The ‘control’ concept of Hampel’s was welcome by many organisations, which also include the Association of British Insurers (ABI) which recognise it a realistic approach that motivated companies to deal with their compliance with the new corporate governance requirements (Fagan, 1999). Neil Cowan, Vice President of the European Confederation of Institutes of Internal Auditing, say that Hampel’s view of risk management represented ‘a welcome restatement of that part of a Board’s prime responsibility for devising a strategy that will ensure the company’s continued existence’ (Cowan, 1997).

The Turnbull Report

A committee chaired by Nigel Turnbull produce a new report titled, Internal Control: Guidelines for Directors on the Combined Code, under the support of Institute of Chartered Accountants in England and Wales (ICAEW, 1999), it was published less than two years after the Hampel Committee on Corporate Governance was published. The document issued by Turnbull committee filled may gaps left by Cadbury and Hampel. The report was drafting by the recommendations of the Combined Code and the underlying Hampel recommendations that directors review all controls. The main aim of the report as agreed by large organisation including ICAEW and the London Stock Exchange was to provide guidance to the listed companies and to implement the requirements in the Code relating to internal control. But the main purpose of the report was giving the relaxation to companies to explain their governance policies, the guidance obliged the board to report on the effectiveness of the company’s system of internal control.

This centre on internal control is attached to the idea of a dynamic company, which requires non-stop monitoring and auditing. The Report states that: A company’s objectives, its internal organisation and the environment in which it operates are frequently developing and, consequence, the risks it faces are frequently altering. So there should a sound internal control system which depends on a regular assessment of the nature and extent of the risks to which the company is exposed. As profits are, in part, the prizes for successful risk-taking in business. Internal Control purpose is to help manager and control risk appropriately rather than to eliminate it. (ICAEW, 1999, p.5, para.13).

Turnbull Committee involve two steps to interpret, firstly to identify the risk and how the risk is managed and evaluated. Secondly, assess the effectiveness of the internal control system, it procedure and effectiveness.

Some other report which focuses on Corporate Governance in UK are Rutteman Report 1994 on ‘Internal Control and Financial Reporting’, Myners Report 2001 on ‘Relationship between institutional investors and companies’, Tyson Report 2003 on ‘Recruitment and development of non executive directors’ (Chartered Institute of accountants for England and Wales, 2006).

Why use Corporate Governance?

The argument that the company should be subject to legal regulation at least some of their actions tends to be couched in term of ‘Market failure’. Companies are recognized to have characteristics, particularly the scale and scope of their operations, which make the market governance of their actions imperfect. The purpose of the regulation is to iron out those imperfections and to restore market governance. Now in some cases this may mean very extensive legal regulation indeed, and in exceptional cases, particularly in respect of the so-called natural monopolies, an acceptance that market governance must be abandoned in favour of economy governance. This is a topic, which is growing in importance following a number of high profile failures. In UK stock market as per Financial Aspects of Corporate Governance,1992 all listed companies need to publicly state whether or not they comply with Corporate Governance. If the Investors they are not fulfilling this requirement, they may full loss as this is an incentive for the listed companies to use Corporate Governance otherwise investors may choose to invest elsewhere.

According to James Madison (Bavly, 1999) No man is allowed to be judge in his own case, because his interest would certainly bias his judgement and, not improbably corrupt his integrity described by James Madison (Bavly, 1999). Because of the Corporate Governance, companies are run in a fair and efficient manner to maximise the wealth of the organisation rather than maximise the profit and that no one person should have too much control.

The Institute of Chartered Accounts for England and Wales (ICAEW, 2002) discuss the importance of Corporate Governance in more details, ICAEW (2002) explain that because of the corporate scandals, Corporate Governance came into motion or it can also be said corporate scandals is the main driver for Corporate Governance as it highlights what can actually happen and also the devastating affects.

The ICAEW (2002) also indicated that because of the awareness and the increased knowledge of shareholders have lead to companies to improve there presentation in the market and also to improve the way in which they operate in order to attract investment. Shareholder influence affect the structure of an organisation (Investments) so they having a positive impact on Corporate Governance as it is a key driver for the implementation of Corporate Governance to many companies.

Iskander and Chamlou (2000) explain that, to increase the market value and the market share good corporate Governance is essential. This is a key subject to consider because if the management is not performing efficiently and effectively, then money is going to be spent on agency problems, which arise. However with good Corporate Governance the board is working more consistently.

Coyle (2003/2004) explains that there is also a difference of interest between directors of a company and its shareholders’. The directors need to earn more benefits and high remuneration whereas the shareholders want the company to be earn more profit or to maximise the profit of an organisation so that they can cover there cost of capital. Corporate Governance allows shareholders and Directors to set criteria to come to an friendly agreement. This allows to set out exact guidelines to each other thus reducing conflict.

(PriceWaterHouseCooper, 2004)

The above figure is taken from a survey conducted by PriceWaterHouseCooper in year 2004, undertaking 134 executives. The executive were ask, what was the main reason for the failure of Corporate Governance. 37% of the executives replied because of the compliance failures and 26% replied because of the poor management and also because of the poor leadership. The conduct of senior executives was also a major risk according to 15% of directors. The figure clearly shows that Corporate Governance strongly focuses on activities such as leadership of executives.

Corporate Governance in the USA

Corporate Governance in the United States of America (USA) is different in some way from United Kingdom, however there are some similarities. In America the first Corporate Governance documents, was Treadway Report (Chartered Institute of Management Accountants, CIMA, 1999). It emphasis on auditing, which it stressed must be separate from directors (CIMA, 1999). There are many forces that have led to the development of corporate governance in the U.S. as it appears now. The problem of the corporate governance in U.S is that there is not a set of laws or regulation to decide how organization matters are to be addressed. There are two side-by-side laws first is Federal law and Second is state laws, and traditionally corporate governance is a matter of state, so it is determine by the sate laws. This recommendation of corporate governance was aimed at reviewing the performance and profitability of companies through an independent organization in order for shareholders to have a true picture of how the company is performing. The Committee of Sponsoring Organisations of the Treadway Commission (COSO) then produced a further document on Corporate Governance which was based on Internal Control (CIMA, 1999). This was designed to discuss how a company should be run and appropriate controls, which would ensure this.

After the corporate scandal of Enron, the Sarbanes-Oxley statute is really a federalization of corporate law. Sovereign of written statutes and regulations, the U.S. is a common law system so a great deal of the law on corporate governance comes through judicial decisions. The United States of America introduced corporate governance legislation in 2002, the Sarbanes Oxley Act (SOX).

High profile corporate collapses due to a number of circumstances including financial reporting irregularities leading to a lack of investor confidence and public trust. The Financial Services Authority (FSA) which is the regulating body of the Financial Services sector in the UK did a number of things in reaction to the Enron scandal (Rouston, 2003). Rouston explains that the FSA conducted a review of listing rules and looking further into the matter of accountancy and auditing (Rouston, K, 2003).

However in the USA the response to the growing number of Corporate Scandals and most recently the Enron scandal the USA was different than the UK. The Sarbanes-Oxley Act was introduced in 2001 as a direct response to a number of corporate failures (Matyjewicz and Blackburn, 2003).

The Sarbanes-Oxley Act (2002) was useful as it meant that Corporate Governance would have to be taken seriously and that there would be company on the stock exchange who did not comply with SOX (2002). Although the UK does not have legislation many companies do use corporate governance, the Combined Code, in order to attract investors (Financial Aspects of Corporate Governance, 1992).

The three reasons for the development of Corporate Governance in USA:-

(The Continuing Evolution of Corporate Governance in the United States- Thomas A. COLE Chairman, Executive Committee, Sidley Austin Brown & Wood LLP)

Capitalistic view has clearly prevailed with specific regulations imposed relating to the treatment of employees and such.

The second factor in the development of U.S. corporate governance is that there are very widely held corporations.

Another factor that has shaped corporate governance is the rise of the institutional investor.

Paying for Good Governance

One of the survey done by Mckinsey & Company in 2000 all the investors are willing to pay more for a company with good board governance. Nearly 83% in latin America, 81% in US and 89% in Asia they consider that there should be proper control upon the working of the organisation.

Source: Mckinsey & company, Investor opinion (2000)

Corporate Governance: A Mandate for Risk Management?

Risk Management is described as identifying and managing a firm’s exposure to financial risk. Corporate Governance as describe above is a set of rules, procedure and structures by which investors, who invest in an organisation assure themselves that they are getting pre-determined return and they also ensure themselves that there investment is used and invested in efficient portfolio and the managers are not misusing there investment. It is at the top of the international development agenda as emphasised by James Wolfensohn, President of the World Bank: ‘The governance of companies is more important for world economic growth than the government of countries.’

This section will focus the connection between risk management and Corporate Governance. Corporate Governance and Risk Management are strongly linked and the two are used in conjunction with one another to help companies in the running of a smooth and well-organized business. One of the main reasons for the implementation of Corporate Governance is to stop Corporate Failings and Turnbull highlights that that drive the business forward, some risks should be taken (Chartered Institute Internal Auditors for UK and Ireland). And is said to calculate risks the use of risk management is essential because even the smallest risk can create big problem for companies.

CIMA (1999) explain number of factors which link Corporate Governance with Risk Management, good corporate Governance reduces risks. The purpose of the risk management is to eliminate risk. Risk Management as described by Coyle (2003/04) identifying, assessing and controlling the risks facing a business, and with incorporating risk issues into decision making processes (Coyle, B, P2). And if we compare the definition provided by the (Cadbury, 1992, Coyle, p4) The system by which companies are directed and controlled both the definitions aim to protect the organisation and their investor (equity or debt) and also ensure the smooth running if the organisation.

There have been many changes in issues Corporate Governance and Risk Management from the Cadbury Report of the early 1990s to the more recent Turnbull Report of 1999. Well it is now clear to all the boards of directors there responsibility to ensure that all possible threats to an organisation have been systematically identified, carefully evaluated and effectively controlled.

Corporate Scandals

The Corporate Scandals were occurring on a frequent basis in the 1980’s – 1990’s (The international Corporate Governance Review 2003). This was considered as a worrying condition for investors and companies. Short et al (1998) suggested that corporate scandals can occur for a number of reasons one of the reason given by them was creative accounting, which can explain as not doing the accounts properly and hiding the problems or risk through which the company is exposed. And the investors believe that company is performing and working in a good condition and there investment is safe. They also explained that dishonest of directors also played a vital part in corporate scandals, this can be in many ways such as hiding the fact and telling shareholder that the company is doing well.

Nathanson (2002) explain corporate scandals often have elements of political blame. Nathanson explain this by taking the example of Heath’s Government in 1972 as they made a drive for growth. Which mean high share prices which affected the economy which was growing at round 5%. And some companies such as Slater Walker went bankrupt (Nathanson 2002).

One of the interesting question to analyse is How do (the suppliers of finance) make sure that managers do not steal the capital they supply or invest it in bad projects (Licht, 2003). To protect Investors is the overall main purpose of Corporate Governance and this statement shows the overall purpose for the Corporate Governance.

The scandals not only affected the shareholders of the organisation but it also harm the staff, usually financially. So the whole organisation was effected by the Corporate Scandals. One of the article printed in Financial Times in year 2002, which explain the former employee’s pension which was previously worth $450, 000 is now worth $12,000, this is because of the collapse of the company, and financial time total blame corporate governance (Financial Times, 2002). This shows how the collapse of a massive company such as Enron can have on one individual employee. However we should also understand that shareholder are not only one who are affected by this disaster but it also affected such as the financial services market, a decline in confidence in the market, and the government as it is poor publicity.

(Market and opinion research International, 2003)

The figure 3.2 highlights that confidence in UK organizations is in-fact fairly high when comparing the above data it is clear that in-fact confidence is rather high with 47% disagreeing that an Enron could occur and 35% strongly disagreeing. But the fact is that only 4% of the directors who were interviewed believe that it was likely or highly likely. To conclude this, now the directors are confident after the effective corporate governance that there won’t be another Enron Scandal occurs in the UK.

Maier (2005) suggested of the failure of the corporate governance is corporate scandal. And because of these corporate scandals investor loose there confidence over the market (Maier 2005). Because of these corporate scandal government introduce the Cadbury Report (1992) to increase the confidence of the investor (Cadbury Report 1992). The USA also acted in a similar way to the Enron scandal by introducing the Sarbanes-Oxley Act (2002). It appears that corporate scandals have many bad affects but they are a key driver for Corporate Governance.

Can directors be trusted to tell the truth?

Agree: 17%

Disagree: 65%

Are directors paid too much?

Agree: 75%

Disagree: 11%

Can firms’ pension promises be trusted?

Agree: 34%

Disagree: 43%

Can accountants be trusted to check results?

Agree: 37%

Disagree: 39%

(BBC Business, 2002)

The above figure was taken from BBC business survey which was conducted in 2002 by surveying 2000 members of the UK public. The survey was conducted soon after the corporate scandals which were because of the failure of the Corporate Governance. When analysing the figure the general public of UK totally lost confidence from the companies and only 17% of the citizen respondents that they trust Directors.

So we can conclude by saying that corporate governance is a prime factor or this also be explain as a key element which not only enhance investors confidence but it also promote competitiveness and ultimately the whole economy benefits. ‘The governance of companies is more important for world economic growth than the government of countries’ (James Wolfensohn, President of the World Bank).

Cultural, political and economic norms affect the way in which a society approaches corporate governance and its affects on board leadership, management mistake and accountability. The challenge in front of the policy maker is to reach a balance of legislative and regulatory reform, taking into consideration the best practice to promote enterprise, enhance competitiveness and stimulate investment.

Conclusion

There are clearly many factors which act to provide incentive for institutions not to involve themselves in Corporate Governance issues. Whilst the level of monitoring by institutions is greater than that commenly supposed, such monitoring tends to be carried out in private, and, as Black and Coffee (1994) note, ‘for most British institutions, activism is crisis driven’. Furthermore, it is unlikely that ‘behind the scenes’ monitoring is satisfactory, particularly from the point of view of the public, as it enhances the belief that institutions and company management are all simply part of the same ‘old boy network’, a belief illustrated by the debate concerning the high level of directors’ remuneration. The increase in number of information’s and guidance has increased the knowledge of the companies’ and has also made the corporate practices more sophisticated. If we go through Cadbury committee report there was lack of internal control however Turnbull report lifted the veil and this report emphasized on internal control as part from other controls. Other countries such as the USA are different from Great Britain, the USA introduce Corporate Governance Legislation called the Sarbanes-Oxley Act. Although the United Kingdom do not have Corporate Governance legislation as such companies feel obliged to follow guidance if wish to attract investment (ICAEW, 2005).

Corporate Governance is very much important for these days for the companies who work either in public sector or private sector as it has been highlighted in previous high profile corporate scandals, such as Enron, that lacking of Corporate Governance companies are exposed to being involved in a Corporate Scandal (ICAEW, 2005). Corporate Governance is now becoming a culture of companies in Britain and it is more often used than ever before.

Large corporate scandals in the USA, such as Enron, have an affected other countries which also include the UK. Corporate Governance is closely linked to Risk Management; so it is essential to go through the key component in the risk management regime.

Chapter 2

Case Studies

In order to see the poor performance of Corporate Governance and lack of Corporate Governance legislation it is useful to use the case study approach. It was very important for the dissertation as it highlights the real life example of the poor performance of Corporate Governance. A case study can be defined as a research study which focuses on understanding the dynamics present within a single setting (Eisenhardt 1989, p65). This technique (Case Study) was introduced in 1934 as per the Oxford English Dictionary (2006). According to Stake (1993) the purpose of using two case studies was to see how the failure of corporate governance and there affect on the companies in different ways. One of the key objectives of including these cases is to see the affect of corporate scandals and how they can happen and this aim can be assisted by the case study technique. There are a many limitations however; the company scandals are in different sectors of the economy.

The approach of case study is having number of advantage and number of disadvantages as well. By using case studies, comparisons can be drawn, comparing one corporate scandal with the other company scandal (Jankowicz, 2005). It must be noted that when comparing the different corporate scandal they are often very different but the reasons of this occurrence are very much similar. Jankowicz (2005) also highlights that the case study approach is open research method, which can be change on a daily basis. This approach given by Jankowicz is different and difficult to understand as if the case study is changing constantly then it will be time consuming and the other can be possibly confusing. This was problem was solved by setting clear dates of data, to research and not add any irrelevant information or new information unless it was important. Another advantage of case studies is that real life examples support research findings.

The aim of this section is to include two corporate scandals as case study and to discuss why and how they have occurred. These case studies were particularly selected to evaluate and highlight the similarities and differences in the arena of corporate scandals in the UK and the USA. The two case studies chosen for this section are from Robert Maxwell (1989) and Arthur Andersen (1991).

Case Study one – Robert Maxwell

Ian Robert Maxwell was born on 6th October 1923 JA¡n Ludvik Hoch in the small town of SlatinskA© DA´ly, Slovakia, (now Velyky Bychkiv, Ukraine) into a poor Yiddish-speaking Jewish family. He joined the British Army as an infantry private and fought his way across Europe from the Normandy beaches to Berlin. His intelligence and gift for languages gained him rapid promotion to captain, and in January 1945 he received the Military Cross. It was during this time that he changed his name to Robert Maxwell (wikipedia.org)

After the World War 2, Maxwell first worked as a newspaper censor for the British military command in Berlin in Allied-occupied Germany. Later, he used various contacts in the Allied occupation authorities to go into business, becoming the British and United States distributor for Springer Verlag, a publisher of scientific books. (wikipedia.org)

The Maxwell scandal was a pension scandal which occurred in 1989 in Great Britain. Robert Maxwell who actually owes the Mirror newspaper group defrauded more than 400 million of employees’ pension funds (BBC, 2001). Maxwell fell to his death from his yacht in Spain (Picard, 1996).

Robert Maxwell was able to fraud the company as he was claiming that he actually owe the whole assets of the company, and he was claiming that he had more assets that he did and the some assets he claimed were not indeed his. The loss/deficit was covered by the pension scheme of the employees’ from this organisation (Greenslade 1992).

Robert Maxwell issued a video in 1989 and he declared to his company employee’s ”Your Pension is safe with me” (Greenslade, 1992). This video was issued shortly before the Maxwell scandal was uncovered as he was trying to lye with his employee’s.

Maxwell had already experienced much controversy in the years, which had led to the corporate scandal (Ipsen, 1991). The Department of Trade and Industry (DTI) declared him unfit to run any company twenty years before this scandal (Ipsen, 1991). DTI in 1969 actually declared Robert Maxwell unfit to carry any business activities and also declared him to perform such functions which involve any public fund. This was held when one of the renowned company of Maxwell ‘Permagon’ was in a process of takeover talk with Leasco who reported Maxwell inaccurate profit figures to the DTI (Thomas & Turner, 2006).

How could this have been prevented?

The scandal of Robert Maxwell occurred as Maxwell was the chairman and the chief executive of the Maxwell Corporation, which gave all the right and large amount of power in the absence of proper Corporate Governance (Maier, 2005). The Combined code recommends against this as it may be a conflict of interests (Combined Code, 2005). As Maxwell was performing the duties of Chairman and Chief Executive so it gave him too much power and it is possible that it was this power which allowed him to defraud his companies.

There was a different lack of Corporate Governance legislation or even guidance with the first piece not being introduced until 3 years later in 1992 by the Cadbury Committee (Untied Nations, 2003). The lack of guidance or legislation meant that Maxwell was in a position to defraud his employees by playing with their pension funds. Until then there were no specific guidelines to highlight how a company should be run and what are the duties of the directors or chairperson and because of this loophole he Maxwell fraud was not brought to light until it was too late.

Robert Maxwell company was listed in the stock exchange until the Maxwell scandal effected the organisation. However with Maxwell’s employee’s trusting him with their pensions this could have been one of the assurances which were given, had it been in place. To provide good internal control The Turnbull Guidance was actually designed and it also includes Risk management (ICAEW, 1999). The key failings of the Robert Maxwell scandal were internal control, as no other directors reported what Maxwell was up to, and conflict of interests with Robert Maxwell was the chairman and the chief executive (Maeir, 2005). The internal control failures of Maxwell were vast. Firstly Maxwell employed his son’s as non executive directors, when non executive directors are meant to be independent (Maier, 2005). Secondly Maxwell was able to hide these massive debts without anybody realising, which section 4.28 of the Combined Code (1999/2005) aims to eradicate. The fact that Maxwell had already been exposed as being unfit to run a company, employees still trusted him with their pension premiums. However employees may have had little choice if this was the only pension scheme available to them.

According to Wheen (2001) the auditors of Robert Maxwell’s business empires, should have seen what Maxwell was up to. The combined code also concentrates on auditing and if this guidance had been in place perhaps the scandal may never have occurred.

Impact of the Robert Maxwell scandal?

One of the affect of the Maxwell scandal was that employees who were contributing into the pension scheme lost there money, which were contributing over the years. This is really a main focus point that the ordinary workers lost there saving which was for there benefits and it was because of the dishonest actions of one individual.

The impact of the Maxwell scandal was also on the British economy and was vast and it put increasing pressure on the Department of Work and Pensions who wrote advice which suggested that occupational pensions schemes were safe (Abraham, 2006). However the Maxwell scandal highlighted the risk to every occupational pension.

Case Study Two – Arthur Andersen?

Arthur Andersen LLP, based in Chicago, Illinois, was once one of the Big Five accounting firms in the United States of America with revenue reaching $9.3 billion (Brown & Dugan, 2002), performing auditing, tax, and consulting services for large corporations. The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany & Co. The firm changed its name to Arthur Andersen & Co. in 1918 (en.wikipedia.org).

Arthur Andersen was working for a big energy giant called Enron Corporation which is an American energy company based in Houston, Texas, United States when they were exposed of a massive corporate scandal (Deakin & Konzelman, 2004). Arthur Andersen were convicted in the supreme court, Houston, of shredding important documents of Enron and destroying emails from Enron, which would have involved them in Enron’s corporate scandal (Economist, 2005).

Arthur Andersen were the accountants for Enron and they were accused of accounting irregularities and a lack of transparency (Uma et al, 2002, p77). Nancy Temple (Andersen Legal Dept.) and David Duncan (Managing Director for the Andersen Houston Office) were cited as the responsible managers in this scandal as they given the permission to shred relevant documents. Since the U.S. Securities and Exchange Commission does not allow convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to practice before the SEC on August 31 (en.wikipedia.org).

Arthur Andersen were hired to ensure that the accounts of Enron were correct and valid and they were convicted because they did not ensure this and also because they tried to cover up their lies by shredding documents. Arthur Andersen were first employed by Enron as consultants and then employed as auditors which the SEC (Securities and Exchange Commission) felt were a conflict of interests (Goldstein, 2002). Kadlec (2002) further explains that Arthur Andersen made massive mistakes in the Worldcom scandal and it also appears that auditors Arthur Andersen missed two cases of fraud in Worldcom. This was the bad publicity, which Andersen could have done without as it closely followed the Enron fiasco.

On the 10th January Andersen admitted that they shredded important documents and emails regarding Enron which would have incriminated them (Sridharan et al 2002). This was extremely shocking for the economic world including many auditors, as it was their job to catch out accountancy fraud and mistakes, not to assist companies in committing such crimes.

Arthur Andersen, much like Robert Maxwell were no strangers to controversy. Andersen had experienced a turbulent past leading up to the Enron and Worldcom scandals (Gredier, 2002). They were connected with the Sunbeam scandal in which the Securities and Exchange Commission ordered them to pay $110 million compensation and also the Lincoln savings and Loans Company (Gredier, 2002). The fact that Andersen had been involved in trouble in the past raises a few questions like why did companies continue to use them as auditors?

How could this have been prevented?

One of the policy of Arthur Andersen company was to employ cheaper and less experienced staff and one policy was that senior employees will retired at the age of 56 in order to save money (Brown & Dugan, 2002). There was now drawback for this policy, this policy may have been financially sensible it did mean that experienced staff were being replaced with inexperienced staff, which is a risk for any business.

The Enron fiasco was not the only case with Andersen there was many other case such as Worldcom scandal (Kadlec, 2002). Enron had already been caught up in a similar corporate scandal and companies like Enron continued to use them. Also the fact that the directors of Andersen did not act upon previous mistakes, these mistakes continued to happen. Again the role of Corporate Governance would have played an vital role, however it is difficult to analyse how anybody could have stopped employees from shredding documents. The directors of the company were essentially to blame as they should have known what was happening in their own company. This type of practice is one that is unpredictable however it is largely contributed to the downfall of Andersen.

In a strange turn of events when the Enron scandal was made public Andersen were actually auditing the FBI (Federal Bureau of Investigation) for the government according to Senator, Patrick Leahy (2002), who was the chairman Judiciary Committee.

Impact of Arthur Andersen

Arthur Andersen once employed 85,000 employees however now they only employ 200 employees who only look after legal claims following the scandal which ruined the company (Wall Street Journal, 2005).

The corporate scandals which Andersen were involved in cost them dearly as highlighted below in some of the compensation claims:

Waste Management 75,000,000.00

Sunbeam 110,000,000.00

Boston Market Bankruptcy 10,300,000.00

Baptist Foundation, Arizona 217,000,000.00

(Wall Street Journal, 2002)

The figure highlights some cost associated with Arthur Andersen incurred through corporate scandals in which they had some degree of blame. The estimated cost of these four corporate scandals was $412.3 million Wall Street Journal, 2002. These figures do not show the figures including Enron but these other corporate scandals were deemed to be smaller and the cost of corporate scandals is here.

The Sarbanes Oxley Act (SOX) (2002) was introduced in direct response to a number of corporate scandals, namely Andersen/Enron (Economist, 2005). This response was similar to the UK’s response to Maxwell and Polly Peck, The Cadbury Report (1992) however the Sarbanes Oxley was legislation which meant companies had to follow the Corporate Governance Guidance set out in SOX (2002).

Comparison

These two companies experienced different types of corporate scandals. The two comparisons chosen are quite different but this highlights the fact that corporate scandals can happen to any business.

There was a degree of dishonesty in both the Andersen and Maxwell scandals, with Robert Maxwell being dishonest and employees and directors being dishonest for Andersen. This dishonesty was at the source of both scandals with Maxwell lying about how many assets he had and Andersen shredding documents which would have incriminated them.

There was also conflict of interests in both cases. Robert Maxwell was the chief executive and the chairman (Maier, 2005) and in Andersen they were consultants to Enron before being their auditors (Goldstein, 2002). This meant that in the case of Maxwell he had too much power and in the case of Andersen they had worked for Enron in a different capacity which means that they were no independent, they knew about the inside affairs of the company.

These scandals occurred when there were no proper corporate governance legislation / guidance. The first piece of Corporate guidance was not introduced in the UK until 2001, which was the Cadbury Report (Cadbury Report, 2002) and the first piece of Corporate Governance legislation was not introduced to the USA until 2002, The Sarbanes-Oxley Act (2002) (Sarbanes Oxley Act, 2002). This meant that these two companies had no guidance/legislation on Corporate Governance, which meant they could choose how their companies were run.

One of the key failures in both corporate scandals was internal control. Andersen was also involved in a number of corporate scandals and nothing was done within the company to stop these from occurring. Both of the above corporate scandals had a positive impact on corporate governance with Andersen leading to the Sarbanes-Oxley Act and Maxwell largely contributing to the Cadbury report.

Conclusion

Corporate scandals have had devastating affects on companies, in Andersen’s case the massive fines and loss of business activity. However corporate scandals have benefited corporate governance as the Cadbury guidance was implemented in response to corporate scandals such as Polly Peck and Maxwell (Cadbury, 2002). In the United States the Enron scandal led to the implementation of Corporate Governance legislation.

Although both Andersen and Maxwell had an extremely negative affect for many reasons there was one key positive to be deduced which was they both improved corporate governance.

Chapter 3

Discussion

The purpose of the project undertaken is to analyse the issues in Corporate Governance and the Corporate Scandals. A thorough literature review has been taken into consideration in order to come with a conclusion. The initial part emphasise on different authors’ research having different Corporate Governance disciplines. One of the main topics discussed was of the development of Corporate Governance and the stages involve in it.

The history of Corporate Governance is dated back to 1920’s, when the running of business was debated by to American’s (OECD, 2004). It began with a single document i.e. Cadbury Report, on a later stage it was followed by a number of others that were Greenbury (1995), Turnbull (1999/2005) and Combines Code (1998/2003). It started on a narrow scale having various disciplines of Corporate Governance in individual documents. Then there was an introduction of the Combined Code in (1998/2003), the purpose of which was to guide the organisations through one document incorporating good leadership in them. To assist the companies in their internal control section of the Combined Code, the Turnbull Report was introduced. Corporate Governance has become a hot topic in debates over the number of years having a turning point by coming in the UK listing rules in 1998 (FSA, 2003), which abide companies to disclose what procedure are they following or whether or not they follow the combined code. This disclosure of codes push the companies into trouble if they are not applying as the chances to have less investments were there and vice versa. The Combined Code was a assurance for investors that the company is run honestly and efficiently.

The last decade of twenty first century has given a rise to Corporate scandals with examples in the UK being Robert Maxwell and Polly Peck, in USA as Enron and Shell (Parkinson & Kelly, 1999). Due to these scandals the investors’ security and trust was lost from giant organisation as their investment was vulnerable at such places. UK established the Cadbury Report (1992) when acting upon the bad publicity of Corporate scandals and USA introduced the Sarbanes-Oxley Act (SOX) (ibid).

The link between Corporate Governance and Corporate thus, is very strong. The above scandals in UK and USA were happened due to a lack of control. Therefore, Corporate Governance provided the necessary controls on the organisation to avoid any mishap and give the investors assurance that their investments are safe and in a growing place.

Limitations

The limitation when handling the issue of Corporate Governance in this report were mainly due to the different aspects of the subject area, as different authors have different views and everybody’s opinions are subject to bias. This was mainly overcome by sticking to the guidelines provided in the aims and objectives of the report. The time duration to complete this report was also a matter due to a large amount of literature document was to be undertaken. The deadline outlined by the University authorities was strict and the work was expected to be prA©cised. These limitation were eliminated by setting up deadlines, for number or weeks to ensure some productive result.

Conclusion

The objectives of the report were attained by analysing different literature and theoretical background of subject matter. The case studies involved in the report allowed a solid background of examples of two companies who already have experienced Corporate scandals. Both are different from each other, Maxwell is a publishing company and Andersen is in auditing business. But a number of reason from both the failures pointed out were similar. The internal control and dishonesty were mainly lacking in both the cases.

These and other such failure has led the intervening organisation to change the ongoing system to maintained trust and honesty, thus Corporate Governance is changed now and is evolving into a better shape. The combined code of Corporate Governance (1998/2003) and The Turnbull Guidance (1999/2005) are now in place as two concise and informative documents. USA has introduced in the legislation for companies to be enforced by Corporate Governance but in UK the companies on the stock exchange has to declare where they are complying with it or not.

The Cadbury Report (1992) was implemented as the direct response to corporate scandals, which were highlighted through the introduction of Corporate Governance Guidance. The negative effects through Corporate scandals were so many from which the main were job losses and shareholders trust loss but these were also the main idea for intervening the organisations with regards to Corporate Governance.

Recommendations

The discussion on Corporate Governance is widespread in around every country disregards of it is developed or developing. However, there might be different methods of having a check and internal control on different companies in different states due to the countries economic policies as Russia and China are following a different economic ideology as compared to USA and UK. The comparison between these two ideological background of internal control could be useful in line with further changes and evolution to Corporate Governance.

Since past fourteen years, Corporate Governance has evolved a lot, when the Cadbury Report was introduced and for further research, it could be a worthwhile project to analyse corporate governance changes in these years.

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Corporate Governance Post-Economic Collapse Essay

Corporate Governance Business enterprise

Imposition of rigorous corporate governance and disclosure demands is an unneeded stress on organization, they minimize aggressive edge of business enterprise, and they increase added price tag to the culture.” Critically examine this statement in light of the current breathtaking corporate collapses around the globe. Your respond to must supply arguments for and against this assertion, and a judgement at the finish.

Introduction

Recent company collapses, such as Enron and WorldCom in United States and HIH Insurance coverage in Australia, elevated an alarm for accounting normal location bodies in all around the world and have introduced the problem of corporate governance to the forefront. The regulators and other standard environment bodies took this problem severely and instantly responded to the scenario with amount of new and significant policies, laws, codes of conduct and prompt very best procedures. The fundamental reason of these initiatives was to make certain that people dependable for governance of an corporation need to comply as for every the expectations of stakeholders and they ought to act in a way to provide trustworthiness and transparency in company monetary reporting. In accordance to Gillan and Martin (2007) the around the globe failure of big companies arose in a program of corporate governance, both equally inner and external to the organization and they located that the essential bring about of failure was corporation’s incapability of controlling its administration. Australia also adopted a range of initiatives which incorporate company code of ethics, CLERP 9 Act and ASX rules and suggestions on the problem of company governance and other disclosure prerequisites as carried out by ASIC and ASX. Much more recently, an crucial report released by the expert accountants in small business committee (PAIB) of Global Federation of Accountants (IFAC) explores the corporate governance in huge standpoint and suggest that an entire accountability framework is needed for trying to keep a superior balance amongst company governance measures and initiatives for sustainable organization price. The assignment is divided into 3 areas. Initially portion describes the value of corporate governance in the global company and investigates the will need of company governance so that ethics of business should really not be overlooked because it can have long long lasting impacts. The argument is offered to show that right after the key scandals in the company entire world, why there is a need to have to build moral requirements and polices. For any multi-national company it is very crucial to think about the impression of its business enterprise on people today as perfectly as on culture. Next part of the assignment discusses the pricey behavior of corporate governance and disclosure in which is a load on the organization and consequences aggressive gain at massive. 3rd part is the conclusion which summarizes the entire essay according to the needed subject matter. Now if we go into deep in this difficulty we see that organizations regulate and take care of a significant portion of the methods and uncooked components of this earth and are dominating the economic globe. But at the same time these corporations have abused their positions in some way or the other

What is Corporate Governance?

The principle of company governance arrived into circulation from last thirty a long time and now the expression is really intercontinental. Now there is a rising realization that very good company governance can not only aid in staying away from issues but also supply quite a few other advantages this kind of as facilitating funds investment and reducing threat. Company governance in incredibly uncomplicated terms is the process by which organization firms are directed and managed (Cowan, 2004). A superior company governance technique guarantees that the corporation sets ideal objectives and then arranges methods and framework in area to guarantee that these goals are met, and also delivers the indicates for some others, both of those inside and exterior of the company, to handle and observe the actions of the company and its professionals. Enron was not able to exhibit and follow good corporate governance methods consequently it paid its rate. Enron supplied misleading info to stay clear of outcomes and unsuccessful to inform shareholders and traders o the real level of personal debt With the growing globalization of company and opposition for funds, it can be claimed that firms which can give assurance of being appropriately managed can achieve competitive edge. Minimizing perceived dangers to buyers can decrease the cost of cash. On the other hand weak corporate governance also dangers a loss of self confidence in the place of the accounting occupation itself. Building countries are paying out a lot more significance in strengthening clear corporate governance and accounting method due to the fact buyers and shoppers demand truthful enterprise and return. And if they never adhere to these standards they will not obtain competitive benefit. Entire world course companies these kinds of as Cadbury and Vienot have issued new pointers which highlights the will need of sound corporate governance this sort of as audit committees, inner composition and management manage.(antidote to corruption) Job of accounting in an integral element of any corporate governance structure mainly because accounting gives the implies for audience to analyses and monitor the firm and to asses how properly the management has done. A robust disclosure routine that promotes actual transparency and ethical corporate governance is a essential attribute of productive multinational businesses (OCED 2004 ).

Excellent company governance is a worldwide organization requirement

As a result it can be mentioned that company governance involves ensuring that the choices made by all those handling the corporation are suitable and delivering a means to observe corporate activities and the final decision producing itself. Drever et al states that alternative is for companies or corporations to be shaped to make and offer products and services effectively. The healthy company governance framework guarantees that timely and precise disclosure of fiscal condition and overall performance is the final result of the business. The challenge for company governance is to balance the fascination of traders and the company at the exact time due to the fact company governance has to set priorities, delegate electrical power and command and preserving accountability and disclosure. The corporations which emphasis experiences concerns such as how the firm is integrating sustainability into business will produce new means for integrating stakeholders. In accordance to OCED 1999, good company governance will help to guarantee that businesses consider into account the interests of a broad vary of constituencies, as effectively as of the communities in which they function, and that their boards are accountable to the enterprise and to the shareholders. This is convert, can help to assure that businesses run for the benefit of society as a entire. It can help to retain the assurance of investors- both equally domestic and foreign- and to appeal to additional patient prolonged expression cash. The need to have for company governance: Transparency vaccine Now the level is why organizations adopt corporate governance in their rules? Company entire world background has a lengthy checklist of frauds and scandals. In the commencing the phrase company governance was utilized as a mechanism for minimizing errors but now the possible toughness of company governance has widen its area. Some circumstances of company criminal offense: Reserve Robert & monk Alleco: Mr. Morton M. Lapides was convicted and jailed of a price tag fixing plan which caused record- braking penalties. The judge claimed that Alleco is tied with optimum unlawful exercise and wants a right systematic company governance regime. Common Electrical: In 1992, was billed with untrue billing with federal govt for armed forces gross sales to Israel in the course of 1980’s. Company’s employees did conspiracy with an Israeli air division to divert income into their pocket. Later on, GE compensated $ 69 million fines and missing its reputation and have faith in in the marketplace. Gitano Team: In December 1993, business was pleaded guilty to the charges that they experienced sought to circumvent customs duties on imported dresses. Wal-Mart then the most significant client of Gitano ceased to do organization with it unless the business follows stringent ethical expectations and regulation. A.H Robins: The Enterprise promoted an intra-uterine contraceptive machine known as Dalkon protect, even with the actuality that it had additional than 500 unfavorable studies from physicians and medical professionals. In 1985, the product was in the long run recalled just after the dying of 17 women and was observed guilty and paid $2.4 billion believe in fund to compensate for the act. Several most extremes examples of the negligence of company governance had been of De Lorean Automobile Plant in North Ireland- which associated defrauding the authorities. Blue Arrow scandal Uk was the final result of manipulating and twisting the DTI (office of trade & marketplace) policies and regulations. The the latest fraud by Cendant was the result of disclosing and misleading excessive profit and belongings. Thus, corporate governance guidelines, rules, disclosures and prescriptions are necessary by the companies since of the framework of the firm. Investors who have furnished the assets to the organization in some way or the other do not specifically operate the organization organization. These contributors will need to count on professionals and corporation. This division concerning capital contributor and administration is the root bring about of many troubles and crisis relating to corporate governance. Hayek argues that firms cannot afford to pay for to dismiss the requires of stakeholders. It is always permissible, even expected for administration to think about the fascination of all stakeholders. Gibson (2000) insists that firms use codes and conduct to enable make a aggressive gain for the corporation. This improves their by now present name in just the global market. Lenox and Nash, (2003) suggests that principles and restrictions are invented to supply details about the business with the hope these claims will be rewarded by people in some way or the other and finally increase the bond between the two. Findings of Chang et al (2000) say that the Asian Monetary crisis in 1997 experienced global implications and lifted the have to have of reform challenges which include corporate governance. The unexpected collapse of South Asian tiger like Thailand, South Korea, Taiwan, and Indonesia highlighted the reality that there is no economical company governance which appears to be immediately after the financial sector. Businesses not only compete with just about every other firms inside their state, but with corporations from around the environment. The require for corporate governance occurs when financial capital moves throughout internationally and it will become necessary to assure that the firm is not only managed according to procedures and laws but also has a great corporate administration. Sizeable Evidence against Harris Scarf and 1.Tel depicts that government principles and procedures in individuals corporations wherever weak and also they lacked accountability (Bosch 2002). Altogether it can be stated that there is a have to have for corporate governance simply because it enriches the wealth and general performance of a agency. Holding in head the upcoming success, large corporations such as Starbucks and The Physique Store have involves in-shop flyers to summarize important sections of the sustainability report, HP has produced effort and hard work and also provided flyers in its printer cartridges to teach and tell consumers. Similarly BP has also experimented with advertising and marketing on tv to teach consumers as to the actual electrical power competitiveness. Businesses must stability many competing equations- lengthy and shorter phrase notions of attain, cash and accounting concepts. As a outcome of company governance failures in the world-wide market place of United states of america and United kingdom which resulted predominantly because of to lack of management and mismanagement gave beginning to the need to have of forward thinking. The basis of these codes and carry out is disclosure. Transparency is the 1 and only criterion a agency really should depend on. Disclosure and accountability are the two observe phrases of the company governance on which lengthy term techniques are crafted. Thus, the require arises as how the organizations are governed- their possession and manage, the objectives they go after, the legal rights they regard, the tasks they realize, and how they distribute the price they build – has come to be a make any difference of higher significance, not just or their administrators and share holders, but also for the broader communities that serve. Moore et al offers the instance of a few firms, Dofasco, Novo Nordisk and Roche who have built-in their sustainability report into their yearly report. By this, they are focusing monetary analysts and shareholders as their major viewers. This main alignment will assistance the business much more effectively and successfully to generate worth for their traders. Disclosing transparently allows corporations to be additional easily scrutinized and to engage in additional straight forward and strong discussion on the challenges they are going through with their critics. Disclosure delivers a lot of competitive advantages these as leadership, a good boost to its image, a possible advancement in sector collaboration and an chance to create religion with key shareholders. An Unwanted stress- whose curiosity need to firms serves? There is an ongoing debate that utilizing corporative governance procedures and polices is needed for an companies results or not? Corporate governance has a different that means and at any time altering policies. Consequently corporate governance have to not have the privilege to ‘one measurement suits all’ method. Relatively, superior governance routinely develops with in a corporation by location down voluntary policies and criteria which best fits in accordance to their situations and demand. Justice owen described that the crucial to achievements and expansion of corporate governance lies in compound not kind. It relies upon on how the directors and supervisors of a agency generate a composition to in good shape the situation of the agency and then check it periodically for its simple performance. Report of HIH Royal Fee argues that it is not generally needed that individuals who have great governance construction will carry out much better than other or be immune from failure. Challenges are usually current in business enterprise and it should be taken a stepping stone for the group as dangers are taken for new marketplace seize or reward. There is no one set of principles which can avert blunders or go over firms and their investors from the outcomes of failure. There is also an argument which suggests that companies really should not be burdened with compliance expenditures. This results in in shedding aggressive edge of an business. It will become a really pricey process for the administration of a company to combine lawful, monetary and economic logic There is an ongoing debate that there is no common components for fantastic corporate governance. Firms vary in their dimension, complexity, ownership and so on that what is excellent for a person in some circumstances may possibly be inappropriate in others. Also, as firms improve and maximize their marketplace measurement, they want to adapt their altered approaches. Attempted and confirmed corporate governance structure can assist to increase their capacity to bring in funds and rely on but at the exact time it is not vital just about every time when the organization grows. As accounting details is a very important factor of any company governance, it has two vital roles: to guide and control steps alongside with decisions, and to inform shareholders and other stakeholders. It is quite critical that facts really should be right, unbiased, and suitable. Irrespective of recommended nature, it can only be attained via the moral behavior of management. The issue is that, no matter if making use of moral ideas and standards, disclosures can nevertheless end result in be incomplete and deceptive because of to many motives. Cornford 2004, argues that typical assumption is that if people are rational, they will do their very best to optimize their fascination, somewhat than principles. Moral rules are also rational they will expect the management not always to act in the gain of shareholders and traders. Hideki states that it is genuine that company governance and disclosure boosts transparency but at the exact same time it has its personal price tag which administration has to fork out. The load of this value is on the corporation which is needed to make disclosure and as a result on the nationwide economic sector. At the exact same time, it gets to be incredibly hard to acquire the whole edge of disclosure devoid of producing a extensive disclosure regime within the agency which contains all the auditing and accounting staff members to be faithful and faithful. Findings of Porata et al say that Disclosure has its own inevitable difficulties. He suggests that disclosure is finished on the quarterly foundation in U.S and twice in 1 yr in Japan. According to him, this periodic disclosure has two negatives. 1st, there is a time change in between the day when disclosure and economic statements are well prepared and when they are basically disclosed. There is an avoidable stress on the firm to update the information just before coming into community. Hence the price of any disclosure should be in contrast with its enforcement price tag. From- (https://www.orac.gov.au/run_near_company/good_corp/default.aspx) Size of the group has a huge effect on the techniques of corporate governance. In little firm with less investment decision and couple liquid property, informal way of procedures can accomplish properly. Medium to significant dimension organizations require to formalize their moral requirements for their survival and competitive edge. Also, tiny agency ought to not be overburdened with unwanted benchmarks and pink tape. The most monotonous problem in any corporate governance method is how to make company world accountable to the other contributors and shareholders of the organization whose investment are utmost threat and danger. Unquestionably, the major challenge a company faces is not failure but a accomplishment. If we appear at the big firms of 1960’s these kinds of as Xerox, Kodak, Normal Motors, Sears, and meltdowns in very last thirty several years, it can be concluded that when company is is failing, it is ready to check out just about anything to save its situation. At this stage, it definitely becomes a difficult job to come to a decision what to disclose and what not to disclose. Globalization has elevated an essential challenge in corporate governance and disclosing that whether or not there is any particular universal design of moral standard and regulation which can guarantee success and aggressive gain. Summary – It can be concluded from the above dialogue that high ethical conventional and rules of corporate governance and disclosure by any group can carry miracles in the business environment. Nonetheless, transparency and fairness are the instruments to efficient company governance currently in any place. For any organization to be transparent it is important to spend attention to disclosure, accounting and audit. All these purposeful circumstances are inter-dependent on every other. The essay highlights several illustrations of the companies which confirm that it is much less expensive to disclose destructive information and facts than to suppress it and confront lengthy phrase penalty.

References

1.Lenox, M. and Nash, J. (2003) ‘Industry Self-Regulation and Adverse Range: A Comparison Throughout 4 Trade Association Programs’, Company Technique and the Environment, 12: 343-356. 2.Gibson, R. (2000) ‘Encouraging Voluntary Initiatives for Corporate Greening: Some Issues for Additional Systematic Structure of Supporting Frameworks at the Countrywide and World Levels’, Voluntary Initiatives Workshop, United Nations Environment Programme, [www document] www.uneptie.org/outreach/vi/experiences/encouraging_voluntary_initiati ves.pdf. (accessed November 7, 2003). 3.OCED (2004) Pointers for Multinational Enterprises, Paris : OCED 4. Chang,J.,Khanna,T., and Palepu K.G. (2000) Analysts exercise close to the earth. Harward organization college, operating paper. 5. Henry Bosch 2002, the switching experience of company governance 2002, 25 university nof new south wales law jaournal. 6. Owen report, earlier mentioned n 3 para 6.6 7. Kanda, Hideki. 2000. “Legal and Regulatory Reforms for Efficient Corporate Governance”. draft. 8. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W Vishny. 2000. “Investor Security and Company Governance”. draft. 9. The following stage for corporate disclosure Philippa Moore. Company Duty Management. London: Feb/Mar 2006. Vol. 2, Iss. 4 pg. 30, 4 pgs

Corporate Governance Lessons from the Financial Crisis Essay

The Corporate Governance Lessons from the Financial Crisis Grant Kirkpatrick * This report analyses the impact of failures and weaknesses in corporate governance on the financial crisis, including risk management systems and executive salaries. It concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies.

Accounting standards and regulatory requirements have also proved insufficient in some areas. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests. The article also suggests that the importance of qualified board oversight and robust risk management is not limited to financial institutions. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries.

The current turmoil suggests a need for the OECD to re-examine the adequacy of its corporate governance principles in these key areas. ———————————————————————————————— * This report is published on the responsibility of the OECD Steering Group on Corporate Governance which agreed the report on 11 February 2009. The Secretariat’s draft report was prepared for the Steering Group by Grant Kirkpatrick under the supervision of Mats Isaksson.

Main conclusions The financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements This article concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements. When they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. A number of weaknesses have been pparent. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone: information about exposures in a number of cases did not reach the board and even senior levels of management, while risk management was often activity rather than enterprise-based. These are board responsibilities. In other cases, boards had approved strategy but then did not establish suitable metrics to monitor its implementation.

Company disclosures about foreseeable risk factors and about the systems in place for monitoring and managing risk have also left a lot to be desired even though this is a key element of the Principles. Accounting standards and regulatory requirements have also proved insufficient in some areas leading the relevant standard setters to undertake a review. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests.

Qualified board oversight and robust risk management is important The Article also suggests that the importance of qualified board oversight, and robust risk management including reference to widely accepted standards is not limited to financial institutions. It is also an essential, but often neglected, governance aspect in large, complex nonfinancial companies. Potential weaknesses in board composition and competence have been apparent for some time and widely debated. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries.

The OECD Corporate Governance Principles in these key areas need to be reviewed The current turmoil suggests a need for the OECD, through the Steering Group on Corporate Governance, to re-examine the adequacy of its corporate governance principles in these key areas in order to judge whether additional guidance and/or clarification is needed. In some cases, implementation might be lacking and documentation about the existing situation and the likely causes would be important. There might also be a need to revise some advice and examples contained in the OECD Methodology or Assessing the Implementation of the OECD principles of Corporate Governance I. Introduction Corporate governance enhancements often followed failures that highlighted areas of particular concern The development and refinement of corporate governance standards has often followed the occurrence of corporate governance failures that have highlighted areas of particular concern. The burst of the high tech bubble in the late 1990s pointed to severe conflicts of interest by brokers and analysts, underpinning the introduction of principle V.

F covering the provision of advice and analysis into the Principles. The Enron/Worldcom failures pointed to issues with respect to auditor and audit committee independence and to deficiencies in accounting standards now covered by principles V. C, V. B, V. D. The approach was not that these were problems associated with energy traders or telecommunications firms, but that they were systemic. The Parmalat and Ahold cases in Europe also provided important corporate governance lessons leading to actions by international regulatory institutions such as IOSCO and by national authorities.

In the above cases, corporate governance deficiencies may not have been causal in a strict sense. Rather, they facilitated or did not prevent practices that resulted in poor performance. It is therefore natural for the Steering Group to examine the situation in the banking sector and assess the main lessons for corporate governance in general The current turmoil in financial institutions is sometimes described as the most serious financial crisis since the Great Depression.

It is therefore natural for the Steering Group to examine the situation in the banking sector and assess the main lessons for corporate governance in general. This article points to significant failures of risk management systems in some major financial institutions1 made worse by incentive systems that encouraged and rewarded high levels of risk taking. Since reviewing and guiding risk policy is a key function of the board, these deficiencies point to ineffective board oversight (principle VI. D). These concerns are also relevant for non-financial companies.

In addition, disclosure and accounting standards (principle V. B) and the credit rating process (principle V. F) have also contributed to poor corporate governance outcomes in the financial services sector, although they may be of lesser relevance for other companies. The article examines macroeconomic and structural conditions and shortcomings in corporate governance at the company level The first part of the article presents a thumbnail sketch of the macroeconomic and structural conditions that confronted banks and their corporate governance arrangements in the years leading up to 2007/2008.

The second part draws together what is known from company investigations, parliamentary enquiries and international and other regulatory reports about corporate governance issues at the company level which were closely related to how they handled the situation. It first examines shortcomings in risk management and incentive structures, and then considers the responsibility of the board and why its oversight appears to have failed in a number of cases. Other aspects of the corporate governance framework that contributed to the failures are discussed in the third section.

They include credit rating agencies, accounting standards and regulatory issues. II. Background to the present situation Crisis in the subprime market in the US, and the associated liquidity squeeze, was having a major impact on financial institutions and banks in many countries By mid 2008, it was clear that the crisis in the subprime market in the US, and the associated liquidity squeeze, was having a major impact on financial institutions and banks in many countries. Bear Stearns had been taken over by JPMorgan with the support of the Federal Reserve Bank of New York, and inancial institutions in both the US (e. g. Citibank, Merrill Lynch) and in Europe (UBS, Credit Suisse, RBS, HBOS, Barclays, Fortis, Societe Generale) were continuing to raise a significant volume of additional capital to finance, inter alia, major realised losses on assets, diluting in a number of cases existing shareholders. Freddie Mac and Fanny Mae, two government sponsored enterprises that function as important intermediaries in the US secondary mortgage market, had to be taken into government conservatorship when it appeared that their capital position was weaker than expected. In the UK, there had been a run on Northern Rock, the first in 150 years, ending in the bank being nationalised, and in the US IndyMac Bancorp was taken over by the deposit insurance system. In Germany, two state owned banks (IKB and Sachsenbank) had been rescued, following crises in two other state banks several years previously (Berlinerbank and WestLB). The crisis intensified in the third quarter of 2008 with a number of collapses (especially Lehman Brothers) and a generalised loss of confidence that hit all financial institutions.

As a result, several banks failed in Europe and the US while others received government recapitalisation towards the end of 2008. Understanding the market situation that confronted financial institutions is essential The issue for this article is not the macroeconomic drivers of this situation that have been well documented elsewhere (e. g. IOSCO, 2008, Blundell-Wignall, 2007) but to understand the market situation that confronted financial institutions over the past decade and in which their business models and corporate governance arrangements had to function. There was both a macroeconomic and microeconomic dimension.

From the macroeconomic perspective, monetary policy in major countries was expansive after 2000 with the result that interest rates fell as did risk premia. Asset price booms followed in many countries, particularly in the housing sector where lending expanded rapidly. With interest rates low, investors were encouraged to search for yield to the relative neglect of risk which, it was widely believed, had been spread throughout the financial system via new financial instruments. Default rates on US subprime mortgages began to rise as of 2006, and warnings were issued by a number of official institutions

It is important for the following sections of this article to note that default rates on subprime mortgages in the US began to rise in 2006 when the growth of house prices started to slow and some interest rates for home owners were reset to higher levels from low initial rates (“teaser” rates). Moreover, at the end of 2006 and at the beginning of 2007, warnings were issued by a number of institutions including the IMF, BIS, OECD, Bank of England and the FSA with mixed reactions by financial institutions. The most well known reaction concerned Chuck

Prince, CEO of Citibank, who noted with respect to concerns about “froth” in the leveraged loan market in mid 2007 that “while the music is playing, you have to dance” (i. e. maintain short term market share). The directors of Northern Rock acknowledged to the parliamentary committee of inquiry that they had read the UK’s FSA warnings in early 2007 about liquidity risk, but considered that their model of raising short term finance in different countries was sound. By mid-2007 credit spreads began to increase and first significant downgrades were announced, while subprime exposure was questioned

In June 2007, credit spreads in some of the world’s major financial markets began to increase and the first wave of significant downgrades was announced by the major credit rating agencies. By August 2007, it was clear that at least a large part of this new risk aversion stemmed from concerns about the subprime home mortgage market in the US3 and questions about the degree to which many institutional investors were exposed to potential losses through their investments in residential mortgage backed securities (RMBS), •ecuritized•ed debt obligations (CDO) and other •ecuritized and structured finance instruments.

Financial institutions faced challenging competitive conditions but also an Accommodating regulatory environment At the microeconomic or market environment level, managements of financial institutions and boards faced challenging competitive conditions but also an accommodating regulatory environment. With competition strong and non-financial companies enjoying access to other sources of finance for their, in any case, reduced needs, margins in traditional banking were compressed forcing banks to develop new sources of revenue.

One way was by moving into the creation of new financial assets (such as CDO’s) and thereby the generation of fee income and proprietary trading opportunities. Some also moved increasingly into housing finance driven by exuberant markets4. The regulatory framework and accounting standards (as well as strong investor demand) encouraged them not to hold such assets on their balance sheet but to adopt an “originate to distribute” model.

Under the Basel I regulatory framework, maintaining mortgages on the balance sheet would have required increased regulatory capital and thereby a lower rate of return on shareholder funds relative to a competitor which had moved such assets off balance sheet. Some of the financial assets were marketed through off-balance sheet entities (Blundell-Wignall, 2007) that were permitted by accounting standards, with the same effect to economise on bank’s capital. III. The corporate governance dimension

While the post-2000 environment demanded the most out of corporate governance arrangements, evidence points to severe weaknesses The post-2000 market and macroeconomic environment demanded the most out of corporate governance arrangements: boards had to be clear about the strategy and risk appetite of the company and to respond in a timely manner, requiring efficient reporting systems. They also needed to oversee risk management and remuneration systems compatible with their objectives and risk appetite.

However, the evidence cited in the following part points to severe weaknesses in what were broadly considered to be sophisticated institutions. The type of risk management that was needed is also related to the incentive structure in a company. There appears to have been in many cases a severe mismatch between the incentive system, risk management and internal control systems. The available evidence also suggests some potential reasons for the failures. Risk management: accepted by all, but the recent track record is poor

Risk models failed due to technical assumptions, but the corporate governance dimension of the problem was how their information was used in the organization The focus of this section about risk management does not relate to the technical side of risk management but to the behavioural or corporate governance aspect. Arguably the risk models used by financial institutions and by investors failed due to a number of technical assumptions including that the player in question is only a small player in the market. 5 The same also applies to stress testing.

While this is of concern for financial market regulators and for those in charge of implementing Pillar I of Basel II, it is not a corporate governance question. The corporate governance dimension is how such information was used in the organisation including transmission to the board. Although the Principles do make risk management an oversight duty of the board, the internal management issues highlighted in this section get less explicit treatment. Principle VI. D. 2 lists a function of the board to be “monitoring the effectiveness of the company’s management practices and making changes as needed”.

The annotations are easily overlooked but are highly relevant: monitoring of governance by the board also includes continuous review of the internal structure of the company to ensure that there are clear lines of accountability for management throughout the organisation. This more internal management aspect of the Principles might not have received the attention it deserves in Codes and in practice as the cases below indicate. Attention has focused on internal controls related to financial reporting, but not enough on the broader context of risk management

Attention in recent years has focused on internal controls related to financial reporting and on the need to have external checks and reporting such as along the lines of Sarbanes Oxley Section 404. 6 It needs to be stressed, however, that internal control is at best only a subset of risk management and the broader context, which is a key concern for corporate governance, might not have received the attention that it deserved, despite the fact that enterprise risk management frameworks are already in use (for an example, see Box 1).

The Principles might need to be clearer on this point. Box 1. An enterprise risk management framework In 2004, COSO defined Enterprise Risk Management (ERM) as “a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives”.

ERM can be visualised in three dimensions: objectives; the totality of the enterprise and; the framework. Objectives are defined as strategic, operations such as effective and efficient resource use, reporting including its reliability, and compliance with applicable laws and regulations. These will apply at the enterprise level, division, business unit and subsidiary level. The ERM framework comprises eight components: 1.

Internal environment: it encompasses the tone of an organisation, and sets the basis for how risk is viewed and addressed by an entity’s people 2. Objective setting: objectives must exist before management can identify potential events affecting their achievement 3. Event identification: internal and external events affecting achievement of an entity’s objectives must be identified, distinguishing between risks and opportunities 4. Risk assessment: risks are analysed, considering likelihood and impact, as a basis for determining how they should be managed . Risk response: management selects risk responses developing a set of actions to align risks with the entity’s risk tolerances and its risk appetite 6. Control activities: policies and procedures are established and implemented to help ensure the risk responses are effectively carried out 7. Information and communication: relevant information is identified, captured, and communicated throughout the organisation in a form and timeframe that enable people to carry out their responsibilities 8.

Monitoring: the entirety of enterprise risk management is monitored and modifications made as necessary Source: Committee of Sponsoring Organisations of the Treadway Commission. The financial turmoil has revealed severe shortcomings in risk management practices… Despite the importance given to risk management by regulators and corporate governance principles, the financial turmoil has revealed severe shortcomings in practices both in internal management and in the role of the board in overseeing risk management systems at a number of banks.

While nearly all of the 11 major banks reviewed by the Senior Supervisors Group (2008) failed to anticipate fully the severity and nature of recent market stress, there was a marked difference in how they were affected determined in great measure by their senior management structure and the nature of their risk management system, both of which should have been overseen by boards. Indeed, some major banks were able to identify the sources of significant risk as early as mid 2006 (i. e. when the housing market in the US started to correct and sub-prime defaults rose) and to take measures to mitigate the risk.

The Group reviewed firm’s practices to evaluate what worked and what did not, drawing the following conclusions: CDO exposure far exceeded the firms understanding of the inherent risks • In dealing with losses through to the end of 2007, the report noted that some firms made strategic decisions to retain large exposures to super senior tranches of collateralised debt obligations that far exceeded the firms understanding of the risks inherent in such instruments, and failed to take appropriate steps to control or mitigate those risks (see Box 2).

As noted below, in a number of cases boards were not aware of such strategic decisions and had not put control mechanisms in place to oversee their risk appetite, a board responsibility. In other cases, the boards might have concurred. An SEC report noted that “Bear Stearns’ concentration of mortgage securities was increasing for several years and was beyond its internal limits, and that a portion of Bear Stearns’ mortgage securities (e. g. adjustable rate mortgages) represented a significant concentration of mortgage risk”(SEC 2008b page ix).

At HBOS the board was certainly aware despite a warning from the FSA in 2004 that key parts of the HBOS Group were posing medium of high risks to maintaining market confidence and protecting customers (Moore Report). Understanding and control over potential balance sheet growth and liquidity needs was Limited • Some firms had limited understanding and control over their potential balance sheet growth and liquidity needs. They failed to price properly the risk that exposures to certain off-balance sheet vehicles might need to be funded on the balance sheet precisely when it became difficult or expensive to raise such funds externally.

Some boards had not put in place mechanisms to monitor the implementation of strategic decisions such as balance sheet growth. A comprehensive, co-ordinated approach by management to assessing firm-wide risk exposures proved to be successful… • Firms that avoided such problems demonstrated a comprehensive approach to viewing firm-wide exposures and risk, sharing quantitative and qualitative information more efficiently across the firm and engaging in more effective dialogue across the management team. They had more adaptive (rather than static) risk measurement processes and systems that could rapidly alter underlying ssumptions (such as valuations) to reflect current circumstances. Management also relied on a wide range Box 2. How a “safe” strategy incurred write downs USD 18. 7bn: the case of UBS By formal standards, the UBS strategy approved by the board appeared prudent, but by the end of 2007, the bank needed to recognise losses of USD 18. 7 bn and to raise new capital. What went wrong? UBS’s growth strategy was based in large measure on a substantial expansion of the fixed income business (including asset backed securities) and by the establishment of an alternative investment business.

The executive board approved the strategy in March 2006 but stressed that “the increase in highly structured illiquid commitments that could result from this growth plan would need to be carefully analysed and tightly controlled and an appropriate balance between incremental revenue and VAR/Stress Loss increase would need to be achieved to avoid undue dilution of return on risk performance”. The plan was approved by the Group board. The strategic focus for 2006-2010 was for “significant revenue increases but the Group’s risk profile was not predicted to change substantially with a moderate growth in overall risk weighted assets”.

There was no specific decision by the board either to develop business in or to increase exposure to subprime markets. “However, as UBS (2008) notes, “there was amongst other things, a focus on the growth of certain businesses that did, as part of their activities, invest in or increase UBS’s exposure to the US subprime sector by virtue of investments in securities referencing the sector”. Having approved the strategy, the bank did not establish balance sheet size as a limiting metric. Top down setting of hard limits and risk weighted asset targets on each business line did not take place until Q3 and Q4 2007.

The strategy of the investment bank was to develop the fixed income business. One strategy was to acquire mortgage based assets (mainly US subprime) and then to package them for resale (holding them in the meantime i. e. warehousing). Each transaction was frequently in excess of USD 1 bn, normally requiring specific approval. In fact approval was only ex post. As much as 60 per cent of the CDO were in fact retained on UBS’s own books. In undertaking the transactions, the traders benefited from the banks’ allocation of funds that did not take risk into account.

There was thus an internal carry trade but only involving returns of 20 basis points. In combination with the bonus system, traders were thus encouraged to take large positions. Yet until Q3 2007 there were no aggregate notional limits on the sum of the CDO warehouse pipeline and retained CDO positions, even though warehouse collateral had been identified as a problem in Q4 2005 and again in Q3 2006. The strategy evolved so that the CDOs were structured into tranches with UBS retaining the Senior Super tranches.

These were regarded as safe and therefore marked at nominal price. A small default of 4 per cent was assumed and this was hedged, often with monoline insurers. There was neither monitoring of counter party risk nor analysis of risks in the subprime market, the credit rating being accepted at face value. Worse, as the retained tranches were regarded as safe and fully hedged, they were netted to zero in the value at risk (VAR) calculations used by UBS for risk management. Worries about the subprime market did not penetrate higher levels of management.

Moreover, with other business lines also involved in exposure to subprime it was important for the senior management and the board to know the total exposure of UBS. This was not done until Q3 2007. Source: Shareholder Report on UBS’s Write-Downs, 2008. of risk measures to gather more information and different perspectives on the same risk exposures and employed more effective stress testing with more use of scenario analysis. In other words, they exhibited strong governance systems since the information was also passed upwards to the board. …as did more active controls over the onsolidated balance sheet, liquidity, and capital • Management of better performing firms typically enforced more active controls over the consolidated organisation’s balance sheet, liquidity, and capital, often aligning treasury functions more closely with risk management processes, incorporating information from all businesses into global liquidity planning, including actual and contingent liquidity risk. This would have supported implementation of the board’s duties. Warning signs for liquidity risk which were clear during the first quarter of 2007 should have been respected

A marked feature of the current turmoil has been played by liquidity risk which led to the collapse of both Bear Stearns and Northern Rock7. Both have argued that the risk of liquidity drying up was not foreseen and moreover that they had adequate capital. However, the warning signs were clear during the first quarter of 2007: the directors of Northern Rock acknowledged that they had read the Bank of England’s Financial Stability Report and a FSA report which both drew explicit attention to liquidity risks yet no adequate emergency lending lines were put in place.

Countrywide of the US had a similar business model but had put in place emergency credit lines at some cost to themselves (House of Commons, 2008, Vol 1 and 2). It was not as if managing liquidity risk was a new concept. The Institute of International Finance (2007), representing the world’s major banks, already drew attention to the need to improve liquidity risk management in March 2007, with their group of senior staff from banks already at work since 2005, i. e. well before the turmoil of August 2007. Stress testing and related scenario analysis has shown numerous eficiencies at a number of banks Stress testing and related scenario analysis is an important risk management tool that can be used by boards in their oversight of management and reviewing and guiding strategy, but recent experience has shown numerous deficiencies at a number of banks. The Senior Supervisors Group noted that “some firms found it challenging before the recent turmoil to persuade senior management and business line management to develop and pay sufficient attention to the results of forward-looking stress scenarios that assumed large price movements” (p. ). This is a clear corporate governance weakness since the board is responsible for reviewing and guiding corporate strategy and risk policy, and for ensuring that appropriate systems for risk management are in place. The IIF report also noted that “stress testing needs to be part of a dialogue between senior management and the risk function as to the type of stresses, the most relevant scenarios and impact assessment”. Stress testing must form an integral part of the management culture so that results have a meaningful impact on business decisions. Clearly his did not happen at a number of financial institutions some of which might have used externally conceived stress tests that were inappropriate to their business model. Stress testing has been insufficiently consistent or comprehensive in some banks Stress testing is also believed to have been insufficiently consistent or comprehensive in some banks, which is more an implementation issue of great importance to the board. The IIF concluded that “firms need to work on improving their diagnostic stress testing to support their own capital assessment processes under Pillar II of the Basel Accord.

It is clear that firms need to ensure that stress testing methodologies and policies are consistently applied throughout the firm, evaluating multiple risk factors as well as multiple business units and adequately deal with correlations between different risk factors”. Some have taken on high levels of risk by following the letter rather than the intent of regulations In some cases, banks have taken on high levels of risk by following the letter rather than the intent of regulations indicating a box ticking approach.

For example, credit lines extended to conduits needed to be supported by banks’ capital (under Basel I) if it is for a period longer than a year. Banks therefore started writing credit lines for 364 days as opposed to 365 days thereby opening the bank to major potential risks. Whether boards were aware that capital adequacy reports to them reflected such practices is unclear although there is some indication that they did not know in some cases. Transmission of risk information has to be through effective channels, a clear corporate governance issue

Even if risk management systems in the technical sense are functioning, it will not impact the company unless the transmission of information is through effective channels, a clear corporate governance issue. In this respect it is interesting to note that “a recent survey of nearly 150 UK audit committee members and over 1000 globally, only 46 per cent were very satisfied that their company had an effective process to identify the potentially significant business risks facing the company and only 38 per cent were very satisfied with the risk reports they received from management” (KPMG, 2008).

In interpreting the survey, KPMG said: “recession related risks as well as the quality of the company’s risk intelligence are two of the major oversight concerns for audit committee members. But there is also concern about the culture, tone and incentives underlying the company’s risk environment, with many saying that the board and/or audit committee needs to improve their effectiveness in addressing risks that may be driven by the company’s incentive compensation structure”. A failure to transmit information can be due a silo approach to risk management

Another example of failure to transmit information concerns UBS. Although the group risk management body was alerted to potential subprime losses in Q1 2007, the investment bank senior management only appreciated the severity of the problem in late July 2007. Consequently, only on 6 August 2007, when the relevant investment bank management made a presentation to the Chairman’s office and the CEO, were both given a comprehensive picture of exposures to CDO Super Senior positions (a supposedly safe strategy) and the size of the disaster became known to the board.

The UBS report attributed the failure in part to a silo approach to risk management. Lower prestige and status of risk management staff vis-avis traders also played an important role At a number of banks, the lower prestige and status of risk management staff vis-a-vis traders also played an important role, an aspect covered by principle VI. D. 2 (see above). Societe Generale (2008) noted that there was a “lack of a systematic procedure for centralising and escalating red flags to the appropriate level in the organisation” (page 6).

But soft factors were also at work. “The general environment did not encourage the development of a strong support function able to assume the full breadth of its responsibilities in terms of transaction security and operational risk management. An imbalance therefore emerged between the front office, focused on expanding its activities, and the control functions which were unable to develop the critical scrutiny necessary for their role” (Page 7). One of the goals of their action programme is to “move towards a culture of shared esponsibility and mutual respect” (page 34). The inability of risk management staff to impose effective controls was also noted at Credit Suisse (FSA, 2008b). Testimony by the ex-head of risk at the British bank HBOS, that had to be rescued and taken over by Lloyds TSB, gives a picture of a bank management with little regard or care for risk management as it pursued its headlong rush into expanding its mortgage business. 8 An SEC report about Bear Stearns also noted “a proximity of risk managers to traders suggesting a lack of ndependence” (SEC 2008b). The issue of “tone at the top” is reflected in principle VI. C and in the Basel Committee’s principle 2 (the board of directors should approve and oversee the bank’s strategic objectives and corporate values that are communicated throughout the banking organisation) as well as principle 3 (the board of directors should set and enforce clear lines of responsibility and accountability throughout the organisation). Remuneration and incentive systems: strong incentives to take risk

Remuneration and incentive systems have played a key role in influencing financial institutions sensitivity to shocks and causing the development of unsustainable balance sheet positions It has been often argued that remuneration and incentive systems have played a key role in influencing not only the sensitivity of financial institutions to the macroeconomic shock occasioned by the downturn of the real estate market, but also in causing the development of unsustainable balance sheet positions in the first place.

This reflects a more general concern about incentive systems that are in operation in non-financial firms and whether they lead to excessive short term management actions and to “rewards for failure”. It has been noted, for instance, that CEO remuneration has not closely followed company performance. One study reports that the median CEO pay in S 500 companies was about USD 8. 4 million in 2007 and had not come down at a time the economy was weakening. 9 Board and executive remuneration Remuneration has to be aligned with the longer term interests of the company and its shareholders

Principle VI. D. 4 recommends that the board should fulfil certain key functions including “aligning key executive and board remuneration with the longer term interests of the company and its shareholders”. The annotations note that “it is regarded as good practice for boards to develop and disclose a remuneration policy statement covering board members and key executives. Such policy statements specify the relationship between remuneration and performance, and include measurable standards that emphasise the long run interests of the company over short term considerations”.

Implementation has been patchy. However, remuneration systems lower down the management chain might have been an even more important issue. The Basel Committee guidance is more general extending to senior managers: the board should ensure that compensation policies and practices are consistent with the bank’s corporate culture, long term objectives and strategy, and control environment (principle 6). Executive remuneration has been less analysed and discussed

Despite highly publicised parting bonuses for CEOs (Table 1) and some board members, executive remuneration has been much less analysed and discussed even though the academic literature has always drawn attention to the danger of incentive systems that might encourage excessive risk. 10 It is usual in most companies (banks and non-banks) that the equity component in compensation (either in shares or options) increases with seniority. One study for European banks indicated that in 2006, the fixed salary accounted or 24 per cent of CEO remuneration, annual cash bonuses for 36 per cent and long term incentive awards for 40 per cent (Ladipo et al. , 2008). This might still leave significant incentives for short run herding behaviour even if it involved significant risk taking. By contrast, one study of six US financial institutions found that top executive salaries averaged only 4- 6 per cent of total compensation with stock related compensation (and especially stock options in two cases) hovering at very high levels (Nestor Advisors, 2009).

It is interesting to note that at UBS, a company with major losses, long-term incentives accounted for some 70 per cent of CEO compensation and that the CEO is required to accumulate and hold shares worth five times the amount of the last three years’ average cash component of total compensation. Of course, such figures might be misleading since what matters for incentives is the precise structure of the compensation including performance hurdles and the pricing of options. Losses incurred via shareholdings (Table I) might also be partly compensated by parting payments.

Ladipo et al. also noted that only a small number of banks disclosed the proportion of annual variable pay subject to a deferral period11. Table 1. Examples of parting payments to CEOs Name and company Estimated payment Losses from options, shares etc Mudd, Fannie Mae USD 9. 3 million (withdrawn) n. a. Syron, Freddie Mac USD 14. 1 million (withdrawn) n. a. Prince, Citibank USD 100 million 50 % drop on share holdings of 31 million shares O’Neal, Merrill Lynch USD 161 million Loss on shares Cayne, Bear Stearns USD 425 million (sales in March 008 at USD 10 per share) Source: OECD. More investigation is required to determine the actual situation and the corporate governance implications of remuneration schemes A number of codes stress that executive directors should have a meaningful shareholding in their companies in order to align incentives with those of the shareholders. Only a few European banks had such formalised policies in 2006. However, the actual amount of stock owned by the top executive in each the bank was well above 100 per cent of annual fixed salary (Ladipo, p. 55).

With respect to non-executive directors, it is often argued that they should acquire a meaningful shareholding but not so large as to compromise the independence of the non-executive directors. Only a few European banks disclosed such policies. UBS actively encourages director share ownership and board fees are paid either 50 per cent in cash and 50 per cent in UBS restricted shares (which cannot be sold for four years from grant) or 100 per cent in restricted shares according to individual preference. Credit Suisse also has a similar plan.

However, one study (Nestor Advisors, 2009) reports that financial institutions that collapsed had a CEO with high stock holdings so that they should normally have been risk averse, whereas the ones that survived had strong incentives to take risks. 12 More investigation is required to determine the actual situation with respect to remuneration in the major banks more generally and the corporate governance implications. Incentive systems at lower levels have favoured risk taking and outsized bets Remuneration problems also exist at the sales and trading function level

Official as well as private reports have drawn attention also to remuneration problems at the sales and trading function level. 13 One central banker (Heller, 2008) has argued that the system of bonuses in investment banking provides incentives for substantial risk taking while also allowing no flexibility for banks to reduce costs when they have to: at the upper end, the size of the bonus is unlimited while at the lower end it is limited to zero. Losses are borne entirely by the bank and the shareholders and not by the employee. In support, he notes that the alleged fraud at Societe Generale was undertaken by a staff member ho wanted to look like an exceptional trader and achieve a higher bonus. Along the lines of Heller, the International Institute of Finance (2008b) representing major banks has proposed principles to cover compensation policies (Box 3) that illustrate the concerns about many past practices. Box 3. Proposed Principles of Conduct for Compensation Policies I. Compensation incentives should be based on performance and should be aligned with shareholder interests and long term, firm-wide profitability, taking into account overall risk and the cost of capital.

II. Compensation incentives should not induce risk-taking in excess of the firms risk appetite. III. Payout of compensation incentives should be based on risk-adjusted and cost of capitaladjusted profit and phased, where possible, to coincide with the risk time horizon of such profit. IV. Incentive compensation should have a component reflecting the impact of business unit’s returns on the overall value of related business groups and the organisation as a whole. V.

Incentive compensation should have a component reflecting the firm’s overall results and achievement of risk management and other goals. VI. Severance pay should take into account realised performance for shareholders over time. VII. The approach, principles and objectives of compensation incentives should be transparent to stakeholders. Source: Institute of International Finance (2008b), Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best Practice Recommendations, Washington, D. C. Incentive structures eed to balance various interests The Senior Supervisors Group (2008, p. 7) noted that “an issue for a number of firms is whether compensation and other incentives have been sufficiently well designed to achieve an appropriate balance between risk appetite and risk controls, between short run and longer run performance, and between individual or local business unit goals and firm-wide objectives”. The concern was also shared by the Financial Stability Forum (2008). Financial targets against which compensation is assessed should be measured on a riskadjusted basis…

The private sector report (Institute of International Finance, 2008) also identified compensation as a serious issue: “there is strong support for the view that the incentive compensation model should be closely related by deferrals or other means to shareholders’ interests and longterm, firm-wide profitability. Focus on the longer term implies that compensation programs ought as a general matter to take better into account cost of capital and not just revenues. Consideration should be given to ways through which the financial targets against which compensation is assessed can be measured on a risk-adjusted basis” (p. 2). Some banks, such as JP Morgan, already build risk weighting into employees’ performance targets to recognise the fact that their activities are putting more capital at risk, but they are the exception rather than the rule. …which is more difficult if the internal cost of funds do not take account of risk These issues were picked up in the UBS report, which noted that the compensation and incentive structure did not effectively differentiate between the creation of alpha (i. e. return in excess of defined expectation) versus return from a low cost of funding.

In the case of UBS, the internal cost of funds did not take account of risk so that the traders involved in sub-prime could obtain finance at a low cost. This made sub-prime an attractive asset to carry long. Super senior tranches carried low margins so that the incentive was to expand positions to achieve a given level of bonus. The report goes on to note that “day 1 P treatment of many of the transactions meant that employee remuneration (including bonuses) was not directly impacted by the longer term development of the positions created.

The reluctance to allow variations between financial reporting and management accounting made it less likely that options to vary the revenue attributed to traders for compensation purposes would be considered (p. 42). Essentially, bonuses were measured against gross revenue after personal costs, with no formal account taken of the quality or sustainability of those earnings. Senior management, on the other hand, received a greater proportion of deferred equity. Incentive systems at sub-executive level are also a concern for nonfinancial companies

Incentive systems at sub-executive level are also a concern for nonfinancial companies. For example, transactions-based compensation and promotion might lead to corrupt practices contrary to company policies and interests. Audit Committees, a key component of the corporate governance structure, appear to becoming aware of the issues. Thus the KPMG survey noted that “[w]hile oversight of compensation plans may generally fall within the responsibility of the remuneration committee, audit committees are focusing on the risks associated with the company’s incentive compensation structure.

In addition to risks associated with an emphasis on short-term earnings, audit committees want to better understand the behaviour and risks that the company’s incentive plans encourage and whether such risks are appropriate. ” Basel II enables regulators to impose additional capital charges for incentive structures that encourage risky behaviour The Basel II capital accord contains mechanisms in pillar II enabling regulators to impose additional capital charges for incentive structures that encourage risky behaviour.

Indeed, the UK’s FSA has stated that they would consider compensation structures when assessing the overall risk posed by a financial institution but that it would stop short of dictating pay levels14. A leading Swiss banker is also quoted as saying that he expected regulators to use the second pillar of the Basel II accord to oblige banks to hold additional capital to reflect the risk of inappropriate compensation structures (Financial Times, 22 May 2008, p. 17). Risk policy is a clear duty of the board Deficiencies in risk management and distorted incentive ystems point to deficient board oversight Deficiencies in risk management and distorted incentive systems point to deficient board oversight. Principle VI. D. 1 recommends that “the board should fulfil certain key functions including reviewing and guiding corporate strategy, major plans of action, risk policy… while VI. D. 7 defines a key function to include “Ensuring the integrity of the corporation’s accounting and reporting systems …and that appropriate systems of control are in place, in particular systems of risk management, financial and operational control”.

Principle VI. D. 4 identifies the key functions of the board to include “aligning key executive and board remuneration with the longer term interests of the company and its shareholders”. The Basel Committee Guidance on corporate governance of banks (Basel Committee, 2006) looks more at how responsibilities are implemented: “the board of directors should set and enforce clear lines of responsibility and accountability throughout the organisation (principle 3)”.

A key area concerns internal controls (including in subsidiaries) which requires that “the material risks that could adversely affect the achievement of the bank’s goals are being recognised and continually assessed. This assessment should cover all risks facing the bank and the consolidated banking organisation (that is credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal risk and reputational risk). Internal controls may need to be revised to appropriately address any new or previously uncontrolled risk” (Basel Committee, 1998). The annotations to Principle VI.

D. 7 note that “ensuring the integrity of the essential reporting and monitoring systems will require the board to set and enforce clear lines of responsibility and accountability throughout the organisation. The board will also need to ensure that there is appropriate oversight by senior management”. Financial companies are not unique in this regard even though the macroeconomic impacts of poor risk management are arguably more important Recent experiences in banks as well as in companies as different as Airbus, Boeing, Alsthom, BP and Siemens confirms the Steering Group’s standpoint on the importance of risk management.

Earlier cases include Metallgesellschaft and Sumitomo Corporation. Financial companies are not unique in this regard even though the macroeconomic impacts of poor risk management are arguably more important. Non-financial companies also face exchange rate and interest rate risks although operational risks such as outsourcing risks, loss of intellectual property rights, and investment risks in unstable areas might be more important. Box 4. Risk management issues in non-financial companies In recent years there have been numerous examples in major non-financial companies that have highlighted weaknesses and failures in risk management.

BP was hit by a refinery explosion in Texas. A commissioned report (the Baker Report) suggests that the risk was well known at lower levels in the company but that it was not adequately communicated to higher levels. This is similar to what happened at Societe Generale and at UBS. The refinery had been acquired as part of a M and it appears that risk management systems and culture had not been fully implemented at the new subsidiary, very similar to HSBC and UBS, the latter also with a new subsidiary.

BP also has complex risk models including a model for corrosion used in forecasting expenditures. After major oil spills in Alaska that resulted in suspended output, it was discovered that the model significantly under-estimated corrosion, raising question about testing risk models. Airbus has invested massively in a major investment in developing the large Airbus 380 aircraft. Such projects include substantial exchange rate risk as well as significant payments to customers in the case of late delivery.

Despite the substantial risks the company was taking, and which had been approved by the board, information about significant production delays came as a major surprise to the board of both Airbus and its controlling company EADS. Similar surprises were in store for boards at Citibank and UBS. Siemens represents a case of compliance risk with respect to breaking German and other laws covering bribery of foreign officials. The supervisory board of the company appeared not to have clearly specified their expectations and to have overseen their implementation.

The fact that the chairman of the board had been the CEO might not have been helpful in getting to grips with practices that had been ongoing for a number of years. Boeing also faced problems in breaching public tender rules, a serious risk for a major defence contractor. A number of banks have faced similar compliance problems in areas such as money laundering and in complying with local regulations (e. g. Citibank private bank in Japan actually lost its license). Source: OECD. But are they up to the task? Does the board obtain relevant information? In the wake of the financial crisis many oards of financial enterprises have been quite active, but why not before? In the wake of the financial crisis many boards of financial enterprises have been quite active with a number of CEO’s at problem banks being replaced. Tellingly, both Citibank and UBS have also announced board room departures to make way for new directors with “finance and investment expertise”. UBS has gone further and is eliminating the chairman’s office that has been widely criticised in the past by shareholders and Citibank has also restructured the board, eliminating the executive committee.

Shareholders have also become more active, especially with respect to voting against audit committee (or equivalent) members who have been held to higher standards of accountability than other board members. The fundamental issue is, Main conclusions The financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements This article concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements.

When they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. A number of weaknesses have been apparent. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone: information about exposures in a number of cases did not reach the board and even senior levels of management, while risk management was often activity rather than enterprise-based. These are board responsibilities.

In other cases, boards had approved strategy but then did not establish suitable metrics to monitor its implementation. Company disclosures about foreseeable risk factors and about the systems in place for monitoring and managing risk have also left a lot to be desired even though this is a key element of the Principles. Accounting standards and regulatory requirements have also proved insufficient in some areas leading the relevant standard setters to undertake a review. Last but not least, remuneration systems have in a number of cases not been closely related to he strategy and risk appetite of the company and its longer term interests. Qualified board oversight and robust risk management is important The Article also suggests that the importance of qualified board oversight, and robust risk management including reference to widely accepted standards is not limited to financial institutions. It is also an essential, but often neglected, governance aspect in large, complex nonfinancial companies. Potential weaknesses in board composition and competence have been apparent for some time and widely debated.

The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries. The OECD Corporate Governance Principles in these key areas need to be reviewed The current turmoil suggests a need for the OECD, through the Steering Group on Corporate Governance, to re-examine the adequacy of its corporate governance principles in these key areas in order to judge whether additional guidance and/or clarification is needed. In some cases, implementation might be lacking and documentation about the existing situation and the likely causes would be important.

There might also be a need to revise some advice and examples contained in the OECD Methodology for Assessing the Implementation of the OECD Principles of Corporate Governance. however, why boards were not effective in the years preceding the turmoil especially in view of the emphasis given in many countries in recent years to internal control even though it was restricted to financial accounts (e. g. SOX 404 certifications). Reports have not so far dealt in much depth with the role and performance of the boards

The available reports have not so far dealt in much depth with the role and performance of the boards, the focus being on documenting risk management failures. This is an unfortunate omission since it is a prime responsibility of boards to ensure the integrity of the corporation’s systems for risk management. A private sector report (Institute of International Finance, 2008a) has examined board performance concluding that “events have raised questions about the ability of certain boards properly to oversee senior managements and to understand and monitor the business itself”.

This is a potentially very worrying conclusion. There appears to be a need to re-emphasise the respective roles of the CEO and the board in the risk management process The IIF report stressed that a solid risk culture throughout the firm is essential but that there appears to be a need to re-emphasise the respective roles of the CEO and the board in the risk management process in many firms. The report goes on to make suggestions for strengthening Board oversight of risk issues; the boards need to be educated on risk issues and to be given the means to understand risk appetite and the firm’s performance against it.

A number of members of the risk committee (or equivalent) should be individuals with technical financial sophistication in risk disciplines, or with solid business experience giving clear perspectives on risk issues. A separation between risk and audit committees should be considered. However, form should not be confused with actual operation. At Lehman Brothers, there was a risk committee but it only met twice in both 2006 and 2007. Bear Stearns’ only established a full risk committee shortly before it failed.

Above all, boards need to understand the firm’s business strategy from a forward looking perspective, not just review current risk issues and audit reports. A survey of European banks indicate that risk management is not deeply embedded in the organisation, a clear corporate governance weakness Supporting information has been presented in a survey based on interviews with European banks (Ladipo et al. , 2008). All interviewed banks accepted that risk governance was a key responsibility of bank boards.

All the banks interviewed stressed that board priorities included defining the company’s risk appetite and indentifying emerging areas of risk. A number also noted that the board must ensure that risk appetite is a coherent reflection of the company’s strategic targets. With these expectations, it is important to note that a majority of the banks indicated that their boards were broadly knowledgeable rather than extremely knowledgeable of their company’s risk measurement methodology.

More importantly, only one third of the banks were confident that their strategy and planning functions had a detailed understanding of their companies’ risk measurement methodology (Ladipo, 2008, p. 45). This would indicate that risk management is not deeply embedded in the organisation, a clear corporate governance weakness. A good example is provided in the UBS report which noted that the strategic decision to build rapidly a fixed income business (i. e. achieve significant market share) was not associated with a orresponding change to risk policy and risk appetite and a requirement for appropriate indicators. On the other hand, there are worries about the board oversight model of corporate governance: one bank noted that “risk issues are increasingly becoming too specialist for meaningful oversight by the whole board” (op. cit. , p. 47). Risk management information was not always appropriate or available to the board Reports have documented that risk management information was not always available to the board or in a form corresponding to their monitoring of risk. 15 An important Principle in this respect is VI.

F, which states that: “In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely information”. 16 The efficiency of the risk management process and its connection to board oversight has led a number of companies to establish a Chief Risk Officer (CRO) with board membership in unitary board systems. With an appropriate mandate, CROs can potentially provide a strong internal voice for risk management Achieving a strong internal voice for risk management will depend on firm specifics such as size and complexity.

It has been done successfully where the CRO reports directly to the CEO or where the CRO has a seat on the board or management committee. In many cases, the CRO will be engaged directly on a regular basis with a risk committee of the board, or when there is not one, with the audit committee. This area might need more attention in the Principles that are still focused on internal controls for financial reporting. Some banks make it a practice for the CRO to report regularly to the full board to review risk issues and exposures, as well as more frequently to the risk committee.

The IIF study concluded that to have a strong, independent voice, the CRO should have a mandate to bring to the attention of both line and senior management or the board any situation that could materially violate risk-appetite guidelines. Similar arrangements have often been introduced to support the work of internal auditors. Board composition The composition of risk committees is also an important issue As with an audit committee, the composition of any risk committee is also an important issue17.

Ladipo reports that in their sample of 11 European banks with risk committees (Figure I), a half staffed their committees with non-executive directors. However, they also reported that in such cases the CEO, the CFO and the CRO were always in attendance at the committee meetings and are reported to have played a major role in the committee’s deliberations. In two cases, including UBS, non-executive directors comprised only a third of the risk committee. Whether committees staffed by non-executive directors but where officers of the company play a key role differ from those where executives are actual members is a key policy concern.

Presumably, the Senior Supervisors Group has sufficient experience to make such a judgement: in at least one case they formed the judgement that there is indeed a difference. In the US, a number of financial institutions do not have a separate risk committee but rather have made it a matter for the audit committee. One Survey reports that audit committees feel that their effectiveness may be hampered – or negatively impacted – by overloaded agendas and compliance activities (KPMG, 2008).

The legal requirement in the US for audit committees to have only independent directors distorts the information content of Figure I for the US. Figure 1. Non-executive directors as a percentage of the Risk Committee Source: Ladipo, D. et al. (2008), Board profile, structure and practice in large European banks, Nestor Advisors, London. The quality of board members is a particular concern, but fit and proper person tests often do not fully address the issue of competence The quality of board members is a particular concern of bank supervisors who often set fit and proper person tests.

However, such tests do not fully address the issue of competence in overseeing a significant business that is an issue for shareholders and other stakeholders. The issue of board competence is addressed by Principle VI. E that states that “the board should be able to exercise objective independent judgement on corporate affairs”. The annotations note that a negative list for defining when an individual should not be regarded as independent can usef

The True Value of Corporate Governance Essay Example for Free at Magic Help Essay

The topic of company governance is important to just about every listed corporation due to the fact the connected ideas guideline the company exercise and deliver higher values with increased profitability for the company, (Aksu and Kosedag 2005). It is about procedures and regulations and also a subject of ethics, consequently failure to comply with company governance situation has an unfavorable influence on the money market place and their investors, (Worldwide Federation of Accountants 2008). The lack of powerful corporate governance final results in large amount of monetary losses of businesses, like the Hong Kong stated enterprise: CITIC Pacific Limited’s incident in 2008. This indicators firms that fantastic company governance observe is elementary to corporations’ accomplishment. This examine is to obtain out the partnership amongst corporate governance observe and economical overall performance of businesses. A lot more importantly, the Code of Company Governance Practice has turn into productive from 1 January 2005 onwards and detailed firms in Hong Kong have to comply with the obligatory provisions. Companies are also inspired to comply with the voluntarily recommendations for best tactics. Judges’ Report of the HKMA Ideal Once-a-year Report Award 1994 pointed out that prior investigate demonstrates that businesses only comply with minimum disclosure demands of corporate governance benchmarks. This study is going to assess the level of compliance of firms with both necessary provisions and voluntarily tactics. It is generally agreed that firms in market other than retail, specially the banking, general public utility support, and house development marketplace, have much better functionality in company governance given that 1990s when the corporate governance benchmarks have developed drastically. For instance, Solar Hung Kai Attributes Constrained attained the Company Governance Asia Recognition Award in 2009 from the Corporate Governance Asia Journal CLP Electricity Hong Kong Restricted received the prime award from the Hong Kong Institutes of Qualified Accredited Accountants (HKICPA) for the seventh successive 12 months and HSBC Holdings plc received the Greatest Corporate Governance Disclosure Award 2009 from HKICPA as well. But for the retail marketplace, there is a lot less prior analysis for investigating the corporate governance disclosure of these businesses. As a result this review is heading to investigate the follow in the retail industry.

1.2 Exploration Aims and Targets

1.2.1 Analysis Aims

The investigation aim is to take a look at how company governance follow is disclosed in the retail marketplace and how it contributes to the businesses by looking at its affect on firms’ functionality in running, fiscal and stock sector aspects.

1.2.2 Investigation Objectives

To critically look at the importance of corporate governance to organizations and recognize the contributions of corporate governance framework. To evaluate the disclosure actions of shown companies in retail field of Hong Kong. To compare company governance practice of the shown companies in retail field of Hong Kong. To look into whether or not or not businesses with very good governance would have better performance in operating, fiscal and inventory market areas by conducting ratio analysis.

1.3 Exploration Outline

The remainder of the exploration is established as follows. Chapter 2 reviews prior exploration and literature about theoretical framework, worth and contribution of company governance, advancement of governance disclosure, measurement of corporate governance, and hypotheses progress. Chapter 3 describes the methodologies of the analysis. Chapter 4 shows the empirical findings: (1) corporations’ position for governance disclosure, and (2) romance involving company governance and effectiveness. Chapter 5 concludes the investigation.

Chapter 2: Literature Assessment

2.1 Definition

There is no single definition for corporate governance as it differs from nations by international locations and companies by corporations (Craig et al. 2007) and is dependent on how one particular watch this (Salehi 2008). Salehi summarized the research of prior scientists and grouped company governance into four views: accountability, integrity, performance and transparency. For the goal of measuring corporate governance, Standard & Poor’s outlined company governance as the reciprocal actions and influence of agents (supervisors and directors) and principal (shareholders) to regulate the company in which the steps enable stakeholders to get hold of specific returns from that company (Standard & Poor’s Governance Service 2004). It is similarly outlined by the Hong Kong Institutes of Certified Skilled Accountants (HKICPA) and Corporation for Economic Co-operation Improvement (OECD) as coordination processes among manager, board members, shareholders and stakeholders, and the organizational structures which travel the route, procedure and the checking the company for obtaining the organizational objectives. (Abdullah and Valentine 2009) delivered a boarder definition for company governance as processes of managerial choices building and a established of policies of management for both equally financial and non-financial functions carried out by the corporation.

2.2 Theoretical framework

There had been extensively talked about the concern of separation of ownership and regulate of corporation in prior research (Boubakri et al. 2008). Two major theories ended up made use of to demonstrate the situation wherever the agency concept on one particular hand presented a divergence of pursuits of agent and principal, and stewardship idea on the other hand shown alignment of all those pursuits (Davis et al 1997). (Mallin 2007) instructed numerous theories would influence the improvement of company governance, specifically agency theory, stakeholder principle and stewardship idea.

2.2.1 Company Principle

(Jensen and Meckling 1976) famously describes the romance between shareholders and supervisors as “pure company relationship” exactly where the shareholders (principal) who owned and obtained ownership of the company and maximized their returns with the assist of agents who provide the shareholders interests and handle the corporation. (Davis et al. 1997) quoted the strategy of (Walsh and Seward 1990) that corporation would eliminate aggressive benefits and would be not able to go on if professionals act adversely with the shareholders’ aspiration. The writer even further defined that company issue happened when there is “a deficiency of awareness to maximizing shareholder returns”, i.e. self-interested opportunism, wherever the principal is influenced by the self-interest of their agents. Prior investigate have proposed two management mechanisms, the choice government payment strategies and governance buildings, can be utilized to clear up the agency issue, to guarantee shareholders wealth maximization and to tutorial the agents’ conduct (Demsetz and Lehn 1985 Jensen and Meckling 1976 and Davis et al. 1997). It is proved that company expenditures have impacted the means and mechanisms of company governance (Hutchinson and Gul 2003) and company expenses incurred for delivering incentives and compensations for administrators and monitoring their conducts can prohibit individualism of professionals (Roberts 2005). Scientists had recommended that there are constraints related with agency idea (Doucouliagos 1994 and Davis et al. 1997) as this assumed divergence of passions resulted from individualism of professionals which in fact may well not be correct to be utilized to all brokers. In addition, as said by (Jensen and Meckling 1976), controls of company only give likely income that satisfying shareholders as a substitute of creating selected the shareholders wealth are maximized. (Roberts 2005) presented other opposes to this assumption, for instance, (Donaldson and Dais 1991) who applies Mc Gregor’s Concept Y to agents.

2.2.2 Stewardship Principle

(Davis et al. 1997) quoted the definition of stewardship theory released by (Donalson and Davis 1989, 1991) as “a usually means of defining relationships dependent on other behavior premises” which is opposed to the agency principle. (Mallin 2007) reveal that stewardship principle attracts on the assumptions fundamental company idea. With regard to the stewardship concept, organizational construction is meant to aid productive motion by the supervisors and directors and to assist them to formulate and employ options for far better corporate effectiveness. Nonetheless the theory has by no means been empirically to specifically explain brokers compensation or been employed as an fundamental concept (Hengarrtner 2006).

2.2.3 Stakeholder Idea

The stakeholder idea applies to a wider context that to give believed to a team of folks these kinds of as workers, consumers, federal government, lenders and general general public, other than just the shareholders (Mallin 2007). The writer also said that organizations strive to increase shareholders price together with the goal to care about the interests of stakeholders. (Jensen 2001) said there are theorists oppose to stakeholder theory simply because it aims to address the pursuits of all stakeholders which may well not be logically possible and theorists furnished no explanations of how to trade-off towards those people pursuits. The tradition look at of stakeholder theory is hence modified by the author who enlightened benefit maximization to resolve troubles that arise from numerous targets that accompany traditional stakeholder theory.

2.3 Products

There are four important styles of company governance exercise versions adopted by firms all over the world (Bhasa 2004). 2.3.1 Industry-centric governance product 2.3.2 Romance-based governance design 2.3.3 Transition governance model 2.3.4 Rising governance product

2.4 Worth and Contributions

Company governance is significant simply because it contributes to the very well-governed company: enhance in firm’s value and greater profitability (Brown and Caylor 2005) and reduced price of expense of shareholders (Ashbaugh et al. 2004). Company governance can enhance accountability for stakeholders and make sure the company satisfies the demands of the basic community (Peter and Nelson 2006). The mechanism can also lessen agency value and stay away from reduction of firm’s industry benefit resulted from managers’ opportunism (Øyvind et al. 2004). Prior researcher experienced developed methodology and carried out empirical assessment in 30 international locations for investigating the contribution of corporate governance, and it is discovered that greater governance report enhance productiveness of aspects and economic advancement (Sadka 2004).

Corporate Governance from the Failure of Lehman Brothers Finance Essay Essay

Lehman Brothers a single of the major monetary expert services corporation was founded throughout the calendar year 1850 filed its individual bankruptcy protection through September 2008. Several causes caused this money financial commitment firm to cripple via the financial turmoil. The court purchased an external examiner to conduct an investigation by supplying out 10 needs to guidebook him as a result of his investigation about the problems of litigation and any breaches of legislation that may well have happened. Mr Anton R. Valukas the chairman of Jenner & Block has taken up the job of investigation and conducted 100’s of interviews and searched by way of the company’s information and paperwork about a 12 months costing $38 million. Mr. Valukas generated 2200 webpages of doc about his conclusions of investigation. This article discusses about the learning’s in regards to company governance from the failure of Lehman Brothers and the scenario of Australia in comparison with The us contemplating the rules by regulatory authorities and pertinent legislation managing the money expert services sector. Company governance learning’s: The document by examiner raises the flaws in the corporate governance these have to be reviewed to steer clear of this kind of collapses in potential. The main results of investigation as for each the examiner which are related to issues addressing the company governance are Chance Administration and applicable disclosures by management to the board and challenges of related internal controls. Deficiencies in stress tests situations. The have to have for disclosures to board of directors. Remuneration of top rated executives tied to brief-time period functionality. Those outlined out results are further mentioned in short about surrounding problems by comparing what happened and the ideas to avoid the event of these troubles in future. Possibility Management and appropriate disclosures by administration to the board and troubles of suitable interior controls: The chance products utilised by LBHI experienced quantity of assumptions ensuing to inaccurate results, but even now the important motive staying the utilization of info in just the organisation experienced flaws. The board and the administration of Lehman Brothers begun to adopt the high hazard getting business approaches. The understanding of the pitfalls involved in fiscal devices like collateralised money owed, sub-key lending, and derivatives was inadequate and lack of acceptable manage methods to reduce individuals challenges. The board experienced not requested a problem to administration about the risk dealing with techniques and the types utilized to calculate the danger even considered a person of the most important ideas getting overseeing the threat administration technique for financial commitment firms. The board’s supervision of difficulties relating to hazard has to be strengthened. The usage of threat design which is dynamic with regard to market place changes addresses the existing scenario much better than applying a previous static design with restrictions. The board must have a blend of directors with unique capabilities which are essential for that particular business. One of the director’s with complex understanding of chance similar problems would have helped to discover the ‘red flags’ substantially before permitting them to just take correct steps to get over the dilemma. The lack of systematic methods to communicate perhaps important company hazards as a result of successful channels weighs down to the challenge of company governance. The board of administrators ought to obviously create the accountability and responsibilities appropriate by the organisation. The absence of inside controls which can elevate red flags to administration even though dealing transactions which lead to exceeding the possibility restrictions of organisation aids in keeping away from these transactions. The administration and officers have taken really risky decisions based mostly on their intent and pas practical experience about how it could result instead than analysing the scenario centered on the quantitative specifics. For that reason the apply of every sizeable transaction with supporting documents which includes point primarily based evaluation has be ready and authorised by pertinent authority. Deficiency of timely action: The administration and board alongside with the government imagined the result of crisis is short term and as a result LBHI went on to receive risky investments increasing their chance hunger with out truly calculating their ability based mostly on the pertinent points. Afterwards they realised outcomes and took actions to provide down the leverage ratio, but thanks to deficiency of liquid property and anticipation of losses in finding rid of illiquid assets even further troubled. Deficiencies in pressure tests eventualities: LBHI normally applied the testing scenarios in determining regardless of whether to practise a specific transaction was worth the hazard it carries. They also applied its hazard administration method to endorse the companies abilities to credit rating agencies, potential investors and regulating government bodies. The eventualities utilised had whole lot of assumptions which biased the true calculations from the actuality. They excluded which includes the effects of money devices like industrial real estate investments, leveraged loans, and private equity devices leaving a huge hole in analysing the risks posed by these securities. Consequently they finished up acquiring pretty risky options which made considerable problems. Later on when they included all people instruments the chance very well exceeded the chance hunger of LBHI forcing them to cut down the leverage but that was as well late to assemble the damages prompted. Accumulating more information and facts about the huge variety of hazard actions, diverse views of related pitfalls will help in more productive measurement and helpful communication throughout the organisation from board to manager’s leaves in improved situation. Lehman Brothers experienced very good rules and self governing regulations in position but when it arrived to subsequent individuals policies in business enterprise conclusions the management unsuccessful to do so. For instance, the management exceeded the single transaction limit plan to favour the handling of massive discounts. In its place of just trying to keep the rules and guidelines to guides and structure of a company, getting inside controls which do not make it possible for overriding these principles avoids the dilemma. The will need for disclosures to board of directors: The disclosure by the management of the impacts of transactions and procedures the two in phrases of constructive as nicely as adverse outcomes to the board helps them to take the better choices thanks to the offered facts. The deficiency of information and facts about the damaging results and the way the possibility product is calculated disabled the administrators from excellent business selections. If the management would have provided the board with all the appropriate disclosures have elevated pink flags about the circumstance forcing to act more quickly to get well the situation by lowering the over-all chance taken by company. As a result the board of administrators need to have accessibility to the well timed, relevant and correct information. Correct foresight and forecasts by senior administration really should be practised. It can also be finished by like CRO to occupy the posture on the board and examining the dangers administration issues during meetings gives a good guidance. The mixture of competence of board of administrators has to be dealt with given that the correct mixture assists speaking about about different views in analysing the distinctive situations. Remuneration of top executives tied to short-expression efficiency: Several corporations observe the strategy of calculating the remuneration of top rated executives based on their functionality which is obtained from their financial statements, hence tying down to shorter-phrase general performance rather than extensive-time period objectives. This approach of practising is discouraging these who act favouring extended-expression sustainability of firm and gives incentive to settle for those people approaches which boosts the revenues in brief-phrase but they may induce severe risks later. Therefore the calculation need to also think about the danger element and need to stimulate the extended-expression standpoint. The CRO’s spend typically is not tied with their efficiency, the provision of tying CRO’s remuneration in relation to their performance also delivers an incentive to act in favour of making a strong risk methods. Comparison of American problem to Australia: The important difference of Australian condition was the economic markets were being in good form with superior governance of ASIC and APRA the two regulating authorities of Australia. The Australian financial system experienced a robust expansion, extremely secure financial process, lesser unemployment charge and a very little inflation fee. There is no situation of ‘too major to fail’ and Australia doesn’t have economical establishments as major as LBHI. The sub-key market place in Australia accounted for less than 1% of monetary devices in contrast to the England, U.S mortgage loan market and many other nations. The rate of arrears for loans was lesser in Australian circumstance on comparison with American which is mainly thanks to the characteristics of the financial loans available. The Australian market did not provided dangerous mortgage buildings like providing reduce introductory desire rates for a interval of time. The powerful competitiveness in banking sector in U.S induced supplying large-possibility loans and decrease price. Major Australian fiscal services sector preserved potential energy in balance sheets and stayed away from smaller sized sum viable economical disinterested events. The Australian legislative method permits the lender to acquire the mortgage repayments not only as a result of proceeding of sale of collateral but also other particular if the provided collateral alone was not sufficient, therefore offering a more powerful inducement to repay the personal loan. The lower unemployment price also facilitated the Australian financial state compared with the big layoffs of American state of affairs. The laws in Australia in relation to insolvency investing, liquidation are extremely stringent. As for every the companies legislation if the director trades all through insolvency is regarded as as breach of administrators responsibilities, if any administrators uncovered guilty in breach of administrators duties are held dependable for the losses as a result it prompts to appoint administrator. The administrator will take demand of the complete firm in which he analyses and negotiates with lenders about the options and director is not entitled to any part unlike American situation in which director continue to operates the organization. The failure in company governance and danger management, weak point in regulatory frameworks prompted the collapse of Lehman Brothers. ASIC (Australian Securities and Financial investment Fee): The objective of ASIC is to endeavour to maintain, facilitate and strengthen the efficiency of the monetary program and the entities functioning inside that procedure. ASIC also promotes the self confidence in investors and customers by facts transparency in securities provided. All the money assistance vendors need to possess a licence from ASIC thus enabling ASIC to observe the things to do. The functioning specifications and employing competent personnel for accountable roles varieties a common information strains below ASIC. ASIC works based on corporation’s law and ASIC act for company governance and the conduct of the corporations with respect to the share holders and beneficiaries. There is no off stability sheet cars or small-time period loans presented in the Australian regulatory framework. Consequently any modifications or deviation from AASB has to condition thoroughly by providing out the factors for non-compliance and the system made use of with enough disclosures. Director’s breach of fiduciary responsibilities and as very long as they are not guarded by business enterprise judgement rule the directors are subjected to forgo the losses incurred. The business judgement rule protection in Delaware courts was extremely broadly safeguarding directors with the will need for much better proof. In Australian case it does not safeguard as perfectly as it was with Delaware courts law. Laws will need to be regarded as by ASIC in light-weight of the collapse of the economical establishment Lehman Brothers. The utilization of ‘Repo 105’ transaction and any other off balance sheet automobiles are to be disclosed with distinct description of the strategies made use of. Any this kind of accounting gimmicks are to be prohibited in initial place. The flaws in the accounting framework concerning ahs to be addressed to resolve the way of calculating and the pertinent disclosures has to be obviously stated. As the corporation’s law has described the purpose of directors similarly the description of function of senior management officers and their duties places some stress on their duty to deliver. The requirement to communicate all the points to the board ought to be held as one particular of the responsibilities. Have to have to formulate rules regarding the corporate governance concerns in respect to both equally administration and directors obligations have to be reviewed. APRA (Australian Prudential Laws Authority): The function of APRA is to safeguard depositors, superannuation fund customers and coverage coverage holders but not the share holders. The position of APRA is to market robust chance management and prudent behaviour. The Australia had assumed about Basel committee all through 2004 on banking regulation is performing to established up shock absorbers into capital frameworks. When the board doesn’t recognize the superior threat products and how to mitigate the effects it is recommended to not to invest on those people items. The superior governance is vital for any organisation. The calculation of threat urge for food was flawed in the LBHI’s situation leaving hole for institutions to acquire their individual. But in APRA’s case the rules has generally averted sure short comings but improvement of quantitative methods. The area regulating bodies like APRA worked in direction of increasing the sector condition. A couple initiative’s are to cut down the complexity of goods, transparency of securities presented, enhancing the part of credit history ranking companies. Particular challenges to be dealt with by regulators included based on the Lehman Brother’s collapse are: The funds needs for expense corporations has to be reviewed, there should really be a laws towards managing the leverage ratios. The entire banking program is dependent on mitigating the chance and attaining the earnings appropriate to chance, considering that hazard is the crucial difficulty for financial investment firms that should really be managed by distributing the chance. Regulators ought to impose limitations on large-chance enterprise tactics by imposing a cap on whole permitted threat at any time. The monetary companies have to get the approval from regulators about the danger product usage and adaptive worry screening situations. The prudential regulator APRA producing proposals on remuneration emphasising on monetary steadiness and long-phrase progress. All the entity’s personnel concerned in selection producing which impacts the share holders are included in remuneration prepare. Legislative provisions: So for the worldwide money crisis has not delivered a great deal modifications to the Australian laws. The Australian company governance and other regulatory bodies have properly managed the global economical disaster with fewer affect on the financial system. Conclusion: The ‘Too Huge To Fail’ financial services company Lehman Brothers collapse has focussed the flaws in company governance, chance administration methods, and consequences of age aged off balance vehicles i.e., the accounting standards are learning’s for the potential. Lots of restrictions and law reforms are created from the complications the earth faced as they type like Sarbanes-Oxley act which caused the formulation of internal controls as a standard. Hence this collapse also arrives out with well regulated policies and robust methods to handle the strain and limits on threat taking are needed. The element of law which governs the troubles reviewed in this post is companies act 2001. Other regulatory frameworks which require review are prudential regulation, Accounting expectations, corporate governance challenges.

Corporate Governance Failure: Marconi Essay

An Exploratory Study of Failure in Successful Organisations: The Case Study of Marconi 1. Introduction and Objectives There has arguably never been a worse case of corporate governance failure than Marconi. In October 2005, Marconi accepted a A£1.2bn offer from Sweden’s Ericsson, signalling the end of one of the UK’s finest manufacturing companies. Over the past six years it has been shorn of its telecoms equipment business and reduced to an obscure rump company, called telent, which is not even permitted the dignity of a capital letter to its name. (Riley, 2005) Marconi was once, briefly, the most valuable company listed on the London Stock Exchange, under the name General Electric Company, but over the course of 20 years it has gone through various stages of decline. Under an autocratic chief executive, Arnold Weinstock, it attained its greatest power in the late 1970s and early 1980s by exploiting cost-plus, inflation-proofed contracts in telecoms, power engineering and defence: all at that time in the public sector. Orders in those conditions were carved up politically. However, the GEC drifted into becoming a fading conglomerate as the British economy was privatised and tt was unable, in contrast to its US near-namesake General Electric, to reinvent itself to suit different circumstances. After Arnold Weinstock retired in 1996, it was seized by eager wheelers and dealers, including the controversial corporate financier John Mayo, and transformed into a dangerously overleveraged telecoms – particularly internet equipment – specialist (Riley, 2005) British institutional investors stood by and watched this happen and even encouraged it as marking an improvement on the semi-stagnation of the end of the Weinstock period. There followed, after the technology bubble burst, as close a brush with bankruptcy as could be, with shareholders in 2003 losing 99% of their equity in the restructured company (Birkinshaw, 2004). Even a multi billion dollar debt for equity refinancing could not save the business, and in April 2005 Marconi failed to win even a small slice of BT’s A£10bn network upgrade programme. Various European and Chinese suppliers easily underbid Marconi, including Alcatel, Siemens and Ericsson itself, leading to claims that France, Germany and Sweden know something about supporting national champions that the UK does not (Riley, 2005). Maybe the stricken Marconi was no longer up to the job when the BT opportunity appeared, but it also appeared that the new management, led by chief executive Mike Parton, had been given inappropriate incentive packages and was unwilling to suffer the pain of the low BT tender price required. Or perhaps the Marconi bosses believed their long-time clients at BT would help them out for old time’s sake. (Riley, 2005) The group’s long-term investors had effectively been wiped out and the shareholder list was dominated by short-term investors, including former bondholders swapped into equity, supplemented by speculative buyers of what was seen as a high-risk recovery stock. Following the initial crash and debt for equity deal, something of a false dawn ensued and, as the company recovered partially after its May 2003 relisting there was a bonanza for managers: 50 of them gained A£28m in bonuses, including A£10m for Parton. However, these windfalls were earned mostly for repaying debt and only partly for achieving what eventually turned out to be a temporary rise in the share price. With hindsight it appears that little attention was being paid to the preservation of Marconi as a substantial independent force in the telecoms manufacturing industry, which is often what happens when a business is being run for the benefit of its creditors (Burkinshaw, 2004). It has been claimed that, in reality, stock market investors failed to relate to any of the successive management regimes that took the group down the slippery slope from GEC through Marconi to telent: the domineering conglomerate boss, the reckless cowboys of the bubble brigade, or the double-or-quit rescue squad loaded with stock options (Riley, 2005). The decline of Marconi can be seen as a stark example of what happens when a country like the UK sucks a disproportionate amount of its talent into the financial engineering sector: the other forms of engineering: mechanical and electrical, suffer. However, surveying the wreckage following the burst of the dotcom bubble of 2001, it is easy to overlook the persistence and rapid growth of e-business throughout the global economy. While many high-flying technology firms, including Beyond.com, Boo.com, and Webvan vanished, and companies relying on their business, such as Marconi, suffered heavily, use of the Internet as an essential business tool continued to grow drastically. Indeed, whilst “pure-play” online grocers Homegrocer and Webvan received enormous media attention and heavy investment from venture capitalists, today, both are out of business, while the traditional supermarket chain Tesco has emerged as the most successful grocer online. As a result, this work intends to conduct a theoretical study into the factors that make organisations successful, the reasons why previously successful organisations go from being successful to failing, and the lessons which can be learnt from these organisations. It will then analyse the origins, rise to success and ultimate failure of Marconi, in the context of the theory, and looking for areas where Marconi’s failure was in line with theory, in for areas where it was unique. 2. The Success and Failure of Organisations – Theoretical Background 2.1 What Makes for Successful Organisations? Managers crafting a successful business strategy today face a far more difficult task than their forebears. Historically, crafting a strategy centered around three elements: the “fit” between the company and its industry (Porter, 1980); allocation of limited resources among investment opportunities (Barney, 1992); and a sustainable long-term perspective. These elements created a frame of reference for many managers that, more than anything else, bound them to approaching strategy as if they were going to war. Unfortunately, they often use the most recent “war” as their guide to framing tomorrow’s problems and solutions and, led into this type of war game, managers began to believe that sheer weight and mass could overcome speed and agility. However, resources: the firm’s ‘weight and mass’, alone no longer can guarantee industry leadership. During the 1980s the U.S. auto industry spent close to $100 billion on automation, acquisitions, and restructuring their operations. However, none of the “Big Three” was able to satisfy customer demands for a high-quality, low-cost car that could match Japanese standards until the early 1990s. Regardless of how much GM, Ford, and Chrysler “strategically” planned their future investments, their earlier organizational structures were not geared toward speed and learning. Some of the strategic practices that hindered large U.S. companies from pursuing new opportunities quickly are those that have also lead to several companies failing to achieve success. Vertical Integration For most of this century, views of corporate strategy were shaped by industrialists such as Andrew Carnegie, Jay Gould, Cornelius Vanderbilt, and Henry Ford, all of whom believed that vertical integration could guarantee sources of supply and secure leverage on vendors (Peyrefitte and Golden, 2004). Vertical integration can help firms build and protect their competitive advantage when technology is predictable and markets are stable. The Big Three auto makers at one point vertically integrated into coal and iron ore mines, steel plants, glass and rubber factories, and credit financing operations to secure stable sources of raw materials and easy access to customers. However, vertical integration also can inhibit a firm’s ability to learn, since it insulates the organization from market changes that may redefine its firm’s core competence. Thus, vertical integration limits a firm’s learning potential when technologies and markets are fast-changing (Penrose, 1995). In the computer industry, the most successful firms tend to be loosely integrated, since they need to incorporate the newest chips and components from whoever produces them. In contrast, IBM trails its competitors, such as Compaq, Apple, and Dell, partly because its internal operations are geared to a high level of vertical integration, rather than fast-response to customer needs (Hitt, 1999) Unlearning the competitive advantage of vertical integration has been a painful and humbling experience for many of this century’s most successful firms. Diversification In the 1950s and 1960s, diversification became the strategic weapon of choice. It was popular to break organizations down into decentralized profit centers and treat them as independent SBUs. The rise of conglomerates, such as ITT, Litton, and Textron, mandated that managers adopt new strategic perspectives to manage their far-flung and often unrelated businesses. In response to this management need, the Boston Consulting Group advised top managers to locate each unit’s position based on its market growth rate and relative market share. This resulted in business units being labeled “cash cows,” “stars,” “question marks,” and “dogs.” (Hambrick and MacMillan, 1982) Dogs were clear candidates for divestiture because they required too much cash; however unfortunately, managers often found that promising new question mark areas were laden with other dangers, as Westinghouse learned. Seeing a decline in the 1980s in the domestic demand for power generating equipment, Westinghouse diversified into office furniture, cable television, broadcasting, and financial services: all of which came under tremendous pressure to change in the 1990s. Simultaneously, Westinghouse sold off its power distribution equipment business to Asea Brown Boveri, thereby losing the opportunity to convert a domestic “dog” into a global “star” by serving developing countries’ huge, pent-up demand for electricity (Klebnikov, 1991). Generic Strategies for Success Low Cost, Differentiation, and Focus Michael Porter developed a generic strategy model that could be used in a variety of industries (Porter, 1980) This model required companies to find markets they could defend from competitors either by becoming the low-cost producer, differentiating products in ways that could command higher prices and, therefore, higher profits, or erecting entry barriers for new competitors. A low-cost strategy requires a firm to excel at cost reduction and efficiency, which calls for reducing administrative expenses, maximizing economies of scale, securing inexpensive suppliers, and minimizing sales, advertising, and service costs. A differentiation strategy emphasizes offering a unique product or service, which allows a firm to charge a premium. It often relies on extensive advertising or an emphasis on quality that stresses unique attributes that appeal to customers’ distinctive preferences or loyalty. Firms employing a differentiation strategy can earn higher profits without necessarily investing in highly capital intensive, hard-to-change manufacturing processes. A focus strategy requires a firm to identify a defined niche in which it will either offer a unique product or low cost. For example, Acura Legend LS, Lexus LS500, Mercedes-Benz, and BMW 735i are targeted to a niche market of American car buyers (Greuner et al, 2000). SWOT Analysis SWOT analysis became the buzzword of the 1980s when Jack Welch used it to assess where GE stood in each of its various businesses (Thompson, 2004). The acronym SWOT refers to internal strengths and weaknesses and external opportunities and threats. The goal of a SWOT analysis is to help a firm identify its critical strategic factors and then build on vital strengths, correct glaring weaknesses, exploit significant opportunities, and avoid disaster-laden threats. An objective SWOT analysis can help form the initial steps of building a learning-based strategy. Used to question current assumptions and strategic plans, SWOT analysis can help managers break free of traditional modes of thinking and planning. At GE, SWOT analysis was designed to give managers a platform for rethinking how to compete with other firms. Using SWOT analysis, Welch managed to more than triple GE’s productivity growth rate, double the proportion of annual revenues coming from high-growth technology and service sectors, and initiated joint ventures with foreign firms like the Tungsram Company of Hungary (light bulbs) and Ericsson of Sweden (cellular communications) (Thompson, 2004). However, these conventional market- and competitor-driven approaches to strategy lack the speed and sensitivity of the modern marketplace: low cost, differentiation, and focus are descriptive of strategies that provide managers with checklists to identify and “freeze” market niches and segments. In contrast, modern, often learning-based, strategies are designed to “unfreeze” existing markets to create new ones in which rapid product development, high-quality manufacturing and service, and innovation are exploited to their fullest. The following four strategies have all been designed, and used by companies, to provide sustained competitive advantage and long term success in the modern economy. Specific Strategies for Success Sustainable Growth In her management classic The Theory of the Growth of the Firm, Edith Penrose comes to the conclusion that growth is essential for organizations. (Penrose, 1995) However, organizations that grow too rapidly push, as a result of scarce resources, against their administrative and cognitive boundaries and easily lose control. (Hambrick and Crozier, 1985). An empirical study by Cyrus Ramezani at the California Polytechnic State University confirmed this theory: continuous growth first has a positive effect on profitability and company value, but this effect turns unmistakably negative as soon as an optimum growth value has been exceeded, making firms slow and unwieldy (Ramezani et al ,2002). Firms should thus limit their growth to an optimum rate. To what extent growth can be sustained is firm specific. Three influencing factors are particularly important in determining the optimum rate of growth, notably financial, market, and managerial indicators (Penrose, 1995). The sustainable growth rate from the finance literature provides the first and foremost indication of how much growth should be envisioned. The rate of organic market growth in the targeted segments provides a second indication. Continued growth that is significantly above that of the market can only be achieved through acquisitions, diversification, or a mix of both. Studies reveal that both an increasing number of acquisitions (Kusewitt, 1985) and a high degree of diversification are negatively related to performance (Hitt et al, 1998). Inorganic growth should thus be limited to a manageable level. How much growth a firm can manage is a third indicator of both inorganic and total growth. The internal ability to cope with growth depends on factors such as the organizational structure, the reward mechanisms, and the characteristics of the leadership team (Hambrick and Crozier, 1985). Stable Change Insights from strategy research reveal that an organization’s ability to innovate and change is in-dispensable in dynamic environments. However, excessive change leads to the destruction of an organization’s identity. People are only able to act when they have a specific degree of certainty. Organizational controls provide certainty, routines, and habits. If the change exceeds a certain dimension, organizations increasingly lose their ability to act (Nelson and Winter, 1982) Organizations therefore need a certain degree of both stability and change to survive (Leana and Barry, 2002). While certain aspects of organizational identities need to change, others have to be maintained to provide the necessary security to accomplish change, and companies thus need to balance stability and instability in their identities in order to keep the ability to change rapidly, whilst making sure that the change is successful (Gagliardi, 1986). Shared Power Studies from leadership research indicate that, although the optimal leadership style in organizations may be dependent on the situation, in the majority of situations mutual or shared power utilization leads to the greatest success. Only in a few selective crisis situations can an autocratic leadership style be an advantage (Ogbonna and Harris, 2000) Empirical studies have shown that a healthy balance between CEO and board powers is required to ensure effective company performance and for effective checks and balances in corporate governance (Pearce and Robinson, 1987). Healthy Organizational Culture Insights from game theory indicate that egoistic competition between employees has less success in the long-term than trusting cooperation. However, in successful large organizations excessive trustfulness may lead to an increasing number of free riders being dragged along. The system then becomes unattractive for high performers. Game theory therefore advises the middle way of a “defensible” culture of trust. An achiever can count on being rewarded; those who do not achieve can count on being penalized: the tit-for-tat strategy (Axelrod, 1984). Organizational culture thus has to strike an optimal balance between rivalry and cooperation in order to maintain a reasonable degree of focused reactivity to change (Abell, 1996) Keeping the Balance In general, most successful organisations appear to keep an optimum balance, in line with the four specific strategies, and based on the two generic ones. Minor fluctuations around the ideal are, nevertheless, completely normal however, at a certain point, e.g. during continuous overloading, due to market pressures, the system becomes increasingly vulnerable. Successful organizations therefore ensure that they keep the balance in the long term, and don’t overreact in to short term trends. Indeed, some of the most consistently successful organizations of the last twenty years, among them BMW, General Electric, Siemens, and Toyota, pursued an organizational policy which kept the organizations in balance in the long term (Abell, 1996) 2.2 Why Do Successful Organisations Fail? Managers have been quick to blame their failure on external conditions such as declining stock markets or intensifying competition. It is certainly true that the general market decline over the past years contributed to the failure of so many once respected companies. The large number of failures in the airline business and in the telecom industry shows that industry-specific effects such as in-creasing fuel prices or technological changes play an important role in explaining corporate failure. However, as discussed above, industry effects alone cannot explain why some companies within these industries failed, while others continued to be successful. For example, the telecom giants AT&T and Worldcom figure prominently on any list of failed companies, while competitors such as SBC Communications and Swisscom remained highly profitable (Probst and Raisch, 2005) In order to explain such differences, it is necessary to analyse firm specific reasons for failure: factors that firm managers can actively influence. Over the last few years it has scarcely been possible to read a book on management without encountering four key factors of success: a high growth rate; the ability to change continuously; a highly visionary company leadership; and a success oriented company culture. However, the great majority of the failed organizations of the last few years possessed these success factors in abundance, and exactly here lay their problem. It seems that there is a boundary outside of which these success factors have a counterproductive effect, and previously successful companies that fail, often owe their failure to at least three of the following four characteristics: excessive growth; uncontrolled change; autocratic leadership; and an excessive success culture (Maslach, 2001). Excessive Growth A huge proportion of the recent TMT company failures followed a phase of tremendous company growth. For example, the revenues of the energy broker Enron grew at an unbelievable 2000 percent between 1997 and 2001 (Swartz and Watkins, 2003). High growth has been related to a number of constraints and long-term problems in the literature among which are the managerial constraints on firm growth (Penrose, 1995). Fast-growing firms are likely to incur managerial problems and reduced effectiveness in their core operations (Slater, 1980). The problems arise from the lack of suitable management to coordinate the increasing complexity of an organization during its expansion. While a few firms do surmount the problems that high growth engenders, many fail (Gartner, 1997). Second, there are market constraints on firm growth (Penrose, 1995), as companies quickly reach the limits of organic growth. In order to maintain their high growth rates, many failed companies turn increasingly towards acquisitions. For example, at ABB there were 60 takeovers in two years, at WorldCom 75 in three years, at Interpublic Group 200 in four years, and almost 300 in five years at the French energy provider Suez and the conglomerate Tyco swallowed more than 200 companies per year at the height of its hyperactivity (Probst and Raisch, 2005) However, there is a long history of literature that recognizes the risks associated with acquisitions (Sirower, 1997) Empirical studies have shown that the majority of all acquisitions fail and that in general acquiring firms experience negative re-turns (Agrawal et al, 1992) Finally, there are financial constraints on firm growth. The finance literature provides the “Sustainable Growth Rate” (SGR) concept that, based on a firm’s financial position, calculates how much sales growth it can afford (Higgins, 1977). In the finance literature “excessive” growth, defined as growth above the SGR, is regarded as the main reason for insolvencies (Higgins, 1977). In order to finance growth above the SGR, many companies borrow large amounts of outside capital, and studies have shown that such highly leveraged firms are substantially more sensitive to an economic downturn than their competitors (Opler and Titman, 1994). In a recession the company loses earnings that are urgently needed for debt repayment. Even companies that can avert threatening insolvency face a mountain of debt that will tax their development for years. Uncontrolled Change Sooner or later high growth leads to the saturation of the original target markets. To ensure further growth, many of the examined companies diversified aggressively into new markets. The literature shows that an increasingly disparate portfolio of businesses leads to coordination problems and control losses (Rumelt, 1982). Especially the integration of a wide variety of acquired companies caused an in-crease in complexity and unrest in the analyzed companies (Jemison and Sitkin, 1986) The absorption of managerial time and resources in the new business fields led to the erosion of the core business (Ahuja and Katila, 2001). Some companies went even further and sold their core business to focus on the newly acquired fields. These companies suffered from a complete loss of organizational identity (Dutton and Dukerich, 1991). A typical example is the technology group of companies, ABB. After 60 acquisitions in various industries and a true restructuring frenzy, a dissipated, homeless group was all that remained. With the sale of the rail technology and the power station construction, the heart and soul of the organization was sold. The constant direction change and radical reconstruction led to a complete loss of company identity. (Probst and Raisch, 2005) Marconi had a similar experience, with the radical reconstruction from being a defense contractor to a telecom company being regarded as a chief cause of the failure. Prior research has shown that organizational changes lead to an immediate increased risk of organizational failure due to the disruption and destruction of existing practices and routines (Amburgey et al, 1993). A certain organizational identity is required; companies cannot endure without developing a solid core that provides some guidance during changing times (Collins and Porras, 1994). Fundamental changes, such as radical transformation, adoption of a brand new business model, entering a different industry or merging with another firm, always lead to a certain destruction of identity (Bouchikhi and Kimberly, 2003). A loss of identity occurs if a new identity that the organization’s members neither understand nor accept replaces the existing identity, for example, in Enron’s case, in the end “no one could any longer explain what the basis of our business was,” according to a top manager (Hamilton, 2003). Autocratic Leadership Any organization that relies on the ability of a single person at the top is living dangerously. A top executive who has too much power has been found to be a major source of organizational decline (Argenti, 1976). Consistent with agency theory arguments, enhanced power may provide CEOs with sufficient discretion to pursue objectives that are inconsistent with company objectives (Daily and Johnson, 1997). Empirical research shows that firms where powerful boards effectively controlled managers’ actions are associated with superior performance (Pearce and Zahra, 1991). Almost without exception blessed with a charismatic and self-confident personality, autocratic leaders use their position to pursue aggressive and visionary goals, and the press, shareholders, and analysts praise initial successes with increasing rapture. These leaders are the “superhero” Bernie Ebbers at WorldCom, the “genius” Jean-Marie Messier at Vivendi and the “godfather” Percy Barnevik at ABB. Surrounded by followers, they indulge in increasingly excessive conduct (Whetten, 1980). Tyco’s CEO Kozlowski was called the “Roman emperor,” Ahold’s CEO Cees van der Hoeven, “the Dutch Napoleon.” Prior research has identified success, media praise, self-importance, and weak board vigilance as key sources of CEO hubris (Finkelstein, 1992).CEO hubris, manifested as exaggerated pride or self-confidence, played a substantial role in the failure of many companies in the first half of this decade (Probst and Raisch, 2005). Excessive Success Culture The downside of a highly competitive company culture became apparent during the crises at the examined companies. Competitive reward systems had been designed to motivate employees with high salaries, bonus payments, and opportunities for swift promotion. To this day legends are woven about those who were privileged at Enron. The success culture was perfected by a rigid selection, long working hours, and a belief in strong rivalry. Employees at companies such as Enron, Finova Group, Tyco, TimeWarner or World-com characterized their company’s culture as “shark-like,” “egoistic,” or “gun-slinging.” Studies have shown that increased rivalry and competition between employees can be detrimental to trust (Ferrin and Dirks, 2003). A lack of employee trust has a negative effect on openness in communication, in particular regarding information sent to the superior (Roberts and O’Reilly, 1974). Two-thirds of Abbey National’s staff, for example, indicated in a recent survey that their managers aren’t open and trustworthy (Probst and Raisch, 2005) This illustrates why no one questions excessive leadership behaviour, or reacts to the first signs of a crisis in autocratic companies. Recent revelations of accounting irregularities in various companies show that despite a large number of accessories, no one challenged these practices, and the lack of trust also affects job satisfaction and the organizational climate (Probst and Raisch, 2005). An unhealthy work climate and other job stressors, such as an excessive work load, have been mentioned as key contributors to job stress, which ultimately leads to degraded job performance (Driskell and Salas, 1996). Flagging employee morale and high management turnover, which deprived the examined companies of key talent, are among the immediate consequences. The Pattern behind the Dotcom bubble In summary, the four described factors can be classified as symptoms of the same illness that has been termed the ‘Burnout Syndrome’ (Probst and Raisch, 2005). In the long run organisations burdened by an excessively ambitious CEO, and by excessive growth and inexorable change, simply burn out. In an extreme case, organisational systems, weakened by high debts, growing complexity, and constant uncertainty, simply implode. There are so many examples of the Burnout Syndrome in the aftermath of the boom period of the late 90s that one could almost speak of an epidemic (Probst and Raisch, 2005). In a period of market decline, highly leveraged firms suffer most from plunging margins that make debt repayment increasingly difficult. However, this doesn’t mean that the Burnout Syndrome is a unique phenomenon at the end of a historical upswing period. In each decade there have been numerous examples of the Burnout Syndrome, among which are the U.S. steel producer LTV (1970), the German electrical company AEG (1974), the U.S. computer pioneer Atari (1984), and the German Metallgesellschaft (1993) (Sutton et al, 2001). However, Probst and Raisch’s (2005) long-term studies provided some indication that the number of burnouts rapidly rises in the aftermath of a stock market crash. Exemplary in this regard is the collapse of a high-flying utility empire, Middle West Utilities, as a result of the crash in 1929 that economic historians describe as identical to the fall of Enron (The Wall Street Journal Europe, 2002). While the root causes are internal, the danger of a burn-out appears to increase significantly in times of market decline. 2.3 Examples of how Organisations Learn from Failure? Using learning strategies to become an industry leader, and avoid the failures of others, requires a company to adopt three management practices that capitalize on its capabilities and culture as well as its competitive strengths. Managers’ greatest challenge is to hone these practices and drive them relentlessly through the organization. The first practice is developing a strategic intent to learn new capabilities, the second is a commitment to continuous experimentation and the third is the ability to learn from past successes and failures (McGill, at al, 1992) These practices will enable a firm to constantly renew itself and develop new sources of competitive advantage, and specifically a firm will be better able to uncover and serve new markets and new customers. Strategic Intent to Learn Bally Engineering Structures, Inc. is one company that has focused on its strategic intent to learn from its customers. Tom Pietrocini, its president, decided that Bally’s survival depended on changing from a company that made specific products, like refrigerated rooms and walk-in coolers, to one that could custom-manufacture a wide range of products, but at a cost of standard mass-produced goods (Harvard Business Review, 1993). When Pietrocini joined Bally in 1983, it was a high-quality, high-cost producer struggling to survive in a mature market. Pietrocini repositioned it into a lean, cost-efficient manufacturer. He used continuous-improvement processes to reduce the number of defects and the time to fill orders. In addition, he broke down barriers between functional departments and gave quality teams wide latitude to make changes. He made employees responsible not only for doing their own jobs, but also for figuring out better ways of operating, and he rewarded them for making improvements (Harvard Business Review, 1993). Determined that Bally would learn how to be the number one walk-in refrigerator company, Pietrocini had to convince employees that they were an integral part of the company’s success. He spent countless hours teaching them to view the company in terms of its capabilities and values rather than as a maker of products: for example, that customer demands and Bally’s widening array of manufacturing processes would determine what products they would produce (Harvard Business Review, 1993) Learning to listen more closely to customer complaints and suggestions rather than relying for feedback solely on customer-reported defects or customer-satisfaction surveys, Bally’s employees gained valuable insights into applying new technologies in unanticipated ways. For example, after a customer complained that his floor kept wearing out every 18 months from the hot steam he was using to clean the freezers: a process not recommended by Bally, a cross-functional team of Bally employees developed a completely new technology to prevent moisture from entering crevices and destroying the floor. Bally not only won back the customer, but in rising to the challenge of meeting one customer’s specific needs, it also created and leveraged a technology that gave it a sustainable competitive advantage in its market (Harvard Business Review, 1993). Bally also broke up its rigid manufacturing processes. Before the restructuring, employees built refrigeration units in well-defined sequences along an assembly line, precluding any potential for offering the customer options. By rethinking the manufacturing process to eliminate this rigidity, Bally has expanded its customer options from 12 to 10,000 (Harvard Business Review, 1993) Different modules, such as welded construction, finishes, and air-and-electrical-control systems, are now brought together for the customer as needed. A sophisticated information-management system is the central nerve system that coordinates customers’ needs and Bally’s manufacturing know-how. A sales rep can custom-design each order in the customer’s office on a laptop computer connected to Bally’s computer via a modem. Once the design is completed, the software defines the precise combination of modules required to make the customer’s product and makes this information available to all employees working on the order. Employees with the necessary skills can be quickly assembled to provide whatever the order requires (Harvard Business Review, 1993). Retailing giant Wal-Mart also has climbed to success by developing a strategic intent to deliver products to customers with minimal inconvenience. It focuses on learning to eliminate steps in the distribution process that increase its overhead and that separate Wal-Mart from the customer. Wal-Mart has developed a “cross-docking” distribution process in which goods are continuously delivered to its warehouses, where they are selected, sorted, and sent to stores, often the same day (Biederman, 2006) Cross-docking takes advantage of the economies of scale achievable with full-truckload purchasing. It requires continuous contact among Wal-Mart distribution centres, suppliers, and every store’s point-of-sale cash registers. By ensuring that orders can flow in and be consolidated and processed within a matter of hours, cross-docking gives Wal-Mart the benefits of speed, low inventory, and fast response to the market’s demands. To fully leverage this core competency, which competitors find difficult to imitate, Wal-Mart operates its own satellite communication system that sends daily point-of-sale data directly to its 4,000 vendors. In essence, customers “pull” products when and where they need them through Wal-Mart’s distribution system. By running 85 percent of its goods through this warehouse system, Wal-Mart has reduced its sales cost by 2 to 3 percent over the industry average and enabled it to pass on everyday low prices to its customers. Senior managers’ role is not to control what store managers do, but to create an environment in which they can learn from each other and from the market. (Seiders and Voss, 2004) At Bally’s and at Wal-Mart, competitive advantage is sustained by the commitment to continuous learning from every interaction with employees, customers, and suppliers. Commitment to Continuous Experimentation The second practice of crafting a learning strategy is to encourage continuous experimentation. Often this includes embracing ideas that come from customers as well as from employees in other divisions and other companies. To learn from others, managers must continuously scan their environment for opportunities to develop new products or services. The company must then rush these to the market before their competitors. Not only does bureaucracy slow down the decision-making process, but also ideas and imagination wilt in a bureaucracy; conversely, they flourish in an atmosphere that fosters speed and agility (Garvin, 1993). Management processes in learning organizations are specifically engineered for speed and responsiveness, and managers in agile organizations believe that it is often better to make the wrong decision than to make a late one. Crafting a strategy is as much about bringing new products to the market as it is about getting the right trajectory and following through. Deciding today and implementing tomorrow enables the company to capture the initiative from competitors. Johnson & Johnson is one company known for fostering new ideas and developing them quickly. Managers work hard at developing open-mindedness and encouraging employees to experiment. For example, after learning of an inexpensive way of making contact lenses (a technique developed by a Copenhagen opthalmologist), J&J’s Vistakon, Inc., a maker of specialty contact lenses, was able to create a new, disposable lens called Acuvue (Weber, 1992). The tip, which came from a J&J employee who worked in an entirely different division, got to the ears of Vistakon’s president. At that time, J&J only made contact lenses for people with astigmatism, and its sales totaled $20 million. The president sought out the ophthalmologist and, realizing the commercial value of the idea, quickly bought the patent rights to the new technology. The company assembled a team to oversee the product’s development and built a state-of-the-art manufacturing facility in Florida in less than a year (Silk et al, 1997). Vistakon’s managers were willing to incur high manufacturing costs even before a single lens was sold because the new facility would enable it to leap-frog major competitors Bausch and Lomb and Ciba-Geigy. When initial customer reception cooled because competitors challenged the lenses’ safety, Vistakon express-shipped some 17,000 lenses to eye-care professionals (Weber, 1992). This speedy reaction built up goodwill in the marketplace and indicated to eye-care professionals how much service they could expect. It also led to a new marketing approach: Vistakon went directly to eye-care professionals and showed them the profit they could make from prescribing these new lenses. Vistakon saw each obstacle as an opportunity to learn how to improve its customer responsiveness and delivery speed. In 1992, with more than $255 million in sales, Vistakon had captured 25 percent of the U.S. contact lens market, and began working on a technology to make the initial lenses obsolete (Weber, 1992) As with Bally Engineering, J&J practices self-obsolescence to cultivate new sources of competitive advantage. Experimentation with new products is not always successful. In the 1980s, the public was not ready for Sony’s new Mavica digital filmless camera, which could take clearer pictures faster than a traditional camera. Sony withdrew the camera, but it used the digital technology insights to develop new generations of compact disc players, VCRs, and portable communication devices (McGill, at al, 1992) Rather than penalize Mavica managers for experimenting with a new digital technology, Sony encouraged them to apply their expertise to products such as HDTV. The irony is that Sony’s failure with the Mavica reinforced its long-standing philosophy that new products create new markets if a company can galvanize its strategic intent to learn from its own experiences (Garvin, 1993). Learning from the Past For decades, St. Louis-based Emerson Electric has posted an enviable record, celebrating 36 consecutive years of improved earnings and earnings per share (Probst and Raisch, 2005). Emerson is committed to learning from its successes and to seeking improvement. Its strategic intent is to continuously learn how to be the best-cost producer. Emerson’s strategy, developed in the 1980s and little changed since, begins with the recognition that customers’ expectations are increasing and, to remain competitive, it must meet or exceed the highest standards of performance, including on-time delivery and after-sale service (Bernstein and Macias, 2002). Emerson’s strategy depends on continuous improvements in six areas: commitment to total quality and customer satisfaction; knowledge of the competition; focused manufacturing, competing on process as well as product design; effective employee communications and involvement; formal cost reduction programs; and commitment to this strategy through capital expenditures (Mechanical Engineering, 2001) The two underlying management practices that have enabled Emerson to implement its best-cost producer strategy are continuous cost reduction (Mechanical Engineering, 2001) and open communication (Probst and Raisch, 2005). Managers and employees embrace these ideals as pillars that define Emerson’s unique competitive advantage and these practices, by forcing Emerson to strive for ever higher levels of improvement, result in the company’s habitually exceeding its previous accomplishments and performance. In good times and bad, Emerson has practiced cost-reduction goals at every level. It requires employees to identify specific measures necessary to achieve these objectives and managers to report every quarter on the progress against these goals. The second principle: open communication, means that division presidents and plant managers meet regularly with all employees to discuss the specifics of the business and what the competition is doing (Bernstein and Macias, 2002). This creates an open, collaborative culture, and means that Emerson is always looking to respond to change, and is always prepared when change arrives. Learning from Failure In learning organizations, failures are looked upon as useful steps in helping managers acquire new experience, insights, and knowledge that may be applicable to future products, technologies, or markets. Although failures may reflect the organization’s initial inability to satisfy a particular market or customer, they can spur innovative efforts to renew and improve the organization’s basis of competitive advantage (Garvin, 1993) To learn effectively from failures, managers need to see how previous missteps can translate into knowledge or actions that ultimately strengthen their firm’s core competencies and competitive advantage. Managers must confront the reasons for earlier failures head-on and answer the question, “How can we apply what we learned to future activities?” (McGill, at al, 1992) The fabled, mythological Icarus is said to have flown so close to the sun that his artificial wax wings melted and he plunged to his death in the Aegean Sea. His greatest strength, the power of his wings, led to his demise. That same paradox can be applied to companies: their victories and strengths often seduce them into excesses and neglect that cause their downfall (Miller, 1990). Success leads to specialisation and exaggeration, to confidence and complacency, to dogma and ritual. Recently, firms have begun to recognize the importance of the link between learning from earlier failures and developing future sources of competitive advantage (McGill, at al, 1992). For example, diversifying into new products or industries can be costly when management does not really understand how to leverage a firm’s core competency. Kodak’s experiences during the late 1980s and early 1990s provide a case in point. Kodak is the world’s largest producer of chemical-based film used in consumer photography, medical imaging, and industrial-commercial processes. The company’s strategic intent is to dominate the technology behind imaging: capturing, recording, transferring, and enhancing images, no matter who the end user or customer may be. To further advance its imaging-based core competencies, Kodak has spent incredible amounts on R&D, developing leading-edge thermal printers, colour manipulation software, and a digital technology that stores images electronically and translates them into digital data. Despite Kodak’s imaging strengths in the lab, its biggest diversification move in 1988 was the acquisition of Sterling Drug, a pharmaceutical firm that appeared to have numerous promising drugs in the pipeline. Kodak reasoned that, with its extensive knowledge of chemical-based lab processes, it would instantly become a formidable player in the profitable pharmaceutical industry. Because Kodak’s blood analyzer, diagnostic equipment, chemical substrates, and film products were already widely used in medical laboratories, its managers thought that Sterling would provide them with an easy entry into a new industry that would not face the same kind of intense competitive pressures characterizing the photographic film industry (Jaffe, 1989). These expectations never materialized, however. Kodak found few real opportunities to leverage and share its industrial, film-driven, chemical laboratory processes with pharmaceutical product development. Competitive advantage and success in the pharmaceutical industry depended more on basic lab research that involved molecules, proteins and carbohydrates, while Kodak’s labs had deeper, more applied experience with organic chemistry, polymers, and enzymes. The ability to leverage technologies used in films and imaging did not fit well with the skills required for smooth integration and mastery of the pharmaceutical industry (Hammonds, 1989). Kodak eventually placed a major part of its Sterling Drug acquisition into a joint venture with French pharmaceutical giant Sanofi. In July 1994, Kodak sold its portion of the pharmaceutical joint venture to Sanofi (Hammonds, 1994). Kodak’s most recent moves appear more promising. Rather than seeking external diversification opportunities, it has refocused its efforts on building a strong presence in new digital-imaging technologies Now wary of how peripheral businesses can distract the company from its core imaging businesses, Kodak is investing in new products and creating strategic alliances that extend and renew its imaging-based competencies (Tauhert, 1997). Even though advances in digital imaging may eventually displace sales of Kodak film and development paper over the course of this century, the company appears committed to learning and applying new skills and techniques to play a leading role in the emerging multimedia industry. The Learning Organisation By the end of the 1990s, “the learning organization” and the concept of “organizational learning” had become indispensable core ideas for managers, consultants and researchers looking to make ensure continued success for an organisation. For any business or organization, the ability to learn better and faster than its competitors is an essential core competency. A learning organization can be recognized from the outside by its agility in changing how it relates to the external world and how it conducts its internal operations (Marquardt, 2002) It can be recognized from the inside by an ethos in which learning from challenges and mistakes is central (Lytras et al, 2005) While successful results are very important to learning organizations: typically they set very high standards, they recognize that often success is only achieved after initial mistakes, and what people learn from those early mistakes is often the key to eventual success. People must learn from everyone’s mistakes, not just their own, as it is too costly to have people repeating mistakes that have already been made by others (Lytras et al, 2005). A story from IBM Corp. tells of a very worried manager going in to see his boss right after the failure of the big innovation project he had headed. Wasting no time, he said, “I suppose you’re going to fire me.” “Why should I do that,” replied the boss, “when I’ve just invested $6 million in your education?” (Sugarman, 2001) That tale reflects several ways of thinking that are characteristic of a learning organization: important learning comes from mistakes, once they have been properly analyzed; this form of learning is at least as important as formal training; and a company must take good care of the people who develop this knowledge. A learning organization is good at two kinds of learning: good at creating new solutions, and good at sharing knowledge with other members who may need it. So there must be openness to new ideas, wherever they come from, and to sharing knowledge for the good of the business. It becomes important to set aside the embarrassment over sharing one’s mistakes and the reluctance to ask for help or to borrow someone else’s solution. It is not just individual attitudes that have to change, though; it is also the policies and patterns of management behaviour (Lytras et al, 2005). When employees can trust that their bosses will not penalize them for revealing mistakes or for seeking help with a difficult problem, then there will be more organizational learning and better solutions to be shared. The goals for a successful learning-based change initiative are usually two-fold: they focus on improvement in specific, short-term business results through making major improvements in the work processes and interpersonal relationships at the workplace. Because of these goals, “work” includes certain kinds of “learning.” In most cases, a key role in formulating these dual-focus goals, and in negotiating the strategy is played by a “core learning team,” a reflective leadership group of enthusiasts who initiate the change process. This learning-based change process depends upon change bubbling up from the core of the organization, rather than on a program cascading down from the top (Lytras et al, 2005). The top executives of many successful companies are among the change leaders in their programs or units, and this takes place under their initiative, not their boss’s. They are volunteers, not under orders to lead change and, in presenting it to their followers; they seek volunteers who want to become engaged in the initiative (Lytras et al, 2005). As such, the learning-based approach introduces into the workplace ways of thinking and behaving that are significantly different from what has been ingrained by over a hundred years of the old industrial tradition (Marquardt, 2002) The new economy demands a new kind of organization, based on new ways of thinking. For an established company to make such a change is a huge accomplishment: even in just one segment of the whole, but the rewards can be immense. 3. The Marconi Case 3.1 Marconi: a Brief History General Electric Company (GEC) grew rapidly in the 1960s under Arnold Weinstock’s domineering but effective leadership. (The Economist, 1995) Like its American counterpart, General Electric, GEC grew into a conglomerate with interests in such diverse businesses as white goods, defence electronics, telecoms and power systems. While there was no real logic underlying this array of businesses, Weinstock held the company together through a combination of his imposing personality and a strict system of financial controls, and at its peak GEC had sales A£11bn, a cash pile of A£2bn and was the most valuable company in the UK FTSE (Fildes, 1996). Lord Weinstock retired in 1996 and was replaced by George Simpson, a former executive at Rover. Over the course of the next five years, Simpson and his finance director John Mayo masterminded a complete rethinking GEC’s corporate strategy. They decided to focus the company strongly on the fast-growing telecoms equipment industry. Simpson bought two mid-sized US competitors for large sums of money: Reltec for $2.1bn and Fore for $4.5bn, and invested in developing a range of new products to compete with industry leaders Cisco and Nortel (Sheffler, 1999) To pay for this growth, most other businesses, including defence electronics, white goods and power systems were sold off. To reflect this change of strategy, GEC was renamed Marconi. Marconi, as a telecoms-equipment maker, was never an ordinary company. Initially, it was renowned as one of Britain’s modern business success stories, the transformation of sluggish, unfashionable GEC into slick, forward-looking Marconi. 3.2 Problems Start On the back of the dot-com boom, Marconi’s share price peaked in August 2000 at A£12. Then things started to go badly wrong, as the dot-com bubble burst, and demand for new telecoms equipment dried up. Lucent, Cisco and Nortel all announced profit warnings and Marconi’s share price dropped even though it denied that its sales had been hit. Marconi stood as the Teflon of the European equipment space until July 2001 when it cut in half its profit forecast for this year and cut 4,000 jobs (Omatseye, 2001). This took investors by storm and sent its stock into a sudden plummet, as angry investors dumped the stock. Chief Executive George Simpson acknowledged that his company was vulnerable for a takeover, although he said “there are no talks with competitors at the present time.” He noted that with the company’s share price now low, “I know we are vulnerable.” (Omatseye, 2001) Industry speculations hinted that Alcatel, Cisco Systems Inc., Nortel Networks and Lucent Technologies Inc. were eyeing the company (Druce, May 2002). In addition, two U.S. class-action law firms filed lawsuits on behalf of Marconi’s investors in the District Court for the Western District of Pennsylvania for “materially false and misleading” statements about the company’s growth prospects. Marconi also faced trouble with its unions. “Our members are angry that their jobs have been put in jeopardy by a failed management strategy,” said Roger Lyons, general secretary of the Manufacturing Science Finance union. (Omatseye, 2001) However, in the build up to the 2001 profit warning, even as they could see Marconi was plunging into the abyss, its bosses kept quiet. They paid the price for this at the annual general meeting at London’s Queen Elizabeth Conference Centre in July, where some shareholders clearly had difficulty believing they were getting the full story from the podium, where the company’s directors stood (Druce, September 2002). It now emerged that the shareholders were indeed left in the dark; but they were not the only ones, as some of the most important members of the board of the company claimed that they had not been told the full details, and that the chairman, Sir Roger Hurn, and the chief executive, by then Lord Simpson, had claimed that the company was only in a temporary blip (Omatseye, 2001). With telecoms companies looking weaker by the day, it was hard to see where Marconi’s optimism came from, but right up to and through the acrimonious annual general meeting, Simpson and Hurn insisted they believed the world would improve, and soon. They also refused to countenance writing down the value of Marconi’s acquisitions in America, despite the fact that its American peers had all written down their acquisitions and the value of telecoms companies had plummeted (Druce, May 2002). Even the A£1 billion of excess stock Marconi had collected was deemed to be worth as much as ever. “Our view is that we will consume that excess stock as we go through this year,” Simpson told a sceptical shareholder at the annual meeting. When the shareholder asked what would happen if the telecoms market was to take another dive, Simpson replied: “What I can say is we have taken fast and draconian action. We should be able to sustain any reasonable development in sales levels.” (Druce, May 2002) Shareholders at the annual meeting were openly sceptical and up on the podium Marconi’s directors looked distinctly uncomfortable. There were signs, too, that the relationship between Hurn and Simpson had started to come unstuck. According to at least two sources, Hurn discovered soon after the July profits warning that big institutional shareholders were not placated by the firing of Mayo, that they believed Marconi’s fall from grace required more radical action than simply ditching the finance director, and that Simpson knew little about telecoms (The Economist, 2001) According to these sources, Hurn raised the issue with Simpson, suggesting that perhaps he should depart before the calls became louder. Simpson responded by seeking the backing of the rest of the board. He received it, but the once close relationship between the two men was damaged, and this may have contributed to both men being fired at the Monday meeting, as the angry directors took their revenge (The Economist, 2001). Immediately following the meeting, the revelations of the losses made meant that the company, loaded down by huge debts from its acquisitions, was struggling to remain afloat. Those close to GEC in its old guise were outraged at the destruction that has been wrought. Roy Gardner, the Centrica chief executive, was a former GEC board member: “What happened at Marconi could not have happened under the old GEC management,” he said. “Either they changed the control environment or they ignored what they were told.” (Omatseye, 2001) Derek Bonham, the former Hanson executive who joined the board in April 2001, took over as chairman, with the greatest reluctance because, as chairman of Cadbury and deputy chairman of Gallaher, the tobacco company, he had plenty to occupy his time, and knew that the problems with Marconi were likely to get worse (The Economist, 2001). Indeed, it was reported that, after the company’s first profits warning in July, he was asked by Hurn, then chairman, if he would take on the role, and declined (Druce, May 2002). However, by the time of the general meeting, Bonham knew he would have to rethink, and over the weekend he discussed the prospect with his wife. The information handed out to non-executive directors ahead of the meeting showed that Hurn and Simpson had been hopelessly optimistic in their July estimates of how the company would fare. Its debts had spiralled, its losses had climbed to A£227m in the three months to June 30, the first quarter of Marconi’s financial year, trading remained dire and another 2,000 jobs would have to go (Omatseye, 2001). Bonham could not see how Simpson and Hurn could avoid joining the casualty list, and so agreed to take on the role. Whilst Simpson and Hurn did not put up a fight to stay on the board, it would be wrong to suggest their departure was anywhere near amicable. Thousands of Marconi workers, and thousands more former Marconi workers, felt badly let down by their management team, and the disenchantment extended right up to the boardroom (The Economist, 2001). If Hurn and Simpson had hoped to salvage their reputations by staying on after the July profits warning and making John Mayo, the finance director fired at the time of the profit warning, a scapegoat, the ploy backfired badly. Shortly after stepping down, Hurn made it known that he will not be seeking a pay-off, and Bonham made it plain he expected Simpson to agree to similar terms. However, whilst Simpson and Hurn could retire to lick their wounds, and avoid the mess they created, the remains of the Marconi management team was forced to try and salvage what remained of the firm from bankruptcy, and Michael Parton, head of the Communications Networks Division, was moved up to the chief executive’s office. Unlike Simpson, whose background was in engineering, Parton was well versed in Marconi’s core businesses. However, until the crisis, few analysts had thought him chief-executive material, with Mayo due to take over from Simpson before the company started falling apart (Druce, May 2002). Indeed, as Bonham expected, the problems were far from over, as Marconi’s banks were shocked by the three month trading statement, and by the news that debts had risen by more than A£1 billion since the year end to reach A£4.4billion in August (Druce, Sept 2002). Marconi claimed it believed that its debts had peaked and would now start to decline, but the banks worried that if the company was proved wrong there would ne little they could do to stop more of their money being pumped into the ailing group. In May, Mayo had signed up the banks to a new 3 billion Euro banking facility at a low interest rate, and with virtually no covenants: the restrictions that allow banks to call back their money if a company starts to fail. (Druce, Sept 2002) The single real restriction was a “material adverse change” clause, which most banks say they would not invoke except in exceptional circumstances. However, at the time at least one of the fourteen banks in the syndicate backing Marconi had investigated the possibility. Without the traditional banking covenants to restrict it, Marconi managed to avoid a damaging liquidity crisis, and in theory, had it required, it could have drawn another A£2 billion from its banks. In reality, had it attempted to use this as a solution, it would have likely sent the banks to their lawyers to find ways of avoiding paying up (Druce, Sept 2002). However, the new Marconi board put together a recovery package, which in theory would result in no need for further cash. It agreed to sell its medical systems business to Philips, bringing in A£780 million, and put several other non telecoms businesses up for sale, including its half share in Hotpoint, and its petrol-pump assembly business: both remnants from Marconi’s old guise as the General Electric Company. The businesses earmarked for sale had revenues of more than A£1billion a year and whilst some, such as the white goods joint venture, were in far from sought-after

Corporate Governance Enron Essay

Department of Economics

VALUE CREATION AND THE ROLE OF CORPORATE GOVERNANCE

Abstract

Corporate Governance is a subject of many professional and academic debates. Since there are many different research and contexts associated with corporate governance problem, then, this topic has continued to be an interesting topic under scrutiny. However, is has been observed that the relationship between corporate governance and value creation of corporation remains as an untapped area with enough consideration. This paper tends to investigate this linkage and using Enron case as critical analysis.

TABLE OF CONTENTS

1. Introduction………………………………………………………………………5

2. Literature Review………………………………………………………………..6

3. Corporate governance and performance of the company ………………………8

3.1. Definition and explanation of key concepts ……………………………………8

3.1.1. The concept of corporate governance……………………………………..8

3.2.2. The concept of value creation……………………………………………12

3.2.2.1. Definition of value creation…………………………………12

3.2.2.2. The importance of value creation……………………………13

3.2.2.3. Measuring Value-creation……………………………………15

3.2. The impact of corporate governance in the Value Creation……………………..17

4. The role of finance in creating value …………………………………………..21

4.1. The principles of management by the financial value………………………….21

4.1.1. The principle of double market………………………………………21

4.1.2. The principle of identifying financial levers…………………………22

4.1.3. The principle of internal steering…………………………………….22

4.2. The mechanisms and the extent of creating value………………………………23

4.2.1. The economic indicators……………………………………………..23

4.2.2. The indicators such as accounting……………………………………24

4.2.3. The nature of stock market indicators………………………………..25

4.3. The limits of management by the financial value ………………………………26
4.3.1. Scope limited and performance standards unrealistic………………..26

4.3.2. Transfer of risk to the employee shareholder…………………………27

4.3.3. Focus on short-term and limits the cost of capital……………………27

5. Critical approach to corporate governance: the case of Enron……………………29

5.1. Introduction of the Enron affair………………………………………29

5.2. Enron’s scandal………………………………………………………32

The consequences of this scandal…………………………………….34

The lesson from Enron Case…………………………………………36

6. Conclusion………………………………………………………………………37

7. Further study recommendation……………………………………………….38

References…………………………………………………………………………39

List of Abbreviations

NGO

Non- Governmental Organization

US

United State

CEO

Chief Executive Officer

BOD

Board of Directors

COO

Chief Operating Officer

CFO

Chief Financial Officer

CRO

Chief Risk Officer

CFROI

Cash Flow Return on Investment

EVA

Economic Value Added

RCF

Residual Cash Flow

DCF

Discounted Cash Flow

CVA

Cash Value Added

RAN

The Rainforest Action Network

MFV

Management by the Financial Value

TSR

Total Shareholder Return

MVA

Market Value Added

NPV

Net Present Value

EPS

Earnings per Share

ROE

Return on Equity

EROR

Economic Rate of Return

PBR

Price to Book Ratio

1.Introduction

The successive industrial revolutions of the late eighteenth and nineteenth century were a major factor for the development of Western capitalism and gave gradually traits that characterize it today. In this movement, the company as a structure that brings together human beings who are organized to act on nature to obtain useful results and thus create value has always been at the heart of the capitalist system.
However, in recent decades, many changes have affected the financial-market capitalism and gave new prominence to creating value for shareholders of the company. This has resulted in the emergence of a form of management oriented to advance the financial value and mobilize employees to that goal. This focus on value creation reflects a desire to meet the requirements of the shareholder because it has become in the current financial world a king increasingly adulated and increasingly capricious. Undoubtedly, this logic has largely influenced the conduct of the strategy of companies that demonstrate ingenuity to cope with competition and remain competitive.
However, it has undergone profound questioned at a number of scandals that have marked with an indelible history of finance and have been accompanied by strengthening institutional mechanisms for regulation of businesses and financial markets.

In such a context of questioning, suspicion and doubt in respect of managerial practices, questions about the role of governance and firm’s value creation – does it not absolute importance to apprehend the changes that occurring within the company? The aim of this paper is to answer this question.

The structure of the paper is organized as follows. Section 1 provides a background of what has been done in the literature in the effort to capture relationship between corporate governance and value creation. Section 2 introduces the key concepts such as corporate governance and value creation. Section 3 illustrates the role of finance in creating value in firms. Empirical approach are presented and discussed in section 4, with special stress on the managerial behaviour in Enron’s Company. Section 5 will conclude and propose further areas of research.

2. Literature review

On the topic of relationship between corporate governance and value creation, there have been various researches and conclusions.

Before examining about the relationship between corporate governance and value creation, many early studies has explored the linkage between Ownership and Value Creation as a beginning. Talking about owners who have been passionate about their ideas and visions to create the best value for their company, study named Ownership and Value creation of Carlsson.R.H (2001) gave a valuable historical review and illustration with case how active ownership has played an important role in company development. Through this book, we can see that ownership makes significant differences in corporate governance, it fulfils an indispensable role in the market and its quality made firm the best value.

Later, in his research Corporate Governance and Value Creation, Jean-Paul Page (2005) has referred to the financial approach to corporate governance in his analysis. He has explored the connection between the foundation of power and decision making to create the large value for firms. In order to focus on an in-depth analysis of the links between value creation and governance, his research started with the assumption that regulation and laws exist to constrain corporate activities which could harm society as well as the economy, then corporate agreement is expected. Through a research, he tried to find the answers of who should hold the ultimate power which companies can create maximum value or how this power should be used. To do this, first, he discussed the delegation of shareholder power and a variety of standard to evaluate the performance of managers. Then, he presented a framework by which securities analysts can evaluate corporate governance system. As the result of his study, he strongly believed that directors of companies have the necessary judgment to discharge their value creation responsibility. Jean-Paul Page result is developed further in detail by Monks (2002) when he applied this theory into Volkswagen Company.

After that, Huse (2007) successfully combines the behavioural of director’s work and the value creation which contributes to both the practitioner and the academic debate. Huse’s book is based on two key ideas: the main task of a broad of director is to create value for company and looking inside board to understand the value creation process needs. His book provided a good discussion about governance effectiveness and value creation by an exploration of behavioural perspectives on governance and how various types of related factors influence governance as well as value creation.

In addition, in his recent research named The Value Broad: Corporate governance and organizational behaviour in 2008, he aimed to go further and explore actual behaviour in creating value from entrepreneurial management perception throughout various European countries such as Netherlands, Italy.

Beside, The differentiated Network: Organizing Multinational Corporation for value creation of Nohria.N and Ghoshal.S (1997) was successful to present the globally distributed capabilities of multinational corporations and organize these corporations for value creation. This study is built to develop these ideas of both authors above.

Besides theoretical research and studies, many case studies were analysed to examine the implication of all theories in the real economic market. Case study in Finances: Managing for Corporate Value Creation of Bruner.R.F (1990) provided numerous financial analyses of the world famous and successful corporations such as Walt Disney, Atlantic Southeast Airlines, Morgan Stanley Group INC, Merit Marine Corporation…However, this analysis was published in 1990, it can not update with changes in the economy as well as financial scandals have been happened through recent years.

Based on all these suggestions, an analysis of value creation and the role of corporate governance is an interesting paper. And Enron’s scandal in 2001 is an updated illustration.

3. Corporate governance and performance of the company

3.1. Definition and explanation of key concepts
3.1.1. The concept of corporate governance

We can consider that the practices of corporate governance have ancient origins insofar as they are inseparable from the very concept of enterprise. Indeed, corporate governance problem was already in the eighteenth century. Adam Smith posed as soon as 1776, in the Wealth of Nations, the problem of separation of interests between managers and owners in companies per share. This question will take a new turn with the emergence in 1807 in France and then England with the Company Act and a little later the United States, the limited liability company.
In general, governance refers to the governing relations between the leaders of a company – more broadly, an organization – and the parties concerned by the fate of the so-called organization, mainly those who hold “legitimate rights “- namely shareholders. Even if made generally and in order to illuminate our analysis, such a definition requires clarification.
First, governance is focused on a category of actors of any organization: the leaders of this organization, category sometimes reduced to a person, most often represented by a small group strongly hierarchical around the leader, sometimes expressed by semi-hierarchical and ill-defined contours. Whatever the difficulties of defining exactly and narrow, this category of actors always pay attention on a system of governance. Corporate governance can be seen as vast field and its works as regulatory body that includes (OECD, 2004):

Chief Executive Officer (CEO)

Board of Directors (BOD)

Management of Organization

Shareholders

Stakeholders (Suppliers, Employees, Creditors, Clients and Social Communities)

Then, the issue of governance is also the role and control of corporate officers in legal persons. The leaders of an organization finalized – commercial, public … Speak and act on behalf of this organization: a title that they can buy, sells, hire, dismiss and so on. They have before it the financial, material, human, which can be considerable even excessive. Issues relating to their appointment as corporate officers, the conditions for exercising their mandates are, therefore, legitimate and make corporate governance a key point of management systems of the latter.

Finally, the governance system includes various components that can be, simplifying, grouped into three sets of components: structures, procedures and behaviour.

The structures involved in the governance system are varied. Some are specific to the organization concerned: general meeting, board of directors, ad hoc committees. Others are external and intervene on the basis of contractual missions (auditors, rating agencies) or as part of missions of general interest (regulatory authorities).

The procedures are also very varied and more or less diversified in codes or codes imposed on the actors involved (chart of accounts, commercial code …). They may involve both methods of collection and dissemination of information on the functioning of the entities concerned that ways and means to carry out such an operation such as changing the parameters of the structure or listing on the financial market.

The behaviour complements the first two components by providing a dimension without which they would remain for the most formal. Such behaviour are those agents – individuals is not the legal fiction made up by legal persons – involved in the institutional and responsible to implement it and animate it. Therefore, their “best practices”, their ethics or, conversely, their lack of scruples and their departures were a major part in the effectiveness of governance systems like any human system.

In their brilliant literature review of corporate governance topic, Shleifer and Vishny (1997) offered a definition of corporate governance: Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (p. 737).

This notion of governance seems rather simplistic. Because it is limited to the individual control worked out by shareholders and ignores the rights of all the other stakeholders in the company such as creditors, suppliers, customers, employees, and finally, the State and society in general. Indeed, the shareholder affects some form of power and imposes limits in varying degrees that affect value creation. Besides, this definition of governance fails to take into account the implicit rules and standard such as legislation, regulations and contracts. All these things actually have an important influence on final decision.

In his book, Jean- Paul also gave the broad definition of corporate governance as follows:

Corporate governance consists of the legal, contractual, and implicit frameworks that define the exercise of power within a company, that influence decision making, that allow the stakeholders to assume their responsibilities, and that ensure that their rights and privileges are respected. (pp.2)

To be successful in this notion, corporations must acquire the best resources such as: finance, material and human at the best if they want to create value or wealth.

Good corporate governance is assessed in a book named Corporate Governance: Responsibilities, Risk and Remuneration, Keasey. K and Wright. M (1997) He defined a good corporate governance is as concerned with correctly motivating managerial behaviour towards improving the business, as directly controlling the behaviour of managers. They also analysed executive remuneration is one mean of motivating good behaviour.

Illustrating the standard corporate governance frame work, both authors above indicated that the key elements concern the enhancement of corporate governance is via supervisors of management performance and ensuring the accountability of management to shareholder and other stakeholders. They displayed it as a figure below:

Supervision of directors

Analysis of a frame work of corporate governance was also carried by Hart (1995). He discussed the need for accountability and supervisor of director come up because there is a divorce between ownership and control power in large firms. According Hart’s study, supervision may take various forms ranging form system where shareholders are outsiders with little direct incentive to monitor management.

Moreover, Whittington (1993) argued that is has to be noted that the accountability and supervision aspects take place within a wider regulatory framework which regulates relationship with external third party contractors.

In 2005, McGee et.al described a summarized version of a company and its different environments in which it operates as a picture below:

3.1.2. The concept of value creation
3.1.2.1. Definition of Value Creation

As for value creation, it is an ambiguous concept because of the multiplicity of managerial practices associated with it: exchange value, book value or economic value partnership, value for the customer, and so on.

In all case, the most important objective of every firm is to maximize resource allocation, to produce as much economic value as much as possible and to look up social well-being. Offering the best product and services at reasonable price is the way which firms can do to achieve these objective above.

Jean-Paul Page (2005) examined economic value as creating wealth. Because the firm’s wealth is measured by the value of their product on the market, then, creating value for firm mean company will observe its prices and value increase as demand for its services and goods rises.

Concisely, creating economic value means increasing in firm’s value, increasing in share price and creating wealth.

As a result, corporate governance have to focus on decision that tend to maximize share price and then on the creation of economic value. This way will translate the wealth creation objective of firms into tangible results.

3.1.2.2. The importance of value creation

In his academic journal, Favaro.Khas proved that if firm puts their value creation as a first strategy, it will help a corporation growth in the greatest rate.

First of all, by understanding how, why, where the value is created within your company; which is the market where your company perform best; identifying which of your company’s activity and asset is distinctive enough to be a profitable growth will tell your company where and how to grow. The best example of this case, we have to mention about Coca -cola. Since the early of 1980s, Coca-cola’s leader discovered the value creation in their mix businesses and in the entire beverage system; then, this company have taken a major growth opportunity in their core business.

Secondly, there are two advantages which putting value creation first can gives firms are: capital and talent. When firm set value creation first, they will never suffer from a capital shortage. Favaro gave explanation that, these companies which put value creation first will find sufficient capital for their investment needs and can attract a large capital from the market, and then they never miss any investment opportunities.

In addition, knowing all important targets, these companies also understand how important the high standard and good qualification managers are. Therefore, over time, these firms will build a team of manager with better capabilities and standards. This will give company more managerial talent and help these companies achieve higher level of profitable and also sustainable growth than their competitors.

Value creation enhances company’s ability to grow up which requires perseverance Discipline and leadership skills. Through his experience, Favaro suggests that:

By product, channel, customer, market and technology; skilled managers who always put value creation first will understand how or why value is created or destroyed. Then, they will know whatever cut will be the best reveal the truly capabilities or asset which their company have to do to get profitable and growth.

Promoting, celebrating and rewarding managers who see growth is an outcome of their focus on value creation.

Briefly, if a company put value creation first in the right way, their managers can identify how and where to grow, they will use capital better than others and build up more talents. Consequently, value creation will offer you a vast advantage to achieve profitable and long-term growth.

It should be noted that these multiple approaches are experiencing varying degrees of success. Thus, while some of them are rather a fashion effect, others seem more rooted in the reality of management. This is particularly the case in the field of strategy with the general themes related to the competitive advantage that determines the value that a company can create for its customers and in the field of finance with the concept of maximizing the shareholder value.

However, there are two themes refer to distinct managerial logic. In schematising, one can oppose a logic of financial reform dominated the creation of financial value and logic of integration that connects the various aspects of value creation.

The financial approach emphasizes the idea that any asset is comparable, at least conceptually, a financial asset whose correct measure is the present value of expected flows of that asset, given the risk that it is linked. Thus, by analogy with financial assets, it is possible to buy or sell at any time comparable assets or reinvest the funds on other opportunities. The option is part of choice and is a factor of flexibility.
The logic of integration recognizes the importance of value creation but the analysis as the result of a synthesis of different components of value, whether organizational aspects, competitive or institutional. It puts forward concepts such as basic skills, know-how of cooperation and coordination, competitive advantage. It requires a broader view of performance and the development of a scoreboard, including non-financial aspects.

This concept of value creation is currently experiencing a revival and for several reasons. This renewal first undoubtedly result of the transformation of financial capitalism and its origin movements takeover carried out on companies that exploitation not effectively their asset base for shareholders. These practices have provided external visibility to “market discipline” that has prompted leaders to do more attention to creating value and bring back the shareholder at the centre of the strategy.

In addition, development of globalization and the rise of new technologies of information and communication technologies have accelerated the process of internationalization of enterprises and networking complex and globalize. The result is a financial reform of the strategy based on the refocusing on the principal market and the pursuit of critical size. That is why the purchase of shares and options markets external growth is systematically privileged at the expense of endogenous development of the company. But for institutional investors, who control more companies using their power, the ability of business to create value is an essential criterion of assessment. Finally, another external factor that has boosted the value creation is the gradual disappearance of state monopolies especially in the case of France. The purpose of the public monopoly system based on the existence of cross-shareholdings is to ensure a stable partnership. The financial globalization has gradually reduced the interest of a national shareholding making less essential closures capital that provides few resources.

3.1.2.3. Measuring Value-creation:

When evaluating value creation, there are three main measurements are: Cash Flow Return on Investment (CFROI), Economic Value Added (EVA), and Residual Cash Flow (RCF).

G. Bennett Stewart III (1991). The Quest for Value. HarperCollins discussed Economic Value Added (EVA) as the heart and soul of Value planning. He described EVA is the one measure which properly accounts for all the complex trade-offs involved in creating value. EVA computed by taking the spread between the rate of return on capital r and the cost of capital c* and then multiplying by the economic book value of the capital committed to the business:

EVA = (r-c*) x Capital

EVA = (rate of return – cost of capital) x capital

EVA will increase when:

The rate of return earned on the existing base of capital improves; that is, more operating profits are generated without tying up more funds in the business.

Additional capital is invested in projects that return more the cost of obtaining the new capital

Capital is liquidated from, or further investment is curtailed in, substandard operations when inadequate return being earned.

These are the only way in which value can be created, and EVA captures them all. One calculated, EVA as seen as an indicator of how much value was created. If EVA is positive, value was added. In contrast, if EVA was negative, value was lost. It all depends on the governance of a corporation.

The second measurement is Cash Flow Return on Investment (CFROI) was marked by Bartley J. Madden (1999). CFROI valuation: a total system approach to valuing the firm. He has shown that CFROI is rooted in discounted cash flows (DCF): more cash is preferred to less, cash has a time value and less uncertainty is better. Besides, applying DCF, the CFROI illuminate variables ignored in many valuation models. The CFROI valuation model incorporates managerial skill and competition in the form of a competitive life-cycle framework for analyzing firms past performance and forecasting future performance. In equation, we have:

CFROI = Inflation Adjusted Cash Flow

Inflation adjusted Investment

Under CFROI, economic is measured and calculated by:

Classifying cash outflow and inflow over the life-cycle of assets

Amending both cash out flow and inflow into unit which suitable to constant purchasing power.

Calculating the CFROI similar to Internal Rate of return.

Rahul Dhumale (2003) with Excess cash flow: a signal for institutional and corporate governance has introduced about Residual Cash Flow (RCF). He defined RCF or Cash Value Added (CVA) is net cash flow minus a charge for cost of capital.

RCF = Adjusted operating Cash Flows – Cost of Capital

In his book, Dhumale pointed out some drawbacks of RCF, but they are just few such as RCF is not a comparable type of measurement between companies and it is sometimes more appropriate for project evaluation rather than company valuation.

3.2. The impact of corporate governance in the Value Creation
There is now a general consensus on the idea that governance plays a crucial role in creating value. The areas on which governance can act to create value are many and varied and there can be no question to consider exhaustively. To discuss about the impact of corporate governance on value creation, a close examination on the impact on its internal operations were carried out by Tan.W.L

Strategic direction in long term. Corporate governance always requires the strict selection of the board of managers which help firm identify exactly what are the targets they want. If the selected managers do not have right attitude who have less strategic long-term initiatives will affect the firm’s strategic direction.

Transparency issues: Corporate governance and transparency issues have a strong connection. The guidelines require the corporate disclosure about the manager’s activities. That is a reason why there is always high demand for an internal audit and an audit committee in all firms. As a result, there is also a spate of management frauds which lure the regulators who responsible to institute or peer into areas the abuse could occur. In case of value creation, the link between the actual results and the intended results would be tenuous, leading to the over passionate auditors to rein in value creation activities.

Beside, I can limit to consider three points: the building of trust, respect the interests of stakeholders, taking into account the social responsibility as others impacts of corporate governance on value creation.

The establishment of confidence
The establishment or restoration of the confidence of shareholders has become a necessary condition for the operation and even for corporate survival. Indeed, a series of scandals recently punctuated the business world. Capitalism has been transformed so that managers often enrich themselves at the expense of shareholders.
In this sense, the adoption of standards and financial laws guaranteeing greater transparency in accounting and management and due diligence of boards in terms of accountability can restore confidence to investors.
Thus, the law Sarbanes – Oxley Act passed by U.S. Congress in July 2002 adopted three principles: accuracy and accessibility to information, managerial accountability and independence of auditors. The law thus increases dramatically transparency modes of governance for ensuring accountability much more detailed to investors.

Similarly, institutional communication online can be a significant means at the service of governance to establish or restore confidence and create the value. It also notes that large companies have all now have a website and compete more and more by the quality of their institutional website. It is today the first reflex of shareholders, journalists, financial analysts and consumers is to visit the website of the company to find information, any information concerning it.

But to create or maintain the confidence of investors, boards of directors are also making efforts to compress wages often very high social leaders. In this sense, during the period of general meetings of shareholders, we note that in recent years of resolutions aimed at compressing the salaries of CEO are more taken. Tackling this element is, however, that address one aspect of the problem of performance pay.
To truly do so, they have a duty to determine the responsibility of the CEO and establish parameters for evaluating the performance of the latter and that of the company and the link between pay and performance. By the way, the emphasis is beginning to be placed on the fee. Similarly, to ensure the long-term interests of shareholders, it provides administrators temporarily transferred shares or units of action delayed. The actions temporarily transferred are actions which can not be sold by administrators after their departure from the board. This eliminates the possibility to take decisions or make recommendations based on their short-term interests.
As the deferred share units, it is not, strictly speaking, actions, but their value is linked to that of an action listed. Again, administrators affect the value of units deferred action when they cease to serve on the board.

Respect the interests of stakeholders
With respect to the interests of stakeholders; we note that social responsibility is one of the newspapers since the financial scandals of recent years. As most of these have resulted in the plummeting value of the securities, attention focuses on the need for greater accountability of the company to shareholders. Agencies such as stock exchanges, securities commissions and the accounting profession have concentrated their efforts on restoring confidence in the financial information system, the integrity of the company and stock markets. We are witnessing a mutation, however, longer-term corporate accountability. The collapse of Enron, globalization, information dissemination and pressing environmental challenges such as climate change transform our conception of the role of business in society. Thus, the corporate law currently in force in most companies give priority to the interests of shareholders, who did not summarize the maximization of profits, and it also protects the abusive practices of leaders.
By the way, the New York Stock Exchange has introduced the Dow Jones focused on sustainability (Dow Jones Sustainability Index), accessible to investors and that follows the performance of companies worldwide fulfilling its criteria. The Dow Jones analyses show that companies listed on the index focuses on sustainability are leaders in terms of performance. In its annual review of the index for 2000, Dow Jones said that the sustainability of interest to investors because it is a business strategy that creates long-term value for shareholders by seizing opportunities and managing risks associated with economic, environmental and social

Taking into account the social responsibility
As far as taking into account the corporate social responsibility, it is certainly a new field but promising. Indeed, the movement of social responsibility which is part of a broader trend towards sustainable development, now pushing companies to play a pioneering role of respect, but also the creation or processing of ethical values.
Concretely, this means that the company has become, in the field of ethics, more attentive to the concerns of its stakeholders, including civil society, including NGOs and the media are the voice.
To understand the link between corporate social responsibility and governance, take the case Home Depot, a North American company. In 1998, the largest retailer of lumber in the world was on the hot seat. The Rainforest Action Network (RAN), an organization dedicated to protecting the environment, accused Home Depot to do business with suppliers whose practices logging of old growth forests destroyed, according to the allegations. Under a highly publicized campaign, RAN described Home Depot’s largest retailer of lumber from forests mature stand of the world, and has organized demonstrations in front of Home Depot stores, the company’s headquarters and at meetings of shareholders.
To avoid tainted his reputation, Home Depot has responded. In the 10 months that followed, the retailer announced a plan to phase out the sale of timber from endangered forests. He created an executive position whose holder is responsible for environmental issues and has the power to cancel the logging contracts with suppliers not environmentally friendly.
Returning to the present, Home Depot now has systems that allow it to trace the origin of each wood product it sells. The company undertakes public not to buy wood products not certified from 10 forest regions vulnerable, and not to accept products made from 40 tree species threatened with extinction. RAN has publicly acknowledged the actions “impressive” taken by Home Depot, and a substantive article published in The Wall Street Journal has presented the company as a model in the art of managing risks arising from requirements imposed by lobbyist’s militants.
One could multiply examples citing the case of Nike and NestlA© who have experienced the same situation in the past. Thus, we see that companies, anxious to heal its reputation, eventually strengthen their value and image of their products in the eyes of the public by acting ethically.

4. The role of finance in creating value

When we look at the financial function within a company, we will find the main activity is accounting such as: payroll administration, processing of payroll, or financial report… According to a survey of The Financial Times journal, there is over 70% of all financial management are spent on the processing of accounting transaction. Risk management, strategic planning, investment analysis and forecasting which called real financial management, therefore, count less then 20% of financial management. In this section first begins by the principles of management by the financial value and then go on to the mechanisms and the extent of creating value. In the last part in this section, I’ll analyst some limitations of management by the financial value.

4.1. The principles of management by the financial value
The management by the financial value follows a number of principles including the principle of dual market, the principle of identifying key financial levers, and the principle of internal steering I will be discussing succession.
4.1.1. The principle of double market

As a first step, we need an overall financial strategy based on the principle of double market. Indeed, the main issue model of creating value is strategic: to establish internal elements of steering the financial value of so-called value based management. According to academic journals, there are 2 definitions of value based management. The first one define value based management is the management approach that ensures corporations are run consistently on value normally maximizing shareholder value. While, another says: Value based Management aims to provide consistency of the corporate mission, strategy, culture, decision process and system, performance management processes with the corporate purpose and values which a corporation wants to achieve Then, the management by the financial value (MFV) appears as the common denominator of the strategic and financial planning, policy acquisition and divestitures, and policy incentives.
Thus, officers and employees will be encouraged to maximize value from mechanisms premiums or bonus related to the enrichment of shareholders. More important than the final result, this step can identify the strengths and weaknesses of various activities of the company. The concept of MFV based on the idea that a company must succeed on both the market for goods and services and on the financial market. This implies an economic strategy aimed at positioning the company products on the market and a financial strategy to maximize shareholder value. Therefore, ignoring one of the two markets will have consequences on other market because the shareholder is the client of the firm on the financial market as the consumer is a client on the market products.

4.1.2. The principle of identifying financial levers
In a second step, it is necessary to identify key strategic levers of value creation. The first task of MFV is to identify levers of value creation to be implemented by the leaders. I can distinguish four: the streamlining of costs to increase productivity, focus on strategic growth opportunities internal and external value-creating, power up the organization and personnel by flying by the cost of capital and finally is the financial optimisation.
However, that among these indicators values, it seems that only the rationalization of costs to increase their productivity had an impact below the refocusing strategies that involve both internal growth than external growth. There is thus a redeployment of internal growth on the business, customers and distribution channels profitable. At the same time, this shift is often supported by external growth strategies aimed at increasing efficiency (divisions, transfers of activities or participation).

4.1.3. The principle of internal steering
In a third step was to implement the pilot by evaluating and incitement. Indeed, the management by the financial value is not limited to strategic manoeuvres. It is also to disseminate “shareholder pressure” within the organization. The steering performance is evaluated by reference to external performance: the market value. Systems of motivation and incentive staff based on indicators of creating shareholder value are put in place a systematic way. The overall financial objective is defined in terms of cost of capital invested. This objective is then distributed in the structure of the organization. The company is divided into profit centres which are centres of responsibility. Each centre is responsible for its performance defined as the excess of profitability in relation to capital invested in the centre.
In addition, a bonus system is in place to lead the accession of each actor to the objective of creating value and managers are accountable on the basis of financial criteria.

4.2. The mechanisms and the extent of creating value
The various models of creating shareholder value are based on the same theoretical framework, the financial microeconomics. They use a common variable; the cost of capital invested which serves as a benchmark for measuring performance. The assumptions are those of conventional financial models based on rationality actors who are maximizations and opportunistic.
The position taken by the theme of value creation in finance has led to the development of a series of indicators that attempt to measure: Total Shareholder Return (TSR), Market Value Added (MVA), Economic Value Added (EVA). This abundance is not without advantage: competition is healthy and should normally allow the best indicator to emerge. More prosaically, some companies take advantage of current uncertainty and lack of standardization of calculations to choose the indicator that best serves their interests, even change the following year.
These indicators may be of three types: economic, accounting and stock market.

4.2.1. The economic indicators
First, the economic indicators have emerged with the realization that profitability is reached, as such a criterion inadequate in terms of value because it does not take into account the concept of risk. Profitability remains clear to compare the cost of capital employed, i.e. the weighted average cost of capital to measure whether the value was created or destroyed.
Thus, the net present value (NPV) reflects the creation or destruction of value generated by the allocation of resources. A value creation means that investors anticipate the existence of some pension over a certain period of present value allows the economic asset of the company contends that its accounting amount. Like the choice of resource allocation, it is necessary for selecting a source of funding refuse to use the cost accounting, but determining the value of under funding issued and deduct the rate of return required. You pass this cost because of explicit or cost accounting to the financial cost: the rate of return required for this class of securities. Minimize the cost of a source of funding is therefore to minimize its financial cost.

Similarly, the Economic Value Added (EVA) criterion also called economic profit measure the enrichment of the company on an exercise and takes into account not only the cost of debt but also the cost of equity. The innovation of the approach of EVA is to reach a level of achievement from which the value is created because it is calculated after payment of creditors and shareholders on the funds they have made to the business. The economic profit measure primarily what was the economic rate of return in excess of the weighted average cost of capital. This difference is then multiplied by the amount of the asset’s economic early period for value creation for the period, either:
Profit economic Assets economic * = (Re – k)

Where Re is the rate of economic return after tax

Accounting k weighted average cost of capital.
Thus, a company that provides early years of an economic asset with a book value of 100, reporting an economic rate of return (after tax) by 12% while the weighted average cost of capital is only 10% will have earned 2% more than the rate required. Of the 100 funds, it will have created value for 2 on the year.

4.2.2. The indicators such as accounting
Then, on indicators such as accounting, note that until mid 1980, the company communicated mainly on net income or earnings per share, leading parameter of accounting but also highly subject to manipulation. But a second generation of indicators accounting became apparent when the reasoning is past in terms of profitability, i.e. efficiency, which reports the results generated capital mobilized to achieve them.
In this sense, we can consider three indicators of value creation: the earnings per share, accounting rate of return and equity per share.
Earnings per share (EPS) remain the favourite of many financial businesses: despite its limitations, this is the criterion most often used today because of the direct link that unites the value of the action the multiple of earnings (PER). The use of earnings per share, however, is based on three misconceptions: that the earnings per share takes into account the cost of capital and therefore the risk, believing that the accounting data affect the value of the company, believing that any financial decision, which tends to grow earnings per share increased value.
In fact, the criterion of accounting can be a useful indicator of value creation only if three conditions are met: the risk of economic asset must be the same from one year to another, or before and after surgery (Fusion, increased capital investment, …); the growth rate of results must be the same before and after a given transaction, the financial structure of the company must be the same from one year to another Or before and after a given operation.
If these three conditions are met, then we can assimilate EPS growth and value creation. If one of them at least is not met, it is absolutely not possible to compare the BPA and say that the growth reflects a value creation and destruction of a decline value.
The accounting rate of return for their cut the rate of return on equity (ROE), the economic rate of return (EROR) and Cash Flow Return on Investment (CFROI), which in its simplified version reported surplus of ‘farm to the economic asset taken on a gross basis.
Only the profitability required by the financial system should be used as the minimum required. Unfortunately, we find that investors and business leaders continue to analyze the impact of their decisions on accounting criteria that we have just seen, even though they have a distant relationship with value creation.
Shareholders’ equity per share gives them an image of the heritage of shareholder and could therefore believe that there is a ratio between the value of the share and shareholders’ equity (Price to Book Ratio, PBR).
Note however that if the equity accounting is properly evaluated, the PBR is less than 1 if the expected return on equity is lower than the profitability required by shareholders and more than 1 if the return is higher than expected profitability required.
It must be noted that the use of accounting criteria, which in itself is not unhealthy, should not lead to believe that artificially increasing the criterion, it creates value or that there is a constant and automatic report between the improvement of these criteria and value creation.

4.2.3. The nature of stock market indicators
Finally, indicators such as stock market: Market Value Added (MVA) and the Total Shareholder Return (TSR) were strongly influenced by market conditions.
For the listed company, the creation of shareholder value (MVA) is:

Creation of market value = market capitalization + value of net debt – amount

of the asset economy.

However, in most cases, no information is the creation of shareholder value is approximated by the difference between market capitalization and the amount of equity accounting (PBR).
As for the Total Shareholder Return (TSR), it is calculated as the rate of return on shareholder who bought the action at the beginning of the period, affected dividends that the more you suppose reinvested in new shares, and that values at the end of the period its portfolio based on the last course of action. It is in reality a rate of return which the actuarial calculation must be on a fairly long period (5 to 10 years) in order to smooth the impact of erratic stock market fluctuations.
However, and this is their main weakness, these two indicators may show a destruction of value even though the company has reached on its economic asset profitability than the cost of capital. It is for this reason that the former regulatory authority markets (COB) had advocated the establishment of a clear distinction between economic performance indicators and indicators of market value.

4.3. The limits of management by financial value

Despite its many advantages and its increasing role in the managerial system management by the financial value has limits which sometimes call into question its utilisation. Thus, the abandonment of EVA by the group ATT shows that the MVF is a strategic exercise difficult. Needs explaining and references to support your point.

Indeed, in 1992, the firm adopted the EVA and sets up an incentive scheme involving about 1100000 employees. Two years later, two new non-financial measures appear: the added value for customers and value added for staff. In 1997, this system is abandoned in favour of traditional accounting ratios. The measure was too complex to understand for most employees, despite a major training effort.
The limits on financial levers are manifold.

4.3.1. Scope limited and performance standards unrealistic
First, their scope is limited and performance standards often unrealistic. That is why we approach the MVF is not well suited to the banking and financial activities as the amount of capital invested is determined in part by prudential regulation. Similarly, in start-ups (start-up), the flow of revenue estimates are too uncertain to be usable. Finally, the recovery of high technology is not based on optimizing capital employed, but rather on the reaction time or ability to impose a technological innovation, or on the ability to manage options for future development, particularly in information technology.
Moreover, the goals of return on equity of 15% announced by some leaders of large companies under pressure from their institutional shareholders (including pension funds) can not always be achieved and, more importantly, maintained over time.

4.3.2. Transfer of risk to the employee shareholder
Then, the risk borne by the shareholder is often transferred to the employee. The objective of maximizing shareholder value implies a shift in the share of value added for the benefit of shareholders and a reduction in the residual risk they bear. The importance of this move depends on the relative strength between shareholders, directors and employees. The constraints of profitability internalized by managers can lead to first reduce labour costs and employment to reduce the risk borne by the shareholder.
It is within this context that has developed adjustments increasingly rapid employment, a research increased flexibility and variable pay practices.

4.3.3. Focus on short-term and limits the cost of capital
The MVF often focuses on the short term. However, steering the company based solely on maximizing value creation for shareholders could hinder growth and innovation and enhance the short term at the expense of long-term strategic vision. By the way, many studies show that many companies have jointly valued human capital and financial capital. The priority given to improving the return on invested capital has led many companies to focus on profitable lines of business. A company that emerges from its existing rate of return on capital employed high may be tempted to reduce its growth and its lack of investment projects with at least comparable profitability.
Furthermore, the problem of optimization and manipulation indicators of value creation arose very frequently. Indeed, in a group, the issue of leverage of debt and cost of capital is generally handled at headquarters level and is the financial strategy.

However, when the salaries of managers (particularly in the form of bonuses) are linked in part to indicators of value creation, risks of handling these indicators appear as shown by the Enron affair studied latter. These manipulations can involve two elements of the rate of return: apparent increase in the result and artificial reduction of capital employed. The spin or deconsolidation of the accounts of operating assets, securitization of trade receivables, financing specific structures are not consolidated practices that have seen, been widely reported.
Finally, there are limits related to the cost of capital. The cost of capital is a fundamental measure for value creation, but its determination is an exercise that has many limitations. The estimate of this variable has a decisive influence on the measure. However, it is subject to numerous challenges. An underestimation of the cost of capital may result in insufficiently profitable investment and a waste of financial resources. The overstatement may deprive the company opportunities for growth. Moreover, the systematic use of cost of capital leads companies to adjust their internal performance on indicators external volatile determined on financial markets, whose time horizon is usually shorter than that of economic activities.

5. Critical approach to corporate governance: the case of Enron

The scope of governance has undergone in recent years a series of scandals which not only shook the world of finance but also employees and investors who are ultimately the big losers. An ineffective governance, questionable accounting methods or falsification of accounts, payment is excessive and greed of executives have undermined investor confidence and some even wonder if the capitalist system would not be disturbed. To better reflect the crisis of governance, I’ll analyze the case of Enron.
5.1. Introduction of the Enron affair
The Texas Company Enron was created the energy sector and has specialized in brokering activity by linking suppliers and seekers. It’s developed over several sectors of energy and has grown from a regional dimension to a national scale, then internationally. In 1999, Enron pointing with more than 100 billion dollars turnover stated the seventh largest U.S. companies and became a player in the sector. Beyond its explosive growth, its economic model based on the control of futures markets and derivatives made it a case of success story given as an example the firms of “old economy”.

According to Enron annual reports, we can summarize Enron’s activities from 1985 until 2001 as in table below:

1985- 1989

1990 -1996

1997-1999

1999-onwards

Industrial activity of gas production and transport,

and electricity production

and transmission

Start of business diversification into

energy distribution, raw materials

trading and services

Diversification of businesses into trading in a large number of commodities (gas, electricity, coal, wood, paper, resins, plastics, metals, etc.). Enron launched its electricity

trading businesses in June 1994 and

was to become the largest operator in

this market in the United States

before extending its businesses to

other markets:

Enlargement of its business portfolio to include

other sectors:

November 1999: creation of

Enron Online, the first global raw materials trading site. Enron was one of the

leaders in the development of

electronic marketplaces

– Construction and management of

energy production plants: Dabhol in

1996 in India (a highly controversial

project)

Continuation and acceleration of the

international strategy of diversification into

trading (wholesale energy, retail energy and

broadband

Development of the sale of speculative financial

Instruments

Enlargement of its business portfolio to include

other sectors:

– Acquisitions of telecom networks (sale of

bandwidth capacities to customers such as

Internet Service Provider) and building of an 18, 000 mile fiber-optic network to deliver video

– Water distribution Intensification of the globalisation process

through a large number of direct investments in

foreign countries:

– Acquisition in 1997 of the Sutton Bridge

gas-fired power station in the UK

– Setting up of generation sites in Spain in

1998 to get around barriers to entry

– Development of joint ventures and

subsidiaries in Norway, Italy, Germany,

Belgium, Nigeria, United Arab Emirates and

Japan

Enron becomes one of the main players in credit

risks with the launch of instruments for

managing risks in energy markets and other raw

materials markets (hedging of climate risk,

enabling electrical companies to protect

themselves against climatic variations)

Global online trading activity

November 1999: creation of

Enron Online, the first global raw materials trading site. Enron was one of the

leaders in the development of

electronic market places

The system handles

transactions in more than 30

countries

Source: Based on information and data from Enron annual reports,

Datamonitor (2004) and business press

5.2. Enron’s scandal

The first crackles occur in October 2001 with a warning about results (profit warning) a sharp decline compared to the forecasts and the first appearance of cash flow difficulties. The events were then rushed: falling prices, investors distrust, degradation notations, on suspicion of handling … and the bankrupt group. Different surveys have highlighted key aspects of this major disaster on the order of 100 billion dollars of liabilities which may be only partially filled.
First, the turnover had been artificially inflated by taking as a basis contracts concluded or being negotiated, as is usual for a broker, the only commissions received or acquired.
Then, the group had created several thousand companies controlled by the company, either in their personal capacity by executives. This proliferation was similar to several objectives, in addition to prevent a global vision of the group to any observer uninitiated: to move assets between components to create fictitious capital gains, debts by transferring a society to another, relocate profits to evade taxes.
Accordingly, it appeared that the situation presented by the heritage assessment was wrong: the assets were largely overvalued, even fictitious, and in contrast, the liability was undervalued, even hidden.
However, these accounts had been audited and certified by Anderson, world-renowned firm. The investigation has revealed that not only the experts’ Anderson had covered the various accounting manipulations, but had contributed to the rise in providing their expertise in the form of advice.
In addition, the community of financial analysts and institutions that employ them have been questioned for less than their blindness because of conflicts of interest in which they were implicated.

The Executive Vice President is crucial responsibility for Enron’s bankrupt

Richard Alan Causey was Enron’s Executive Vice President and also Enron’s Chief Accounting Officer until 2002 when he was fired from Enron as a result of an investigation by the U.S Securities and Exchange Commission. According to Securities and Exchange Commission report, not only Richard Alan Causey, it is also together with other Enron executives and senior managers engaged in a wide-ranging scheme to defraud in violation of the Federal Securities Laws. They manipulated Enron’s publicly reported financial results, made false and mislead statement about Enron’s business.

After an investigation by US Securities and Exchange Commission, Richard A. Causey and many senior manager of Enron were indicted for many frauds.

First, Causey with other Enron senior managers made false and mislead public representation about Enron’s financial report and its unit’s performance. They made a reported earning which rose by around 20% every year. With their fake report, investors were persuaded about the light future of Enron’s profitability.

Moreover, in case of debts, this report deceived rating agency, investment public and lenders about Enron’s obligation and cash flow.

Standing at a high position as an Executive Vice President in Enron Company, Causey was an architect of the plan to control Enron’s reports. He participated in key decisions where budget targets were set and what demands were put on each unit in Enron. For a long time, the Causey’s scheme inflated the Enron’s share price in stock market and keeps the credit score of Enron Company at the successful rate. In 1998, Enron’s stock traded in market increased from $30 per share in 1998 to over $80 per share and made Enron become the seventh-ranked company in U.S.

And as an award for their excellent result, at the same time, Causey and many other senior managers were received an increased salary, bonuses. According to a report after the Enron’s scandal, Causey made more than $3 million in salary and bonuses at that time. Cause’s fraud happened for at least 4 years despite of yearly independent audit by Arthur Anderson accounting firm. Not long after that, one of the world’s top five accountancy- Arthur Anderson- went to bankrupt as a guilty for Enron’s collapse.

5.3. The consequences of this scandal

The consequences of this scandal are undoubtedly many: thousands of workers become unemployed, investors lose their money, the credibility of the capitalist system is deeply attack … But the importance failures at both devices corporate governance than devices support – including auditors and financial analysts – raises questions about the regulatory system and consider reforms.
That is why the U.S, the countries most affected, accounting regulations have been questioning on both methods – U.S. Generally Accepted Accounting Principles (GAPP) standards have shown their limits – and the ethical rules. Especially concerning the separation of activities under the inspection of accounts and those within the council to avoid conflicts of interest.
Financial analysts and their employers were also called to order, especially on the other major risk of conflict of interest that is the porosity between the activity of management titles and those under investment operations – financing undertaken by these establishments. Thus, Merrill Lynch, investment banker and managers of securities challenged by the Securities Exchange Commission had to agree to pay 100 million dollars and commit to change its internal organization.
The Security Exchange Committee, the authority dedicated to the regulation of markets and financial transactions was the instrument of these recommendations and has itself been put on the hot seat; its leaders are not free from reproach. By the way, its chairman, Harwey Pitt was taken to submit his resignation in November 2002.
The political authorities were in a comparable situation: on the one hand, the public expects them to take measures copies, as some initiatives and declarations have been able to suggest: creation by Congress of a commission investigating the Enron affair whose report was submitted in July 2002; statements by President Bush. On the other hand, their representatives did not always seem best placed to act, sometimes themselves involved in certain cases.
Finally, the judicial authority in action for liability criminal level is required to intervene in the most significant charged and convicted a number of actors and the setting fines and damages with a significant amount. These procedures, which have been proliferated during the years 2002, will accentuate the trend of courts in society “already very strong in the United States of America.
In this event, the legislature has also reacted strongly with the law Sarbannes – Oxley. That law, enacted in July 2002 is aimed at strengthening control measures and to try to restore a climate of confidence in the accounts of listed companies.
In France, there have been no direct consequences of this case. But indirect consequences there were: strengthening the mechanism for regulating. Indeed, in 2003 was voted the “law on financial security” which covers three aspects of financial life: the strengthening of the supervisory authorities including the creation of the AMF.
(AMF), coaching lobbying trading in financial matters and the strengthening of control professions audit Banning parallel council and creating the High Council of the Commission accounts.
Thus, we find that the concepts of corporate governance and value creation are at the heart of the company and hence financial contemporary capitalism. To this must be added that governance plays a leading role in creating value from several angles although it should be acknowledged that the world of governance and therefore the company has been rocked in recent years by scandals as evidenced by the Enron affair. But what is – the role of finance in creating value? The financial levers have – they suffered a fate similar to that of governance?
That is what we see in our second game.

5.4. Lessons from the Enron Case

There were many reasons led to the bankrupt of Enron and lessons learn from it. Standing in the view of corporate governance, lessons were learned from Enron’s case.

First comes by a problem of groupthink and corporate governance’s attitude.

Since Enron was performing high in the market, then, Enron’s broad had a blind faith in the performance of top managers whatever their top management proposed without searching the trade- off between returns, risks and authenticity of information.

Enron’s top managers consisted of people who had strong government background and great industry experience, as well as market experiences; hence, there was also a blind trust in each others decision and judgment. When Enron was at their great rate of development, no one of these managers wants to put a question or check the CEO or the performance of their top managers. That’s a reason why for a long time, none of Enron’s management can discovered Causey’s faults.

The CEO and the Board Chairman should be separate persons. CEO might have aggressive strategies and the Chairman board would have conservative thinking which will work together in the firm interest.

Auditors must have their independent assessment as well as judgments which never allow connive with any agents. Enron’s case is not only the expensive lesson for Arthur Andersen; it becomes a page of audit history.

Corporate malpractice is ensured not to set up as precedents by agents. To do this, internal and external stakeholders must be vigilant to make sure that the company is running as a good business citizen. Stakeholder should not be lured by only company’s growth rate or stock price in the market; they must pay attention at the wider interest of all concerned.

6. Conclusion
At the end of our study, it should be noted on the one hand that there are links between corporate governance and corporate performance. Thus, governance understood in the sense of pillar based both on the more active role of directors as the ultimate surveillance of shareholders and the meaning of management which monitors shareholder value and active participation in general plays a key role in creating value. In this sense, it may establish or restore investor confidence, participate in defending the interests of stakeholders in the company by strict control of managers. It may also establish or strengthen corporate social responsibility which has an impact on share prices and, as has been seen, has become a major requirement of most investors and NGOs.
However, it is clear that in recent years corporate governance has been questioned unprecedented response to a number of financial scandals that have called into question not only business leaders but also authorities regulating system of governance and political leaders of the first level. These failures of a large scale with all their consequences are at the root of strengthening the mechanism for regulating which was mainly due legislator more than ever anxious to protect the interests of investors and savers.
On the other hand, the role of finance in creating value now appears inevitable. In this perspective, management by the financial value based on fundamental principles such as the principle of double market that wants the company to succeed as much on the market for goods that the financial market, identification of key strategic levers of the value creation and internal steering through incitement and evaluation. And to measure value creation, management uses a number of indicators which may be of economic nature (VAN, EVA …), accounting (BPA, PER, accounting rate of return …) or market (MVA, TSR).
However, we must recognize that the management by the value of this financial limits that reduce its scope. In addition to its limited scope bound to focus on the short term, the transfer of risk borne by the shareholder to the employee. The MVF stumbles on determining the cost of capital which is a fundamental for measure value creation.
In the coming years, governance and financial levers remain – the role of the first order they occupy so far in the management of businesses? In other words, will they still key to understanding the dynamics of firms?
It is very likely that everything will depend on the effectiveness of the regulatory system put in place.

7. Further study recommendation

The role of corporate governance in creating value for firms has partly been identified in this research. Nevertheless a quantitative relationship needs to be identified between two concepts. Hence it would be an interested research in the future which encompasses these areas.

References

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Corporate Governance Disclosure Essay

CORPORATE GOVERNANCE DISCLOSURES IN EMERGING CAPITAL MARKETS: THE CASE OF GHANA

CHAPTER 1

1.1 INTRODUCTION

Corporate governance has dominated the policy agenda in developed market economies since the mid 1990s. The spate of corporate failures and massive government bailouts that have characterised the current global recession has led to an upsurge in the call for tighter regulation of capital markets and more stringent corporate governance. What has become clear from the current global capital markets meltdown is that, as capital markets develop, so too does the complexity of transactions and organisational structures, and the span of inter-dependencies among the various players in the market which extend beyond the boundaries of nations and continents.

It is imperative for the stability of the global economy that there is adequate and effective regulation of the various capital markets and that the managers of major companies’ be held accountable for complying with these regulations and adhering to the principles of good corporate governance. In order for corporate manager to be held accountable for their compliance with regulations and good governance, they must make relevant disclosures in their companies’ annual reports.

Corporate Governance and Emerging Capital Markets

The recent international financial scandals have generated increased interest in corporate governance as a means of mitigating financial problems in developing economies (Tsamenyi et al. 2007, Reed 2002, Ahunwan 2002). These problems include weak and illiquid stock markets, economic uncertainties, weak legal controls and investor protection, and frequent government intervention. Developing economies also suffer from poor corporate performance and high concentration of company ownership (Tsamenyi et al. 2007, Ahunwan 2002). They usually suffer from state ownership of companies, weak legal and judiciary systems, weak institutions, limited human resources capabilities, and closed/family companies (Mensah 2002, Young et al. 2008). Reed (2002) noted that, globalization, international trade, and international investment practices call for the development of corporate governance in developing nations.

Corporate governance is mechanism for ensuring corporate management acts in the best interest of a company’s stakeholders (John & Senbet, 1998). If capital markets in developing economies such as Ghana are to become fully established and grow, effective corporate governance regulations need to be developed and implemented. Such regulatory structures should not only be adequate to protect the interests of shareholders but also to assist in boosting the confidence of prospective investors and other stakeholders in corporate activities (Cadbury, 1992).

Emerging Capital Markets (ECMs) are an integral part of the global capital market. According to the International Finance Corporation (IFC, 1996), EMCs can be viewed as any market in a developing economy that has the potential for development (IFC, 1996). Such markets compete for investment funds with well developed capital markets and therefore need to put in place appropriate measures to attract business activities. The adoption of effective corporate governance is one such measure. Gompers et al. (2003) assert that, good corporate governance increases company valuations and boosts the bottom line. Along similar lines, Claessens et al. (2002) maintain that sound corporate governance frameworks benefit companies through increased access to financing, lower cost of capital, better performance and more favourable treatment of all stakeholders.

Corporate transparency and full-disclosure of information are core attributes of the corporate governance mechanism (OECD, 1999) and are regarded as an extremely important factor in the quality of corporate governance. Further, Beeks and Brown (2006)contend that firms with more effective corporate governance make more informative disclosures. Although corporate governance systems differ across countries, with the development of Codes of Best Practice around the world, there is gradual convergence of corporate governance practices toward global standards (Hopt 1997). Ghana is an example of an emerging economy which is increasingly embracing the concept of good corporate governance and requiring companies to report on their corporate governance practices.

Attempts being made in Ghana to promote effective corporate governance include the formation of the Institute of Directors in 2001 and the development of National Accounting Standards. Additionally, the Ghana Securities and Exchange Commission (GSEC) has developed a Corporate Governance Code of Best Practice against which companies can benchmark their practices. Other regulatory requirements which govern corporate conduct include provisions in the Companies Code 1963 (Act 179), the Securities Industry Law 1993 (PNDCL 333) and the Membership and Listing Regulations of the Ghana Stock Exchange.

Notwithstanding all of the above measures which are designed to secure good corporate governance by public listed companies in Ghana, the general level of compliance with the requirements is, and has always been, low. A study by Tsamenyi et al. (2007), which investigated corporate governance disclosures by applying a disclosure index to the 2006 annual reports of 22 listed companies in Ghana, found that the extent and quality of corporate governance disclosures were minimal.

Many studies have been examined on corporate governance disclosures based on the examination of the content and scope of annual reports information by establishing corporate disclosure indexes (see Meek et al. 1995, Coy and Dixon, 2003).

This study is concerned with the information disclosed mostly in the annual reports. Information in the annual report consists of qualitative and quantitative data. The quantitative data is both financial and non-financial. Moreover, many annual reports contain illustrations, diagrams and graphical presentations.

1.2 RESEARCH AIM AND OBJECTIVES

Following from the above discussion, the overall aim of this study is to make recommendations designed to improve the extent and quality of corporate governance disclosures by public listed companies in Ghana.

In order to achieve this aim the research has the following objectives:

  1. to determine the current corporate governance disclosure requirements of listed companies in Ghana;
  2. to compare Ghanaian disclosure requirements with those applying to UK listed companies;
  3. to examine the corporate governance disclosures made by a Ghanaian listed companies in their 2008 annual reports;
  4. to identify the differences (if any) in the corporate governance disclosures made by the listed companies in Ghana studied and the corporate governance disclosure requirements;
  5. to ascertain the reasons for the failure by listed companies in Ghana to fully comply with the corporate governance disclosure requirements;
  6. to make recommendations on how the quantity and quality of corporate governance disclosures by listed companies in Ghana might be improved.

1.3 METHODOLOGY

In order to achieve the research objectives the following methods have been used.

  1. Literature review: Relevant articles in academic and professional journals have been reviewed in order to establish the extent to which corporate governance disclosure requirements exist and are adhered to in various ECMs. Keywords such as corporate governance, disclosures, ECMs, and Ghana input into databases such as Emerald, JSTOR, SSRN, and Google to search for relevant articles.
  2. Document study:Statutory and regulatory documents have been examined to ascertain the existing corporate governance disclosure requirements in Ghana. In addition, the annual reports of a sample of 25 listed companies in Ghana for the year 2008 have been studied to determine the extent and quality of their corporate governance disclosures.
  3. Disclosure Index:A corporate governance disclosure index has been and applied to the 2008 annual reports of 25 listed companies in Ghana. The index is has been constructed to include the key corporate governance requirements that apply to listed companies in Ghana.
  4. Semi-structured interviews: Six semi-structured interviews were conducted in order to ascertain the reasons for differences in the corporate governance disclosures made by, and required of, listed companies in Ghana. The interviewees were two finance executives of listed companies, two senior audit partners from the “Big Four” auditing firms and one representative from each of the Ghana Stock Exchange and the GSEC.

1.4 IMPORTANCE AND LIMITATIONS OF THE STUDY

Prior studies such as those of Tsamenyi, et al 2007 and ROSC 2005, which have examined aspects of corporate governance in ECMs and, in particular, Ghana have revealed that corporate governance as a policy and regulatory issue is gaining ground but the level of corporate governance disclosure is low.

This study, by establishing the current extent (and quality) of corporate governance disclosures in Ghana, identifying deviations from the corporate governance disclosure requirements, and making recommendations on how corporate governance disclosure practices may be improved, will help to bring about improvements in the corporate governance disclosures by listed companies in Ghana

However, the study has a number of limitations. These include the following:

  1. The study has focused only on a limited sample of 25 out of the 36 listed companies on the GSE. As a consequence the result may not be representative of all listed companies (or indeed, other companies) in Ghana.
  2. The study will be based on one year’s corporate governance disclosures and these may not be representative of corporate governance disclosures made in other years. Research which incorporates a longitudinal study may be necessary to demonstrate the development of corporate governance disclosures in Ghana.
  3. The semi-structured interviews were conducted with a small sample of interviewees and the opinions expressed may be influenced by their personal ideologies and the extent of their experience with listed companies in Ghana.

1.5 ORGANISATION OF THIS RESEARCH REPORT

This research report has six (6) chapters as follows,

Chapter 1: Introduction: In this chapter the background to the study is explained, and its aims and objectives are specified. The research methods used for the study are outlined and consideration is also given to the contributions and limitations of the research project.

Chapter 2: corporate governance requirements in Ghana: This chapter provides background information on the corporate environment in Ghana and sets out the corporate governance requirements.

Chapter 3: Literature review: This chapter provides a definition of corporate governance and examines the importance of, and the principles underpinning, corporate governance. It also reviews prior research which has examined corporate governance disclosures and more particularly, those which have investigated corporate governance disclosure in ECMs.

Chapter 4: Methodology.This chapter explain the development and application of the of disclosure index used to examine the quantity and quality of corporate governance disclosures in the 2008 annual reports of a sample of listed companies in Ghana. It also describes the methodology adopted for the semi-structured interviews conducted with six interviewees from selected institutions in Ghana. In addition it explains the means by which the data have been analysed and reported.

Chapter 5: Research findings. The results of the analysis of selected companies’ annual reports and the semi-structured interviews are reported and examined in the light of the exact literature.

Chapter 6: Conclusions and Recommendations.This chapter provides a brief summary of the research project and its findings. Conclusions are drawn from the research findings and recommendations made on ways in which corporate governance disclosures by listed companies in Ghana might be improved.

CHAPTER 2

CORPORATE GOVERNANCE REQUIREMENTS IN GHANA

2.1 INTRODUCTION

This chapter provides background information on Ghana, its political and economic environment and its corporate profile. It also explains the legal and regulatory framework and the corporate governance requirements which apply to listed companies in Ghana.

2.2 COUNTRY PROFILE

Ghana is a Sub-Saharan African country with a total land area of about 238,538 square kilometres/92,100 square miles and a population in 2007, of 23.5 million (Bureau of African Affairs, 2008). Ghana’s population is concentrated along the coast in the principal cities (Bureau of African Affairs, 2008). Ethnically, Ghana is divided into smaller groups, each of which has a different language or dialect, however, the official language is English, which is a legacy of British colonial rule (Sarpong, 1999).

2.3 POLITICAL AND ECONOMIC ENVIRONMENT IN GHANA

For more than century, Ghana was under British colonial rule. She attained independence on 6th March 1957 and became a republic in July 1960. After independence, Ghana alternated between civilian and military rule. After a series of coup d’etats (Sarpong, 1999), in January 1993, the country returned to democratic rule under the National Democratic Congress (NDC). After 8 years (in 2001) power switched to the New Patriotic Party (NPP) but in January 2009, following the election, the NPP handed over power to the NDC.

The economy of Ghana is dominated by agriculture, mining and forestry agriculture. Agriculture accounts for about 37.5% of GDP (GOG, 2008), and the largest foreign exchange earners for the country are cocoa, gold and coffee (BBC, 2009). In 2007, the country’s GDP was $15.2 billion. As at the first quarter of March 2009, the inflation rate of Ghana was 20.53 % (GOG, 2009). Ghana is a member of United Nations (UN), the British commonwealth, African Union (AU), International Monetary Fund, African Development Bank (ADB), the World Bank Group and the Economic Community of West African States (ECOWAS).

2.4 GHANA STOCK EXCHANGE AND LISTED COMPANIES OWNERSHIP

STRUCTURE

The Ghana Stock Exchange (GSE) was incorporated in July 1989. It was recognised as an authorized Stock Exchange under the Stock Exchange Act of 1971 (Act 384) in October 1990, and trading on the floor of the Exchange commenced in November the same year. In April 1994, it became a public company limited by guarantee (GSE 2009). The exchange is regulated by the GSE Membership Regulations L.I. 1510, Listing Regulations L.I 1509 and Trading and Settlement Regulations, and is organized as a body corporate under the supervision of the Securities Exchange Commission that falls under the Ministry of Finance.

The Exchange is governed by a council which includes representation from licensed dealing members, listed companies, banks, insurance companies, and the general public. The functions of the Council include preventing fraud and malpractice, maintaining good order among members, regulating stock market business and granting listings. The GSE currently has 36 listed companies with a market capitalization as at 31 March 2009, of GH18,041.20m, equivalent to US$13,073.33m (GSE 2009). The manufacturing and banking sectors currently dominate the Exchange, while other listed companies fall into the insurance, mining, transport, food, publication, pharmaceuticals and petroleum sectors.

Most of the listed companies on the GSE are Ghanaian (three being listed family-controlled companies) but there are five multinationals. Until 2006, individual foreign investors, who were first allowed to participate on the Exchange in 1993, were not permitted, without approval, to hold more than 10% of a listed company’s’ shares and the total foreign investments in any company could not exceed 74% of the company’s shares. These limits were removed by the Foreign Exchange Act of 2006 (Act 723) and non-resident investors can now invest in the market without limit or prior exchange control approval. Dividend income is taxed at 8%, while Capital gains on listed securities are exempt from tax until November 2010 (GES 2009).

2.5 CORPORATE GOVERNANCE REQUIREMENTS IN GHANA

Over the recent years, notions of corporate governance has been gaining roots in Ghana in response to initiatives by some stakeholders such as the Ghana Institute of Directors (IoD-Ghana), Private Enterprise Foundation (PEF), State Enterprises Commission, the Institute of Economic Affairs, and the Ghana Centre for Democratic Development (Ocran 2001; Mensah et. al 2002). The IoD-Ghana strives to improve corporate governance practices and strengthen companies’ boards of directors. It has, for example, hosted international and national conferences, run competitions to increase awareness of corporate governance issues and developed manuals and procedures to help implement good corporate governance practices (Mensah et. al 2002).

Notwithstanding the above developments, formal corporate governance structures and institutions are not widespread although a number of laws provide for governance structures for companies in Ghana. These laws include: The Ghana Companies Code 1963 (Act 179), The Securities Industry Law, 1993 (PNDCL 333) as amended by the Securities Industry (Amendment) Act 2000, (Act 590), and the Listing Regulations of the Ghana Stock Exchange, 1990 (L.I. 1509) (K-Coleman and Biekpe 2008)

2.5 .1 LEGAL REQUIREMENTS

The Companies Code 1963 (Act 179), which is based substantially on the UK’s Companies Act 1948, provides for governance mechanisms of all companies incorporated in Ghana (NEPAD 2005). It provides governance of ministration such as requirements to have directors, appointment and removal of directors, remuneration of directors, directors’ reports, and audited financial statements. It also provides for various mechanisms for shareholders to enforce their rights, such as rights to annual general meeting, equal treatments of shareholders.

The Securities Industry Law 1993 (PNDCL 333), as amended by the Securities Industry (Amendment) Act 2000 (Act 590) and Exchange Commission Regulations (2003), provides for, among other things, the governance mechanism of all stock exchanges, investment advisors, securities dealers, issues concerning accounts and audits and collective investment schemes licensed under the Securities and Exchange Commission (SEC 2003). The Securities and Exchange Commission, overseeing the disclosure of material information to the investing public by companies, including securities listed on the Ghana Stock Exchange.

Regulatory Frameworks for Boards of Directors

The Companies Code describes directors as person who is appointed to direct and administer the business of the company, and stipulates that each company must appoint a minimum of two directors for a company. However, the Code allows companies to fix the maximum number of directors in their Regulations. Section 181 of the Companies Code provides that directors are to be appointed through the individual votes of shareholders at a general meeting of the company. However, this frequently means that the directors are approved by the controlling shareholders. There is no requirement under the Companies Code for the appointment of independent directors but this is required under the Securities and Exchange Commission’s Code of Best Practices on Corporate Governance (SEC Code) for the GSE.

In the exercise of their duties, the directors are required to act at all times in what they believe to be the best interests of the company as a whole so as to preserve its assets, further its business, promote the purposes for which it was formed, and to do so in such manner as a faithful, diligent, careful, and ordinarily skilled director would act in the circumstances.

The Code makes provision for the appointment of executive directors by allowing directors to hold any other office or place of profit in the company, other than office of auditor. The directors’ remuneration is to be reasonably related to the value of services provided and is to and shall be determined from time to time by ordinary resolutions of the company

The Companies Code enjoins directors to, at least once annually (at intervals of not more than 15 months), to prepare and send to each shareholder the directors’ report, which show the state of the company’s affairs with any change during the financial year in the nature of the business of the company. The report is approved by the board of directors and signed on behave of the two directors.

Regulatory Framework for Shareholder Rights

The Companies Code 1963, the Securities Industry Law 1993 and the Regulations of the Ghana Stock Exchange provide the primary regulatory framework for the establishment and operations of companies that issue publicly traded securities.

The Companies Code gives shareholders opportunities to participate and vote in general shareholder meetings or exercising rights through proxy for the appointment or removal of directors, access to timely and transparent company information concerning the date, location and agenda of general meetings and the right to petition against unfair prejudice.

The Securities Industry Law and the GSE Listing Regulations ensure that the market for corporate control of listed companies functions in an efficient and transparent manner. It provides for example the organizing of shareholders meetings, proxy solicitation and voting by shareholders, disclosure of equity ownership, and allowable actions that shareholders may undertake against directors, including law suits, the removal of directors, and penalties for breaches of their fiduciary duty.

Regulatory Framework for Accountability and Audit

Under the Companies Code a company’s, directors are responsible for keeping proper books of account and for the preparation of financial statements which provides a true and fair view of the company. Auditors are to be appointed by an ordinary resolution of shareholders, except that the directors may appoint the first auditor of the company and fill any casual vacancy in the office of an auditor.

Auditors are expected to employ diligence, objectivity and independence in the discharge of their duties and functions. To ensure the auditor’s independence, the Code prohibits an officer of the company or any associated companies, partners of, or employees of an officer of the company from holding office as auditor. However, the Code permits auditors, in addition to their statutory duties to shareholders as auditors, to provide other services to the company such as, advising on accounting, costing taxation, rising of finance and other matters. This provides a ground for a conflict of interest which may impair the auditor’s independent.

An auditor may be removed from office by an ordinary resolution of shareholders at an annual general meeting after 35 days notice and is allowed to speak to this at this meeting in response to his intended removal. No provisions exist under the Companies Code limiting the term of office of auditors.

The GSE Listing Regulations recognize the need for audit sub-committee which should be composed of non-executive directors. The GSE Listing Regulations also prescribe the audit committees duties such as; making recommendations to the board concerning the appointment and remuneration of external auditors; reviewing the auditors’ evaluation of the system of internal control and accounting.

The Companies Code, the Securities Industry Law and the GSE Listing Regulations requires all companies to provide shareholders with audited financial statements prepared in accordance with the Ghana National Accounting Standards issued by the Institute of Chartered Accountants (Ghana) at close of their financial year to its shareholders.

2.5.2 LISTING REQUIREMENTS AND GOVERNANCE GUIDANCE BY CODE OF BEST PRACTICES

In December 2003, the Ghana Securities and Exchange Commission (SEC) issued corporate governance principles for listed companies entitledCode of Best Practices on Corporate Governance. This code is based on the OECD Principles of Corporate Governance (SEC 2003). Consistent with the United Kingdom, the code is not mandatory. While these provisions are not binding, the SEC encourages compliance with the Code and requires listed companies to include a statement in their annual report disclosing the extent of compliance with these guidelines. The Code set out principles for the equitable treatment of all shareholders, disclosure and transparency and responsibility of the board of directors.

As require by best practice.

  1. There should be formal and transparent procedures for appointments to the board.
  2. Also there should be separation between the roles of CEO and Board Chairman responsibilities unless there are specific reasons militating against such separation. In the case where two offices are combined the Code required companies to explain to shareholders and the board must enact procedures that ensure the independence of the board as a whole and their respective responsibilities should be defined.
  3. There should be a balance of executive and nonexecutive directors with the complement of independent non-executive directors being at least a third of the total membership of the board and in any event, not less than two.

2.6 ANALYSIS OF CORPORATE GOVERNANCE DISCLOSURES IN GHANA

IN COMPARISON WITH THE UNITED KINGDOM

The provisions of the code are set in Table 1. Further, so that the provisions applying in Ghana may be evaluated in the light of well established Code of Corporate Governance, the provisions of the UK’s Combine Code of Governance (Financial Reporting Council, 2008) are also presented.

GHANA UK
A. Directors A.1 The Board Every company should be headed by an effective board, which is collectively responsible for the success of the company
A.2 Chairman and Chief Executive There should ideally be a separation between the role of Board Chairman and CEO unless there are specific reasons which militate against such separation. There should be a separation between the roles of CEO and Board Chairman
A.3 Board Balance and Independence The board should include a balance of executive and non-executive directors with the complement of independent non-executive directors being at least one third of the total membership of the board and in any event not less than two. The board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking
A.4 Appointments of Board Appointments to the board should be formal and transparent selection process should be based on merit. There is no nomination committee There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. There should be a nomination committee which should lead the process for board appointments and make recommendations to the board
A.5 Information and Personal Development The board should have unrestricted access to all company information, records and documents. All directors enjoy the right to retain outside professional experts for counsel The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge
A.6 Performance Evaluation The board should annual review their own performance and that of the various committees The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
A.7 Re- Election All directors should submit themselves for re-election at regular intervals and at least once in every three years of its committees and individual directors. A.7 Re- Election All directors should submit themselves for re-election at regular intervals and at least once in every three years All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance
B. Directors Remuneration B.1 Director’s Remuneration The levels of remuneration in corporate bodies should be competitive, should focus on retaining management and be linked to corporate and individual performance. Every corporate body should establish a remuneration committee. The remuneration committee should comprise of a majority of non-executive directors. Does not give number of directors Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance. The board should establish a remuneration committee of at least three independent non executive directors.
B.2 Procedures There should be a formal and transparent procedure for developing policy on executive remuneration. Members of the committee should exclude themselves from deliberations concerning their own remuneration. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration
C. Accountability and Audit C.1 Financial Reporting The board is responsible for ensuring that a balanced and understandable assessment is given of the financial and operating results of the corporate body in the financial statements. The board should present a balanced and understandable assessment of the company’s position and prospects
C.2 Internal Control The board is responsible for ensuring that appropriate systems of internal control are in place for monitoring risk, adherence to financial governance measures and compliance with the law. The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets
C.3 Audit Committee and Auditors The board should establish an audit committee. The audit committee should comprise at least three directors, the majority of whom should be non-executive The board should establish an audit committee of at least three independent non-executive directors
D. Relationship with shareholders D.1 Dialogue with institutional shareholders There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
D.2 Constructive use of AGM The board should use the AGM as the primary means of meeting and interacting with shareholders The board should use the AGM to communicate with investors and to encourage their participation
D.3 Shareholders rights There should be a dialogue with shareholders based on the mutual understanding of objectives

Note: Same is used in the context not to mean same wording but in content

CHAPTER 3

THEORETICAL FRAMEWORK

1. INTRODUCTION

This chapter provides a definition of corporate governance and examines the importance of, and principles underpinning, corporate governance. It also reviews prior research examining corporate governance disclosures and, in particular, those studies which have investigated corporate governance disclosures in ECMs.

2. DEFINITIONS OF CORPORATE GOVERNANCE

Ideas of corporate governance have developed and gained importance as companies have grown in size, and their power and influence in society has increased. At the same time, company managements have come to be regarded as accountable to the company’s stakeholders rather than just its shareholders. The concept of the stakeholder was defined by Freeman (1984) as “any group or individual who can affect or is affected by the achievement of the firm’s objectives” (Freeman, 1984). The increasingly stakeholder-oriented view of corporate governance has resulted in defining corporate governance in broad terms. Solomon (2007) for example, defined corporate governance as a system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity (Solomon, 2007, p. 14).

According to The Committee of Financial Aspect of Corporate Governance (CFACC, 1992: Cadbury Report), corporate governance is concerned with balancing between economic and social goals and individual and communal goals. The governance framework encourages the efficient use of resources and requires accountability for the stewardship of those resources. The aim is to align, as nearly as possible, the interests of individuals, corporations and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for States is to strengthen their economics and discourage fraud and mismanagement (Cadbury Report, 1992). Corporate governance embodies the ideas of specifying the company’s strategy, objectives and controls the development of internal controls to make sure that the company’s managers and employees work towards the achievement of these objectives.

Thus, among other things, corporate governance is concerned with structures and processes for decision making, ensuring accountability, and controlling managerial and employees’ behaviour. It therefore, seeks to address issues facing the board of directors, such as the interaction with senior executives and the relationship of the company with its owners and others interested in the affairs of the company.

2.3 PRINCIPLES UNDERPINNING CORPORATE GOVERNANCE ACTIVITIES

A number of principles underpin effective corporate governance – namely, business probity, honesty, responsibility and fairness or equal opportunity (Nolan 1995). If corporate entities exhibit these qualities, this will improve relationships between companies, their stakeholders and the overall welfare of the economy. These principles are briefly discussed below.

  • Business Probity:Business probity requires company management to be open and honest in the discharge of their responsibilities. According to Brain (2005), openness implies a willingness to provide information to individuals and groups about the company’s activities. In this regard, it is important to recognize that shareholders, other investors and other stakeholders need information about a company’s activities in order to evaluate its performance. Timely delivery of information will enable them achieve this purpose.
  • Honesty:Good corporate governance requires company directors and managers to be honest in the discharge of their responsibilities. Honesty requires managers to deliver factual information. Brain (2005 p. 26) contends that, whiles honesty might seem an obvious quality for companies, in an age of spin and the manipulation of facts, honest information is perhaps by no means as prevalent as it should be.
  • Responsibility:Corporate governance requires company managements to be responsible in the discharge of their duties. Amongst other things, stakeholders require confidence that a company’s financial systems are secure and reliable, and managers are expected to work to meet this expectation. Responsibility in the context of corporate governance includes other issues such as transparency and accountability. Directors are accountable to their stakeholders and therefore have a duty to explain their action to the company’s stakeholders so as to enhance the latter’s understands of the company’s activities (Cadbury 1992).
  • Fairness: The principle of fairness requires impartiality and a lack of bias in corporate activities. In the context of corporate governance, the quality of fairness is achieved when managers behave in a reasonable and unbiased manner, that includes making disclosure in a fair reasonable manner. In this sense, good governance results in all stakeholders receiving equal consideration.

2.4 IMPORTANCE OF EFFECTIVE CORPORATE GOVERNACE AND DISCLOSURE

Good corporate governance underpins market confidence, and corporate integrity and efficiency, and hence promotes economic growth and financial stability (OECD, 2005). The Committee on Corporate Governance (1998: Hampel Report) noted that good governance ensures that constituencies (stakeholders) with a relevant interest in the company’s business are fully taken into account. In addition, good governance can make a significant contribution to the prevention of malpractice and fraud, although it cannot prevent them absolutely. Bosch (2002) also noted that, good governance increases the creation of wealth by improving the performance of honestly managed and financially sound companies.

Other commentators, such as Gregory and Simms (1999), assert that effective corporate governance promotes the efficient use of resources both within the firm and the larger economy. They explain that, with effective corporate governance systems, debt and equity capital should flow to those corporations capable of investing it in the most efficient manner for the production of goods and services most in demand and with the highest rate of return. In this regard, effective governance helps to protect scarce resources and helps ensure that societal needs are met.

According to the OECD (1999) good corporate governance ensures that timely and accurate disclosure is made of all material matters regarding a company, including its financial and non- financial position, performance, ownership, and governance mechanisms. Disclosure also helps to improve public understanding of the structure and activities of the enterprise, its policies and performance with respect to environmental and ethical standards, and the company’s relationship with the communities in which it operates.

Further, according to Verrecchia, (2001), adequate disclosure enhances stock market liquidity, thereby reducing the cost of equity capital either through reduced transaction costs or increased demand for a firm’s securities. Along similar lines, Ashbaugh-Skaife et al. (2006) assert that adequate disclosure of financial information and information about a company’s compliance with corporate governance requirements and/ or guidance is critical to reducing the information asymetry between the company and its capital suppliers. They conjecture that, companies with more timely and informative disclosures are perceived to have a lesser likelihood of withholding value-relevant unfavourable information and, as a result, are expected to be charged a lower risk premium by creditors. As a result of a reduced cost of capital, such companies enjoy high valuation (Coles et al. 2001).

2.5 ATTRIBUTES OF HIGH QUALITY CORPORATE GOVERNANCE DISCLOSURES

Corporate disclosure of relevant and reliable information is critical for the functioning of an efficient capital market. Companies provide disclosure through regulated financial reports, including their annual audited financial statements, directors, management discussion and analysis, and other regulatory filings (Healyand Palepu, 2001). Disclosure concerns issues of transparency in the activities for which companies are accountable, the results of their activities (Leuz and Verrecchia, 2000). Another important aspect that should be mentioned concerning high quality corporate governance disclosures is that we are talking about both qualitative and quantitative and we want it to be complete and also useful.

The conceptual framework of the International Accounting Standards Board (IASB) provides guidance regarding generally accepted notions for assessing high quality disclosure. The IASB framework identifies four qualitative characteristics of information that make information useful to users in making economic decisions, namely, understandability, relevance, reliability and comparability (IASB, 1989). These attributes are briefly discussed below

  • Understandability:An essential quality of information provided in accountability reports it that is readily understandable by users. For this purpose, users are assumed reasonable knowledge of business, economic activities and accounting and a willingness to study the information with reasonable diligence. (IASB, 1989) This means that the manner of presentation has to be in keeping with the knowledge and experience of users, and should include the following: a good design, systematic classification of topics, and an explanation of unknown terms in the text to enhance understandability.
  • Relevance: Information should be relevant to the needs of users in forming an opinion or decision. Information has the quality of relevance when it may influence the economic decisions of users by helping them to evaluate past, present and future events or to confirm or correct past assessments. The relevance of information is affected by its nature and materiality (IASB, 1989).

Information is material if its omission or misstatement could influence users’ decisions. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement (IAS 1). Management is responsible for making appropriate decisions with respect to the application of the materiality principle and its effects on the content of its corporate disclosures.

  • Comparability:Information should be presented in a consistent manner over time and be comparable with related information and with similar information for other entities in order to enable users to evaluate a company’s progress aid and its performance related to those of other similar companies. Users should be able to compare the company’s performance indicators over time and with other similar businesses to enable them to identify and analyse the outcome of any changes. Any reason for a change should be explained by means of notes, and where it is not practical to adjust comparatives, the reason for that should also be explained
  • Reliability:Information has the quality of reliability when it is free from material error and bias, and when it gives a true, complete and balanced view of the actual situation underlying reality. The key aspects of reliability are faithful representation, priority of substance over form, neutrality, prudence and completeness (FASB, 1989). The information should faithful represent the actual situation in the business, complete within the boundaries of what is relevant, well-balanced in terms of reporting both positive and negative events, presented in the right context, and free of material misstatement.

CORPORATE GOVERNANCE DISCLOSURES IN EMCs, – PRIOR STUDIES

Considerable empirical research has been conducted into corporate governance disclosures in corporate annual reports. These studies have in general, used a disclosure index or score to evaluate corporate disclosures in annual reports’ (Patel, and Bwakira 2002, Botosan 1997). However, the research to date has been focused primarily on mature capital markets (Meek & Gray, 1989; Gray et al., 1995) and emerging markets such as Zimbabwe and Tanzania (Mangena & Tauringana 2007 and Abayo et al., 1990)). Very few studies have investigated corporate disclosure in Ghana (Tsamenyi et al., 2007).

Dahawy (2008) studied corporate governance disclosure in Egypt. The study evaluated the corporate governance disclosures by of 30 companies listed on the Cairo Alexandria Stock Exchange (CASE) by comparing them to the United Nations corporate governance disclosure checklist. This checklist consists of fifty-three disclosures to measure the level disclosure. Dahawy found that the level of disclosure in Egypt is low; on average the companies studied disclosed information about 22% of the 53 disclosure items in the UN checklist.

Hossain and Khan (2006) surveyed 100 companies listed on Chittagong Stock Exchange in Bangladesh to ascertain whether there are significant relationship between corporate governance disclosures and corporate attributes such as multinational affiliation, and the auditor been affiliated to the ‘Big Four’ audit firm. They found that those companies having with a multinational affiliation tend to disclosure more information than local companies. Likewise, companies which are audited by a ‘Big Four’ audit firm disclose more information than companies audited by a local audit firm. This support Firth (1979) research which found out that, larger companies are more inclined to disclose more information because they are prone to greater public scrutiny.

In the context of Ghana, Tsamenyi et al., (2007) examined the corporate governance disclosures of 22 listed companies in Ghana. They specified 36 items (including Ownership structure and investor relations; financial transparency and information disclosure; Board and management structure and processes) by using corporate governance index constructed by the OECD checklist to measure the extent of corporate governance disclosures in the company’s annual reports. They found that average disclosure score was only 52 %, was low.

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Corporate Governance and the Different Governance Models Finance Essay Essay

The objective of this essay is to critically analyze, explain and examine the two elementary governance methods when finalizing and summarizing on the most productive and dynamic design. The guidelines governing the structure of the company and the distribution of electricity and command in a small business are normally referred to as company governance. In accordance to a definition of Shleifer and Vishny (1997) “corporate governance offers with the way in which suppliers of finance to companies assure by themselves of finding a return on their investment” Consequently, company governance will only be important in a situation wherever the suppliers of finance (the shareholders or homeowners of the enterprise) do not run the organization them selves but seek the services of a administration crew that is responsible for the day-to-day things to do of the enterprise. Corporate governance is a field that concentrates on the partnership in between boards, stockholders, top rated management, regulators, auditors and other stakeholders. The principal attributes of helpful corporate governance are: transparency, defense and enforceability of the rights and prerogatives of all shareholders and administrators capable of independently approving the corporation’s method and big organization plans and decisions and of independently choosing management, monitoring management’s overall performance and integrity and changing administration when needed. Of significance to this examine is the recognition that boards of directors are necessary to most definitions of company governance. Cadbury (1993:9) states that it is “the capacity of boards of directors to mix leadership with manage and efficiency with accountability that will principally decide how effectively companies fulfill society’s anticipations of them. Maassen (2002). Around the several years, the classic a person-tier administration process was expanded and designed into a much more sophisticated and highly developed two-tier administration process. The well-known 1-tier technique derived from the Anglo-Saxon or Anglo-American program which is characterised by the absence of enthusiasm in employee participation and solid company perceptions. In distinction, the two-tier management technique (known as Continental or dualistic) is heavily influenced by labor legislation and owes its essential organizational functions in Germany. The way in which company governance is arranged in different nations, relies upon on the business enterprise context which it prevails. This entails a separation concerning possession and management. The range of board roles in the governance of corporation variances in the leadership framework, the organization composition and the composition of boards present a wide range of prototypes. Even so, both administration and administrators also share yet another more fundamental purpose, to develop a board which can provide the most educated and most objective suggest readily available. Thus, following the knowledge was drawn from corporate governance lecture for the “competition” amongst the two diverse programs of corporate governance we will present a preliminary evaluation. Distinctive perspectives of company governance give increase to distinctions in the definition of boar’s roles in the governance of firms. We are going to analyze their advantages and negatives referring examples in European nations around the world. The function is not to favor a single product over yet another but to glimpse at similarities and variations. In summary, we can say that methods utilized to appoint administration and managing bodies are not trivial, but they are not the most essential distinct trait of the devices of governance.

Governance products

The two-tier product

In many international locations most companies are operate typically for the benefit of the shareholders and the rightful of homeowners. On the other hand some firms run for the reward of other major groupings such us prospects and employees. This is the two-tier or stakeholder design which we are going to analyze down below. In the two-tier technique of governance all stakeholder pursuits and primarily public are shielded. This model it is constituted from two boards, the administration board and the supervisory board. The administration board includes one or much more people today appointed by the supervisory board. These members chosen by the supervisory board cannot also be a member of the supervisory overall body. The company of the company is administered by the administration board, conditional to the supervision of the supervisory board. The management board is obliged to report periodically to the supervisory board and the latter may at any time connect with for information and facts or clarifications. The administration of the firm by itself may possibly not be undertaken by the supervisory board itself, but its acceptance may possibly be required in the scenario of specific transactions. The management board is obliged to report periodically to the supervisory board and the latter may well at any time connect with for facts or clarifications. The management of the firm alone could not be carried out by the supervisory board itself, but its acceptance might be essential in the case of certain transactions. Chetcuti (2010) The main jobs of the supervisory board are to appoint the associates of the administration board to the shareholders meeting and to keep track of them. To reveal, supervisory board is the checking overall body of the corporation. There is a rigorous separation of control and managerial tasks. The two boards are cooperating and concerning them there is major confidence when information is shared among all the members with the final result of performance conclusion producing. This characteristic is the most significant power of two-tier management. Furthermore, in the shareholders conference an auditor is represented. To eliminate a member of the board of auditors or the exterior auditor a few conditions must be happy, a) initial, a superior bring about is required, b) second, adopted by the shareholder’s conference is wanted, c)3rd, the resolution adopted by the shareholder’s conference will have to be approved by a court. The external auditor may well be removed only when this over situations satisfied. In contrast with the two-tier design the place the supervisory board may perhaps effortless take out folks appointed to corporate bodies this kind of as the users of the administration board. The continental European design (two-tier system) the place supervisory boards consist entirely of non-executives and a decreased stage administration board is composed of full time running directors. Its main change between the other corporate governance models is the electric power granted by the law to the shareholders conference to clear away the users of the supervisory board with a uncomplicated resolution and devoid of the approval of the court. Also, the command of management (not the company) requires the compliance with law and articles of the corporation in its company methods. The regulation has strictly restrictions to transfer the authorities of a single body to a further entire body. An evident and comprehensible illustration of this sort of transfer are the transfer of conclusion-creating on the annual report from the supervisory board to the common assembly of shareholders and the restriction to the administration board getting choices without having the supervisory’s board approval. Bajuk (2010) Having said that, business associations are inherent traits of the German supervisory board. In contrast to the United states of america and the British isles, Germany and Netherlands have a two-tier board method. Germany follows this design, the place the board contains a administration and a supervisory board, which supplies a full separation in between management and supervision of administration as we talked over higher than. The suitable of workforce to participate in selection generating in this product is identified as “co-determination”, which is also reflected in the point that workers’ counsels have legal rights about functioning hrs, vacations, hirings and dismissals. “In methods with co-determination the workers are given seats in a board of directors in one-tier management programs or seats in a supervisory board and from time to time management board in two-tier administration units. In two-tier systems the seats in supervisory boards are commonly confined to 1/3 of all users. In some devices the staff can decide on 1/2 of all users of supervisory boards, but a representative of shareholders is constantly the president and has the determining vote. The personnel associates in management boards are not present in all methods. They are often confined to a personnel director, who votes only on matters concerning workers.” Wikipedia Co-resolve (2010). The remaining members of the supervisory board are appointed by the standard assembly of shareholders. Moreover, the assembly has the suitable to elect the chairman, who has double voting legal rights in the conference. To summarize, the two-tier design is characterized by the central function of the supervisory board which has a monitoring character. The supervisory board is granted two powers: to endorse the equilibrium sheet and to oversee the customers of the administration board with no a resolution of the shareholders’ meeting.

The 1-tier product

One-tier model (Continental European) knows two bodies of company governance. The one particular-tier design in United Kingdom characterized by a far more versatile approach than in two-tier method in Germany. The two bodies of governance are the standard conference of shareholders and the board of directors. Each administration and control entrusted to the fingers of board of directors. The shareholder’s conference appoints the board of director who performs the checking perform. In the Anglo-Saxon nations just one certain stakeholder can be determined which can exert a sizeable influence on managerial choice-creating: the influence of shareholders is strongly institutionalized in these nations around the world. Also in a single-tier design the shareholders are strongly safeguarded by the regulation. As a end result, in the Anglo-Saxon international locations utilize the democratic theory of “one share, a person vote”. A just one-tier board of directors more characterizes the Anglo-Saxon nations around the world: government and supervisory tasks of the board are condensed in one particular legal entity. In addition, in its composition and competencies, the basic meeting of shareholders does not differ significantly from the general assembly viewed in two-tier administration procedure. The final final decision on the composition of managing and administration bodies is nevertheless created by the shareholder’s conference having said that the mix of monitoring and managing bodies are the most crucial characteristics in this design. In addition, just one of its attributes is that the shareholder’s assembly may possibly get rid of the users of the board of administrators at any time. Listed here I have to strain that the board of administrators is composed of equally government and non-government directors who are not associates of the board of directors. As all directors have the same powers, non-government administrators can also get management decisions when at the exact same time this is restricted by the supervisory board in two-tier administration (Germany). From a sensible point of see, the non-govt board users advise the inside directors on main coverage conclusions for the corporation. If we examine director duties in Germany, what we observe is weak guidelines on care and abilities and at the identical time potent on fiduciary duties. There has been appreciable debate over the efficiency of executive and non-government administrators. The revised Mixed Code gives the description of their capabilities. The Mix Code recommends composing at minimum 50 % the board of independed non-executives. Also, a core ingredient of the blended Main is the separation of the positions of board chairman and chief government officer (CEO). The outcome of the two aspects is the management and manage of the company. Derek (2003) As we have explained in the previously mentioned evaluation some a person-tier boards are dominated by a bulk of executive directors although other folks are composed of a greater part of non-government administrators. In addition one-tier board can have 1 leadership composition that separates the CEO and chair positions of the board. One-tier boards can also run with a board management framework that combines the part of CEO and the chairman. The a person-tier boards also make often use of board committees like audit remuneration and nomination committees. Continental European countries these as Germany, Finland and Netherlands have adopted variants of the two-tier board model which make it a lot more individual administration process from one-tier program. The inner audit of the stated firms that undertake the a person-tier procedure is executed by an inside management committee composed by non-govt administrators. An exterior auditor controls compliance with accounting strategies, and the term of the corporate bodies and of the external auditor is a optimum of three It is truly worth to point out that the appointment of a director to the administration handle committee it ought to be accredited by the board of directors. In that case, the eradicated member has its place on the board of directors but will not belong any much more in the managing system of the company. As a result the removal treatment in just one-tier product of governance does not follow the procedure necessary to take out the associates of the board of auditors in two-tier technique. The most attention-grabbing element of the just one-tier program is the way boards of directors operate in blend with managing and monitoring capabilities. The most important pros that have been cited for a single-tier governments include things like: better service coordination, clearer accountability (since there is only 1 tier), much more streamlined final decision-earning, and bigger effectiveness. (Bahl and Linn, 1992) Last but not least, the Anglo-Saxon system of company governance is characterised by reasonably limited-expression financial relationships. Quite unrestricted marketplaces for funds, labor, goods and expert services make sure quick adjustment to transforming instances, therefore disfavoring extended-time period and stable associations (Gelauff and Den Broeder, 1996). This phenomenon has led some to notice that managers in the Anglo-Saxon nations around the world are myopic, concentrating on boosting the following quarterly figures though under-investing in long-term property these types of as study and progress or education (e.g.Porter, 1992 Prodhan, 1993). However, according to some others, there is no concrete proof to help these promises (e.g. Shleifer and Vishny, 1997). The most significant summary in just one-tier board counties is the emphasis on current market procedure where by they are trying to improve shareholders worth.

Comparison of two designs

One-tier and two tier corporate governance models have quite a few dissimilarities. Their primary dissimilarities are owing to the dissimilar roles of their govt organs and the power that can drive. One particular crucial mechanism which is a frequent theme in both corporate governance models is the board of administrators. As properly popular themes are the board of shareholders and auditors. In Continental European model (two-tier process) two more organs make the variance. The supervisory board and the Functions Councils have a critical role in the countries which are pursuing the two-tier system. Former customers of the management board generally turn out to be regular members or even preside of the supervisory board (Schmidt and Drukarczy, 1997). A big issue with the supervisory board is the ownership structure in Continental Europe where by the two-tier board system is predominant. In those nations particular teams often hold significant shares of organizations. Although, the way in which company governance differs from region to county the separation in between possession and management exists in equally methods. A demonstration follows beneath in making a comparison through their strengths and shortcomings. One particular-tier design which is usual in Anglo-Saxon countries and recognised as a shareholders model. Continental European product which adopts its features of the German international locations and is recognized as stakeholders’ design. The first important variance is the shareholders focus, the number or proportion of the future aspects of dividends. In Continental European product shareholders symbolize a substantial proportion of the full quantity of shares which are publicity traded. The shares give the evidence of membership or ownership for shareholders is a piece of paper that has a worth. Each share offers you the correct to vote, the suitable to fork out dividends and equally. On the other hand in Anglo-Saxon nations the shareholders focus is extremely lower. This occurred thanks to the actuality that firms in Anglo-Saxon international locations are larger sized and the share of shares represents an massive capital Franks & Mayer (1994). This model is characterized by the reality that relationships involving organizations and shareholders as well as with their employees are short-term in nature. We observe a bigger mobility on the capital and labor markets wherever counterparts does not transpire the same in Continental design. This is characterized by the really very good and institutional interactions with stakeholders for the routine maintenance of harmony. The position of shareholders can shift the threads in the procedure and advancement of enterprise. Their id differs in these two styles. In United States and United Kingdom most of the totals of shares are in the arms of agents of monetary institutions. In Germany comes about entirely reverse, personal corporations, economic establishments and private folks keep the most of the shares. In one-tier procedure thanks to the polices the economical establishments are not authorized to maintain shares on their very own behalf, on the other hand in two-tier process businesses and individual folks act straight without the need of applying agents to manage their affairs. Monetarily the just one-tier system shareholding through the inventory trade is really popular and the individual shareholders do not have more than enough attendance in the daily practice of the company but the influence of the stock exchange is decisive. The time period “business context” is the selection of stated providers as a percentage of the total number of businesses in a nation. In 1-tier board program a lot of organizations are detailed and their shares are publicity traded as a result of considerably less own get hold of with their shareholders. In distinction, the two-tier design is characterized by a small business administration who’s in search of long lasting institutional relationships with all stakeholders. In European nations around the world fewer companies are publicity traded, so a robust relationship exists between the management of the firm and its shareholders. The vast majority of European companies hold significant stakes in linked businesses and shareholding and vice-versa. The existence of various holdings and top-down buildings in these corporations regulates the numerous styles of handle, which are normally taken care of about the very long time period. Nevertheless, transparency is substantially more restricted in these nations around the world because of the constrained quantity of shareholdings and thus the limited extent of details disclosure. In addition, polices as anti-believe in legal guidelines and arms-duration concerning guardian and daughter businesses have constrained the complexity of the possession composition in just the tier-two countries.

Summary & Conclusion

By examining the polices for the two board techniques to elaborate the respective strengths and pitfalls, we locate a potent evolution of the methods towards each other. The independence of corporate governance boards is an significant company governance situation. The checking bodies of the organizational buildings of the two versions have to hold the equilibrium of energy between corporation. A single-tier boards stand for more rapidly conclusion producing and flexibility as they are characterized by a evidently defined management human body. On the draw back, there is a greater possibility of board seize for the reason that the customers are intensely influenced by the CEO. To empower non-executive directors, inventory exchanges, legislators and other comment factors market changes to current board structures in Anglo-Saxon nations. In this context we located that Anglo-Saxon nations around the world count on a the greater part of impartial directors inside of the board of directors to guarantee an alignment of pursuits amongst the administration and the shareholders, which is claimed by all the just lately produced company governance codes. Therefore the two the responsibilities of monitoring and the strategy-placing are integrated in the same overall body. The board users fulfill the two cost-effective and checking roles, which is why they face problem, they must make conclusions, and, at the similar time to observe these decisions. While this problem does not exist in two-tier method thanks the formal separation of manage and administration, it is crucial to get hold of this separation afflicted in the a single-tier method. Two-tier boards ensure a clear separation of course and control. This separation can safeguard both of those, shareholders and the community curiosity, this is the important edge. Even though, the separation of management and regulate a little enervates the independence of the associates of the supervisory board, this separation stays a energy pertaining to to the management board. Each and every member of the management board has the same undertaking, to run the enterprise in a way that lets even more improvement and monetary prosperity. The management promises an open discussion between the members of the supervisory board and the management board. The users of the supervisory board are picked out by the administration board and are only formally obtained at the standard conference. In exercise the customers of the management board and common the chairman switches to the supervisory board, and regularly develop into the chairman immediately after retirement. While the co-willpower statute experienced even the edge to cut down the risk of strikes and is an early warning process for social conflicts. On top of that, co-determination is capable of guarding businesses from hostile takeovers. Aside from marginal variances we noticed the identical complications of control for both board systems. The solid evolution of the methods towards each and every other on the a person hand illustrated an impediment for the new lawful form due to the fact the extra gain of the new freedom of alternative involving unique board constructions is lowered. This analysis concludes that Continental European types of board group are barely at any time acknowledged by both equally reformers as very well as scientists in the fields of corporate governance and therefore nevertheless restricted on widespread relevance and suggestion. On other hand, resent fiscal developments in the two corporate Amecrica and Europe have shown incredible limited comings on both manage and diligence on both techniques. More progress and clarification of the two money and governance legislation require to equally refine and merge elements from equally techniques.

Corporate Governance and Financial Scandals in India Essay

INTRODUCTION:

This research will identify Corporate Governance in India and the good reasons of its failures that lead to the money scandals in India. As the major companies’, Enron and WorldCom, unlawful functions ended up disclosed the world’s business arrived into shock. Quite a few other companies in the world came less than this attack like Parmalat in Italy, all had problems in their corporate governance. This showed that the total environment had a trouble in their company governance. As opposed to the developed nations around the world, the developing nations around the world had corporate governance as the most important situation much in advance of these scandals took put as company governance and the financial improvement are joined as this aids in advancement of financial procedure which effects in maximize of development and reduction in the poverty. Hence analysis tells us why there are company governance failures in significant businesses and points out the elements that impact the company governance like ownership construction, framework of organization board, financial construction, etc.

LITERATURE Assessment:

1.1.1 Company Governance: An overview

Corporate Governance is an in depth phrase that refers that the rules, processes, responsibilities and the privileges are shared by the corporate individuals. It essentially says that how the traders assure that they get a return on their expense. It is the determination building committee by which the manager’s function on their responsibilities in order to improve traders wealth. Acc to Keasey et. al.(2005) techniques Corporate Governance as, “Corporate Governance has two prerequisites, micro degree and macro degree. At the micro amount it demands to make certain that the organization, as a productive organization, functions in pursuit of its objectives. Thus if we stick to the classic Anglo-American conception of the firm as a unit to even further the perfectly staying of its proprietor-shareholders, good governance is a matter of guaranteeing that the selections are taken and implemented in the pursuit of shareholder benefit. At the macro stage corporate governance, in the words of Federal Reserve chairman Alan Greenspan, ‘has evolved to far more successfully endorse the allocation of the nation’s savings to its most effective use.’ “

A fantastic company governance should purpose at prolonged term positive aspects to the shareholders and other stakeholders. It can cut down the nationwide money crises. Company governance and currency depreciation have inverse romantic relationship. Asian crisis of 1997 is one instance of very poor company governance norms. The supervisor really should be working in the desire of the shareholders. Supervisors have the management over the business enterprise and may not act in the reward of the shareholders. This is the popular problem all more than the world. On the full a excellent company governance can help in stopping the financial scandals that transpired in the earth.

1.1.2 Company Governance in India:

In India, corporate governance was not comprehended until early 1990s. Indian legal technique is dependent on the English frequent regulation and provides the best defense to the traders and to creditors as perfectly. The corruption charge is incredibly higher in India. The most vital enhancement in corporate governance and investor’s security in India is the institution of the Securities and Trade Board of India in 1992,(Chakrabarti et. at.,2007). It was established to keep an eye on the inventory trading which helped in earning the fundamental guidelines for the carry out of company in India. Reforms were being produced to make the persons rely extra on marketplace than on govt. The public sector was focused inorder to make it far more successful and to convey out the authorities holdings for sale to the public. Banking sector reforms have been also created to bring them to the intercontinental levels. In 1998 a code- Attractive Company Governance in India and the businesses adopted it,(Mallin,2010). Lots of who did not follow it expert losses and finished up in shedding the self-assurance of people today. SEBI also built a committee on corporate governance in 1999 headed by Shri Kumar Mangalam Birla and report was posted in 2000,(Mallin,2010). This concentrated on the cash market’s growth. The code is to be followed by the both equally public and non-public sector providers. The code tells about the framework of the business, the position played by them and what is most people entitled for. i.e. Board of Administrators, Nominee Directors, Chairman of the board, Audit committee, Remuneration committee, Shareholders, how company governance is applied, administration of the firm and the board strategies. Even though India has one of the very best company governance legislation but the implementation of them is quite very poor. In India, the principal business form is the community minimal companies. The authorized program is the English Typical Legislation, the construction of the Board is unitary and the possession is generally loved ones possession or corporate but now the institutional investor’s possession is increasing.

1.1.3 Money Scandals:

The company governance is affected by the ownership structure, the construction of business boards, the economic framework and the institutional setting. If any of these does not do the job appropriately then the scandals are prone to occur. The individuals select the board of directors, which even more appoint supervisors for distinctive do the job who in fact get the job done each day in buy to maximize shareholders wealth. It is the board of administrators that decided the corporate objectives and the administrators are the a single who have them out. The key good reasons that trigger corporate governance to fall short are as follows: the most significant is that the perform performed is not viewed adequately and is extremely weak. There is not a lot regard for the shareholders, and additionally the administration has the comprehensive authority who works for their possess benefits somewhat than the shareholders wealth maximization (KPGM, 2009). The number of company scandals that have taken location all in excess of the world are like Enron (United states), WorldCom (Usa), Satyam (India) and many much more (Mehta et. al).

Investigation Questions AND Objectives:

The study aims to uncover the corporate structure and its part in satisfying the goals of an business. The exploration about the current corporate governance framework and the adjustments it has appear extra time and even more any changes needed according to worldwide norms.

The most important aim of the investigation is as follows:

How can company governance be additional stringent to steer obvious of scandals?

How crucial is the Board framework and the Audit committee on the board for good Corporate Governance?

Is there any alteration expected in the recent composition of company governance to make it work far more effectively?

Method:

The exploration is to be completed, in particular, for the in depth info on the company governance and the reasons of its failure which end result in the fall of massive providers dependent on the pursuing two explanations i.e. the Board composition and the Audit committee. The qualitative technique will be made use of. The most important data selection for the Board construction will be carried out dependent on two organizations i.e. Tata Consultancy Solutions (TCS), India and Infosys Technology Minimal (India) which can be in comparison to the 1 of the important organization of India, Mahindra Satyam, which failed because of to weak corporate governance. All a few are the software program organizations. Using immediate interviews with the high officers on the management committee will be of beneficial in acquiring out the deep structure and variations that are needed for the corporate governance to do the job much more proficiently and how does it continue to help the providers to perform up to their shareholder’s anticipations. The Board construction can be talked about by recognizing the selection of users on the board, their independence. Auditors participate in an important position due to the fact due to their studies folks set religion in the company. The audit associates will be uncovered and the genuine information of the associates will be collected from the CMIE’s prowess database which will support in telling no matter if the committee has plenty of expertise in get to fulfill the shareholder’s need or not.

Secondary info is the data in which researcher is not included in the selection (Dale, Arber, and Proctor 1988). The secondary information selection also obtained some benefits as price and time, substantial-high quality info, prospects for longitudinal analysis, more time for details analysis and reanalysis may supply new interpretations (Knight and Latreille, 2000). Secondary facts will be collected from enterprise web site, yearly studies, publications, journals, newspapers and publications. The knowledge collected as secondary can supply important info about the firm and can demonstrate supportive in analysis.

3.1 Evaluate Analysis High quality:

Dependability: The trustworthiness of job interview can be ascertained by ensuring that all questions are plainly comprehensible to all the interviewees and the replies been given can be coded explicitly. The solutions received from job interview ought to make perception and will have to show helpful to the analysis.

The self-completion questionnaire should be filled by staff devoid of any force from their professionals. As a result, a pilot exam need to be conducted in advance of issuing of questionnaire (Saunders et al., 2003).

Validity: The validity is worried with the challenge that no matter if the details gathered is linked to what it is anticipated to be. According to Saunders et. al(2003), validity is related to a query of everyday romance amongst two variables?

The exploration will be conducted from February 2010 to May possibly 2010. And there will be direct call with senior professionals in DAIPL to keep updated about any adjust in their motivational strategy or any transform made internally. This will guarantee the validity of the investigate completed.

Ethics: The code of ethical perform stated that it is the obligation of the researcher to evaluate carefully the responsibility of hurt to exploration individuals, and, to the extent that it is achievable, the likelihood of harm should really be minimized (Bryman and Bell, 2007).

As a result, investigation carried out will be carried out only when supervisors and staff members are inclined to participate in investigate. The names of all participates would be saved private and not disclosed at any cause. The questions in the job interview will not be formulated in manner that they clearly show any participant’s id.

Accessibility: The researcher right here is been granted the suitable to obtain and publish all the results that are related to all ethical necessities.

TIME SCALE:

Corporate Governance and Company Law Essay

INTRODUCTION Modern day company enterprises taking large exertion to improve their profits by applying their have marketplace strategies, corporate governance has large amount to do below these types of situation. Corporate governance comprehensively refers to the most important system which involves in the method of regulation and existence of an company.The independent authorized entity strategy exactly where a business possesses and its distinct nature from the associates who fund in their income in the direction of the money of the company and empower its administration to a crew of specialised managers. In this context the individuals who pooling their revenue in to organization are shareholders and the specialist administrators who are assign to immediate and regulate are properly-acknowledged as Administrators of the organization. It is significant that there is no common definition with similar to the corporate governance but it develops a system the place the directors are entrusted with responsibilities and duties in relation to the administration of the business, far more completely it dealt with the methods of bringing the positive aspects of the traders (the principals) and the supervisors (the agents) it is centered on a system of collective board responsibility and accountability as a complete. It is obvious that the corporate governance focuses towards for the optimum welfare to the shareholders by regulating the obligations of the administrators of its business. The well identified point is that since company posses a different lawful entity from its administrators and the owners, it has some obligations in the direction of constituencies at substantial, the place it declares certain moral obligations to the company to take into account other “stakeholders”. In the context of law the time period stakeholder consist of suppliers, workforce, prospects and the modern society at huge. It is typically reported that the company governance is also consider about social deal wherever a corporation bargains with the interest of other stakeholders. The Firm for Financial Co-Operation and Enhancement expressed the watch of above as follows “Corporate governance consists of a established of associations among a company’s management, its board, its shareholders and other stakeholders.1” As stated previously, the principal purpose of the company governance is to monitor the functions of the directors of a organization and control its obligations by offering the system so that to certify that they do not misuse their powers. Several strategies of system can be observed in United kingdom which can be employed to control the obligations of its administrators, one of prominent out of all is the Corporations Act of 2006. There is also recognition to protected creditors by advantage of statutory provisions, below the Companies Laws of 2006 and also below the Insolvency Act of 1986. This investigate paper essentially specials with the discussion amongst the shareholder and the stakeholder styles in British isles, it also elaborate the new strategy that has been introduced to secure stakeholder’s curiosity in purchase to achieve all round good results to the corporation. SHAREHOLDER PRIMACY Model Mainly this product thinks shareholder as the owner of the business, and generally deals with the gain maximisation of the organization. The look at of shareholders as the owners of the company is mirrored in the Cadbury Report on the Economical Facets of Corporate Govenance2.The most idealistic way to place it would be that the shareholders are not the proprietors of the business but the house owners of the shares of the corporation. This followed by the land mark circumstance of Salomon v Salomon & Co,3 Which elaborates the individual lawful entity principle of a business. Due to the fact the concept of shareholders product specials with cash of the organization, the principal objective of