Corporate Government: Significance and Issues
The modern corporate accounting is gradually becoming more complicated with the dynamic business environment and globalization. Where earlier the company was evaluated only on their financial performance, nowadays the non financial metrics have become more important in assessing the success and sustainability of the companies. One such contemporary issue in corporate accounting is the Corporate Governance.
Corporate governance is the set of rules and systems that should be followed by the management so as to justify their actions and decisions. The governance policies aim at holding management responsible for their actions to the stakeholders. The concept is introduced by the government authorities to restore the fading trust of investors in companies. The report critically evaluates the corporate governance issue in light of three articles from different sources.
The report concludes that the corporate governance is important for long term sustainability of the company but at the same time the presence of corporate governance policies is not sufficient. The management and the board need to align their goals with the goals of the company and there has to be complete separation of the ownership and management.
Corporate governance is the topic of increasing interest for all policy makers, investors and stakeholders. The ICSA – Governance institutes defines corporate governance as a way in which the companies are governed. It involves all aspects of the organization and helps in deciding the ways in which the functions of the organization are carried out. They are operating procedures at the corporate level which aims to ensure that the business of the company is carried out with transparency, prudently, responsibly and in the best interest of the shareholders and stakeholders. Corporate governance nowadays is considered as synonymous to sustainability. However, like no two businesses are same there is no set of corporate policies that can be considered as good for all business. Corporate governance comes as a highly subjective issue which varies from company to company and even person to person in the same company. The report critically analyses the concept of corporate governance in light of three articles on importance and need of corporate governance for the companies and tries to find out if the articles are in agreement with the view.
With all the authorities emphasizing on corporate governance and corporate governance audits becoming the latest trend in growing organizations, the burning issue here is whether the corporate governance is actually so important for the companies? If Yes, than how to decide on which are the good corporate governance policies when they vary from one company to another. The Corporate governance is observed as the measure by which the company displays it strong traits so as to gain trust of the shareholders and stakeholders. Despite this practice it is observed the market trust on businesses is on decline. The global surveys shows that trust of consumers on corporate have decreased in last 20 years (Price, N., 2017). In light of this observation the role of corporate governance comes under critical analysis. Is really the corporate governance helps in building trust and increases the stakeholders’ confidence in the management of the company? Let us try to find out the answer to the question with the help of three articles on corporate governance. The three articles belong to different sources and are not interrelated so that the view can be easily generalized.
Good corporate governance practices includes that the management should take care of the society and the natural environment in which they are operating along with the interest of the stakeholders. Thus the objective of profit maximization should be in line with the fulfilling of the social responsibilities as well. It is believed that for long term sustainability the corporate must give equal weight to environmental concerns and incorporate it in their corporate governance as the central theme. The research conducted by Hussain et.al (2018), finds out the relationship between good corporate governance and sustainability of the corporate on triple lines of economic, social and environmental concerns.
The companies are governed on the basis of the agency theory, where in the managers are the agents of the shareholders. To motivate the agents to work in best interest of the shareholders the executives are paid high salaries. The managers can thus work in best interest of shareholders and maximize the profits of the shareholders by making decisions which are economically strong and ignore the social and environmental concerns. However, the performance of the organization is not measured only in financial terms but also the non financial terms like the contribution it makes to the outside environment. Simultaneously the increased rules and regulation to conserve natural resources also requires the companies to use the renewable resources so that they can continue their operations smoothly in long run. The same is supported by Hussain et.al(2018) in his study which shows a positive relation between the non financial performance of the company and its long term sustainability. Corporate governance plays an important role in designing the company policies towards environment and society, thus good corporate governance is necessary for the long term sustainability of the company. The study also shows that in order to ensure strong corporate governance there should complete separation of the CEO and the board of directors, so that corporate governance activities can be performance and evaluated effectively. Thus the article agrees to the fact that good corporate governance activities are important for the sustainability of the company.
Corporate governance is a way by which the stakeholders and shareholders can monitor the activities of the managers of the company. The Good corporate governance works on the principles of transparency, accountability, responsibility, true and fair view of the financial transactions of the business and sustainability. The company makes framework which guides the management in performing their day to day activities. The framework is designed so that they lead to complete transparency of the decisions taken by the management and hold them responsible for any careless behavior. However at the same time, the corporate governance framework cannot be designed very precisely and specifically and has lots of scope for personal judgment and manipulation. The first and foremost requirement for good corporate governance is that all the management people should have same understanding and perception of the framework and view the business activities from the same perspective. What if the management people have different outlooks and the entire team is not aligned towards the same objectives and goals? In the article by State Street Global Advisors (2018), they conducted research on the corporate governance role where the board and management do not have aligned objectives.
It was observed in the article through the research that good corporate governance is not sufficient unless the board and management staff have their objectives aligned with each other and with the objectives of the company. There research shows that not all the principles of the corporate governance policies as stated and drafted by the companies were followed unless all the board members were aligned with the objectives of the company. The principle which required the alignment of management and board on long term strategy with the company showed maximum non compliance.
Source : State Street Global Advisors (2018)
Thus having a good corporate governance policy is not sufficient unless it is adopted by the employees of the company. This can be ensured adding by diversity to the board and reducing their tenure.
It is also observed that despite the good corporate policies, the shareholders are helpless and has to face the agency issues with the manager. A recent article by Adam Vaughan in The Guardian ( 9 Sep., 2018) stated that he investors of the Newcastle United Football club are not happy with the management of the CEO Mike Ashley. The club like all have a good corporate governance policy but what if the CEO or the management is not ready to follow the policies! The article states that the investors are highly dissatisfied with their CEO’s governing style and want to raise their concerns in the AGM of the company. Here the CEO is the largest shareholder of the company. The shareholders blame the CEO for flushing out huge cash out of the company for his personal and family use. The reason for this concern in this particular case is the lack of separation of ownership from management. The effective management of the company is possible with good corporate governance policies only when there is clear separation between management and ownership. In this case the CEO of the company is also the major shareholder and hence he is using the position for his personal benefits.
The above three articles can be use to generalize the observation on corporate governance being a tool in the hands of management and not a 100% effective measure to control the activities of the management. The three articles covers the journal article based upon the academic research, the research conducted by the group of advisors from the actual market data based upon the practical situation and the news paper article which publishes the ordeal of the shareholders. The three articles are from three different sources being a journal, website of the advisor group and the new paper report.
There is coverage disparity as one is based upon the academic research, one on real life data and one is a report on a specific company. The three sources are independent of each other and report different scenarios on corporate governance.
The significance of the report is there because it critically evaluates the academic and theoretical concept of corporate governance. According to the theory corporate governance is the most sought after concept to improve the management of the corporate and increase the investor confidence. The corporate governance is considered to be the way to monitor and control the activities of the senior management. Still it is observed that the trust and confidence of the investors is declining. This is because the mere presence of the good corporate governance policies is not sufficient. The management needs to support the policy and follow it diligently. The article reviewed in this report critically evaluates the theoretical concept of corporate governance and re-iterates the importance of business ethics and fair principles as the most important factors of sustainable business.
Corporate governance is no doubt a contemporary issue in modern corporate accounting. The more it is being sought after as a solution to good corporate management the more critically it needs to be evaluated. The report shows that there is a relationship in sustainability and corporate governance of the companies. The good corporate governance policies ensure long term sustainability. But the mere presence of corporate governance policy is not sufficient in the company. The management and board of directors should follow the policy diligently. This is possible when the objectives of the whole group are aligned towards the objectives of the company. Also there has to be a clear separation between the ownership and management of the company. The corporate governance is effective only when there is a principle and agent relationship between the management and the shareholders. If the management and ownership is shared the objective of good corporate governance losses its importance.
Thus corporate governance is important and necessary for the effective management of a company but the policies are very subjective and vary from one company to other and also from one person to another in their interpretation. There has to goal congruence and ethics in order to implement the corporate governance effectively.