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Corporate Governance Issues Raised Using Corporate Governance

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Question:

Discuss the Corporate Governance Issues raised using Corporate Governance Theories to Illustrate the Importance of these Issues.
 
 

Answer:

Introduction:

The article contemplates the support given by CMI on the measures taken by the government to advance in the domain of corporate governance. Corporate governance is analyzed around its major theories which are agency theory, stewardship theories, resource-dependence and stakeholders. The profile of the company is stated and the issues of the article are discussed. The article discusses three factors, the first being executive pay, the second is purpose and trust and the third is voice of employees.  According to the article, the poor management of all the big corporations like BHS and sports direct is widespread and has turned the attention towards business leaders once again. Corruption scandals have hampered the organization’s performance; the famous examples are the Rolls-Royce and Sweett Group.

The article discuses the stand, the company CMI has taken with regard to corporate governance. The Chartered Management Institute (CMI) is a certified professional organization for management with its base in UK. It is segregated into three categories, one is member, the other is Fellow members with important proficiency and finally companion that is the most superior level. Apart from supporting its members, the institute promotes management development, conducts several researches, and does a great number of publications on the subject that relates to business. The company also produces an official magazine in the name of professional managers. This magazine is circulated to more than 80000 participants of the CMI. The organization also connects with government and other government authorities regarding strategies and course of action on management and business subjects (Chartered Management Institute, 2017).

 


As per the government and the support backed by CMI, the main point highlighted in the article that is the crux of the message is that there is a requirement of change in legal parameters to tackle and deal with the inefficient corporate leadership. It was mentioned that the former city minister had also asked for the said change. The same was also pointed out in the CMI’s influential Management 2020 report. This report was submitted to the Commission in the year 2014 on the issue of Future of management and leadership. It was analyzed that the results of the short term behavior of the leaders will definitely result in a big explosion of intolerant and narrow minded management. Using this setting as background CMI has accepted the corporate Governance Reform Green Paper by the government. It has its main focus on the executive pay and the significance of the voice of the people (Coglianese, et al., 2004). It believes that it is nice that government recognizes the fact that organizations should make revenues by maintaining the trust of all its stakeholders, primarily their customers, employees and the general public.

Arguments made by the author in context to its three perspectives are discussed in detail. The first one is a CMI view on the executive pay. According to the CMI there is some disengagement between the pay and performance. In various businesses in the UK the pay of the senior employees outshines as compared to the employees at the lower level. In several organizations bonuses are not paid at all. As per the article, the CMI has stated categorically that the resolution of such issues is good management practices (Stoker, 1998). There has to be achievable targets, there should be a direct association of the bonus with the performance and it is important that people should not hesitate in having confronted arguments. In a CMI survey in the year 2016, 74% of managers had supported the government for taking steps to go away with the runaway executive pay which makes it all the more clear that good management practices are not being followed by the businesses. CMI wholeheartedly backs the government to ensure that there is a control on the extreme unearned pay. It also supports the government to make transparency, stronger and aid remuneration committees to attain these goals. CMI also accepts the steps taken to take organizations towards taking more time for assessing senior leader’s performance and pay. Many businesses as a result are now productively stating their long term social rationale and is looking for ways to move from the autocracy of the short term financial metrics for defining success (Macfarlanes, 2015).

 


The next issue discussed is the issue of purpose and trust. In the recent times, corporate invaders attempted to overtake prestigious business of UK Uniliver, but the only thing that prevented such an act was when the chief executive Paul Polman restated Uniliver’s core future social ambitions. This sets a great example that long term social commitments based on purpose and trust are more essential than short term financial gains. The article also points out that CMIs management 2020 report inquires its 2000 UK businesses on what is the present plan of businesses in relation to purpose. And also what is the role that they have to play in Governance. It is a clear message that long term business strategy has to have a well defined assurance of both financial goals and the long term purpose of the businesses (Ewalt, 2001).

Too many boards at a time is failing to take broader prospective and this failure is creating dissatisfaction among middle managers and leaders, this was discussed in their report of 2016.  Although trust factor is a very important factor for organization’s performance, but in actual only 36% managers said they have trust on their leaders. For a transparent culture, it is important that communication is clear from executives to board so that trust can be maintained for good corporate governance (Uk Government, 2016).

Finally, CMI view on the employee voice that is the third parameter is discussed. It supports employee voice and realizes its importance in the context of today’s business environment. Theresa May when became Prime minister, suggested the idea of mandatory worker demonstration on board. Although at present, the government has not accepted this approach, but future forecast 2016 said that 63% of CMI members strongly believe in this idea and supports it. Even if the government is taking steps, the businesses should make efforts to listen to their employees. The government is focusing on corporate governance and CMI will continue to nourish this topic (Lashgari, 2004).

There are few issues which have arisen in the article as discussed above. A thorough literature review on the subject is studied. Corporate governance is analyzed around its major theories which are agency theory, stewardship theories, resource-dependence and stakeholders.

Firstly, the issue is that the salary of senior employees is far higher as compared to other employees getting few or is no bonuses at all. CMI suggests resolution of this issue is important for the organization (Bapiml, 2010).  Agency theory began from the difference between the owner of the company known as ‘principals’ and the agents who are executives hired to manage the organization. This theory argues that the motive of principal is different from agent.  It assumes that principal is at a loss in this situation as he is not directly handling the company. The part of earning which they could have earned goes to an agent. A board is also developed which exercise strict control of performance and monitoring of agents in the interest of principals. This board is occupied in the major decision making process and is accountable to shareholders. This board’s motive is non-profitable and will express hands on management in the interest of stakeholders (Yusoff & Alhaji, 2012).

The second issue is being explained through Stewardship theory, this theory suggests that managers are considered to be stewards of both the owners and both have common motives. The article has raised the issue of poor management and corruption scandals which is affecting company’s performance. The board should not be too controlling as the above theory suggests. In fact, the board should be supportive and empower employees so that they give better performance. The theory suggests improving relations between boards and executives by imparting training, mentoring and discussing major decisions.

 


Thirdly, lack of trust is there in the organization’s staff. Long term goals are more important than short term business strategies. Too many boards at a time is not able to provide enough resources for managers resulting in failing to achieve long term goals and broader prospective. Resource Dependence theory suggests that board provides all resources for executives to achieve their goals. This theory suggests changes made by the board towards humans, financial and intangible help to executives. Board members who are experts can train and mentor the executive in achieving organization’s goals. This theory suggests that executives should make their decision after some approval from the board (Abdullah & Valentine, 2009).

Lastly, it is clear from the article that all stakeholders are important for good management practices.  Employees pay, trust, management’s satisfaction are important for overall performance of the organization. Stakeholder theory assumes that stakeholders are just a group who has a stake in the company. In fact clients, surrounding environment has an equally important role. They all are affected by loss or profit of the business. Hence, managers have to ensure that all stakeholders in the company receive fair returns. It is also the duty of the business to fulfill their corporate social responsibility duties and work in ethical ways. The board has to make sure that the interest of all stakeholders is fulfilled, including sustainability of the surrounding environment. This should be done even if it affects the profits of the organization.

CMI entered the media as a green paper outlining proposal for good practices may be beneficial for all companies in the UK. The prime minister asked all companies to volunteer by creating a stakeholder advisory panel and consult employee’s annual remuneration report. Further the companies can also employ non executive directors so that they can make sure that voices of employees can reach higher levels. With volunteer actions this will become more flexible approach to discuss employee satisfaction without the need of a legal framework. In most of the Western Europe, employee representatives are in the minority. Media exposure to these issues will become an eye opener for companies to take revolutionary steps towards corporate governance and good management practices

 

Conclusion:

As employee representatives are in minority in the UK, therefore the government had asked the companies to volunteer and create a stakeholder advisory panel to ensure steps are taken towards corporate governance and good management practices.

The article has very categorically pointed out three factors that are crucial for corporate governance. The first perspective that was discussed and highlighted was executive pay, the second was purpose and trust and the third was voice of employees. Both the Government as well as the CMI stands united on the fact that there is a disproportionate distribution of pay for the senior and the junior employees and it calls for stringent solutions like having specified targets and equal pay for equal work done. Employees should be bold enough to have the difficult conversations to minimize this gap. The article also points out that there should be transparency in the way the business is conducted so that the businesses do not lose trust and faith of its stakeholders and should know their role in corporate governance. In order to have a transparent culture communication is the key so that there is no misunderstanding between the executives and the board. The third and a very essential point of view of CMI is that the businesses should make a thorough effort to listen to its employees and their say in the organization should be stronger in the times to come.

 

References

Abdullah, H. & Valentine, B., 2009. Fundamental and Ethics Theories of Corporate Governance. EuroJournals Publishing, Issue 4, pp. 88-96.

Bapiml, 2010. Report on the corporate Governance and SRI Programmes, Available at: https://www.mybapension.com/resources/corporateGovernance/CEOReport_2010.pdf

Chartered Management Institute, 2017. CMI backs UK government measures to improve corporate governance, Available at: https://www.managers.org.uk/insights/news/2017/march/cmi-backs-uk-government-measures-to-improve-corporate-governance

Coglianese, C., Healey, T., Keating, E. & Michael, M., 2004. The Role of Government in Corporate Governance, Available at: https://www.hks.harvard.edu/m-rcbg/research/rpp/reports/RPPREPORT8.pdf

Ewalt, A., 2001. Theories of Governance and New Public Management: Links to Understanding Welfare Policy Implementation, Available at: https://unpan1.un.org/intradoc/groups/public/documents/ASPA/UNPAN000563.pdf

Lashgari, M., 2004. Corporate Governance: Theory and Practice. The Journal of American Academy of Business, pp. 46-52.

Macfarlanes, 2015. UK companies’: corporate governance - 2015, Available at: https://www.macfarlanes.com/media/569616/uk-companies-corporate-governance-2015.pdf

Stoker, G., 1998. Governance as theory: Five propositions: Blackwell publishers, Available at: https://www.catedras.fsoc.uba.ar/rusailh/Unidad%201/Stoker%202002,%20Governance%20as%20theory,%20five%20propositions.pdf

Uk Government, 2016. Government launches review of corporate governance, Available at: https://www.gov.uk/government/news/government-launches-review-of-corporate-governance

Yusoff, W. & Alhaji, I., 2012. Insight of Corporate Governance Theories. Journal of Business & Management, 1(1), pp. 52-63.

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