Toshiba case
This report has been prepared to analyze the corporate governance and monitor the executive performance. This report depicts about the financial scandal of Toshiba, which is the one of the biggest scandal in Japan. In this report, it has been analyzed that how an effective monitoring could reduce the chances of scandal in an organization.
This report briefs the user about Toshiba case. Further, it depict about the monitoring on corporate governance and compensation of management in an organization. More, this report brief about the challenges management and organization could face while compensating the mangers of the organization. Philosophies have been discussed for the compensation system of executives in an organization. Key components have been disused. Further, recommendation has been given and concussion has been shown.
Toshiba’s case has been studied and it has been found that it was a huge scandal by the top leading company in Japan. The Toshiba scandal was took place due to bas internal audit quality. Corporate governance report of 2014 has been analyzed and found that the scandal has taken place due to less payment to the auditors in comparison of other companies. The accounting rules have not been followed by the company properly and thus the company got able to reduce the tax amount of ¥224.8 billion from 2008 to 2014. The executive members of the company were also involved in this scandal (Baker and Anderson, 2010).
Effective monitoring is essential for every company to manage the financial and non financial aspect of the company. It has been analyzed that effective monitoring is essential for every organization to manage the corporate governance in the company (Ellig, 2002). Effective monitoring is a process in which every aspect of company is analyzed to identify the worth of the business and analyze the ethics and corporate governance of the company.
It has been studied that effective monitoring is essential for every business to analyze every factor of the company. If a company uses the effective monitoring than there are less chances of the company to being involved in any kind of scandal (Balsam, 2002). The main reason behind occurring the scandal is the less monitoring practices in a company. It has been analyzed through the case study of Toshiba that the company’s internal effective monitoring was not so impressive and that is why the scandal has taken place (Berger and Berger, 2000).
It has been found that top level management of the company was involved with the scandal and thus the company has to face so many issues and the investment of the company got affected (Bebchuk and Fried, 2004 and Locke, 2007).
It has also found that in Toshiba case, the auditors didn’t perform their duty in a better manner due to less compensation. It has been found that Japan is the less paid country among all the developed companies to the auditors (Core, Guay and Larker, 2003). It has also found through the cases that if an effective monitoring process has been adopted by both the companies than there were null chances of the happening of scandal in the company.
Effective monitoring on Executive performance management and compensation
In that situation all the involved employees, top level management and executive members did not have the courage to do that and if they are well paid than also they need not to occur the money illegally (Engle, Gordon and Hayes, 2002).
Managing executive compensation is the biggest challenges in front of the organizations now days. It has been found through analyzing the case studies and many other articles and text books, it has been found that the companies are required to manage the compensation of its executive members in such a way that all the problems of organization could be resolved (Bertrand and Mullainathan, 2001),. It could be said through analyzing the case study that there must be a different committee for setting the compensations for the executive members of the company.
It has been analyzed through this study that many challenges are occurred in front of an organization while planning for the compensation (Matsunaga and Park, 2001). Some of them are as follows:
It has been found through analyzing the case study that organizations must consider this inequality factor as due to high executive compensations, it becomes tough for the organization to manage the equality in the income of executive members and other employees of the company (brooks, May and Mishra, 2001). It has been found that earlier executive members used to take less compensation and the scandals were also less in earlier time whereas currently the compensation has been raised from earlier time and still the chances of scandals are high. Thus it is the biggest challenges for the organization to take the decision about executive compensation.
It is the basic thought to compare the salary of CEO with the performance of the organization under the leadership of him or her as it offers some sense of logic. But in reality, it is different as only a single person does not lead the performance of the company and do not enhance the share price of the company (Guidry, Leone and Rock, 1999). A study reveals that the performance of the company depends only 4% on the top level management of the company (Carpenter and Yermack, 1999). Thus it is the biggest challenges for the organization to take the decision about executive compensation.
It is common knowledge that when a direct link could be shown among the performance and effort than only incentive could be paid to the individual. As discussed earlier, the performance of the company depends upon every employee of the company and thus the incentives must not be paid to the executive members of the company.
Thus it is the biggest challenges for the organization to take the decision about executive compensation.
A compensation philosophy is a formal statement which is documented the position of the company about executive compensation. It depicts the reason behind the executive pay and makes a consistent framework (Cebon, 2017). It makes the compensation transparent so that the best decision could be made by the employees.
Challenges in managing executive compensation
It is crucial for an organization to design the executive compensation in a perfect manner so that the corporate governance of the company could be transparent and the belief of the shareholder in the company could be enhanced (gaver and gaver, 1998). Some of the philosophies to design the executive compensation system are as follows:
This philosophy states that the compensation must be clearly stated by the company to its employees and executive members so that the issues could not be raised by the executives after a period of time. This philosophy states that the compensation strategy of executives could be beneficial for the organization and executive both as well (Murphy, 1998). It has been clearly stated in the accounting rules that the salary and compensation must be clearly stated in the book.
A company’s business philosophy helps the company encompass the beliefs and basic values of the company which defines the environment of the company in which a strategy of compensation could be administered (Hallock, 1997). This philosophy depict that the organization must make the compensation strategy according to the business beliefs, basic values, mission and vision of the company.
This philosophy depict that the compensation offered to the executive members must be transparent so that the chances of scandal could be lesser. It has been clearly stated in the accounting rules that the salary and compensation must be clearly stated in the book.
This philosophy depict that the compensation offered to the executive members must include all the extra benefits such as retirement benefits, health insurance, disability insurance, capital accumulation plan etc (Kole, 1997). This philosophy would help the organization to motive the executives and thus this would help the corporate governance in enhancing.
This philosophy depict that the compensation offered to the executive members must be according to the legal compliances and according to the mission and vision of the company. This philosophy would help the organization to motive the executives and thus this would help the corporate governance in enhancing (Heinrich and Lynn, 2000).
A compensation system is helpful for the organization in managing the executive and corporate governance in the company. Compensation strategy also assists the company in reducing the risk factor from the company (Core, Guay and Larker, 2003). It has been analyzed through analyzing over the compensation philosophy, challenges, strategy etc that the following are key components of compensation system for executives:
Incentive policy is key component of corporate governance and manages the effective link among the expectation of employer and executive performance. For the organization, it is good to introduce an incentive policy as through the incentive policy, employees would be motivated to work with quality and in less time. Thus they would be able to meet the organization expectation and help the company to achieve their goal (Bushman, Indjejikian and Smith, 1996).
For an effective link among the employer expectation and executive performance it is a required for the organization to take the help of legal compliances as it would ensure the federal and state law and thus executives would work with quality and with lesser time and thus they would be able to meet the organization expectation and help the company to achieve their goal (Chung and Pruitt, 1996).
Philosophies for designing the executive compensation system
Salary ranges are the main component for an organization as it sets an effectual relation among the employer expectation and executive performance. It is a good option for the organization to introduce a salary range as it would motivate the executives to work with quality. And employees would be motivated to reach into next salary range and thus they would be able to meet the organization expectation and help the company to achieve their goal (Bushman, Indjejikian and Smith, 1996).
Benefit packages would help the organization into setting an effective link among the employer expectation and executive performance. Benefit packages would be a good option for the organization as it would motivate the executives to work with quality and with lesser time and thus they would be able to meet the organization expectation and help the company to achieve their goal.
Salary audit would help the organization into setting an effective link among the employer expectation and executive performance. Salary Audit would be a good option for the organization as it would motivate the executives to work with quality so that they could not come into the list of any kind of fraud and thus they would be able to meet the organization expectation and help the company to achieve their goal (Chung and Pruitt, 1996).
Performance management system would help the organization into setting an effective link among the employer expectation and executive performance. Performance management system would be a good option for the organization as it would motivate the executives to work with quality and with lesser time and thus they would be able to meet the organization expectation and help the company to achieve their goal (brooks, May and Mishra, 2001).
Structured Administration would help the organization into setting an effective link among the employer expectation and executive performance. Structured Administration system would be a good option for the organization as it would motivate the executives to work with quality and with lesser time and thus they would be able to meet the organization expectation and help the company to achieve their goal.
Conclusion:
Thus through analyzing this report, it could be said that it is required for an organization to monitor all the internal controls of the company sp that there would be less chances of the company t get involved with any kind of issues and scandal. Effective monitoring is essential for every organization to manage the corporate governance in the company. Effective monitoring is a process in which every aspect of company is analyzed to identify the worth of the business and analyze the ethics and corporate governance of the company.
It has been analyzed through this study that many challenges are occurred in front of an organization while planning for the compensation. Such as performance, inequality of income, incentive plans etc. A compensation philosophy is a formal statement which is documented the position of the company about executive compensation.
Thus it could be said that corporate governance and management compensation is essential for an organization.
References:
Baker, H.K. and Anderson, R. (2010) A Synthesis of Theory, Research, and Practice, Wiley, John, Wiley & Sons, Inc.
Balsam, S. (2002), An Introduction to Executive Compensation, San Diego: Academic Press.
Bebchuk, L. and Fried, J. (2004), Pay Without Performance: The Unfulfilled Promise of Executive Compensation, Cambridge, Mass: Harvard University Press.
Berger, L.A. and Berger, D.R. (eds.) (2000), The Compensation Handbook : A State- of-Art Guide to Compensation Strategy and Design, 4th edition, New York: McGraw- Hill.
Bertrand, M. and Mullainathan, S. (2001), “Do CEOs Set their Own Pay? The Ones without Principals Do,” NBER Working Paper No. 7604, March. Also available at
Brooks, R.M., May, D.O. and Mishra, C.S. (2001), “The Performance of Firms before and After They Adopt Accounting-based Performance Plans, The Quarterly Review of Economics and Finance, 41: 205-222
Bushman, R.M., Indjejikian, R.J., and Smith, A. (1996), “CEO Compensation: The Role of Individual Performance Evaluation”, Journal of Accounting and Economics, 21: 161-193
Carpenter, J. and Yermack, D. (eds.) (1999) Executive Compensation and Shareholder Value: Theory and Evidence, Boston, Kluwer Academic Publisher.
Cebon, P. ,The 3 Company Crises Boards Should Watch For (2017), Harvard Business Review. Also available at
Chung, K.H, and Pruitt, S.W. (1996), “Executive Ownership. Corporate Value and Executive Compensation: A Unifying Framework”, Journal of Banking & Finance, 20: 1135-1159
Core, J.E. Wayne, Guay, R. and Larker, D.F. (2003), “Executive Equity Compensation and Incentives: A Survey”, Economic Policy Review, April, Vol. 9, No. 1
Ellig, B.R. (2002), The Complete Guide to Executive Compensation, New York: McGraw-Hill.
Engle, E., Gordon, E.A. and Hayes, R.M. (2002), “The Roles of Performance Measures and Monitoring in Annual Governance Decisions in Entrepren******ial Firms”, Journal of Accounting Research, 40(2): 485-518
Gaver, J.J. and Gaver, K.M. (1998), “The Relation Between Nonrecuring Accounting Transaction and CEO Cash Compensation”, The Accounting Review, 73(2),: 235-253
Guidry, F., Leone, A.J. and Rock, S. (1999), “Earnings-based Bonus Plans and Earnings Management by Business-unit Managers” Journal of Accounting and Economics, 26: 113-142
Hallock, K.F. (1997), “Reciprocally Interlocking Boards of Directors and Executive Compensation”, Journal of Financial and Quantitative Analysis, 32(3): 331-344
Heinrich, C.J. and Lynn, L.E. (eds.) (2000), Governance and Performance: New Perspective, Washington, D.C. : Georgetown University Press.
Kole, S.R. (1997), “The Complexity of Compensation Contracts”, Journal of Financial Economics, 43: 79-104
Locke, G.M. (2007), The Year in Executive Compensation: Towers Perrin HR Services
Matsunaga, S.R. and Park, C.W. (2001), “The Effect of Missing a Quarterly Earnings Benchmark on the CEO’s Annual Bonus”, The Accounting Review, 73(3): 313-332
Murphy, K.J. (1998), “Executive Compensation”, Working Paper, Marshall School of Business, University of South California
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