Introduction
This is an essay explaining how the adoption of effective Corporate Governance systems and processes can positively affect company conduct and performance. The following are the presentation of the issues to be covered by this essay: definition of terms used in this essay; the reason for the growth of interest in the subject; the way corporate governance operates in an organization; cooperate governance in relation to the corporate purpose and to business ethics. A conclusion will end the essay, summarizing key points in relation to the subject topic. This essay is in relation to the understanding of the author to corporate governance after studying several references and materials. The writer evaluated and used some listed organizations of United Kingdom and Hong Kong in order to demonstrate the analysis. The following companies were used in order to demonstrate the answer for the good effect of effective governance, The Bank of China Limited, China Zenith Chemical Group, The Hysan Development Corp., Kee Shin Holdings Limited, Enron, Moulin Global Eye Care and CLP Holdings Limited. The author acknowledges the references used by providing a bibliography part at the end of this essay.
According to Chen (2004), there is good corporate governance and poor corporate governance. Good corporate governance provides proper incentive for the Board and the management to pursue objectives that are in the interests of the company, on the other hand, poor corporate governance can damage the interest of the parties involved. Corporate Governance is an issue attracting much attention in global strategic marketing. The need to analyze on how effective corporate governance systems and processes can positively affect a company’s conduct and performance will provide deep understanding oh how to incorporate governance in the system of a company.
Basic Definitions
The following are definitions of the words used in this paper. The definitions may derived from authorities of the subject or from dictionaries.
BUSINESS ETHICS – movement within a business or the movement to build explicitly ethics into the structures of corporations in the form of ethics codes, ethics officers, ethics committees, and ethics training (De George, 2003).
CORPORATE GOVERNANCE – is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm’s relationship with all its stakeholders.
DIRECTORS – in general, person who leads, manages, or supervises an organization, program, or project. Specifically, person appointed or elected member of the board of directors of a firm who, with other directors, has the responsibility for determining and implementing the firm’s policy. He or she does not have to be a stockholder or an employee of the firm and may hold the office of the director.
EXECUTIVE DIRECTORS – working director of the firm who is usually its full time employee, and has a specified decision making role as director of finance, marketing, operations, etc. on an on-going basis.
NON-EXECUTIVE DIRECTORS – directors not classified as working director, and has no specified decision making.
ORGANIZATION – social unit of people systematically arranged and managed to meet a need or to pursue collective goals on a continuing basis.
STAKE HOLDER – person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization’s actions, objectives, and policies.
Reason for the Growth of Interest in the Subject
There are various reasons for the growth of interest on conducting a single framework for effective corporate governance, According to Mohamad (2004), the term corporate governance came into vogue following the Asian Economic Crisis in July 1997 and has since been bandied about quite frequently in the business press. Furthermore, Calvin (2006) in his report stated that the Deutsche Bank Study concluded that, “The assessment of corporate governance standards is a valid measure of equity risk. There is a clear link between corporate governance and assessment and share price volatility, corporate profitability, and share price performance.
The author has derived three (3) reasons on why there is a growth of interest in corporate governance. The first one is that good corporate governance means a good conduct of business and hence the economy of a country will flourish. Second reason is that corporate governance will ensure that a corporation will unlikely to experience a problem or if cases of worst circumstances, will be able to survive any occurrence of dilemma within its organization. The author has included this reason because as the company continue to conduct its business it is inevitable that a corporation may not be able to experience any problem. The last reason is that the necessity to produce more positive outcome in the conduct of the business. Thru corporate governance, a corporation will be able to create policies and set up a framework in order to produce positive results for the company.
It is an interest with the diverse stakeholder groups, because these groups are mainly concerned with their own rights and capabilities is affected on the way the corporation is being governed. The main foundation of a corporation is the stockholder, which would in return must experience good return as to the value of its stocks. In order to provide a concrete example, The Bank of China Limited, in its Annual Report 2007, has reported that it continued to improve their corporate governance structure in accord to the principles of scientific decision-making and effective supervision. The bank also conducted its first annual general meeting which had provide excellent opportunities for communicating with their shareholders.
According to the study of About.com (2008), institutional investors in companies based in emerging markets claim to be willing to pay as much as thirty (30) percent more for share in companies that are well-governed. This was attributed to the fact that investors will have a stable return of income or profits as good governance will ensure that the business is also stable. The presence of the transparency of good corporate governance must be established not only based on the reports submitted but also with the way, it actually carries out its business. Effective corporate governance is perceived by consumer means that an organization renders services and offer products of high and best quality.
How Governance operates in an Organization
Several countries implements codes for effective corporate governance. The codes provide guidelines and policies in order for the listed companies create effective governance. In addition, the guidelines set a compulsory submission of annual reports as regard to the practice of the company. In order to illustrate how the factors that would affect corporate governance, the writer will put in some details one of the successful companies who have effective governance.
Rudrum (2008) stated that the Cadbury Committee defined corporate governance as the systems by which an organization is directed and controlled, at its most senior levels, in order to achieve its objectives and meet necessary standards of accountability and probity. Governance operates in a corporation by creating rules and regulations on establishing board of directors that would explicitly handle the way the corporation will be manage. A chief executive director will head the board of directors, which is task to oversee the performance of the directors in relation to their function. The non-executive directors on the other hand will serve as the evaluator of the conduct of the executive directors in order to determine whether the executive director perform their conduct to the benefit of the corporation.
Hence, the effect of the corporate governance will be determined on how the corporation’s director will handle it functions. Asian Development Bank recognizes the principles that effective corporate governance requires partnership of the board and the shareholders and management as well as the interface with an array of stakeholders such as employees, the media, creditors, and suppliers. From this it can be inferred that the governance operates on how the corporation will be able to carry out its business for the benefit of the whole corporation, not only focusing on single matters that will only contribute a small amount to the effective conduct of the business. The corporation will benefit on the effectivity of its corporate governance if the directors will be efficiently handles its functions as what is required for them.
In order to illustrate the abovementioned statement, China Zenith Chemical Group Limited is a company, which has strategically moved to manufacturing coal, related chemical products from manufacturing petroleum refined chemical products. In observance to the Code of Corporate Code of Hong Kong, it adopted the principles laid down in order to safeguard the interests of the shareholders and enhance the corporate value and accountability. The directors of China Zenith do have different task that has been the reason for their continuous growth. The success of their strategic moved is attributed to the fact that they maintain regular dialogue with its investors and stockholders, hence, matters of resolutions, and questions as raised by the people in the company. It can be inferred from the practice of the company, that the adaptation of the principles laid down by the company was not only in its because the Hong Kong has provide stricter rules but also the principles laid down were all substantial hence it will make a company progress thru the improvement of its corporate governance.
According to Chen (2004), the study of corporate governance is about how authority originates in companies and how it is allocated amongst the parties involved. In business organizations a board was set up which comprises directors which will conduct itself in behalf of the company. The board will determine the risk to be assumed by the organization, whether it would be conducive to the business or not. Hence, effectiveness of the corporation’s director is significantly needed to the corporation. According to the Business Round Table (1997), some of the functions of the board are to select and regularly replace the executive officer; review the major strategies and financial; plans of the corporation; advise management on significant issues facing the corporation and oversee the processes for evaluating the adequacy of internal controls, risk management and other financial matters and lastly nominate directors and ensure the structure and practices of the board provide for sound corporate governance.
On the other hand, the role of non-executive directors, according to the website ECGI, should scrutinize the performance of the management in meeting agreed goals and objectives and monitor the reporting of performance. The non-executive directors do the checking and balancing of such functions. The Hysan Development Company Limited has reported several numbers of awards they have received because of their efficient corporate governance. The company also reported in its 2007 Annual report that they established an appropriate check and balances into their governance structure, which include the need to designate a Senior Independent non-Executive Director. The Code of Hong Kong requires independent non-Executive Director on the hand. A director will be considered an independent director in pursuant to the requirements laid down by the Code. The INED need to comply with and operate with what is provided by the Code. As mentioned non-executive directors are tasked to check and balance the conduct of the excutive directors, the INED helps reduce reduce the possibility of fraud and improves the level of disclosure in financial reporting, in the performance of the Audit committee. As to the Renumeration committee, majority of members are INEDs.
As aforementioned, the need to construct effective corporate governance will enable the corporation to conduct its business productively. However, there are number of companies that have been practicing poorly with their corporate governance hence resulting to their downfall. The writer will provide two companies as an example.
The fall of Enron is considered the worst occurrence of bankruptcy due to poor implementation of corporate governance. The fall of Enron, according to Munzig (2003), is attributed to the fact that there was a manifestation of the agency problem, that there were significant costs associated with the high-power incentive contracts with for the management, and due to lack of board independence, which has likely resulted to the management, rent extraction.
The writer have seen that the there has been an inefficient compensation packages with the company that has resulted into poor motivation and lack of dedication by the directors. Although the system acquired by the company was efficient especially in creating effective corporate governance, the practice of Enron has been no longer helpful to the company and has resulted to its downfall. As stated, the company will benefit to an its effective governance if it has been practicing the overall open dialogue for the directors and establishing a framework that would specifically put the directors in the perspective of achieving goals for the company.
The effectiveness of the corporate means that the policies and framework are also efficient. The efficiency of the policies and programs will determine how the corporation will be able to progress its business continuously. According to Gronow and Bache (2006), the case of Hong Kong based Moulin Global Eye care, which has considered discussions on restructuring after subsequently collapsing into liquidation after the uncovering of systematic corporate governance failures. The business of Moulin was in detrimental financial position that its based Asian-based operations cannot be saved.
The problem of Moulin was based on questionable transactions and financial statements that have brought such to the filing of a case against the company. The questionable transactions and a business that appears to be efficient nevertheless was no has brought disappointment to the creditors of the company. From that situation, it is right for the writer to say that the need to have transparency on all the company’s transactions is vital to the effectiveness of corporate governance. Hence, the need to have a constant evaluation on the corporate governance is necessary in order to run efficiently the company. As stated, the company must see to it that there is balance in the way it handles its business in relation to all the people having interest with the corporation.
Relation of Corporate Governance to Corporate Purpose, and to Business Ethics
According to Rudrum (2008), corporate governance is not solely about introducing systems of control, it is linked fundamentally to directing organization in order to achieve objectives. She further stated that corporate governance is critical to the success of the organization and is a central part of the role of the board.
Corporate purpose is the goal and objectives of the corporation for the establishment of its business. In a corporation, its purpose determines the way and the system that a corporation must have to tract. The conduct of the corporation will also depends on its purpose, any deviation to its purpose means it did not handle its business efficiently or its system is not consistent with what its purpose has indicated. Poor governance in a corporation means a negative result in the achievement of its purpose. In addition, as the directors carry out the policies of the corporation in pursuant on effectively managing the business, the actual implementation must not deviate to what the objective of the business is. Kee Shin Holdings Limited on its 2007 Annual Report stated that no amount of material uncertainties was found that might cast significant doubt about the Company’s ability to continue as its concern for the year. The company’s purpose is to have a continuous progress hence thru its effective governance there is no doubt that it has been maintaining the achievement for its purpose.
The relation of business ethics to corporate governance is important on how the corporation’s dealings. Business ethics is the proper conduct of a person in business transactions. The principles of business ethics are laid down as innate in the business market. According to the presentation of Mr. Greenwood, Director and Company Secretary of CLP Holdings Limited (2005) that their company promotes ethical standards because it is a practical steps in corporate governance. CLP has a code of conduct in order to use of objective industry standards for measurement and reporting. Hence, in effective governance the code of ethics must laid matters that would dictate the conduct of the members of the company tasking into consideration the right and wrong.
Conclusion
The adoption of effective corporate governance system and process can positively affects the company’s conduct, performance will depend on the way the directors, and how the people within the corporation will be able to manage its corporation. The cooperation of all the people involve in a corporation means that the governance is so effective in creating a harmonious system within the corporation. The relevance of a good structural framework and code of ethical framework will give an assurance that effective governance will likely to succeed. Also according to the report of ADB, from the vantage point of institutional investors, good corporate governance is a key risk management tool that helps preserve and grow capital in ways compatible with their values. Good corporate governance is considered a great weapon specially in attracting investors, and consumers.
The writer therefore concluded that the adoption of effective governance would make significant positive results to the conduct of business of a corporation. The company will have a better decision making and will improve the access to financial matters. The shareholders on the other hand will be able to be protected from abuse of fraud and other matters that would prejudiced their interest to the company. The communication within the company will be open hence; matters need to be address will be taken into consideration immediately.
BIBLIOGRAPHY
BOOKS
Chen, J. 2004, Corporate Governance in China, RoutledgeCourzon, New York.
De George, R. 2003, A History of Business Ethics, 2008 Markkula Center for Applied Ethics.
JOURNALS
Gronow, N. & Bache, S. (2006), Distressed Debt in Asia, Ferrier Hodgson, 27 July.
ELECTRONIC RESOURCES
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Munzig, P. 2003, Enron and the Economics of Good Governance, viewed 29 May 2008, < http://www-econ.stanford.edu/academics/Honors_Theses/Theses_2003/Munzig.pdf>.
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