Introduction
Corporate responsibility comes hand in hand with corporate governance and organizational structure. The practice of the latter is a representation of the former. Corporate governance provides the basis for a stable and productive business environment. It can be especially important in emerging markets and to firms that seek to distinguish themselves in the global economy (Economic Perspective, 2006).
Knowing what corporate governance and responsibility are and their impact on the investors in a particular country had become one of the major concerns of globally individual strategies only on their way to becoming one. Getting acquainted with the principles governing corporate governance, organizational structure, as well as ethical considerations of leadership and corporate management, will further help the economic progress of the country and create a strong and stable economic status. Good corporate governance attracts more investors upon which contributes to an increase in power in the global context.
Fundamental principles
Several fundamental principles involve the achievement of responsible corporate governance. The first principle establishes the roles of management and the board, with a balance of skills, experience, and independence on the board appropriate to the nature and extent of company operations stated under the second principle. Integrity is as well significant in attaining strong corporate governance thus, its importance among those who can influence a company’s strategy and financial performance, together with responsible and ethical decision-making encompasses the third principle (ASX Corporate Governance Council, 2006).
The fourth principle tries to meet the information needed of a modern investment community that is paramount in terms of accountability and attracting capital, as well as presenting a company’s financial and non-financial position requires processes that safeguard, both internally and externally, the integrity of company reporting. The provision of a timely and balanced picture of all material matters makes up the fifth principle. The rights of company owners, that is shareholders, need to be recognized and upheld is contained within the sixth principle (ASX Corporate Governance Council, 2006).
The elements of uncertainty
The elements of uncertainty that carries a risk that can be managed through effective oversight and internal control hold the seventh principle, and the maintenance of the pace with the modern risks of the business and other aspects of governance requires formal mechanisms that encourage enhanced board and management effectiveness is on ASX’s eighth principle.
ASX, furthermore, has added the principles concerning the rewards needed to attract the skills required to achieve the performance expected by shareholders that are contained in its ninth principle. Finally, the tenth principle talks about the impact of company actions and decisions that is increasingly diverse, and good governance recognizes the legitimate interests of all stakeholders (ASX Corporate Governance Council, 2006).
At the least, however, corporate governance is simply the relationship among various stakeholders concerning the control of corporations. Corporate governance deals with these relationships and above all addresses the relationship between the owners of a company and those who manage the company’s operations. The owners are as well the shareholders who are the principals and those who manage the companies are the executives hired by the owners to run the company as agents of the principals. Corporate governance encompasses the weight given to various factors in connection with the process for making strategic decisions, the adequacy and transparency of disclosures, the reliability of financial reporting, and compliance with laws and regulations. Corporate governance comprises a combination of regulatory rules and private sector-driven guidelines that take in hand these concerns between the two most basic figures that run the corporation (Millstein, 2005).
Individual strategies
Countries around the globe formulate their strategies regarding corporate governance. Meeting up with the demands of the different corporations in the country has become one of the main goals of the countries concerned with economic prosperity and sustainable development. Concerning the desired corporate governance, governments have become more aware as to how they would help protect the interests of both the domestic and international investors such that they would remain stable for the benefit of the people and the country’s economic progress as well.
Highly developed countries continuously struggle upon coming up with the perfect corporate governance such that those whose legal systems are rooted in British common law, the interests of shareholders are held to be dominant in most corporate decisions. On the other hand, the developing countries that have traditionally fostered concepts of partnerships between management, employees, and other stakeholders, have other social priorities, or have mixed government-private ownership arrangements are now recognizing investor protection as an important signal to potential capital providers. They need to demonstrate the adoption of corporate governance principles to promote investor trust and attract capital, which will, in turn, lead to investment and economic growth. Moreover, modifying these principles is necessary to be able to match the needs of its local or domestic investors. But certain fundamentals cannot be ignored, which may be found necessary and significant to adapt to the demands of the stakeholders as well as the community itself.
On the other hand, in countries with a more sophisticated financial market, their corporate governance rules and structures are contained in laws protecting property rights and shareholder rights through legislation, accompanying regulations, judicial decisions, and stock exchange listing rules. This situation has been the most important strategy that works for the government that is parallel to the need of their markets. It has been fundamental for these countries to utilize such strategies to meet the needs of their investors. In addition to formal rules, corporations adopt best-practice principles and guidelines, which are continually being developed by the private sector and academia in response to prevailing market conditions and investor demands. Developing countries need to take both elements — governmental infrastructure and best practices—into account. (Millstein, 2005)
Global trends in corporate governance made the countries more or less similar when it comes to their responsibilities concerning the issue. Not only in the implementations did these countries have become similar, but even with the different issues involving controversies and failures connected to corporate governance as well.
These failures have further stimulated the debate about corporate governance, leading to regulatory action and other reforms. One of the most significant cases in corporate governance failures were those of the United States’ Enron, Worldcom, and Tyco that later initiated the major debate and legislation in the country. Australia has its significant issue that of the HIH, an insurance company that collapsed in 2001 with debts of about $5.3billion (Saville, 2003). Other businesses had collapses such as the Ansett Airlines and One Tel in Australia (Survey of Corporate Governance, 2006).
As both countries had been practicing the common-laws, the United States and Australia are more “shareholder-focused” in their governance and accounting standards, in contrast to the code-law countries of Japan, Germany, and France which represent bank-dominated economies and are more “stakeholder focused.” (Holcomb, 2004)
The United States corporate governance regards corporate law as but one small part of a complex U.S. corporate governance system comprising a wide array of complementary institutions, incentive structures, constraints, and practices that work together to create a whole that is greater than the sum of its parts (Paredes, 2004).
The complex governance system of the United States requires the country to put the importance on shareholder performance while catching up with the managerial action in a strong legal and regulatory framework designed to ensure legitimacy and prevent conspiracy. The emphasis of corporate governance in the United States is towards the protection of its shareholder rights and maximization of shareholder return, and meeting the metrics imposed by an active, liquid, and deep capital market (Detomasi, 2002).
One could postulate that about corporate performance, the Walmart board, who meet only four times a year, would be in an inferior position to the boards of David Jones and Coles Myer, who meet close to monthly throughout the year in Australia. However, the results show that the Walmart board has delivered outstanding results for its shareholders no matter.
Around 80 percent of US companies combine the (chairman and CEO) role, while that of the European countries including Australia, its advisers and others with relationships to the company is valued as directors (Wallis, 2000).
The U.S. corporate governance system also relies on directors and officers “to do the right thing” by voluntarily taking steps to maximize firm value even when nobody is watching and there is little if any risk of market or legal sanction. Norms have received a great deal of recent attention as an important extralegal governance device.
Consequently, relying too much on the directors may develop a negative effect on the system’s governance. Given such very strong authority, officers and directors are challenged to control agency costs. Therefore, whenever the interests of directors and officers conflict with the best interests of the corporation and its shareholders, the concern is that management will tend to act in its self-interest. For example, managers might decide to avoid, pay themselves excessive compensation packages, have fancy corporate jets and other perks, or build an empire by acquiring companies, all to the detriment of the company and shareholder value.
The United States corporate law, though a state law, the mandatory disclosure regime of the federal securities laws makes possible the market-based corporate governance system of the United States. Mandatory disclosure, backed by stringent antifraud provisions, plays a critical role in U.S. corporate governance by ensuring that investors, with the assistance of the supporting institutions described above, have adequate information to exercise their rights to vote, sell, and sue. The ability to exercise these rights allows investors to protect their interests without the need for more substantive regulation of internal corporate affairs at either the state or federal level.
On the other hand, the role of the directors in the corporations does not mean anything as such the shareholders do not have any “positive” control rights over the corporation granting them direct input into and say over how the corporation is governed or whether certain business opportunities are pursued. Shareholders are still given the right to vote for the board of directors, most importantly, and can make recommendations on governance and business matters to the board through the shareholder proposal process. They also have the right to vote on certain mergers and any proposed sale of all or substantially all of the corporation’s assets. Their approval is well recognized such that the company’s articles of incorporation cannot be amended without them saying yes. They are also given the right to vote to amend the bylaws. Nevertheless, they do not have any authority to manage the day-to-day business directly or to set overall corporate policy and strategy, unless granted such control in the certificate of incorporation, which happens rarely, if ever. (Paredes, 2004)
Moreover, in the US corporate governance, public enforcement is limited to a few cases of serious fraud. As a result, there is no civil penalty regime and very little disqualification of directors compared with Australia, and that is a problem. In Australia, enforcement of civil penalties and disqualification of directors is increasing significantly. (Farrar, 2005)
The US has fought back and stood still amidst the different issues and criticisms against proper and good corporate governance. Ethical concerns with regards to the implementation of the various interests of the investors within the two countries are addressed in the reforms such that an equal penalty is specified for those who violate the principles.
To attract the right men and women, at the right age and with the right experience, there is a need to lift remuneration levels, notwithstanding all the hassles this will cause at annual meetings, in the media, and from politicians. Part of this may be paid for by moving to somewhat smaller boards, but not all.
Responsible corporate governance should be prepared to move towards more equity-based remuneration but recognize that many presents and potential non-executive directors will need to be able to access sufficient levels of cash remuneration for their personal needs. It will be interesting to know that the US is underway a significant reversal of previous governance wisdom on this subject. Stock options for directors are now accepted on the basis that they help to align board and shareholder interests. (Wallis, 2000)
The Case of Enron
The downfall of the famous and previously successful companies such as Enron, Barings, and Marconi can be summarized as the aftermath of pure greediness of the people who are holding the most significant positions in each of the companies. It should be noted that there are several reasons why the three companies collapsed or failed to remain on top of their business, but all these reasons have one common denominator – and that is the desire to achieve more money, more fame, and more power even at the expense of people’s trust.
Enron Corporation was once a multi-billionaire and a leading company in the US. It has different branches all over the world. When it collapsed many had questioned the management, and they are right in doing so. Enron’s failure is seen to be the effect of the “poor functioning of operations and performance management” (Kurdina, 2005). The company is very big, the income it was generating was enough to support a luxurious style of living among its managers and even low-positioned employees, the potential for continued growth was apparent.
However, instead of using the said advantages to good use, the top management became greedy enough into wanting more neglecting the ethical values, integrity, and management philosophy that they should adhere to.
“The corporate policies, in formulating and communicating of which Enron operations management participated, were wrong and not compliant with initial values of the company. Strict and harsh hierarchy and performance evaluation system created by Chief Executive Skilling perverted the original values and ethical base of the company – respect, integrity, communication, and excellence, and replaced them with the priority of gaining profit irrespective of methods thereof. Employees were motivated to take to different questionable practices and were rewarded for bringing income to the organization” (Kurdina, 2005).
The same thing happened with The Barings. The company’s top management failed to use proper information in controlling the financial losses of the company. This they did to keep in control of the money even though the company’s operating system needs more funding. The managers intentionally neglect their responsibilities just to maintain control of the income thereby continuously enjoyed the money even though the company is losing.
“The parent company did not comply with the regulation of reporting its large excess accounts to the Bank of England. It also delayed doing so to the Securities and Futures Authority, UK. The parent company also failed to check on Barings Futures Singapore’s open positions in Nikkei Index, Eurodollar, and Euroyen although these were brought to the notice of Jones and Barings Plc. by SIMEX” (Hamilton, Marchand, and Bernard, 1999)
Meanwhile, in Marconi’s case, it would seem at first that the company was just trying to expand the operational activities of the company but it failed to do so, hence the tragic downfall. It should be noted that Marconi tried to compete in the information technology business that was why he decided to use a major part of the company’s assets in repositioning the whole business operation. However, the company failed to consider the most important aspect of the business – and that is learning all the basics of information technology. Marconi was so focused on getting into the business and computing the possible earnings but it did not bother to even understand what the market was and how tangible the movement was at that time. It should be noted that information technology was at its peak during those years and many big companies were venturing into that kind of business. Marconi wanted to earn more and had spent millions of money thinking that everything will be returned at a doubled or tripled amount (Davies, 2001). This is also a sign of greediness.
Enron, Barings, and Marconi are three different businesses. They all succeeded at first but they also all failed eventually. The time of their downfall also varied. However, the similarity behind these three companies’ downfall lies in the “greediness” of their management. Had it not for greediness for power and money, these three companies would have been successful up to this time.
References
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