Corporate Governance And Social Responsibility

Published Date: 02 Nov 2017

Master of Business Administration

Paper Name:

Corporate Governance and Social Responsibility

Lecturer:

Dr. Coral Ingley

Assessment:

Paper Code & Stream:

Eg 476680/60

478912

Word Count: 1422

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Signature : Alok Nimdeo Date: 22/03/2013

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Alok Nimdeo

1248174

Corporate Governance & Social Responsibility

MBA

3/22/2013

Corporate Governance Framework and Analysis

Analysing Factors for Country’s Corporate Governance

Corporate governance has undergone major transformation in terms of the way it has been conceptualized, developed and implemented. From 1990’s since its formalisation to convergence towards this decade, governance in business has been affected by internal factors like company structure, managerial efficiency, governance structure and external like capital markets, law, regulatory bodies and culture etc. As suggested by (La Porta et al., 1998), the legal system takes precedence as it forms the basis of corporate finance. The legal protection offered to investor should ensure that their investment will not be frisked by management or large shareholders. Hence, it would seem logical to assess a countries legal system to understand or develop effective corporate governance.

However, each of those factors vary widely across countries, for e.g. the protection given to investors by law differs globally and hence the governance policies are derived considering legal perspective and greater investor protection in some countries (La Porta et al., 1998). Another aspect is accounting activity which involves interaction between human and non- human resources, so disclosure of information requires participation of both (Perera, 1994, p. 268). In this context, it would be imperative to consider cultural impact on governance policies as it involves people. To understand people behaviour and motives, understanding their background is important; like those in Malaysia have been highly influenced by culture (Haniffa & Cooke, 2002) and yet other by industry (Halme & Huse, 1997).

Introspectively, the need for governance arises in first place because of the conflicts amongst stakeholders known as agency problem (Gillan and Starks, 1998). Different stakeholders have different needs and preferences; also they lack knowledge about other stake holder’s activities. This separation between the board and management leads to power tiff and the emergence of self-interest. Corporate governance became a necessity because of this separation of entities and interests. Hence, understanding the structure and drivers of different stakeholders involved becomes foundation principles for corporate governance.

However, after many iterations of policy improvements over years and analysing each of those factors individually would indicate that a company’s governance policies are influenced more by external factors than internal factors. I would opine that rather than just external factors, the policies have an impact by national factors. From experience, I have found that in India the 26 states are as culturally diverse as America and Japan, yet corporate governance policies are similar nationwide and are more rules and legal based (Dalei, Tulsyan & Maravi, 2012), effectively disengaging the cultural aspect. This nationalist principle is also supported empirically in research conducted by Doidge, Karolyi and Stulz (2007).

According to me, each factor is important to understand how the governance policies have evolved over time for that country. As discussed, legal structure provides the protection rights and define the scope of power of various stakeholders, culture defines the adoption of principles of corporate governance and therefore abandonment too, existence of various types of corporate structures is the reason the need for governance is felt and external factors like politics or markets define how those policies will be implemented, measured and the resultant penalty on failing to do so. Hence, going to basics, I believe a good governance and returns for investors lies on all these factors together – failure of either will lead to failure of governance overall. Each needs to be inspected and optimized for smooth functioning for system.

Insider – Outsider Framework and Analysis

The emergence of two types of governance systems – market based and relation based is due to the institutional and cultural difference in approach towards values and objectives of business.( Clarke, T., & dela Rama, M. , 2008). The OECD also states that the choice to select their own governance should rest with entrepreneurs and companies based on market and economic variables prevalent. These systems provide both benefits and risk to the companies and markets, and both systems have had failures like Asian Crisis and GF Crisis. A relation based system has the benefits of close ties between management and board, thereby reducing agency problem, however may suffer from abuse of power. The market based system results in agency problem, however gives access to company internals to shareholders. These shareholders can control companies through voting rights, continuous dialogue and active participation.

However, as suggested by Tricker (2008), today’s enterprises are dynamic, loosely bonded and a network of complex inter networking relationships. He suggests it is not only enough to have effective corporate governance in practice, but also to evaluate the reality of political environment under which the company operates rather than only focussing on structures through which governance is implemented. Hence, adopting one system of governance policies would not be an effective strategy to survive in such complex environment.

Another framework that can be used to evaluate governance criteria is the one suggested by (Huse, M., 2005) which looks at imploring the behavioural aspect of board rather than the structure. This deals with the accountability of directors and their response to situations. The board accountability is looked from perspective of value creation. Roberts, McNulty and Stiles’s (2005) look at bridging the gap between expectations from the board and the resultant gap from failure to meet those expectations – thus accountability.

The insider – outsider presents a general and working view of approach to corporate governance. But globalization demands better answers resulting from complex queries in business situations. With cross country ownerships and controls and stake holder management, it is imperative to look at governance from different perspectives. OECD provides a good framework as a guiding code, however, better and customized corporate governance policies will be needed to match global requirements.

Corporate Governance Convergence Analysis

Corporate governance is based on principles of transparency, fairness, responsibility and accountability (Klapper & Love, 2004). These principles are independent of all internal and external factors and govern how the business practices should be conducted. Legal aspects, corporate structure provide definitions and scope of governance in a country – whether there is protection for investors, whether it’s a unitary or two-level board etc. whereas the above principles form a guideline for management and board on HOW the duties need to be discharged. The failures of companies like Enron, WorldCom, Tyco etc. has stressed upon and resulted into serious consideration for strong corporate governance, which can be inferred from the emergence and acceptance of generally accepted principles like OECD, CalPERS, CEPS and implementation of SOX; the focus is shifting from individualistic systems to global metrics that will provide the processes to be followed, their assessment and benchmarking.

Although this shift is visible and inevitable, according to me it is a two edged sword. The research indicates that globally concentrated ownership is more dominant than dispersed (La Porta et al., 1998). It has also been proved that the shareholder activism increases proportionally with increased holding (Black & Coffee, 1994. Therefore, it can be concluded that concentrated ownership might be natural way for governance. However, US’ governance system, opposite to natural theory, has been widely adopted. It is essentially a choice between capitalist centred system (equity) to block centred system (family/banks) and both have their advantages and disadvantages. It has been presumed for long time that dispersed ownership is associated with sub optimal system of governance with inadequate control. However, further research provides insight that legal structure and not equity ownership is the basis for control (La Porta et al., 1998, Shleifer and Vishny, 1997). The result of that research proved conclusively that common-law based systems like US, UK were more conducive to entry and growth of companies that civil law based economies like France, Germany. The inference is that those economies that protect minority shareholders through means of legal regulations can result in development of markets.

The result is critical in terms that it also explains the wide adoption of OECD framework. The framework includes promotion of transparent systems, shareholder and stakeholders rights and functions – essentially working towards protection of shareholder. Hence, according to me, whatever the type of economy, adopting of OECD and such other frameworks is not only beneficial but essential.

This also leads to implore the impact of adoption such framework with insider oriented governance style systems. As said earlier, I believe the principles are neutral in terms of impact from any factors and are designed to protect shareholders. Hence, they should be adopted anyway. However, due consideration and flexibility should be incorporated for different types of systems, like dual board, so that it leads in a common global governance standard, all the while maintaining individuality of companies and countries. (Solomon. J, 2011).