The Voices Of Different Stakeholders In Corporate Governance

Published Date: 02 Nov 2017

INTRODUCTION

Following the rise in corporate governance scandals about 2001-2002 most especially the Enron and its audit firm Auther Anderson scandal, WorldCom scandal, Adelphia scandal and so on has totally reduced investors’ confidence, even before this millennium scandal was the financial crisis in Russia, Asia and Brazil in 1998 which made the government recognize the danger of how the poor governance had to led to the instability of the health of the financial system. In 2002, Sarbanes- Oxley Act introduced new and stricter corporate governance regulations in order to curb upcoming corporate scandals. Corporate governance can be said as the system by which ‘’companies are directed and controlled’’ according to (Adrian Cadbury, 1992). It is also referred to as the set of relationship between a company’s director, shareholders and stakeholders (Verdeyen, et al., 2004). Stakeholders are said to be individuals or group of individuals who will be affected from an organisations activities (Freeman 1984 cited in (Skidmore, 2012) and some examples of stakeholders are shareholders, employees, environmental groups, investors, local community, pressure group, trade union, suppliers, customers, regulators and government, competitors and so on. Stakeholders are not just there for the show but they are there because they have a claim or demand for something from the organisation, which may be a change, increase or decrease in the way the organisations operations affect them directly or indirectly (Verdeyen, et al., 2004). Direct stakeholder claims are made by stakeholder who have a ‘voice’ typical examples are trade union, local communities , customers, shareholders, employees and a lot more while indirect stakeholder claims are made on behalf of stakeholders unable to make their claim directly because they are ‘voiceless’ but this doesn’t mean their claims are invalid. Typical examples are the natural environment, future generations and so on. The problem of indirect stakeholder claim is lack of clarity and reliability by interpreter of their claims and this makes it difficult for management to make proper decisions (Kirsi, et al., 2008).

The decision process of an organisation is made by the board of directors and how this board is structured affects the management and expression of conflicting interest. Corporate governance aims to protect shareholders interest, increase transparency and disclosure to all stakeholders, enable effective running of the board and so on. For the board of director, corporate governance ensures there is suitable balance of power on the board, the boards is able to control and manage risk and run the organisation effectively (Cadbury, 2000). Different countries have different corporate governance practise and different board structures such as USA, UK, Germany, Japanese, South Africa, Singapore code and others. Although the public market seeks for globalization in order to increase cross-border transactions (Hoogervorst, 2012). To this end, this study will highlight more and basically focus on how important the voices of different stakeholders are in corporate governance focusing majorly on the shareholders, employees, government and regulators. Also taking into consideration the ways in which shareholders interest might conflicts with each other including a model used for stakeholder analysis called The Mendelow matrix which analyses the level of interest and power stakeholder’s possess (Johnson, et al.,) and lastly a discussion of how the board structure may affect the management and expression of conflicting interest.

THE IMPORTANCE OF THE ROLES OF DIFFERENT STAKEHOLDERS IN CORPORATE GOVERNANCE AND HOW THEIR INTEREST CONFLICTS WITH EACHOTHER

Stakeholders are very essential for the going concern of an organisation; they should also be taken into consideration in the system by which organisations are directed and controlled (Donaldson and Preston, 1995; Freeman, 19841; Letza et al., 2004 cited in (Hansen, 2009). There are various division of stakeholder but we will focus more on the primary and secondary stakeholders. The primary stakeholders are the most important type of stakeholders because without them the organisation would not be in existence or cannot survive such as the shareholders, board of directors and management and secondary stakeholders are the other groups who can be affected by the organisation or indirectly affec the organisation objectives (Verdeyen, et al., 2004). Shareholders and other investors are seen as the most prominent external actors in agency relationship that exist between the board of directors and the shareholders where the board of directors are referred to the agent and the shareholders are referred to as the principal (Benedicte & Ronald, 2010). The agent is expected to observe fiduciary duty towards the principal by acting in their best interest. The principal incurs agency cost when monitoring the behaviour and activities of the agent. Agency cost includes shareholders rewarding the board of directors with packages that can encourage them to align their interest with the shareholder in order to reduce the cost of monitoring their activities, also the cost of holding and attending meetings like Annual general meeting (AGM) and extra-ordinary general meeting (EGM), the cost of studying the organisations performance, analyst reports (Donaldson & Preston, 1995). Shareholders are classified into two types which are the small investors and the institutional investors. The small investors are those investors that hold single units. They buy in small quantities and usually do not have adequate sources of information thereby, having a less robust portfolio. They study the company’s growth, changes in strategy or governance by themselves unlike the institutional investors who are investors that hold the largest investment in organisations and leads the world stock exchange market, such as pension funds, mutual funds, insurance companies, financial institution and so on, each managed by a pension fund manager who help monitor the investments funds carefully either by buying, selling or holding on behalf of this organisation (Solomon, 2010). The role and influence of investor’s most especially institutional investors are they have the right to interfere in management when an organisation underperforms in its operations; when strategies agreed by the board of directors fail in terms of strategic positioning; growth and market strategy; persistent failure of internal control; when executive directors have not been properly scrutinized by non-executive directors; when they don’t comply to the relevant required codes; existence of remuneration policies that are inappropriate; poor approach to environmental footprint or social responsibilities; they can provide a mechanism to transmit information to the financial markets; they can act as activist which is how shareholders can exercise their rights as the organisations owner and influence the business (Solomon, 2010). They have the rights to ask shareholders to meet, recommend shareholders resolutions, voting campaigns, vote in new directors and replace the whole board of directors; engage in either public or private discussions with the board of directors. This is basically to put the board of directors under pressure to perform by enhancing the value of the firm and ensure effective governance (Cadbury, 2000).

Employees include the board of directors, company secretary, sub-board management, low level employees and so on. The role of the board of directors is very important because they are collectively responsible for the organisations behaviour, performance, control and compliance and behaviour. They must also strategize on how to Increase the organisations performance and return on investments for shareholders. They must also ensure that the organisation complies with relevant regulatory requirements such as the accounting, legal and governance framework (Solomon, 2010). The duties of the Company secretary are to ensure the organisation complies with relevant laws and regulatory framework. They are required often to render advises to directors of their legal and regulatory responsibilities and duties. Some of their other duties are maintaining the statutory registers which could be the share register; keeping minutes for the Annual general meeting (AGM) and other important meetings held and also making sure that audited accounts and other documents are filed properly and on time. Trade union can also be referred to as employee representative and they are basically a group that represents employees to the board of directors. They share the same objectives with the organisation and maintain professional and ethical value when carrying out their organisations strategy. They have the duty to unite the workforce and can ensure compliance and commitment to the organisations strategy which means the workforce ‘buys in’ to the strategy. They are thrust with the responsibility of maintaining and controlling employees where a mutual relationship is formed between the employer and the union creating an optimally efficient industrial relationship, thereby reinforcing the productivity of human resources in an organisation, they also help to ensure that the workforce are in good working conditions and can work with maximum efficiency and effectiveness by defending the interest of members and negotiating terms and conditions. Trade union serves as check and balances within the corporate governance structure. Where management abuses occur, the trade union are the first to react which actually favours the shareholders more especially when the abuse (i.e incompetence, fraud, greed, waste and so on) will affect productivity (Cadbury, 2000).

Regulators and Government play a role in corporate governance through imposing legislation and enforcing law and order. They go the extra-mile to impose further control to organisations they consider as politically and strategically important e.g energy, oil and gas, water as so on. They control the supplies and monopolies of these products (Solomon, 2010). The Government rely heavily on tax proceeds levied on organisations profits. The reason for deregulating economic activities is in order to gain economic efficiencies offered by rivalry, create employment, increase tax proceed (Cadbury, 2000).

Different stakeholders interest are in conflict, nevertheless, it is very important to prioritize the interest of different stakeholder groups (Reed Elsevier , 1995). If stakeholders don’t cooperate, it will be very hard to actualize strategies which may lead the organisations not being able to serve as a going concern (Freeman, 1984). However, shareholders can be regarded as the most dominants stakeholders because they invest their funds in the organisation and appoint a board of directors to run the company by making decisions on their behalf, they are basically the owners of the company and hence they expect the board to act in uttermost good faith by taking their interest majorly at heart before making a decision (Donaldson and Preston, 1995 cited in (Heiko & Erik, 2010). Nevertheless, the interest of other stakeholders should not be overlooked but the most the important thing to realise is what they want. Shareholder wants more wealth maximization and better return on their investment and cost cutting to achieve higher profits, while employees want bigger salaries or wages and may also want to work fewer hours than they presently are, customers want lower prices and better quality and 24 hours operations daily all year round and good working conditions (Johnson, et al.,).

Management has to keep all their stakeholders happy most times and to achieve this management has to enter a series of negotiation with stakeholders by taking into consideration what quality and price would retain customers and avoid them from abandoning us for other competitors, what wage increase will prevent employees from resigning or going on strike, what activities of our organisation are going to inconvenience or be of harm the local people, what can be done to keep all these stakeholders onside? (Skidmore, 2012)

Mendelow’s Matrix

Sources: Johnson et, al.,

LEVEL OF INTEREST

Low

High

POWER

Low

Minimal Effort

Keep Informed

High

Keep Satisfied

Key Player

Table 1.1:

Johnson et. al., (2004) illustrated a model for mapping stakeholder analysis using the Mendelow’s matrix. The Key players stakeholders indicated on the illustration are stakeholders with high power and interest, if they unhappy they have the willingness and power to act hence management should ensure their happiness. The stakeholders that should be kept satisfied have high power and low interest. Because of ethical or professional reasons they may not take any actions if management upset them despite all, they have be kept satisfied otherwise they may take actions if provoked and then become key players hence, management should keep them satisfied. Stakeholders to be kept informed are those with high interest but low power, if these sets of individuals are unhappy, they are unable to do very much by themselves but with their influence, key players to act on their behalf. Stakeholders with minimal effort have low power and low interest. These categories of stakeholders can almost be ignored by management because they have low interest and low power. They actually cannot do much if they unhappy.

THE EFFECT OF THE BOARD STRUCTURE ON EXPRESSION AND MANAGEMENT OF CONFLICTING INTEREST

The board of directors are the group of people who head and manage the organisation according to the Combined code (2006) and are expected run it effectively and are collectively responsible for the long term success of the organisation (Cadbury, 2000). The board is normally composed of the chairman, chief executive officer (CEO), executive directors (ED), and non- executive directors (NED’s). These roles have specific activities they have to perform and therefore should not conflict each other. The board should have adequate balance of power, skill, knowledge, experience and independence of the organisation for them to be able to perform their duties effectively. The board of directors are responsible for the accountability and representation of the organisation, they set the organisations value and standards, manage the organisations resources, plan and implement the organisations strategy, positioning the organisation strategically in the environment, and they also have the duty to meet their obligations to shareholders and other stakeholders. The board comprises of two types of structure which are the unitary and the dual or two tier structure (Solomon, 2010).

The Unitary Structure; This is a type of structure dominant majorly in the United States of America (USA) and United Kingdom (UK). It is a single board which comprises and is responsible for both the Control and management team. The unitary board structure includes executive and non-executive directors. The members of this board have equal legal right, executive, accountability and responsibility to the organisation, i.e they owe equal duties to perform and working to achieve same objective and are responsible for all the activities of the organisation. The members of the board are elected in by shareholders during the annual general meeting (AGM). In the Unitary structure, NED’s performs independent scrutiny on ED’s, there is a better flow of information between directors as all of them are on one board, there is less dominance within the board, all members of the board are more accountable as they have the same responsibility, there will be a larger number of the board of directors thereby, increasing the viewpoints than the dual structure but on the other hand, it is almost difficult to expect the non- executive directors totally independent by managing and also monitoring activities which may be very demanding (Opentuition, 2012).

The Dual or Two-tier board Structure; this structure is practised majorly in Germany and France. This type of board structure consists of a dual/two boards which are the executive also know as management and supervisory board. The executive board comprise of the CEO and ED’s and the supervisory board consist of the chairman and NED’s. The chairman heads the supervisory board and has the authority appoint and remove members of the management board; he is thrust with responsibility to oversee how the organisation is managed and business direction (Benedicte & Ronald, 2010). The CEO heads the executive board and he is responsible for the daily running of the organisations operations and takes care of other business issue. In this structure there is a clear separation of power and functions between the management and control, members of one board cannot be members of another board. The supervisory board appoints the management board, while shareholders appoint the supervisory board. The dual board structure shows a clear distinction of duties of the members of board who manage the organisation and those who control it. There is independent discussion between the two boards which will enhance objective decision. A shortfall with the dual board is slower decision making because the supervisory board may lack adequate information and there might be too many different opinions which may lead to bureaucracy. Since the management board are appointed by the supervisory board, their independence may deteriorate (Opentuition, 2012).

The structure of the board is very important because it affects the expression and management of conflicting interest. The board of directors have the fiduciary duty to act in the best interest on behalf of shareholders; they are to avoid conflict of interest and expected to act fairly. The members of the board should possess the right balance of skill, knowledge, experience and independence of the organisation (Solomon, 2010). The balance of skill and power of members of the board is in order to show a clear separation of responsibilities from the head of the organisation between the executive duties of running the organisation to the management of the board of directors. No one individual should have unfettered power of making decision, when more than one person heads an organisation it reduces the risk and this aids in protecting investors concerned with the organisations lack of accountability and transparency (Gray et, al., 1996). The separation of powers between the chairman and CEO reduces the risk of conflicts of interest of one person being responsible for the performance of the company and reporting this performance to the public market and also ensures the CEO concentrates on his executive functions and not distracted and allows the chairman to represent the shareholders interest which creates a dialog of the happenings of the organisation to them (Opentuition, 2012). The chairman addresses the challenges of the NEDs who in turn represent the external challenges of the board of directors. Also some codes expect the chairman to also act on behalf of stakeholder’s interest. The procedure for appointing new directors to the board should be formal, rigorous and transparent (Cadbury, 2000). Directors should also submit themselves on intervals for re-election. Their independence is also very important especially for NEDs because they assist in scrutinising the performance of the EDs. Different committees such as nomination, audit, remuneration, risk committees has been set up to also avoid conflict of interests by reducing the work load of the board and allow them focus on important issues, use expertise to make informed decisions, and lastly communicate to stakeholders the importance of risk and other challenges faced by the organisation (Freeman, 1984).

CONCLUSION

Stakeholders participating in corporate decisions making cannot be overemphasized as it as it relates to efficiency gain thereby resulting to competitive advantage (Turnbull, 1997). Monks, et al., 2008 described corporate governance as the way organisation encourage the efficient use of resources and also the accountabibility and stewarship of these resources. In particular, ensure effective accountability of these resources by directors to their owners (Solomon, 2010). The different voices of stakeholder are very important in corporate governance as stakeholders are regarded as the end in itself and not just an instrumental of achievement of other ends, therefore it very important to protect the various interest of stakeholders so as not to conflict with eachother by first taking into consideration the most powerful and level of interest (Freeman, 1984). The structure of the board very importants because it is the duty of directors of care and skill to shareholders and to avoid conflict of interest by disclosing profits made secretly, acting in members best interest and lastly use their power to do right (Crane, et al., 2007).Globalization of corporate governance is very important as it enables cross boarder transaction it opens the door to more transactions and investments to be made accross countries.