This paper analyses the role of moral hazard, corporate governance structures, Failures and the role and duties of board of directors in companies. The Research suggests that poor performers with managerial quality lower franchise value were more likely to respond to moral hazard incentives provided by the regulatory failures. The research also suggests that ownership and control variables are significantly related to the probability of failure.
Introduction
Corporate governance is a word that not long ago meant little to all but a handful of scholars and shareholders, has now become a typical concern for the policy circles around the world.
The term corporate governance refers mostly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
The ASX Corporate Governance Council 'Principles'
1) Place a solid foundation for management and oversight: Formalise and release the functions reserved to the board and those assigned to management.
2) Form the board to add value:
A majority of the board should be independent directors.
The chairperson should be an independent director.
The roles of chairperson and chief executive officer should not be exercised by
the same person.
The board should establish a nomination committee.
3) Promote ethical and responsible decision-making: Disclose the policy regarding trading in company securities by directors, officers and employees.
4) Safeguard the truth in financial reporting: The board should establish an audit committee. Structure the audit committee so that it consists of only non-executive directors, a majority of independent directors, and an independent chairperson, who is not chairperson of the board, and has at least three members.
5) Make timely and balanced disclosures: Establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance.
6) Respect the rights of shareholders: Design and disclose a communications strategy to promote effective Communication with shareholders and encourage effective participation at general meetings.
7) Recognise and manage risk: The board or appropriate board committee should establish policies on risk oversight and management.
8) Encourage better performance: Disclose the process for performance evaluation of the board, its committees and individual directors, and key executives.
9) Compensate practically and responsibly: Provide disclosure in relation to the company's remuneration policies to enable investors to understand the costs and benefits of those policies and the link between remuneration paid to directors and key executives and corporate performance.
10) Recognise the legitimate interests of stakeholders: Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders.
Successful corporate governance structures
Effective Corporate Governance support companies to create value, through innovation, development and searching, and provide accountability and control systems matching with the risks involved.
Implication of corporate governance
Corporate governance, although analyzed from many different perspectives, is usually understood as a complex set of constraints that managers put on themselves, or that investors put on managers to reduce the ex post misallocation and to induce investors to provide more funds ex ante (Shleifer and Vishny, 1997). The main tasks of corporate governance:
assuring corporate efficiency and mitigating arising conflicts ( Blair, 1999)
providing for transparency and legitimacy of corporate activity (Monks, 2001)
lowering risk for investments and providing high returns for investors (Cadbury Committee, 1992) and
Delivering framework for managerial accountability (Monks, 2001).
High-quality corporate governance and presentation
Previous studies prove insights to relationships between good corporate governance and performance. It indicates that companies with better corporate governance guarantee the payback to the shareholder and limit the risk of the investment.
Supervisory board: The supervisory board role is to control and advise the management board, it cannot interfere with daily business (Rudolf, 2006a).
Exterior mechanisms: Economic development has resulted in increased competition which is an important governance mechanism.
Code of best practice: It is to be believed that the civilizing corporate governance standards and determining business traditions is by increasing simplicity and accountability, protecting minority shareholder rights, implementing actions for voting and decision-making on shareholder as well as on supervisory boards meeting.
The alertness of corporate governance significance and understanding is to identify and reward companies complying with the best practices. This style is based on the appraisal by separate teams. The evaluation of the companies is conducted according to the following criterion which is based on the OECD corporate governance principles. The OECD Principles of Corporate Governance, formerly adopted by 30 member countries of the OECD in 1999, has become a suggestion device for countries all over the humanity.
Rights configuration:
The intelligibility of the possession arrangement; and
Ownership concentration and the shareholder control influence. (Maria Aluchna)
General shareholder meeting: (Maria Aluchna)
Information providing for equal treatment of shareholders during the general meetings; (Maria Aluchna)
Voting and procedures applied at the general meetings; and(Maria Aluchna)
.Shareholder rights. (Maria Aluchna)
Financial structure:
The quality and scope of financial information disclosed by the company; (Maria Aluchna)
Disclosure on time and access to financial information disclosed by the company; and(Maria Aluchna)
Auditor independence and status. (Maria Aluchna)
Supervisory board structure and its processes: (Maria Aluchna)
Structure and composition of supervisory board; (Maria Aluchna)
The role and efficiency of the supervisory board activity; (Maria Aluchna)
Functioning and the role of independent members of supervisory board; and executive compensation. (Maria Aluchna)
Disappointment of corporate governance
Failure of enormous corporate groups in last two-three decades strengthens the demand further. And astonishingly, in some of such failures, accounting as a regulation is held legally responsible. The way accounting is experienced or the interpretations that may give different prescriptions in comparable situations are some mysterious areas that may open some scope for the corrupted accountants. Addition to that lack of management supervision, poor adherence to risk management systems and controls and failed internal governance procedures.
Lack of Management: The people who are in the management take money from their positions.they work for their own benefit and try to loot money which has been earned by the company.
Poor adherence: people in the management spend lot of money from the part of company's income for their own benefit. The benefits include their personal travels, etc.
Failed internal governance procedures: Companies pay more to employees than what should actually pay. The employee will get benefited but the comp any fall into dire straits.
Examples of corporate governance failure in big companies are Enron, wal-mart, satyam, national bank Australia.
Corporate governance failure at Wal-Mart (Ms. Shruti Mehta and Ms. Rachana Srivastavaare)
Wal-Mart has struggled to execute its principles across its business.
Internal controls limitations have tough reputation on company as an attractive employer and are adding fuel to the fires of Wal-Mart's critics.
Disappointment to bring on the policy commitments is reducing Wal-Mart's capability to expand its new domestic markets.
Over the past several years, it has become more and more concerned by signs of failure in internal controls that have led to government investigations and class action lawsuits by employees.
Allegations include requiring employees to 'work off the clock' -- during breaks and after shifts, systematic discrimination against women, and alleged questionable tactics to prevent workers from voting for union representation.
Wal-mart had little choice but to bring concerns about internal controls, labour violations and the wearing down of the company's reputation to fellow shareholders.
Company was not interested in engaging in a productive discussion about how it builds and supports a compliance culture and, as a result, they have joined an international group of large filers led by the New York City Employees' Retirement System to file a shareholder proposal.
Board of Directors
In the corporate world the board of directors is simply referred to a chairman who is a person who leads a group of decision makers. The board of directors can also be known as a council, commission, and committee.
Powers of Directors
Who can be a director
Management of the business
Board of Directors made up of Executive and Non-executive directors; A company must have more Non-executive directors on the Board
A director does not need to have title of 'director' to be held accountable as director, as per the meaning in Sec 9 of the Corporations and Securities Legislation.
You cannot be a director if you:
Are under 18 years of age;
Are an undischarged bankrupt;
Are in the process of Bankruptcy;
Have been convicted of offences such as fraud or breaches of directors duties or insolvent trading - have to wait 5 years before can act as director
Can exercise all the powers of the company except those that can only be exercised by shareholders
Have the right to inspect books at all reasonable times
Can delegate powers to:
A committee of directors;
Another director;
An employee;
An other person
Have specific powers to:
Register a transfer shares;
Sign/endorse cheques;
Execute documents;
Convene an AGM or meeting of members;
Recommend and pay dividends
Agency theory
Agency theory is between the most universally used theories in corporate governance to search the connection between the board performance and organizational performance. The theory recommends that there is an variance relationship between the board and the top management as the top management's self-interested behavior is not associated with the interest of the stockholders.
Board of Directors Responsibilities
Board of directors in company provides the company's direction and advice. Board of director's responsibility is to ensure that the company fulfils its duty statement. Board of directors is a group of officials who are elected by shareholders to direct the company's operations, in difference with people who are selected by the company. Members of a board of directors are legally responsible for the events which occur on their observe, and they are rewarded in form of stock or cash for their work.
Corporate Board of Directors
Corporate decision is an article which are prepared and approved by the Board of Directors of a given corporation. One of the fundamentals contained in any corporate resolution is a listing of individuals who are authorized to conduct specified actions on behalf of the company.
What makes a Good board of directors? (Peri Pakroo)
There are some qualities that make a good board of directors. These qualities make them to lead their groups creatively and effectively. The qualities that are listed below:
Enthusiasm and Assurance: The best prospects of an board of director will be the people who share enthusiasm and assurance.
Duty of care: The duty of care by board of directors is to be reasonable care in making decisions and taking actions on profit. A reasonable care is known as the level of care that an ordinary person in the same circumstances would reasonably believe is appropriate.
Duty of loyalty: The duty of loyalty also called as fiduciary duty. A director's fiduciary duty is to act in good faith for the best interests of the corporation. A director's fiduciary duty arises out of the board's fiduciary relationship with the corporation and shareholders.
Board of directors should supervise, direct and examine the business, choose, balance and change senior executives, evaluate and in some cases approve corporate financial objectives, begin and implement corporate plans and actions, start and approve accounting changes, inform officers and evaluation corporate actions, Make shareholder recommendations.
Breach of a duty
A breach of an duty arises either through the board of directors making a decision in a negligent manner (e.g. lack of involvement and failure to observe managers) or failing to act to avoid a preventable loss (e.g. failure to monitor and prevent employees' non-compliance with law).(Saboor H.Abduljaami)
Conclusion
The research examined and provided the framework for investigation between board effectiveness and organizational performance. Corporate survival is based on the discipline of managers. This paper extends the literature regarding corporate suffering and good qualities of an corporate governance.
