Corporate Governance and Hostile Take-Over
Corporate governance is more than just board processes and procedures. It involves the full set of relationships between a company’s management, it’s board, its shareholders and its stakeholders, such as its employees and the community in which it is located (Witherell 2000, p. 25).
The focus of corporate governance activity is normally directed toward the internal workings of the company and involves the balancing of the advantages of the corporate form which includes the separation of ownership and management functions that ensures limited individual liability for corporate losses with the need to exert effective oversight over managerial decision-making. It normally combines a strong measure protection for shareholder interest over both the short and long term, while also balancing those interests with those of a wider stakeholder community. Mechanisms of corporate governance do this by reviewing corporate strategy, regulating the company’s overall exposure to financial and other risks, and ensuring that stringent procedures for internal and external auditing and fiscal transparency are in place. The typical governance structure includes a board of directors composed of a number of senior company executives and outside non-executive members who are not involved in the day-to-day management of the company (Dematosi 2002, p. 423). Corporate Governance according to Tricker (1997), is concerned with holding to account the modern corporation, whether it be a large or small holding company and subsidiaries, listed, private, government or non-profit entity (cited in Kakabadse 2001, p. 19). One influential interpretation of corporate governance is to find a way to maximize wealth creation in a manner that does not impose inappropriate costs on third parties or on society as a whole (Monks and Minow, 1996 cited in Kakabadse 2001, p. 19). Within this definition, wealth creation is assessed fro a macro (stakeholder) perspective, including the wealth created for employees and the community as well as investors, thus requiring control and supervision in order to prevent stakeholder claims. Hence, the aim of corporate governance is to evaluate options by measuring them against the goal protecting individual liberty, maximizing wealth in a sustainable way and managing change, which requires a balance of power between the distinct elements of the corporation. From this perspective, corporations are seen as having multiple responsibilities, needing to balance competing conditions, such as long and short term notion gain, profit and sustainability, cash and accounting concepts of value, democracy and authority, power and accountability. Thus the focus is on the way enterprises are governed, as distinct from managed, highlighting the relationship between boards and their shareholders, the company regulators, the auditors and other legitimate stakeholders inside and outside the enterprise, and between directors and top management (Kakabadse 2001, p. 19). Overall, effective corporate governance application requires a system of checks and balances to define appropriately the parameters of authority, and limit the abuse of that authority or power through accountability, while assuring that the right questions get asked of the right people. Moreover, considering that the pace of change is increasing, corporate governance is viewed as being needed to enable corporations to respond to, effect, and even lead, change (Monks and Minow 1996 cited in Kakabase 2001, p. 20).
The Organization for Economic Co-operation and Development’s (OECD) Principles of Corporate Governance cover five areas (Sparkes 2002, p. 235). These are:
1. The corporate governance framework should protect shareholders’ rights, they should receive timely and accurate information about a company where they are investors, and they should have the right to participate in major decisions.
2. The corporate governance framework should ensure the equitable treatment of all shareholders, including minorities and foreign shareholders; in particular, members of the board and executives should disclose any material interests in transactions.
3. The corporate governance framework should recognize the rights of stakeholders in corporate governance, there should be cooperation between corporations and stakeholders on issues like jobs, the local communities, suppliers and the environment.
4. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation. This includes ownership and governance as well as financial disclosure, and information material should be audited.
5. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board’s accountability to the company and the shareholders.
Hostile Take-Over
A hostile takeover generally involves acquisition of at least a controlling number of voting shares for cash (Williamson 1988). There are mixed views of hostile-takeover. In the 1980s hostile take-over was very rampant and its supporters argue that takeovers help in improving the efficiency of the market system by providing more accurate price, and by allowing raiders to squeeze out inefficiencies tolerated by incumbent managers (Kuttner 1999). There are also those who argue that takeovers are detrimental to good strategic management of the firm. Those who oppose takeovers also argue that takeover activity is driven by short-sighted financial markets. Supporters of this perspective argue that the takeover threat forces managers to focus on the short-term rather than allowing them to invest in long-term risky activities that are essential for future growth and business competitiveness.
In this light, takeover is seen as a corporate governance issue, as it has reverberating effects not only to the organization but also to its shareholders and to those groups concerned. I proposed to investigate on how organizations deal with takeovers. I believe that even if there are takeover threats, the company must remain accountable and transparent (Mallete et al 1995).
Dealing with Hostile Takeover Offers
Dealing with hostile offers for the company is an important and difficult responsibility. Because such offers happen very infrequently, directors are often not well informed on this topic. An additional complicating factor is the tendency for hostile offers to end up in litigation as a result of their very high visibility with shareholders. The Board of Directors are responsible for blocking unsolicited tender offers.
1. The Board of directors may take an action that has the foreseeable effect of blocking an unsolicited tender offer, if the action I a response to the offer.
2. In considering whether its action is a reasonable response to the offer:
- The Board may take into account all factors relevant to the best interests of the corporation and shareholders, including, among other things, question of legality and whether the offer, if successful, would threaten the corporation’s essential economic prospects; and
- The Board may, in addition to the analysis, have regard for interests groups (other than shareholders) with respect to which the corporation has legitimate concern if to do so would not significantly disfavor the long term interests of the shareholders.
3. A person who challenges an action of the Board on the ground that it fails to satisfy the Standards set in number one (1) has the burden of proof that the Board’s action is an unreasonable response to the offer.
4. An action that does not meet the Standards set in number one (1) may be enjoined or set aside, but the directors who authorize such as action are not subject to liability for damages if their conduct meets the standards of the business judgment rule (Colley, Logan and Stettinius 2003).
In summary, Boards may act to block hostile takeover bids for the corporation when, after having considered carefully what is in the best interest of the corporation and shareholders, they make the judgment that the takeover may jeopardize the viability of the corporation. This means that they can consider the impact on groups other than the shareholders, as well as other factors that they consider relevant.
Accountability and Transparency in Dealing with Hostile Takeover Offers
Even in the face of hostile takeover threats, corporate governance must be practiced accountably and transparently.
The OECD Principle on Transparency (Principle 4), recognizes that investors and shareholders need information about the performance of the company (its financial and operating results), as well as information about corporate objectives and material foreseeable risk factors to monitor their investment. Financial information prepared in accordance with high-quality standards of accounting and auditing should be subject to an annual audit by an independent auditor. This provides an important check on the quality of accounting and reporting. In practice, accounting standards continues to vary widely around the world. Internationally prescribed accounting standards that promote uniform disclosure would enable comparability, and assist investors and analysts in comparing corporate performance and making decisions based on the relative merits. Information about the company’s governance, such as share ownership and voting rights, the identity of board members and key executives, and executive compensation, is also important to potential investors and shareholders and a critical component to transparency (source: rru.worldbank.org).
Transparency is defined as the ability of an organization to provide adequate and relevant information timely and openly about the firm’s fundamental governance issues that highly impact the interests of the major stakeholders or other principal parties who have the rights to motivate and constrain the firm to behave within these parties’ interests and in acceptable way to the society (Luo 2007). The OECD Principle on Accountability (Principle 5), implies a legal duty on the part of directors to the company and its shareholders. As elected representatives of the shareholders, directors are generally held to be in fiduciary relationship to shareholders and to the company, and have duties of loyalty and care which require that they avoid self-interest in their decisions and act diligently and on a fully-informed basis. Generally, each director is a fiduciary for the entire body of shareholders and does not report to a particular constituency. As the board is charged with monitoring the professional managers to whom the discretionary operational role has been delegated, it must be sufficiently distinct from management to be capable of objectively evaluating them (source: rru.worldbank.org).
Accounting, Disclosure and Auditing
Accounting, disclosure and auditing regulations determine the extent of information asymmetries between corporate insiders and outsiders. Strict accounting, disclosure and auditing rules facilitate corporate governance by corporate outsiders, discourage ownership concentration, enhance risk diversification and promote participation of large numbers of investors in capital market transactions. Weak accounting, disclosure and auditing rules, on the other hand, increase the costs of outside corporate governance, promote ownership concentration, and discourage outsiders from participating in capital market transactions. Strict accounting, disclosure and auditing regulations reduce the information asymmetries between corporate insiders and outsiders. Corporate insiders are forced to publish accurate investment relevant information. Well-defined and well-enforced accounting, disclosure and auditing standards reduce the costs of information interpretation. Assessing a corporation’s financial performance and economic perspective does not require advanced accounting skills. Investment-relevant information has to be disclosed in a timely, understandable and comparable fashion. Outside investors who want to invest in corporate governance do not have to incur prohibitively high information costs (Dietl 1998, p. 12).
References
Colley, J L, Logan, G and Stettinius, W 2003, Corporate Governance, McGraw-Hill Professional.
Detomasi, D 2003, ‘International Institutions and the Case for Corporate Governance: Toward a Distributive Governance Framework?’, Global Governance, vol. 8, no. 4, pp 421+.
Dietl, H 1998, Capital Markets and Corporate Governance in Japan, Germany, and the United States: Organizational Response to Market Inefficiencies, Routledge, London.
Kuttner, R 1999, Everything For Sale: The Virtues and Limits of Markets, University of Chicago Press.
Lou, Y 2007, Global Dimensions of Corporate Governance, Wiley-Blackwell.
Mallete, P, Spagnola, R, Fulford, M D and Enz, C A 1995, ‘State Anti-Corporate Takeover Laws: Issues and Arguments’, Journal of Managerial Issues, vol. 7, no. 2, pp. 142+.
Tricker, B 1997, ‘Information and Power –The Influence of IT on Corporate Governance’, Corporate Governance, vol. 5, no. 2, pp. 49-51.
Williamson, J P 1988, The Investment Banking Handbook, John Wiley and Sons.
Witherell, W 2000, ‘Corporate Governance: A Basic Foundation for the Global Economy’, OECD Observer, vol. 1, no. 221/222, p. 25-28.
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