Shareholder and Institutional Financiers in Corporate Governance
The Chair of the Australian Securities Exchange Corporate Governance Council has commissioned you to assist with informing members of the Council about academic research examining an aspect or aspects of corporate governance. Using real world examples from any country to illustrate your content is desirable and will be rewarded.
You (this is an individual assignment) are to write a report for Council members to provide explanation of at least five quality*, scholarly journal articles that present evidence on your chosen corporate governance aspect(s) in the context of any country. These articles must be drawn from journal titles listed on the Australian Business Deans Council (ABDC) list, which represents a measure of journal quality. You can begin the research required to undertake this assignment from Week 2, but Topic 4 is most relevant.
Selected Article for study: Corporate Governance e-journal: The existing division of corporate decision making power in the UK, USA and Europe: A comparative perspective penned by Shida Galletti
The selected article under consideration takes into account different function and purposes of shareholders, specifically institutional financiers in the area of corporate governance. This study critically assesses division of power in the area of decision making in the legal system of Anglo-America along with ramifications. Also, the study intends to explore whether shifting of specific powers and authorities in the hands of shareholders can prove to be advantageous for the corporations. In addition to this, the study at hand also intends to examine the institutional financiers, their potential to assume a leading role in the running business concerns. Moving further, the current research has the aim to address certain regulatory reforms that need to be taken into consideration in particularly the UK, USA even though it is believed that regulation is mainly prompted by the zeal to act to act in response to a crisis rather than by the real need to re consider the current power allocation.
Corporate governance can be regarded as the arrangement of rules, exercises and procedures by which a corporation is directed as well as controlled. Breitbarth et al. (2015) suggests that corporate governance essentially entails balancing overall interests of a firm’s stakeholders, namely shareholders, firm’s management, target customers as well as suppliers, investors, government along with the entire community. Therefore, it is important to understand actions, powers, authorities and primacy of the ones involved in the process of attainment of good corporate governance. As corporate governance also delivers the framework for attainment of objectives if the firm, it orients nearly every sphere of administration, beginning from action plans, different internal controls to measurement of performance along with corporate disclosures. Essentially, the shareholder primacy premise is a leading principle in corporate regulation that directs decision-makers of the corporation to concentrate on the shareholders’ interests (Chang et al. 2015). However, validity of the notion can be examined and analysed herein in context of UK as well as USA.
Power Division in Decision Making in Anglo-America Legal System
The board of directors can be considered to be the primary stakeholder who directly influences corporate governance. Essentially, directors get elected by various shareholders or else get appointed by different members of the board (Chen et al. 2017). Essentially, directors reflect shareholders of the business entity. In essence, the board has the task of making significant decisions, namely corporate officer arrangements, executive recompense and dividend strategy. In some examples, board necessities broaden beyond pecuniary optimization, when resolutions of shareholder require definite social or else environmental concern to be particularly prioritized (Comer 2017).
In essence, boards necessarily consist of inside as well as independent members. In essence, Insiders refer to shareholders, various founders as well as executives. Again, there are different independent directors who necessarily do not collaborate with the insiders (Dabor et al. 2015). However, they are selected owing to their experience in handling and directing different large business entities. Independents are necessarily regarded to be very helpful for governance as they dilute power concentration and help in aligning interests of shareholders with that of the insiders (Dimopoulos and Wagner 2016).
As rightly indicated in the given article, primacy of the shareholders can be illustrated as the position held by shareholders as ultimate beneficiaries of different accountability norms. In essence, their capability to implement ex ante or else ex post facto authorities to remedy misconduct of directors reflects the supremacy (Kraakman and Hansmann 2017). In its place, the supremacy of the board of directors seems to arise from diverse underlying basic doctrines and principles of corporate regulations that are essential for implementation of effective control of large business enterprises. As rightly indicated by Tricker and Tricker (2015), this supremacy can be further analysed from the restrictions of the powers as well as authorities that are necessarily retained by firm’s shareholders. From the legal perspective it can be said that in both UK (as per the rulings of the section s 3 of the Model Articles, and in the USA (as per rulings of the article s141(a) of the Delaware General Corporation Law), board of directors of the business entities are liable for the overall management of the firm and execute all the powers as well as authorities that are attributed to the directors subject to specific articles otherwise certificates linked to incorporation (Armstrong et al. 2015).
As mentioned in the article under consideration, the ones who argue in favour of the re-allocation of power as well as authorities towards firm’s shareholders assert that enforcement of control authorities of firm’s shareholders can prove to be valid solution to various types of agency issues (Breitbarth et al. 2015). Essentially, this kind of issues can be illustrated as conflicts in specific interest that necessarily crops up when the interests of the agent vary from that of the principle. However, diverse solutions are proposed in a bid to overcome these agency problems, namely combining the compensation of the agent to directly owner’s benefits, allowing shareholders to interfere in a bid to make the chief executive officer perform well, or else enhancing the intervention power as well as control by particularly the firm’s shareholders by permitting them to introduce new managers (Agrawal and Cooper 2017). This kind of emphasis on the results of consequences of ownership as well as control can be criticised by various commentators as very much misleading and at the same time excessive. In addition to this, it can be hereby mentioned that in switching the present debate to the benefits contained in this kind of separation and the overall significance of centralized powers can help in understanding advantages of this such separation as well as overall value of centralized power along with accountability (Aguilera et al. 2015)
Potential Advantages of Shifting Powers and Authorities to Shareholders
As correctly mentioned by Bain and Band (2016), it can be hereby argued that this specific condition need to be exploited in this regard. Essentially, maintaining the present balance delivers the benefit of having balance that delivers the benefit of getting a centralised decision maker who is primarily accountable for gaining decisions. Davies (2016) asserts that absence of this centralised decision making can make it harder for the shareholders to devise decisions. Edmans (2014) mentions that shareholders would necessarily lack adequate information and would likely suffer from reasonable apathy and need to be divided in terms of divergent interests. In essence their decisions have the need to be consistent with the plans of business devised by the board of the business concern. However, this might get undermined by the lack of vision as well as goals. As suggested in the current article under consideration, this arrangement might perhaps direct the way towards disruptive cycles that can necessarily act as an impediment in the process of decision making (Calomiris and Carlson 2016). On the other hand, there are a contractarians who differ in their views and argues that board of directors of a corporation can be held accountable by different forces of the market namely capital as well as product market, different reputational market as well as the market for corporate control.
The study at hand asserts with particular orientation to the USA that empowerment of shareholders might lead to replacement of board and thereby permit shareholders to start modifications, namely reframing and reincorporation of specific business decision that might direct states to compete for various regulations favouring firm’s shareholders (Breitbarth et al. 2015). In this case, directors would stay away from adopting various anti-takeover process at the time when the takeover is provided support by particularly shareholders. In addition to this, shareholders have the need to able to decide regarding termination of the business entity and retain the decision of scaling down that primarily rests in the hands of the board. However, as per the give article, this call mainly in the US cannot be considered to be entirely novel. Chang et al. (2015) suggests that the corporate governance in the UK is mainly instituted with the supposition of a strong and enduring association between firms as well as shareholders founded on constructive engagement along with exit stratagems. This is necessarily a standard that is embraced in particularly the Corporate Code of the UK as well as the Stewardship Code of the UK.
Role of Board of Directors in Corporate Governance
In particularly the UK, the worldwide financial crisis led to assessments namely the Walker Review during the year 2009. This intended to examine some of the evident weaknesses present in the corporate governance, counting composition of the board, performance as well as engagement of shareholders (Dabor et al. 2015). It is necessarily for the FRC to present a formal code of stewardship intended at enhancing overall engagement of various institutional financiers. In essence, the Code of Governance of the UK as declared by the FRC in an amended version during the year 2010 was aimed at enhancing overall effectiveness of the board along with performance. In essence, the regulations have the tendency to follow the cycle of business. Essentially, in the time of worldwide crisis as well as collapse, regulation need to be take up the responsibility of bridging the gaps in order to ensure that this kind of incidents do not recur in the future period (Dabor et al. 2015). Again, during the time of economic boom and generation of economic wealth, there is less drive for enhancement of the overall corporate system. As suggested by Kraakman and Hansmann (2017), engagement of shareholders can be considered to be an important matter of consideration particularly in the post crisis restructuring in particularly the UK as well as US. Nevertheless, as a proper framework as well as procedures plays an important decisive role, there are still some researchers who believe that there is a specific degree of enchantment engaged in reaching most favourable conditions for accurate decision making. Essentially, in other words, it can be said that there are certain components namely trust, constructive debate, information flow as well as honesty together with skills necessary to analyse the flow (Armstrong et al. 2015).
Conclusion
In conclusion it can be said that the role of various shareholders as stewards of the corporation can be considered to be an important component of effectual corporate governance. This is true not only in the UK but also in other parts of the Europe. The study at hand helps in understanding the fact that models used in both UK as well as USA depend on both checks as well as balance between different organs and stakeholders. Particularly, the importance can be witnessed in current reforms in particularly the USA where the imbalance might perhaps is more obvious and evident. Again, different legislators as well as regulators have the need to correctly find out ways and means to engage different shareholders and avert directors of firms to become monarchs. However, the present process of allocation of powers need not be held unsatisfactory. As such, the primacy of the firm’s board of directors does not in itself show the way to negative outcomes and indeed takes in certain recognized benefits associated to overall value of centralised power as well as authority. Besides shareholders, a crucial role needs to be played in this regard by different gatekeepers namely accountants, legal practitioners, assessors as well as rating agencies
References
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance, 7(01), p.1650014.
Aguilera, R.V., Desender, K., Bednar, M.K. and Lee, J.H., 2015. Connecting the dots: Bringing external corporate governance into the corporate governance puzzle. The Academy of Management Annals, 9(1), pp.483-573.
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
Bain, N. and Band, D., 2016. Winning ways through corporate governance. Springer.
Breitbarth, T., Walzel, S., Anagnostopoulos, C. and van Eekeren, F., 2015. Corporate social responsibility and governance in sport:“Oh, the things you can find, if you don’t stay behind!”. Corporate Governance, 15(2), pp.254-273.
Breitbarth, T., Walzel, S., Anagnostopoulos, C. and van Eekeren, F., 2015. Corporate social responsibility and governance in sport:“Oh, the things you can find, if you don’t stay behind!”. Corporate Governance, 15(2), pp.254-273.
Calomiris, C.W. and Carlson, M., 2016. Corporate governance and risk management at unprotected banks: National banks in the 1890s. Journal of Financial Economics, 119(3), pp.512-532.
Chang, C.S., Yu, S.W. and Hung, C.H., 2015. Firm risk and performance: the role of corporate governance. Review of Managerial Science, 9(1), pp.141-173.
Chen, R., El Ghoul, S., Guedhami, O. and Nash, R., 2017. State ownership and corporate cash holdings.
Comer, M.J., 2017. Corporate fraud. Routledge.
Dabor, A.O., Isiavwe, D.T., Ajagbe, M.A. and Oke, A.O., 2015. Impact of Corporate Governance on Firms’ Performance. International Journal of Economics, Commerce and Management, United Kingdom, 3(6), pp.634-653.
Davies, A., 2016. Best practice in corporate governance: Building reputation and sustainable success. Routledge.
Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover Decisions.
Edmans, A., 2014. Blockholders and corporate governance. Annu. Rev. Financ. Econ., 6(1), pp.23-50.
Kraakman, R. and Hansmann, H., 2017. The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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