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Accounting Theory And Accountability: Rights

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Question:

Discuss about the Accounting Theory and Accountability for Rights.

 

Answer:

Introduction

Corporate governance can be considered as a procedure that intends to allocate various corporate resources in a way that can maximize shareholder’s value. The current study intends to critically analyse the influence of different mechanisms of corporate governance and the issues related to corporate governance on corporate performance. In a way, this study aims to analyse various issues associated to corporate governance that involves analysing diverse roles of the board as well as management, composition of board and mix of different executives, disclosures, rights and treatment of shareholders and transparency of disclosures.

 

Identification of an area of research

Corporate governance issues in Australia and its impact on corporate performance are the area of research selected for the current study. This specific area of corporate governance can be considered to very important as this can help in describing the overall state of corporate governance system in Australia and their likely impact on value of firm as well as stock market behaviour. In essence the state of particularly corporate governance in Australia has acquired much media attention as well as policy attention since the social along with the financial insinuations of corporate collapses came to light (Ammann et al. 2013). Some of the most important in the regional financial press of Australia have been the enquiry of governance irregularities that involves unlawful behaviour of the management in firms such as HIH and One Tel that eventually led to their liquidification. Thus, this study can be considered to be of importance and interest as this can help in understanding the entire procedure that aims to allocate different corporate resource, set of procedures, policies, regulations and institutions exerting influence on the way a corporation runs and performs (Lins et al. 2017).    

Research Question

The research question that can be framed based on the objective of the study is as presented below:- 

 
  • What is the impact of system of corporate governance on corporate performance?

Reference to academic journals

Analysis of the journal: “Effect of corporate governance on firm performance” by Ming-Cheng Wu, Hsin-Chiang Lin and I-Cheng Lin

As correctly put forward by Christensen et al. (2015), world bank during the year 1999 mentions that corporate governance mainly comprises of two different mechanisms that includes internal as well as external corporate governance. In essence, internal corporate governance delivers priority to the interests of the shareholders and functions on the board to supervise top management of the firms. Conversely, external corporate governance monitors and simultaneously controls behaviours of managers by means of external regulations. As regards structure of the board, Christensen et al. (2015) asserts that the board acts as a bridge between owners as well as managers and protects the interests of the shareholders. Taking liability for handling and monitoring, the board need to monitor behaviours of managers for the sake of the interest of the shareholders, frame vital decisions, and employ dedicated team of management as well as superintended corporations to obey the regulations.  Grossi et al. (2015) stress light on a corporate governance issue that centres around size of the board of a firm. () find that directors operating in a large board have different viewpoints and therefore it becomes very difficult to reach a consensus. Eventually, this leads to lower level of efficiency in board operations and lead to deterioration of situations. Chen et al. (2016) unveils that size of the board is negatively associated to the performance of firms. However, Chen et al. (2016) asserts a different opinion that emphasizes the fact those large sized boards refers to members with different backgrounds as well as viewpoints that in turn can prove to be helpful for the overall quality of decisions. Moreover, a wide range of interests might help in neutralizing various decisions of the board. Tricker and Tricker (2015) investigates the nature of association between composition of board and diverse financial scams, disclosing that the specific ratio of independent directors in the corporations having no scandals is said to be higher than the corporations found manipulating financial assertions.

Yermack (2011) states that function of a board might get weakened and eventually exert adverse effects on the performance of the firm at the time when chairman of a company assumes the role of a chief executive officer and functions both as a decision maker and simultaneously as a supervisor.  Empirical evidences substantiates the fact that duality of the CEO can adversely affect the overall corporate performance of firms. Nonetheless, in line with the stewardship theory, accountabilities of firm’s executives might neutralize different self-interest behaviours that are necessarily derived from the duality of CEO and exert positive influence on the performance of firms.

Analysis of the journal: “Corporate Governance- Concepts and Issues” by Sreeti Raut

Thorough analysis of the academic literature reveals the fact that there are several compliance issues associated to corporate governance that eventually affects the overall efficiency of operations and corporate performance. Governance, risk management and compliance or else simply referred to as GRC mainly encompasses certain activities that includes corporate governance of firms, enterprise risk management as well as corporate compliance with specific regulations. These activities are primarily carried out to avert conflicts, inefficient conflicts as well as gaps (Christie et al. 2013). Analysis of the literature reveals that the main issues involved in the corporate governance of firms include asymmetry in power and information, diverse interests of shareholders as residual holders, role of specific management, and particular theories of parting of theories, division of corporate pie among the involved shareholders.

Analysis of the journal: “Australia Inside-Out: The Corporate Governance System Of The Australian Listed Market” penned by Alan Dignam and Michael Galanis

Evaluation of the present article helps in understanding financial system as well as governance results, patterns of ownership in different publicly listed firms of Australia, control of various block holders and information flow. As per theory, no accountability issues is said to arise either within the system of corporate governance. In case when there exists an insider system, the divergence between diverse interests of the shareholders as well as managers of the corporations can help in the process of resolving any kind of agency problem of the firm (Banker et al. 2013). However, in case of an outsider system, accountability issues do not occur in case if the share markets are efficient enough and prices of shares reflect with the comparative accuracy the overall value of diverse corporate functions. Supposing market efficiency, restraints from the market for the purpose of corporate control or else for discipline delivered by the requirement to return to the capital market for financing can prove to be adequate to hold back management decisions (Matolcsy et al. 2012).

Analysis of the journal: “Higher market valuation companies with a small board of directors”, Journal of Financial Economics” by Yermack

Critical analysis of the current article reveals the evidences that are consistent with diverse theories substantiating the fact that small sized boards are more effectual. Matolcsy and Wright (2011) asserts that value of a firm essentially relies on the overall quality of monitoring as well as process of decision making of board of directors. Thus, by using a straight forward model of the association between value of firm and size of the board and regression of a set of different explanatory variables as measured against an approximation of Tobin’s Q, the study reveals the nature of relationship between size of board and firm value. 

Analysis of the journal: “Do Board Characteristics influence the Shareholders’ Assessment of Risk for Small and Large Firms?” penned by Christie, Wyatt, Matolcsy and Wright helps in understanding various systemic issues of corporate governance. These issues can eventually affect the overall performance of the firm in the upcoming period. Essentially, in a bid to influence different directors, firm’s shareholders need to unite with other members to develop a voting group that in turn can pose a threat of carrying declarations or else appointing directors at general meeting. There remains barrier to shareholders utilizing proper information can be considered as the cost of processing the same, particularly to a small shareholder. There also exists problems in supply of diverse accounting information, essentially imperfections in the manner of financial reporting procedure might cause imperfections in the efficiency of corporate governance.  Matolcsy et al. (2012) pinpoints that financial reporting scam, counting non-disclosures as well as deliberate falsification of specific values also contribute to information risk of different users. In order to lessen the risks and to augment the perceived integrity of diverse financial reports, firms can carry out audit pecuniary reports by independent external assessors.  Thorough investigation on the association between performance of corporations and compensation of executive does not detect consistent as well as important relations between remuneration of executives and corporate performance.

Analysis of the journal “The Relation between CEO Compensation and Post Performance” by Banker, Darrough, Huang and Dujowich reflects the fact that performance incentives of CEO arise from possession of shares of firms, whilst other associates discovered that the association between share ownership and corporate performance was reliant on ownership level. However, the outcomes recommend that enhancement in ownership over and above 20% direct management to be rooted, and less concerned about shareholders’ welfare. () argue that corporate performance is positively related to different share option tactics and that these tactics direct energies of the managers and extend decision horizons toward long-term performance instead of short-term performance of the corporation (Banker et al. 2013).

Analysis of the journal: “‘CEO compensation structure and firm performance’, Accounting and Finance,” penned by Matolcswy and Wright shows important financial insinuations of the CEO compensation on corporate performance.  The observations of the study reflects the fact that corporations whose CEOs accept compensation  that essentially is inconsistent with characteristics of corporations reflect a low performance as compared to corporations in which compensations of CEOs are consistent with the characteristics of the firm (Matolcsy and Wright  2011).

Analysis of the journal: “The Timing of Changes in CEO Compensation from Cash Bonus to Equity-based Compensation: Determinants and Performance Consequences." Journal of Contemporary Accounting & Economics by Matolcsy, Shan and Seethamraju helps in understanding the fact that a specific combination of different accounting alterations as well as issues of governance directed options to eventually become less popular means of compensation. In addition to this,
Matolcsy et al. (2012) asserted that there exist different alternative applications of buybacks surfaced to defy the dominance of particularly cash buybacks in the open market as the favoured way of applying a share repurchase plan. 

 

Discussion of the findings

Based on the observations and findings of the prior academic literature it can be hereby mentioned that good governance can help in encouraging and guiding firms to adopt diverse superior practices. These practices help in laying solid foundations for management, addition of value through effective board structure, safeguarding integrity in corporate reporting. In addition to this, results of the study also reflect implementation of timely and balanced disclosures, respecting authority of diverse security holders and remunerating fairly. Certain issues of corporate governance such as asymmetry in power as well as information, different interests of shareholders as residual holders, function of specific management, and particular theories of parting affects the overall efficiency of operations and corporate performance.

 

Conclusion

In conclusion, it can be said that board structure as well as board size is notably and negatively associated to performance of firm, reflecting that, in a large board, diversity of opinion of different insiders’ has a negative influence on arriving at decisions, that is again detrimental to performance  of firm. Again, CEO duality is unhelpfully and negatively associated to corporate performance. In addition, the current study also helps in gaining comprehensive understanding regarding the fact that insider ownership has a positive as well as important relation with corporate performance.

 

References

Ammann, M., Oesch, D. and Schmid, M.M., 2013. Product market competition, corporate governance, and firm value: Evidence from the EU area. European Financial Management, 19(3), pp.452-469.

Banker, R.D, M.N Darrough, R.Huang and J.M Plehn-Dujowich, 2013, “The Relation between CEO Compensation and Post Performance, The Accounting Review, 88-1, pp. 1-3

Chen, V., Ramsay, I. and Welsh, M.A., 2016. Corporate law reform in Australia: An analysis of the influence of ownership structures and corporate failure.

Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), pp.133-164.

Christie, J.A, Matolcsy, Z.P, Wright, A and Wyatt, A, 2013 “Do Board Characteristics influence the Shareholders’ Assessment of Risk for Small and Large Firms?” Abacus Vol. 42, No.2, pp. 161-196.

Grossi, G., Papenfuß, U. and Tremblay, M.S., 2015. Corporate governance and accountability of state-owned enterprises: relevance for science and society and interdisciplinary research perspectives. International Journal of Public Sector Management, 28(4/5), pp.274-285.

Lins, K.V., Servaes, H. and Tamayo, A., 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance.

Matolcsy, Z, Shan, Y, and Seethamraju V, V., 2012, "The Timing of Changes in CEO Compensation from Cash Bonus to Equity-based Compensation: Determinants and Performance Consequences." Journal of Contemporary Accounting & Economics, Vol.8, pp.78-91.

Matolcsy, Z.P and Wright, A, 2011, ‘CEO compensation structure and firm performance’, Accounting and Finance, Vol.51, pp.745-763.

Schultz, E., Tian, G.Y. and Twite, G., 2013. Corporate governance and the CEO pay–performance link: Australian evidence. International Review of Finance, 13(4), pp.447-472.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Yermack, D, 2011, “Higher market valuation companies with a small board of directors”, Journal of Financial Economics, Vol. 40, pp 185-211.

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