Sample Accounting Coursework Paper on Corporate Governance

Abstract

The term corporate governance is copiously applied in both public and private industries, and it has become the subject of deep discussion across the world. Various scholars and other groups have provided different definitions that have given rise to queries concerning the definition of corporate governance. Other elements of corporate governance that have become imminent are the need for corporate governance, its expectations, and individuals responsible for it. Different organizations are owned in a different manner (Connelly et al. 2010). Nevertheless, in discussing the concept of corporate governance, the main emphasis is always put on the board of directors and financial facets of organizations and other entities, thereby giving an imprint that corporate governance is associated with these concepts yet it is not so. In all organizations, different elements are involved and it is indispensable to cognize their dealings and impacts to recognize the purpose of corporate governance. This report provides a comprehensive discussion of corporate governance through analyzing its background and comparing its systems in different nations. The report also analyzes the meaning of corporate citizens and its relation to corporate governance.

Corporate Governance

Background of Corporate Governance Systems

Corporate governance is an extremely alluring aspect of the economic theory. The origin of corporate governance concept can be traced back to the days of Adam Smith. In assertion, Smith states in his Wealth of Nations that “Being the managers of other people’s money … it cannot be expected that they should watch over it with the same anxious vigilance…” Nonetheless, Jensen and Meckling initiated the development of the corporate governance topic in 1976. The two scholars presented the notion of separation of proprietorship and control, resultant agency problem and persons to come up with the picture of a corporation as a bond of contracts. Consequently, since the concepts of separation of ownership and control are integral in the contemporary corporate, the element of corporate governance is still significant in the current corporate world.

Furthermore, corporate governance is among institutions that have existed for a longer time. In ancient days, issues of social responsibility rested with the rulers like kings and other administrators who played a significant role in governing the kingdom (Kummamuru 2016). This implies that the wellbeing of the subjects in society was the responsibility of the ruling class. In the contemporary society, the welfare of the society and its populations is rested with existing governments that are elected by people. This means that the obligation of governing is vested on the government in a manner similar to the kings and other rulers in the past. Additionally, there is a new player in the contemporary world of governance referred to as a private sector. The private sector accounts for corporate governance in the corresponding establishments. Despite the fact that the private sector may not directly be involved in the welfare of the public, it plays a significant role in the wellbeing of the society.

Therefore, corporate governance is defined as a set of apparatuses that incorporate the self-interested controllers of an organization to make decisions that touch on the operations of the organization, which make the most of the value of an organization to its owners (Kummamuru 2016). In summary, corporate governance involves different sets of affiliation amongst an organization’s management, its directors, shareholders, and all other stakeholders since directors are becoming more involved in assessing and shaping organizations policies and practices (Ayuso and Argandona 2009). The associations that incorporate different rules and incentives offer the framework through which the operations of an organization are set and lay down the different means of accomplishing these purposes. Therefore, the three important features of good corporate governance include the following:

  • Transparency of company configurations and operations
  • The answerability of administrators and the boards to shareholders
  • Corporate responsibility towards stakeholders

Despite the significance of corporate governance in laying down the structure for establishing long-term confidence between organizations and other external providers of capital, it is not apparent that its significance is to enhance improved access of finance primarily. Many organizations across the globe are recognizing that improved corporate governance enhances significant worth to their effective performance in many ways. For instance, effective corporate governance develops tactical thinking among organizational leaders through investing in autonomous executives who incorporates a wealth of understanding and networking concepts. Moreover, improved corporate governance in organizations enables the leaders to be effective in accountability and checking any risks that the organization encounters globally. Furthermore, effective corporate governance confines the liability of organizational leaders and managers through cautiously enunciating the decision-making process and guaranteeing veracity of financial reports.

Apart from the aforementioned importance, corporate governance also has long- term reputational outcomes among the main shareholders both within and outside the firm (Maher and Andersson 2000). Generally, the degree to which organizations are operated in a transparent and authentic manner is imperative for winning the market buoyancy, the effectiveness of capital allocation and the growth and development of the nations’ industrial bases besides enhancing the states’ wealth and welfare. In the definition of corporate governance, it is significant to note that the concepts of disclosure and transparency are crucial factors. Firstly, disclosure and transparency cement the trust at the organizational level among the providers of finance. Secondly, the concepts also establish complete buoyancy at the collective economy level, which in both cases the outcome is effective allocation of capital.

Corporate Governance Models in the United States, United Kingdom, and Germany

Overview

Traditionally, the US organizations have always incorporated the shareholder corporate governance system. Under this model, shareholders select a management board to control the operations of the organization. The directors are mandated with the primary responsibility of representing the preeminent interests of their shareholders through increasing their wealth. In the UK, corporate system and law are grounded on the values of eccentricity and freedom of contract. This system enhanced the growth of a traditional model that has impacted many systems, for instance, the British colonies. Currently, the UK utilizes a one-tier board structure, with voted non-executive directors besides autonomous auditors used as a safety measure gent of culpability for shareholders. In Germany, the stakeholder system is widely used as the main form of corporate governance system.

The United States System

Many organizations in the US have traditionally incorporated the shareholder model. Under this system, shareholders vote in a management board to manage the operations of the organization. Most importantly, the elected board of directors are mandated with the primary responsibility of representing the unsurpassed interests of their shareholders, which mainly focus on increasing their wealth (Jackson 2011). As provided by the state law, all organizations must have boards apart from few exemptions, which have the essential powers of administration. Some of the roles and powers mandated to the board of directors include the authority to sell the organization, pay dividends, and declare bankruptcy among others. Additionally, the boards of US organizations are unitary unlike other nations (Waring and Pierce 2004). Under this system, the Chief Executive Officer (CEO) functions as the chairperson of the board of directors (Aguilera et al. 2006). In that position, the chairperson performs different responsibilities as stipulated by the board, which can either be restrictive or open dependent on the precise structure in operation.

The board directors are responsible to their shareholders and the apt corporate governance standard. According to the literature written by Adolf Berle and Gardiner, “Means wrote The Modern Corporation and Private Property,” written in 1932, the two scholars disparaged features of the shareholder model system. Berle and Gardiner perceived the distribution of shareholder power as lack of control over the companies they owned, which represented a classic agency problem. The two scholars also went ahead and mounted an argument that organizations had a duty towards the society where they are located and not only their shareholders.

Nonetheless, the failure of Enron in 2001 demonstrated the restrictions of the prevailing US corporate governance. However, comparable disgraces linking WorldCom, Adelphia, and Tyco among other organizations in the United States and Europe have assisted in electrifying the recent transformations to the corporate governance values and the obligation of governments and other shareholders to corporate governance reorganization in the United States. For instance, a noteworthy response by the US was the enactment of the Sarbanes-Oxley Act of 2002. This edict foresaw the establishment of canons of corporate governance for organizations recorded in SEC28. Moreover, apart from the enactment of the Sarbanes-Oxley Act, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) embraced new guidelines regarding the board structure. There was a need for further federal legislation that was indispensable.

In addition, the global financial crisis that began in 2007 also triggered the downfall and bailout of several chief financial institutions by the US government. This led to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted, which was aimed at establishing stouter governing configuration and enhancing effective transparency in the financial.

United Kingdom Corporate Governance System

There are different corporate governance systems in the entire Europe. The differences are as a result of different laws and cultures in the European nations. However, despite the increased amalgamation efforts, Europe remains the largest continent with a bigger diversity of corporate governance systems in the world. Despite having different models of corporate governance, there are two main approaches, which are the shareholder model system in the UK and the stakeholder model as embodied in Germany (Albert et al. 2006). The two models of corporate governance have significantly diverse constructions and objectives.

In the UK, the shareholder system model of corporate governance and regulation are grounded on the values of independence and freedom of contract. These concepts triggered the rise of traditional system, which has impacted several systems, for instance, the British colonies. Currently, the UK uses a one-tier board arrangement entailing voted non-executive boards in addition to the autonomous auditors that promote transparency among the shareholders (Wei 2003). Additionally, the UK uses the Financial Reporting Council’s (FRC) Combined Code on Corporate Governance as a significant tool for corporate governance. This tool is constructed on conform or elucidate ideologies. Furthermore, under this system, the unitary board is mandated with the collective responsibility with separated functions of the chief executive and chairperson.

Additionally, the executive and autonomous non-executive directors have specific and separate influences. The board is also mandated with the responsibility of checking the performance of the organization, assessment, recompense and ensuring that recommendation committees are self-governing and transparent. Some of the key responsibilities of non-executive directors involve the regulation of administration and making sure that the shareholders’ interests are effectively addressed. Moreover, the non-executive directors also play a major role in policy development, thereby making positive criticism and beneficial insight that ensure the goals and objectives of the organization are attained. They also play a significant role in executive directors functions, precisely in the appointment and removal procedures besides setting the remuneration for these positions (Bohinc 2011).

In the United Kingdom, the UK Companies Act, predominantly the Companies Act 2006, controls organizations. However, organizations’ report in the UK are also significant. Several corporate governance reports have been produced in the country since 1992, for instance, the Cadbury Report and The Greenbury Report in 1995 among others. Moreover, the global financial also triggered the establishment of the FRC to reform the Combined Code. The lately created UK Corporate Governance Code in 2010 offered a platform for a well-organized and effective practice standard for board management and culpability to shareholders. The code clearly stipulates the responsibilities of the board as offering entrepreneurial guidance of organizations within the context of discreet and operative controls aimed at enabling an effective risk valuation and management.

German Model System

The main corporate governance system that is prevalent in Germany is the stakeholder model. This system does not emphasize only on the fortification of shareholders. Additionally, the model also underscores the cooperative associations among banks, shareholders, managers, and employees with an aim of enhancing labor harmony and organization efficacy. According to the system, big and public organizations are required to have a two-tier board construction with regards to the German corporate governance system. This involves the lower encompassing the management board and the upper, which entails the supervisory board. One member of one given body cannot double as a member in the other organ (Zhao 2009).

What makes the German corporate governance system unique is the two-tiered system. Whereas the management board is made up of executive directors, the supervisory board comprises external directors. The supervisory board is mandated to appoint, sack, advise, and supervise management board members and affirming essential organization resolutions. On the other hand, the management board takes charge of the daily operations of the organization (Strenger 2009). In terms of membership of the supervisory board, it is different as compared to shareholder system models. Concerning a co-determination structure, a minimum of 50% of the supervisory board members is required to be employees or trade union representatives.

This form of representation is advantageous to the employees since their interests are effectively represented. The main objective of the German model’s standard is to incorporate shareholders in the decision-making processes (Hopt and Leyens 2004). This is evident in the statement once made by the CEO of the German car manufacturing company, Volkswagen: “Why should I care about the shareholders, who I see once a year at the general meeting. It is much more important that I care about the employees; I see them every day.” Furthermore, the German system uniqueness is also apparent in the inclusion of banks to sit in the supervisory board. In this way, the Bank representatives exemplify the interests of lender interests, which epitomize the unique representation of the German model of corporate governance.

Corporate Citizenship and Corporate Governance

Corporate citizenship encompasses the acknowledgement that a business, organization or any entity has a social and cultural obligation in sustaining the environment within which the business is licensed to operate besides the economic and financial responsibilities to the shareholders and stakeholders. Therefore, corporate citizenship entails an organization meeting different needs and requirements of both the internal and external stakeholders to enhance a sustainable organization success that have long term sustainable positive implication to the community or society.

The primary emphasis of corporate citizenship activities is developing initiatives that address explicit societal concerns, for instance, the environment, economic development, health, education, language, and culture among others. Generally, there is an increasing focus on the impact of large organizations globally. The global impact encompasses both the economic and social components. Some wealthy organizations are reluctant to incorporate decisions made by companies, especially those concerning the issues affecting the society. For instance, in the past, organizations could pollute the environment in which they operate and still be considered important without facing the consequences. Nonetheless, in the current business environment, there are rules and regulations to address the issues of organizations that do not incorporate the social needs of the society.

Therefore, under this context, it is apparent that organizations react by upgrading their operating mechanisms through corporate governance and corporate citizenship. Corporate governance is mainly concerned with profit maximization besides protecting the interest of the individuals who have provided capital to the organization (Beltratti 2005). Nonetheless, corporate citizenship extensively concerned with the measures that does not only reflect profit maximizing but also some actions that are beneficial to the external stakeholders.

The corporate sector has from time to time encountered several challenges in two perspectives. Firstly, this involves the notion that the drive for profit maximization may negatively impact the society since this can entail negative implication to the environment and employees’ condition among other factors. Secondly, it is also apparent that some of the organizations in the corporate industry have not been observing the fundamental rules and regulations, thereby negatively impacting the stakeholders. All these factors arise from the reason of organizations’ failure in incorporating elements of both corporate citizenship and corporate governance. An effective corporate governance by an organization system plays a significant role of inhibiting illegal actions directed to the stakeholders. On the other hand, effective corporate citizenship also averts actions that are legal but unfitting to the shareholders.  

Therefore, corporate governance and corporate citizenship are corresponding actions in shaping the objective functions and challenges encountered by the organizations. In addition, corporate governance and corporate citizenship strengthen each other in the contemporary objective of organizations as intuitions that address the needs and requirement of their constituents through increasing value. Therefore, organizations that incorporate corporate governance and corporate citizenship are seen as responsible firms, which is significant in their evaluation both economically and socially. Additionally, effective corporate governance and corporate citizenship complements are significant in organizations and their positive relationship enhances the market value of the organization.

Corporate governance and corporate citizenship have become a focus of sensitive significance and consideration in both private and public policy circles globally. Several reasons explain the contemporary eminence of corporate governance and corporate citizenship. The latest financial scandals that have impacted major organizations globally, for instance, Enron and WorldCom among others and the consequent loss of self-assurance in investing in the public stock market have resulted in a dramatic waning in share prices and ample financial losses of several investors. All these factors have been attributed to the failure of corporate governance and corporate citizenship as a major cause of the scandals. Because nearly of all the populations of adults in the most influential nation globally, the United States, own stock directly or indirectly, corporate governance transformation has become one of the most influential subject politically. In respect to the financial scandals in the United States and other parts of the world with alarm, several steps have been initiated in nations to ensure corporate governance efforts are effective to guard against similar abuses.

Despite the recent scandals, there have been significant efforts, which have been successful to some extent by earlier financial abuses in the early 1990s within the OECD, the European Commission, and individual European countries (Gregory 2002: Boeva 2014). This shows how the rate of corporate governance has been inadequately formulated from time to time. In emerging market economies, particularly in Eastern Europe, the experience of corporate governance in the last decade has indicated that effective privatizations and the expansion of effective private sectors rely on the presence of effective systems of corporate governance. For instance, the capability of “oligarchs” in Russia in their supremacy was attributed to the effective corporate governance that provided adequate protection to home investors.

Additionally, the aptitude of nations to appeal to foreign capital is influenced by their systems of corporate governance to a level in which the corporate management is subjected to respect the legal rights of all stakeholders and shareholders. In most cases, individual and established investors l abstain from offering capital or claim an increased risk premium for their capital from organizations in nations that do not have effective systems of corporate governance as compared to nations with strong corporate governance (Shinn and Gourevitch 2002). As a result of its role in capital formation, corporate governance has a significant influence on economic adeptness and growth. Therefore, it could be argued that establishing a global universal system of corporate governance would fully ensure that companies are regarded as better corporate citizens and prevent the corporate governance scandals that have affected various companies recently. This is because effective corporate governance enforces a chastisement on firm executives to maximize the returns to the organization. With the crusade across the globe aimed at expanding the private sectors and the establishing of more competitive market economies, effective universal structures of corporate governance are considered as a significant variable that will enable organizations to stem actual economic benefits from the essential economic modifications.

Reference List

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http://heinonline.org/HOL/LandingPage?handle=hein.journals/hbuslj7&div=15&id=&page=

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