Primary Checks and Balances for Maintaining Good Corporate Governance
Discuss about the Corporate Governance and CEO Turnover Decisions.
Good corporate governance has the need for wide a range of regulatory checks as well as balances – or in other words mechanisms in order to be effectual. In case if a specific mechanism does not work out, the entire system is said to fail just like a chain of operations having a weak link. The current study at hand intends to deliver an overview regarding the primary checks as well as balances that is necessary for a nation to have fitting corporate governance (Tricker and Tricker 2015). In this connection it can also be noted that current corporate collapse as well as failures have raised several questions.
It can be said that development of financial market can be said to be one of the most significant determinants of growth of an economy. Nevertheless, financiers require confidence and assurance in the market in order to carry out investments. The worldwide financial crisis also shattered the confidence of the investors to a great extent. This has reflected towards poor corporate governance of nations. The current study therefore intends to examine the way corporate law can handle potential conflicts of diverse interests between different stakeholders involved in business concerns (Dimopoulos and Wagner 2016). In addition to this, the current study also has the purpose to evaluate the way corporate law can promote effectual management of firms and at the same time instil confidence in particularly the securities market. In this regard, the current study at hand has the intention/purpose to elucidate illustratively various ways in which corporate regulation deals with the issues by adoption of a wide range of mechanisms that again can be illustrated as a specific scheme of checks and balances (Armstrong et al. 2015).
Corporate governance can be considered to wide notions that explicate the way in which business enterprises can be handled and at the same time controlled. The article titled “The Checks and Balances of Good Corporate Governance penned by John Lessing hereby present in the study various checks as well as balances that are necessary for institution as well as maintenance of good corporate governance. In essence it can be hereby mentioned that supporting principles of corporate governance can be considered to be critical to the survival of business enterprises (Du Plessis et al. 2018). There are past evidences that reflect the fact that boards of directors of business entities that have necessarily failed to sustain a method of checks and balances have endured damage to reputation and went through considerable decrease in fortunes, resulting in losses to their shareholders. Thus, it is important to understand various dimensions of checks and balances that are imperative for maintenance of good corporate governance.
Regulatory Laws and Fiduciary Duties
As per the given article at hand, the regulatory laws for good corporate governance impose certain important duties as well as accountabilities on company directors. As mentioned in the given article, these duties mainly take in fiduciary duties (that is to say, liability to act fairly, truthfully and honestly). However, the issue lie in the enforcement of this regulation especially where offenders control the firm (Breitbarth et al. 2015).
Mautner (2016) says that directors form an important part of the business concern and have important roles to play in the process of framing important decisions. Essentially, the actions of the directors can direct the success or else the failure of the corporation. Therefore, in this connection it can be said that there is need for thorough training of the directors for honest practices are necessary for attainment of organizational objectives. Thus, proper corporate governance can encourage both honest as well as transparent system of monitoring of all the activities of the directors. Comer (2017) suggests that appropriate execution of directors’ duties require proper training as well as development of the directors of the firm. This in turn can help them to perform well in the process of decision making.
As indicated in the current article under deliberation, shareholder remedies can also provide protection from different wrong doings of company directors otherwise managers. This study therefore stresses on the need for enhancing activism of shareholders of business enterprises. In case shareholders find out a way of shielding their own investments, then it rationally follows that their level of confidence also enhances (Hamilton and Micklethwait 2016). Thus, it can be hereby mentioned that remedies of the shareholders can help in good corporate governance that in turn can help in protecting and enhancing different rights of financiers as well as other participants of the market.
Another regulatory determinant that can help in developing good corporate governance includes mandatory disclosures. As mentioned in the current article under study, mandatory disclosures provides shareholders added level of confidence as they have the requisite information and knowledge to undertake an investment decision (Levi-Faur 2017). In addition to this, the yearly audits by various independent auditors along with other reporting obligations might perhaps have a material impact on the prices of the shares of the company too.
Auditors necessarily function as firm’s gatekeepers. In essence, they deliver independent substantiation of financial position of the business enterprise. Nevertheless, current collapses namely Enron have revealed that assessors do not always function with adequate level of independence as the current article suggests there is also lack of professional accountability (Zagorchev and Gao 2015). Thus, these failures lead to greater regulation of the assessors (for instance, implementation of the system of compulsory rotation of assessors, limits on the level of consultation and many others).
Training and Development of Directors
Wanyama et al. (2017) suggest that independent directors are nowadays critical mechanism for development of good corporate governance. In essence their primary role includes independent monitoring of the entire management as well as to take care of the company’s shareholders. In this connection it can be said that there are calls for true independence along with provisions in diverse nations to exclude the ones who even accept indirect advantage from the corporation over and above the fees of the directors. As highlighted in the article under consideration, there is need for independence of chairman and that the specific roles as well as responsibilities of the chairman of firms as well as chief executive officers need to be separated. In addition to this, there is also requirement higher diversity on the composition of the board of the business concerns (Bhasin 2015).
As mentioned in the present article under consideration, securities regulations and directives essentially facilitates agreements between different entrepreneurs, various shareholders as well as shareholders along with financial intermediaries. In essence, directives help in delivering a standard set of rights along with obligations. In this case, the advantage is to lessen various transaction costs, however, they might perhaps also limit diverse legal terms or else contracts. In essence, these regulations also crack down on insider trading (Chen et al. 2017). This means that the securities regulations are against use of specific information for personal benefit particularly at the time when the information is not available to diverse participants of the market. However, there are certain disadvantages of these regulations as well.
As rightly indicated by Wang (2016), share options necessarily provide the directors the authority to purchase shares in the upcoming period at a fixed price. In essence, they can inspire various directors to act and function in the interests of the shareholders by acting in a way that ca enhance the value of the business concern and hence the shares. The article under consideration also reflects that there are directors who manipulate the prices of share and backdate the options. Criticisms are levelled against this wrong doing of the directors. Also, the use of options are also criticised as they can direct the way towards cost cutting in the short term period and in turn make the company less prepared for the upcoming period. This kind of conduct might lead of violation of duties. However, banning the usage of options can be regarded as an overreaction. Thus, according to Dabor et al. (2015), the preferred approach would be to acquire options that are accounted and presented as costs in the financial assertions of business concerns and are validated by the shareholders.
Shareholder Remedies
Misleading advices by research analysts in the investment banks have misdirected investors in the past. In essence, analysts at these banks have sometimes advised to purchase shares of the companies that they knew beforehand were not performing well for earning high fees from the same companies. Many of these banks have disbursed huge amount of compensation for this unlawful act (Chang et al. 2015). Therefore, stricter review of the analysts in the upcoming period is required for checking these unethical practices. Implementation of these checks can help in enhancing the level of confidence of the shareholders.
In past times it has been observed that credit rating agencies have engaged in various unscrupulous acts in the recent financial crisis (Bhasin 2015). Therefore, there is need for introduction of various different stringent regulations for the credit rating agencies for maintenance of proper governance.
It can be widely observed that law practitioners assist in the process of concealment of truth that in turn present misleading information to shareholders. Therefore, for the purpose of maintenance of proper good corporate governance it is imperative on the part of the lawyers to have certain obligations and commitment towards the shareholders of the corporations for which they essentially work for (Levi-Faur 2017).
As rightly put forward by Levi-Faur (2017), regulators do play a significant role in the process of administration as well as enforcement of various corporation regulations. Fundamentally, the regulators namely the Australian Securities and Investment Commission, Australian Prudential Regulatory Authority and Australian Stock Exchange among many other are significant regulators that can implement check and balance and be liable for good corporate governance. However, these authoritative bodies are heavily criticized for not being dynamic enough during the worldwide financial crisis and collapses (Dimopoulos and Wagner 2016). Analysis of the actions of the regulators reveals that there is need for higher level of enforcement for detection of misconduct and maintenance of good corporate governance.
The scheme of monitoring can be considered to be an effective check and balance procedure. As mentioned by Du Plessis et al. (2018), in case if the directives and regulations can help the liquidators to carry out extensive analysis of the reasons behind the collapses of the firm, the in that case, this process can help in unearthing various wrongdoing and the ensuing liability.
As mentioned in the given article, it is imperative for the legal authorities to deliver a specified procedure that can permit different takeovers and can also make sure that the shareholders of the corporation in the target corporation are well shielded (Tricker and Tricker 2015). Hostile takeover threats also act as a check and balance process and inspire management of firms to act effectively and fairly.
Mandatory Disclosures and Yearly Audits
Conclusion
The above mentioned study helps in gaining comprehensive understanding regarding different checks as well as balances that in turn can facilitate the process of maintenance of good corporate governance. This helps in gaining insight regarding the humongous amount of power that is necessarily concentrated in the hands of business concerns that in turn calls for the needs of implementation of good corporate governance. It can be hereby mentioned that implementation of the checks and balances can aid good corporate governance that in turn can make certain careful management of a business entity. This is because there are various important decisions that can prove to be beneficial for any actor namely shareholders, community welfare and directors among many others. In the end it can be said that in order to aver recurrence of any further failure in corporate governance it is important to implement checks as well as balances of different dimensions as discussion above in the study.
References
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.
Bhasin, M.L., 2015. Corporate Governance and Forensic Accountants’ Role: Global Regulatory Action Scenario.
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.
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.
Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover Decisions.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.
Hamilton, S. and Micklethwait, A., 2016. Greed and corporate failure: The lessons from recent disasters. Springer.
Levi-Faur, D., 2017. Regulatory capitalism. Regulatory Theory, p.289.
Mautner, G., 2016. Checks and balances: How corpus linguistics can contribute to CDA. Methods of critical discourse studies, pp.154-179.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Wang, J., 2016. Corporate governance in China. Routledge Handbook of Corporate Law, p.183.
Wanyama, S., Burton, B.M. and Helliar, C.V., 2017. Corporate governance and accountability in Uganda. Corporate Citizenship in Africa: Lessons from the Past; Paths to the Future, p.54.
Zagorchev, A. and Gao, L., 2015. Corporate governance and performance of financial institutions. Journal of Economics and Business, 82, pp.17-41.
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