Corporate governance is the mechanism, process and relationship in which the corporation is controlled and directed. The structure and principles of governance identify the distribution of rights and responsibilities among different participants in the corporation (such as boards, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include rules and procedures for making decisions in corporate affairs. Corporate governance encompasses the process by which company goals are defined and pursued in the context of social, regulatory and market environments. Governance mechanisms include monitoring the actions, policies, practices and decisions of companies, their agents, and affected stakeholders. The practice of corporate governance is influenced by efforts to align the interests of stakeholders. Interest in corporate governance practices of modern corporations, particularly in relation to accountability, increased following the collapse of large numbers of large enterprises during 2001-2002, most of which involved accounting fraud; and again after the recent financial crisis in 2008.
Corporate scandals of various forms have maintained public and political interests in corporate governance arrangements. In the US, these include Enron and MCI Inc. (formerly WorldCom). Their death led to the enactment of the Sarbanes-Oxley Act in 2002, a US federal law intended to restore public confidence in corporate governance. Comparable failure in Australia (HIH, OneTel) is related to the final part of the CLERP reform 9. Failure of similar companies in other countries encourages increased regulatory interest (eg, Parmalat in Italy).
Video Corporate governance
Interests of stakeholders
In contemporary business corporations, major external stakeholder groups are shareholders, debt holders, creditors and suppliers of trade, customers, and communities affected by the company's activities. Internal stakeholders are board of directors, executives, and other employees.
Many contemporary interests in corporate governance relate to the mitigation of conflicts of interest between stakeholders. In large companies where there is a separation of ownership and management and no controlling shareholder, principal-agent issues arise between top management ("agents") who may have very different interests, and with much more information definition than holders shares ("principals"). The danger arises that, rather than supervising management on behalf of shareholders, the board of directors may become isolated from shareholders and tied to management. This aspect is particularly present in contemporary public debates and the development of regulatory policies. More specifically, the danger is that executives who are paid with stock options have an incentive to divert the retained earnings of the company into buying shares of the company's own stock, which will then cause the stock price to rise. However, retained earnings will not be used to purchase the latest equipment or to hire quality people. For thirty or forty years that the model has been there, the transfer of retained earnings to stock price manipulation has gradually eroded the competitiveness of US industrial base. While the public blames low wages in China for eliminating US jobs, the reality is that many US companies compete with high-wage countries such as Canada, Germany, or Japan. It is the failure of large publicly held companies to invest in new equipment and people who hold back the US and erode the middle class (engineers, chemists, CNC machine experts, accountants needed less as abandoned crops for outgoing ages).
Ways of reducing or preventing conflicts of interest include processes, customs, policies, laws, and institutions that affect the way companies are controlled. An important theme of governance is the nature and level of corporate accountability. Related discussions at the macro level focus on the effects of corporate governance systems on economic efficiency, with a strong emphasis on shareholder welfare. This has resulted in a literature focused on economic analysis.
Maps Corporate governance
Other definitions
Corporate governance has also been defined more narrowly as "a legal system and a good approach whereby corporations are directed and controlled focusing on internal and external corporate structures with the intent of monitoring management actions and directors and thereby reducing the risk of agencies that may be derived from misconduct company officials. "
Corporate governance has also been defined as "Whether the act of directing external, controlling and evaluating the company" and related to the definition of Government as "The act of directing the external, controlling and evaluating entities, processes or resources". In this sense, Corporate Governance and Governance differs from management because governance must be EXTERNAL to the regulated object. The governing agent has no personal control over, and is not part of the object they set. For example, it is impossible for the CIO to manage IT functions. They are personally responsible for strategy and management functions. Thus, they "manage" the IT function; they do not "organize" it. At the same time, there may be a number of policies, endorsed by the council, followed by the CIO. When CIOs follow this policy, they engage in "government" activities because the main purpose of this policy is to serve governance goals. This board ultimately "regulates" IT functions as they stand outside the function and are only able to direct, control, and evaluate IT functions externally based on established policies, procedures, and indicators. Without these policies, procedures and indicators, the council has no way of organizing, let alone influencing IT functions in any way.
One source defines corporate governance as "the set of conditions that make up bargains ex post on quasi-rent generated by the company." The company itself is modeled as a governing structure that acts through a contract mechanism. Here corporate governance can cover its relationship with corporate finance.
Principles
The contemporary discussion of corporate governance tends to refer to the principles raised in the three documents released since 1990: The Cadbury Report (UK, 1992), Principles of Corporate Governance (OECD, 1999, 2004 and 2015), Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and Organization for Economic Co-operation and Development (OECD) report presents the general principles under which business is expected to operate to ensure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to organize some of the principles recommended in Cadbury and OECD reports.
- Rights and fair treatment of shareholders : Organizations must respect the rights of shareholders and assist shareholders to exercise those rights. They can help shareholders exercise their rights by publicly and effectively communicating information and by encouraging shareholders to participate in rallies.
- Other stakeholder interests : Organizations must recognize that they have legal, contractual, social, and market-oriented obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities , customers, and policy makers.
- Board roles and responsibilities : The board requires sufficiently relevant skills and understanding to review and challenge management performance. It also requires the size and level of independence and adequate commitment.
- Integrity and ethical behavior : Integrity should be a fundamental requirement in choosing company officials and board members. Organizations must develop a code of conduct for their directors and executives that promote ethical and responsible decision making.
- Disclosure and transparency : The organization should clarify and publicize the roles and responsibilities of the board and management to the public to provide a degree of accountability to stakeholders. They should also apply procedures to independently verify and maintain the integrity of corporate financial reporting. Disclosure of important materials about the organization must be timely and balanced to ensure that all investors have access to clear and factual information.
Models
Different corporate governance models differ according to the various capitalisms in which they are embedded. Anglo-American "models" tend to emphasize the interests of shareholders. The coordinated model or [Model Multistakeholder] associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and society. The related differences between market-oriented and network-oriented corporate governance models.
Continental Europe (Two-tier Board System)
Some Continental European countries, including Germany, Austria, and the Netherlands, require a two-tier Board of Directors as a means to improve corporate governance. In the two-tier board, the Executive Board, composed of corporate executives, generally conducts day-to-day operations while the supervisory board, comprised entirely of non-executive directors representing shareholders and employees, hires and fires executive board members, determines their compensation, and reviews key business decisions.
India
The Securities and Exchange Commission of India's Committee on Corporate Governance defines corporate governance as "acceptance by shareholder rights management that can not be revoked as the true owner of the corporation and from their own role as trustee on behalf of shareholders. values, about ethical business behavior and about making the difference between personal & corporate funds in corporate management. "
United States, United Kingdom
The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single Board of Directors that is usually dominated by non-executive directors elected by shareholders. Because of this, it is also known as the "unity system". In this system, many councils include several executives from the company (who are members of the ex officio board). Non-executive directors are expected to exceed the executive director and hold key posts, including audit and compensation committees. In the UK, CEOs generally do not also function as Chairmen of the Council, while in the US have multiple roles have become the norm, despite great concerns about the effects on corporate governance. However, the number of US companies that combined both roles decreased.
In the United States, corporations are directly governed by state law, while exchange (offer and trade) securities in companies (including shares) are governed by federal law. Many US states have adopted the Model Business Corporation Act, but the dominant state law for public companies is the Delaware General Corporation Law, which continues to be a merger for most public companies. The individual rules for the company are based on the company's charter and, less authoritative, corporate regulation. Shareholders can not initiate changes in corporate charter even though they can initiate changes to company regulations.
Sometimes everyday language states that in the United States and UK 'shareholders own a company'. However, such misconceptions are expressed by Eccles & amp; Youmans (2015) and Kay (2015).
Founder Centrism
The latest scholarship from Oxford University outlines a new theory of corporate governance, the founder of centristism, which is based on a narrowing in the separation between ownership and control. Through the lens of concentrated equity ownership theory, the company's new theory, a list of traditional best practices can not be applied, as evidenced by the remarkable performance of tech companies with a double-class share structure and integrated CEO/Chairman positions:
Rule
Corporations are created as legal entities by laws and regulations of certain jurisdictions. This may vary in many ways among countries, but the status of corporate legal entities is fundamental to all jurisdictions and is provided by law. This allows an entity to own property in itself without referring to a truly real person. It also produces an eternal existence that characterizes modern enterprise. The granting of corporate law of existence may arise from general purpose law (which is a common case) or from legislation to create a particular company, which is the only method prior to the nineteenth century.
In addition to the laws of the relevant jurisdiction, companies are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, the company also has a constitution that provides the individual rules governing the company and endorsing or limiting its decision-makers. This Constitution is identified by various terms; in English-speaking jurisdictions, commonly known as Corporate Charter or [Memorandum] and Articles of Association. Shareholder capacity to change their company's constitution can vary greatly.
The US passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law makes it illegal to bribe government officials and requires companies to maintain adequate accounting controls. This is enforced by the US Department of Justice and the Securities and Exchange Commission (SEC). Major civil and criminal penalties have been imposed on corporations and executives convicted of bribery.
The UK passed the Bribery Act in 2010. This law prohibits bribery either government or private citizens or makes facilitation payments (ie payments to government officials to perform their routine tasks faster). It also requires companies to establish controls to prevent bribery.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 came into effect in the wake of a series of high-profile corporate scandals. This sets out a set of requirements that affect corporate governance in the US and affect similar laws in many other countries. The law requires, along with many other elements, that:
- The Public Accounting Firm (PCAOB) was established to regulate the audit profession, which has been self-regulated before the law. The auditor is responsible for reviewing the company's financial statements and issuing opinions on its reliability.
- The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) prove the financial statements. Before the law, the CEO had claimed in court they did not review the information as part of their defense.
- The board audit committee has an independent member and discloses whether there is at least one financial expert, or the reason why no such expert is in the audit committee.
- External audit firms can not provide certain types of consulting services and must rotate their key partners every 5 years. Furthermore, audit firms can not audit companies if they are in certain senior management roles working for auditors in the past year. Before the law, there was a real or perceived conflict of interest between giving an independent opinion of the accuracy and reliability of financial statements when the same company also provided favorable consulting services.
Code and guideline
The principles and codes of corporate governance have been developed in various countries and excluded from the stock exchanges, corporations, institutional investors, or associations of directors and managers with the support of governments and international organizations. As a rule, compliance with governance recommendations is not mandated by law, although codes related to stock exchange listing requirements may have coercive effects.
Organization for Economic Cooperation and Development Principles
One of the most influential guidelines in corporate governance is the G20/OECD Corporate Governance Principles, first published as the OECD Principles in 1999, revised in 2004 and revised and approved by the G20 by 2015. These Principles often referenced by local developing country code or guidelines. Built on OECD work, other international organizations, private sector associations and over 20 national corporate governance codes set up the United Nations Intergovernmental Intergovernmental Working Group on International Accounting Standards and Reporting (ISAR) to produce their Guidelines on Good Practices in Disclosure Corporate governance. This internationally approved benchmark consists of over fifty different disclosure items in five broad categories:
- Audit
- Board and management and process structure
- Corporate responsibility and organizational compliance
- Financial transparency and information disclosure
- Structure of ownership and exercise of control rights
The OECD Guidelines on Corporate Governance of State-owned Enterprises complement the G20/OECD Corporate Governance Principles, providing guidance tailored to the unique corporate governance challenges of state-owned enterprises.
Standard stock listing
Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:
- Independent director: "Registered companies must have a majority of independent directors... Effective boards of directors apply independent appraisals in carrying out their responsibilities requiring the majority of independent directors to improve the quality of board oversight and reduce the likelihood of undermining conflicts of interest. "(Section 303A.01) The independent director is not part of management and has no" material financial relationship "with the company.
- Board meetings that exclude management: "To empower non-management directors to serve as more effective management checks, non-management directors of each listed company should meet in regularly scheduled executive sessions without management." (Section 303A.03)
- The Council regulates its members into committees with specific responsibilities per charter assigned. "Registered companies must have a corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members to the board of directors. The Compensation and Audit Committee is also determined, with the latter subject to a variety of external records and regulatory standards.
More guides
The organization led by International Corporate Governance Network (ICGN) investors was formed by individuals centered around the world's top ten pension funds in 1995. The goal is to promote global corporate governance standards. The network is led by investors who manage 18 trillion dollars and its members are in fifty different countries. ICGN has developed a series of global guidelines ranging from shareholder rights to business ethics.
The World Business Council for Sustainable Development (WBCSD) has done its work on corporate governance, particularly on Accounting and Reporting, and in 2004 released the Problem Management Tool: A strategic challenge for businesses in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and perspectives of business associations/think-tanks on some key codes, standards and frameworks relevant to the sustainability agenda.
In 2009, the International Finance Corporation and the UN Global Compact released the report, Corporate Governance - The Corporate Citizenship Foundation and Sustainable Business, which links environmental, social and corporate governance responsibilities with financial performance and long-term sustainability.
Most of the code is largely voluntary. The issue raised in the US since the 2005 Disney decision was the extent to which companies manage their governance responsibilities; in other words, are they just trying to replace the legal threshold, or should they create governance guidelines that go up to the best practice level. For example, guidelines issued by individual directors associations, corporate managers and companies tend to be entirely voluntary but the document may have a wider effect by encouraging other companies to adopt similar practices.
History
Initial history
The modern practice of corporate governance is rooted in the Dutch Republic of the 17th century. The first recorded corporate governance dispute occurred in 1609 among shareholders/investors (primarily Isaac Le Maire) and director of the Dutch East India Company (VOC), the first officially registered public company in the world.
United States
Robert E. Wright argues at Corporation Nation (2014) that the governance of early US companies, where more than 20,000 existed by the Civil War of 1861-1865, was superior to corporations by the end of the twentieth century, 19 and early 20th century because early companies set themselves up like "republics", filled with many "checks and balances" against fraud and opposed power struggles by managers or by large shareholders. (The term "robber baron" became closely related to US corporate figures in the Gilded Age - the late 19th century.)
Soon after Wall Street Crash of 1929 law scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means contemplating the changing role of modern enterprise in society. From Chicago's economic school, Ronald Coase introduces the idea of ​​transaction costs into an understanding of why companies are founded and how they continue to behave.
The expansion of the US economy through the emergence of multinational corporations after World War II (1939-1945) saw the formation of a managerial class. Some Harvard Business School management professors study and write about the new classes: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large companies have dominant control over business affairs without adequate accountability or monitoring by their boards of directors".
In the 1980s, Eugene Fama and Michael Jensen set the principal-agent problem as a way of understanding corporate governance: firms are seen as a series of contracts.
In the period 1977 to 1997, the tasks of corporate directors in the US developed beyond their traditional legal responsibility for loyalty obligations to the company and its shareholders.
In the first half of the 1990s, corporate governance issues in the United States gained much press attention due to a spate of CEO firings (for example, at IBM, Kodak, and Honeywell) by their councils. The California Employee Retirement System (CalPERS) leads a wave of institutional shareholder activism (something very rarely seen before), as a way of ensuring that corporate value will not be destroyed by what is now traditionally comfortable. the relationship between the CEO and the board of directors (for example, with the issuance of unrestricted stock options, not uncommonly back-dated).
In the early 2000s, the massive bankruptcies (and criminal offenses) of Enron and Worldcom, as well as smaller corporate scandals (such as those involving Adelphia Communications, AOL, Arthur Andersen, Global Crossing, and Tyco) led to increased political interest in companies. government. This is reflected in the passing of the Sarbanes-Oxley Act of 2002. Other triggers for sustainable interest in corporate governance include the 2008/9 financial crisis and the CEO payout rate
East Asia
In 1997 the East Asian Financial Crisis greatly affected Thailand, Indonesia, South Korea, Malaysia and the Philippines through foreign capital outflows after property assets collapsed. The lack of corporate governance mechanisms in these countries highlights the weaknesses of institutions in their countries.
Saudi Arabia
In November 2006, the Capital Market Authority (Saudi Arabia) (CMA) issued a corporate governance code in Arabic. The Kingdom of Saudi Arabia has made great progress in connection with the adoption of appropriate and culturally appropriate governance mechanisms (Al-Hussain & Johnson, 2009).
Al-Hussain, A. and Johnson, R. (2009) find a strong relationship between the efficiency of corporate governance structures and the performance of Saudi banks when using return on assets as a performance measure with one exception - that government and local ownership groups are unimportant. However, using stock returns as a performance measure shows a weak positive relationship between the efficiency of corporate governance structures and bank performance.
List of countries by corporate governance
This is a list of countries based on the overall average rating in corporate governance:
Stakeholder
Key stakeholders involved in corporate governance include stakeholders such as boards of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and society in general also have an influence. The company's agency view states that shareholders forgive the decision right (control) and entrust the manager to act in the best interests of (shared) shareholders. Partly as a result of the separation between two investors and managers, corporate governance mechanisms include a control system intended to help align managerial incentives with shareholders. Agent concern (risk) is always lower for the controlling shareholder.
In a nonprofit private company, shareholders choose the board of directors to represent their interests. In the case of nonprofit organizations, stakeholders may have several roles in recommending or choosing members of the council, but it is usually the council itself that decides who will serve on the council as a 'self-perpetuating' council. The level of leadership that the board has over the organization varies; in practice in large organizations, executive management, especially CEOs, encourages key initiatives with board oversight and approval.
Responsibility of the board of directors
Former Chairman of the General Motors Board John G. Smale wrote in 1995: "The council is responsible for the success of corporate retaliation, and that responsibility can not be passed on to management." Board of directors is expected to play a key role in corporate governance. The Council has the responsibility for: CEO selection and succession; provide feedback to management on organizational strategy; compensate senior executives; monitor health, performance, and financial risks; and ensuring organizational accountability to investors and their authorities. Boards usually have several committees (eg, Compensation, Nomination and Audit) to do their work.
The OECD Principles of Corporate Governance (2004) describes board responsibilities; some of which are summarized below:
- Board members should be informed and acted ethically and in good faith, with due diligence and care, in the best interests of the company and its shareholders.
- Review and guide company strategy, goal setting, major action plans, risk policy, capital plan, and annual budget.
- Supervise large acquisitions and divestments.
- Choose, redress, monitor and replace key executives and supervise succession planning.
- Aligning executive and key board (salary) salary with the long-term interests of the company and its shareholders.
- Ensure the nomination and selection process of the board members is formal and transparent.
- Ensure the integrity of the company's financial calculation and reporting systems, including their independent audits.
- Make sure the appropriate internal control system is set.
- Supervise the disclosure and communication process.
- Where board committees are inaugurated, their mandates, compositions and working procedures must be well defined and disclosed.
Interests of stakeholders
All parties to corporate governance have an interest, directly or indirectly, in the performance of corporate finance. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is a certain interest payment, while returns to equity investors arise from the distribution of dividends or capital gains on their shares. Customers are concerned with the certainty of providing goods and services of the appropriate quality; suppliers are concerned with compensation for their goods or services, and the possibility of continued trade relations. These parties value companies in the form of financial, physical, human, and other forms of capital. Many may also be concerned with the company's social performance.
A key factor in the party's decision to participate or engage with the company is their belief that the company will deliver the expected results of the party. When a category of stakeholders does not have enough confidence that a company is controlled and directed in a manner consistent with the outcome they want, they are less likely to be involved with the company. When this becomes a feature of an endemic system, loss of trust and participation in the market can affect many other stakeholders, and increase the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.
Absolute landlords vs. Absolute landlords capital guard
World Densions Council experts (WPC) insist that "the owners of institutional assets now seem to be more eager to take over the duties of negligent CEOs" than companies whose shares they own.
This development is part of a broader trend towards more fully asset-held asset ownership - especially from the board of directors ('trustees') of the great British, Dutch, Scandinavian and Canadian pensioners:
- "No longer 'absentee landlords', [guardian pensions] have begun to exercise their governance prerogatives more forcefully across the British courtroom, Benelux and America: coming together through the formation of groups of people, the pressure groups involved [...] to 'shift the [economic] system toward sustainable investment'. "
This can ultimately put more pressure on CEOs of public companies, because "more than ever, many retired carers from North America, the UK and the EU spoke enthusiastically about flexing their fiduciary muscles for the UN Sustainable Development Goals", and other ESG-centric investment practices
United Kingdom
In Britain, "The widespread social disappointment after the great recession [2008-2012] impacts" on all stakeholders, including pension fund members and investment managers.
Many of the largest pension funds in the UK who have become active managers of their assets, engage with the board and talk when they feel the need.
Control and ownership structure
The structure of control and ownership refers to the type and composition of shareholders in a company. In some countries like most of continental Europe, ownership does not have to be equivalent to control because of its existence eg. double class shares , pyramid of ownership , voting coalition , substitute sound and clauses in articles of association provide additional voting rights to long-term shareholders . Ownership is usually defined as ownership of cash flow rights while control refers to ownership of control or voting rights. Researchers often "measure" control and ownership structures by using some measure of control and observable concentration of ownership or degree of control and ownership inside. Some features or types of controls and ownership structures involving corporate groups include pyramids, cross-ownership, rings, and nets. German "concern" (Konzern) is a legally recognized group of companies with complex structures. Keiretsu Japan (??) and South Korean chaebol (which families tend to control) are a group of companies consisting of complex business and shareholding relationships. Cross-ownership is an important feature of keiretsu and chaebol groups [4]. Company engagement with shareholders and other stakeholders can differ substantially across different control structures and ownership.
Family control
Family interests dominate the ownership and control structure of some companies, and it has been suggested that family-controlled corporate supervision is superior to companies "controlled" by institutional investors (or with multiple holdings of shares so that they are controlled by management). A recent study by Credit Suisse found that companies where "founding families retain more than 10% of the company's capital enjoys superior performance over their respective sectoral counterparts." Since 1996, this superior performance reaches 8% per year. Forget the CEO of celebrities. "Look beyond Six Sigma and the latest technological modes.One of the greatest strategic advantages that a company can have is a bond of blood," according to a Business Week study
The importance of institutional investors varies substantially in different countries. In developing countries Anglo-American (Australia, Canada, New Zealand, UK, USA), institutional investors dominate the market for shares in large companies. Although most of the shares in the Japanese market are held by financial companies and industrial companies, these are not institutional investors if their ownership is largely in the group.
The largest collection of money invested (such as the 'Vanguard 500' mutual fund, or the largest investment management firm for the company, State Street Corp.) is designed to maximize the benefits of diversified investments by investing in a large number of different companies with sufficient liquidity. The idea is that this strategy will eliminate most of the financial risk or other corporate risks. The consequence of this approach is that these investors have a relatively small interest in certain corporate governance. It is often assumed that, if institutional investors who suppress change decide they are likely to be expensive because of the "golden handshake" or effort required, they will only sell their investment.
Mechanisms and controls
Corporate governance mechanisms and controls are designed to reduce inefficiencies arising from moral hazards and reverse selection. There is an internal monitoring system and an external monitoring system. Internal monitoring may be performed, for example, by one (or several) major shareholders (s) in the case of a private company or a company belonging to a business group. Furthermore, various council mechanisms provide for internal monitoring. External monitoring of manager behavior occurs when independent third parties (eg external auditors) prove the accuracy of information provided by management to investors. Stock analysts and debt holders may also perform such external monitoring. The ideal supervisory and control system should govern both motivation and capability, while providing incentive balances against company goals and objectives. It should be noted that incentives are not so strong that some individuals are tempted to cross the line of ethical behavior, for example by manipulating income and profit figures to drive stock prices up.
Internal governance control
Internal corporate governance controls monitor activity and then takes corrective action to achieve organizational goals. Examples include:
- Monitoring by the board of directors : The board of directors, with its legal authority to recruit, dismiss and compensate top management, protect the invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Although non-executive directors are considered more independent, they may not always result in more effective corporate governance and can not improve performance. Different different board structures for different companies. In addition, the board's ability to monitor corporate executives is a function of its access to information. The executive directors have superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions leading to the results of financial performance, ex ante . Therefore, it can be said that the executive director looks beyond the financial criteria.
- Internal control procedures and internal auditors : Internal control procedures are policies implemented by the entity's board of directors, audit committees, management and other personnel to provide reasonable assurance from entities that achieve their objectives in relation to reporting reliable finance, operating efficiency, and compliance with laws and regulations. The internal auditor is a person in the organization that tests the design and implementation of the entity's internal control procedures and the reliability of its financial reporting
- Power balance : The simplest power balance is very common; requires that the President be a different person from the Treasurer. This separation of power applications is further developed in companies where separate divisions examine and balance each other's actions. One group may propose administrative changes across companies, other groups review and can veto change, and the third group checks that the interests of people (customers, shareholders, employees) outside of the three groups are being met.
- Remuneration : Performance-based remuneration is designed to relate some proportion of pay to individual performance. This may be in the form of cash or non-cash payments such as stock and stock options, pension funds or other benefits. Such incentive schemes, however, are reactive in the sense that they do not provide mechanisms to prevent errors or opportunistic behaviors, and may result in myopic behavior.
- Monitoring by large shareholders and/or monitoring by banks and other large creditors : Given their large investments in companies, these stakeholders have incentives, combined with rights level of control and power, to monitor management.
In publicly traded US companies, the board of directors is largely elected by the President/CEO and the President/CEO often takes on the Chairman of the Board position for himself (which makes it much more difficult for institutional owners to "fire" "he/she). The CEO's Practice is also Chairman of the Board quite common in large American companies.
Although this practice is common in the US, it is rare elsewhere. In the UK, the best codes of conscientious practice have been recommended to oppose duality.
External corporate governance control
External corporate governance controls external stakeholder exercises against the organization. Examples include:
- competition
- debt agreement
- request and assessment of performance information (especially financial statements)
- government regulations
- managerial labor market
- media pressure
- takeover
- proxy company
Independent financial reporting and auditors
The board of directors has the primary responsibility for internal and external corporate financial reporting functions. Chief Executive Officer and Chief Financial Officer are important participants and the board usually has a high degree of confidence in them for the integrity and supply of accounting information. They oversee the internal accounting system, and rely on corporate accountants and internal auditors.
The current accounting rules under International Accounting Standards and US GAAP allow managers to have multiple options in determining measurement methods and criteria for the recognition of various elements of financial reporting. The potential exercise of this option to improve performance clearly increases the risk of information for users. Fraudulent financial reporting, including non-disclosure and deliberately falsifying value also contribute to the risk of user information. To mitigate this risk and to improve the integrity of the financial statements, the corporate finance report shall be audited by an independent external auditor who issues the report accompanying the financial statements.
One thing of concern is whether the audit firm acts as an independent auditor and management consultant for the company being audited. This can lead to a conflict of interest that places the integrity of financial statements in doubt as the client's pressure to ease management. The strength of corporate clients to start and stop management consulting services and, more fundamentally, to select and dismiss accounting firms conflict with the concepts of independent auditors. Changes enacted in the United States in the form of Sarbanes-Oxley Act (after numerous corporate scandals, culminating in the Enron scandal) banned accounting firms from providing audit and management consulting services. Similar provisions apply under clause 49 of the Standard Listing Agreement in India.
Systemic issues
- Request information: To influence the board of directors, shareholders must join others to form a voting group that may pose a real threat in bringing a resolution or appointing a director at a rally.
- Monitoring costs: Barriers to shareholders using good information are processing fees, especially for small shareholders. The traditional answer to this problem is the efficient market hypothesis (in finance, efficient market hypothesis (EMH) confirms that efficient financial markets), which suggests that small shareholders will be free to ride larger professional investor ratings. li>
- Provision of accounting information: Financial accounts form important links in enabling financial providers to monitor directors. The imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the workings of the external audit process.
Problems
Executive payments
Increased attention and regulation (such as under the Swiss referendum "against Rip-off companies" in 2013) have been brought to executive payment levels since the 2007-2008 financial crisis. Research on the relationship between corporate performance and executive compensation does not identify a consistent and significant relationship between executive remuneration and firm performance. Not all firms experience the same level of agency conflict, and external and internal monitoring devices may be more effective for some than for others. Some researchers have found that the CEO's biggest performance incentives stem from company shareholdings, while other researchers find that the relationship between shareholding and company performance depends on the level of ownership. The results show that an increase in ownership above 20% causes management to become more entrenched, and less interested in the welfare of their shareholders.
Some argue that the company's performance is positively related to the stock option plan and that this plan directs managers' energy and broadens their decision horizons toward long-term performance, rather than short-term, firms. However, the point of view came under substantial criticism amid various security scandals including episodes of joint time funds and, in particular, the backdating grant option as documented by the University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of > Wall Street Journal .
Even before the negative influence on public opinion caused by the 2006 backdating scandal, the use of options faced various criticisms. A very strong and long-standing argument concerns the interaction of executive options with the company's stock buyback program. Many authorities (including Federal Reserve Board economist Weisbenner) specify options may be used in parallel with stock repurchase in a manner contrary to the interests of shareholders. These authors argue that, in part, the repurchase of the company's shares to US Standards & amp; The Poors 500 company soared to a $ 500 billion annual rate by the end of 2006 due to the options effect. A summary of the academic work on purchase options/issues is included in the research scandal by writer M. Gumport issued in 2006.
The combination of accounting changes and governance issues led the option to a less popular remuneration as it progressed in 2006, and various application of alternative purchases emerged to challenge the dominance of "open" market repurchases as a preferred way to implement stock buyback plans.
Separation of Chief Executive Officer and Chairman of the Board roles
The shareholders elect the board of directors, who in turn employ the Chief Executive Officer (CEO) to lead the management. The primary responsibility of the board relates to the selection and retention of the CEO. However, in many US companies, CEO and Chairman of the role of the Council is held by the same person. This creates a conflict of interest between management and the board.
Critics of the combined role argue that two roles must be segregated to avoid conflicts of interest and more easily enable poorly performing CEOs to be replaced. Warren Buffett writes in 2014: "In my ministry on the board of nineteen public corporations, however, I have seen how difficult it is to replace a mediocre CEO if that person is also Chairman. (Deed is usually done, but it is almost always very late.) "
Advocates argue that empirical studies do not show that the separation of roles improves the performance of the stock market and it must be left to shareholders to determine the appropriate corporate governance model for the company.
Source of the article : Wikipedia
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