Issues related to Corporate Governance

 

CORPORATE GOVERNANCE

Corporate Governance is the structure with the help of which organizations operate their businesses. This structure defines the methods for conducting and controlling business, the relationship between different members of the organization and sets down the responsibilities of each member. (Tricker, 2015)

Each party involved in the organization i.e. directors, shareholders and other stakeholders have their specific roles in the governance of the organization. The shareholders, for example, are responsible for appointing the board of directors and also appointing appropriate auditors who will look after the interest of all stakeholder. The board of directors, in turn, are responsible for the management of the firm. They are responsible for developing the long-term strategies that will guide the firm. The board of directors is responsible for five components of Corporate Governance:

  1. Employees
  2. Long Term Strategies
  3. Suppliers, Distributors, and Customers
  4. Compliance ( with laws and regulations)
  5. Environment ( not harming the environment and community in which the business exists)

Thus, Corporate Governance gives the duties and responsibilities of everyone within the organization for the smooth running of the organization.

ISSUES RELATING TO CORPORATE GOVERNANCE

There are some issues and problems that hinder the successful corporate governance within the organization. Some of these will be explained below:

Director Dominance

The board of directors is the links between the management and the owners of the company. They are elected to make sure that interest of both these parties is taken care of and not exploited. The problem comes when the directors’ self-interest dominates their all other responsibilities causing the issues in the governance of the organization.

There have been cases wherein the board the decision-making has been dominated by a single or a group of directors while others have to follow their decision whether right or wrong. These groups are often found exploiting their powers which may cause other problems like nepotism, decline in employee motivation, etc. (Sautner, McCahery, & Starks, 2015)

Auditors

Auditors occupy an important position in the Corporate Governance structure of the organization. Stakeholders like creditors, shareholders, investors, etc. depend on mainly upon the external auditors for the fair view of the company’s financial condition. If the external auditors are not independent, they may harm the interest of all the parties associated with the firm. The auditors’ may give dishonest reviews of the financial statements of the company in order to maintain the relationship with the firm or for their profits.

Take an example of Enron, where the auditors covered up the actual financial situation of the firm for a number of years which finally lead to the demise of the firm. Thus, if any party relevant to the governance of the organization fails in its duties, it can cause long-term harm to the company.

(McNulty, Zattoni, & Douglas, 2013)

Social Responsibility

Over the years, one of the aspects that have been emphasized all over the world is that the companies are not only responsible for generating profit for their benefit and benefit of the stakeholders. A company by its very operation affects the society by paying taxes, hiring employees, contributing to the economy etc. Since actions of the companies can affect the society, it has been a growing concern that these companies do not exploit their powers. There have been cases of tax evasion, avoidance of labor laws, etc. by the companies, such actions of the organizations negatively affects the society. Thus, it has been an issue of corporate governance to develop policies that increase the social responsibilities of the firms.

Shareholder’s Vs Board

Another issue in successful corporate governance primarily faced by the board of directors is the tug of war between the long-term interests of the company and the short-term demands of the shareholders. Traditionally, shareholders were not actively involved in the decision made by their companies and were only concerned with the dividends received. These days the roles of shareholders have evolved, and they are more actively taking interests in decisions made by the board of directors. (Claessensa & Yurtoglub, 2013)

The result of such a situation is that the directors often find themselves pressurized by the shareholders to make a decision that will benefit the company only for a short term.

Risk Management

Businesses face a number of risks like operation financial, compliance, etc. that can affect the operations of the organization. The Corporate Governance is at risk if the board of directors is not carrying out well-structured risk management policies and practices or if they are unaware of the risks.  Whatever the reasons may be a lack of risk management can result in an inadequate system of organization that can negatively affect the company in the long run.

CEO Incentive

The work of (Armstronga, Blouina, Jagolinzerb, & Larckerc, 2015) discusses how the CEO incentive is linked to the tax avoidance and corporate governance practices. According to this paper, the governance practice of linking the CEO incentive to increased profits and equity value of shares increases the tax evasion behavior of the CEOs. This issue has been in debate for years, and companies have tried to change the policies to overcome such problems.

Regulatory Compliance

Ensuring the compliance with the laws and regulations of the countries is also part of the corporate governance and one of the most important issues in successful governance. As the companies expand globally compliance with the laws and regulations of each country becomes challenging and a problem for the companies. (Gregory & Austin, 2014)

CONCLUSION

The above-stated issues indicate that although the companies and the regulatory authorities have been working to develop good governance practices, the expanding business and evolution of roles of stakeholders in the businesses keep on adding to these issues.

The companies can deal with all these issues by developing well- structured and thought out policies and by developing an organizational culture that supports the goal of good governance.