Corporate Finance And Governance

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Corporate Finance And Governance

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Question:
Prepare a report to be submitted to the AICD evaluating the evidence that the responsibility of a company director is to place shareholder interests above those of other stakeholders.

Answer:

Introduction
The Board of Directors is the essential figure in the governance of companies. As we know, its role is to create value for shareholders, employees and other stakeholders through the approval and supervision of the implementation of the most appropriate strategy. At the same time, an effective Board will reduce risk by limiting management behavior with potential to destroy shareholder value.
Corporate governance and practise
Many of the historical efforts of regulators in the face of past crises have been on the way to tightening supervisory systems and reporting requirements (S-OX and, more recently, Dodd-Frank). Although the authors believe in regulation, we want to talk here about the “self-regulation” of the Boards by establishing healthy models of corporate governance (Farrar and Hanrahan, n.d.).
We mention below the set of elements that we think make up the ideal “architecture” of good corporate governance:
Clarity of functions: The Board of Shareholders supervises the Board of Directors. It is clear that the clarity of his expectations for the Board inspires the sharing of responsibilities in the organization. The proper delimitation of functions of the Board and senior management is essential to avoid overlaps that generate inefficiencies.
Weights and balance of power: The composition and appropriate roles in the Board play a fundamental role in the rigor and quality of decision-making, but also in the balance of power in the organization, to protect the interests and prospects of All stakeholders (controlling shareholders, minority shareholders and those of other stakeholders: employees, clients, suppliers, etc.) (Hilb, n.d.).

Alignment of incentives: One of the fundamental springs of managerial behavior is the incentive scheme. Top management has to receive both short-term and long-term stimuli that foster today’s success, without prejudice to future strategy. The directors and managers, on the other hand, have the main task of “looking beyond” and must be encouraged to work preferentially for the long term.
Rigor in decision-making: The composition of Boards and Commissions and the professional competence of its members will be essential in decision-making. It is also clear that a planned, reflective, inclusive and informed decision-making process will, in general, lead to a better decision quality. The quality of information provided to counselors, the timing of their reporting, and, of course, the chairperson’s expertise in handling the debate will help the quality of the decision.
Conflict of interest management: Counselors are increasingly sensitive to the incompatibilities and conflicts between their own activity and that of their companies. If there is a relevant factor that leads to a wrong decision is the lack of independence; The conflict of interest.
Transparency: A growing demand from investors, proxy advisors and other investor defense associations is transparency about the Board’s actions (activities, costs, meeting frequencies of the Committees, presence and participation of directors, etc.). After all, the quality of corporate governance is also one of the fundamental variables that the investor will consider in the management of his portfolio. This transparency contributes to providing certainties to all stakeholders.
In the future, the evaluation, both in aggregate and in detail, of the Boards of Directors In addition, there are two cross-cutting aspects of Board effectiveness that underlie what has been described above: the independence and capacity of its members.

Regarding the dimension of excellence in the functioning of the Board, it is critical to highlight the importance that we think will have in the future the evaluation of the Boards. We understand, therefore, the implementation of systematic and stable evaluation processes that identify in an aggregated but also detailed way the strengths and opportunities for improvement in the functioning of the Board (Hilb, n.d.).
This evaluation process, which is part of the Board’s dynamics as a central element of its functioning, is at the basis of the “continuous improvement” of the capacities of its members and hence of the Board as a whole.
The Boards must be independent bodies of thought in which there is a substantive debate and a real contrast of ideas
Therefore, we believe that transparency in access to the Boards, evaluation of its operation and its subsequent development, will undoubtedly result in a better quality of management of our organizations and lower risk.
The final objective should be to facilitate that Boards are always independent bodies of thought in which there is substantive debate and real contrast of ideas that contribute value through the quality of their decisions. In this sense, it is the very attitude of the Presidents Which can systematically safeguard the competence and independence of the Boards. It is therefore a question of using all the available talent in the Board in the government of the organization
In an era where the companies have focused on wealth creation for shareholders, the companies that have outperformed their peers are those that have gone against the grain and embraced stakeholders. A good example is the South west airlines which at one time had a market capitalization that was equal to the rest of the U.S airline industry combined, the company had put its employees first, customers was second and shareholders last (John, Makhija and Hirschey, 2009). The company never had any layoffs and continued to perform well even after the September 11,2001 terrorist attacks when the industry was nearing its shutdown. Another company that has demystified the stakeholders theory is Men’s Wearhouse, the company sell almost 25% of all mens suits in the U.S. The company has placed shareholders last, and has heavily invested on its employees and other stakeholders, thus, competing not only on price but also on quality shopping experiences it offers its customers.

Civil society has been organized since the inception of companies to regulate and establish fair relations between the company and its main stakeholders: shareholders and employees. The concept of the board of directors was developed and the unions emerged. At the beginning of the 20th century the fundamental principles of the relationship between workers and enterprises were developed by the International Labor Organization (ILO). Outside the company, by acquiring economic power through its growth, investing in external shareholders, creating jobs and generating well-being in a community, the company has become more powerful and stronger in what happens in the society (Kim, Nofsinger and Mohr, 2010). Investors act in the different markets trying to obtain the best return for their money while pretending to minimize the risk of their investment. The capital market offers at all times an efficient frontier, which relates a certain profitability to a certain level of risk or volatility.
The investor can get a higher than expected required rate of return in exchange of a higger uncertainty. The uncertainty price is the total difference between the rate of interest and the return on investment that is considered as very safe. In corporate governance terms it is known as the risk premium of an investment. Corporate governance analysts and financial analysts suggests that the value of money over a period of time is the same amount of money an investor prefers in its present value rather than its future value. Thanks to a good system of governance, shareholders and investors will shield their interests from conflicts with ethics, among other threats to the credibility of the organization, avoiding jeopardizing the value of the company. (Kim, Nofsinger and Mohr, 2010).
Importance of Good Corporate Governance
Good corporate governance is characterized by choosing a board of directors that provides a business vision to shareholders and investors in matters of credibility and transparency. For most people the term “good corporate governance” seems distant, unnecessary or difficult to implement. However, in practice, it is a fairly simple concept: to work based on high standards of transparency, professionalism and efficiency, generating confidence in the market, which in the long run will have a positive impact in terms of value and competitiveness. An example is Walmart. Thanks to a good system of governance, shareholders and investors will shield their interests from conflicts with ethics, among other threats to the credibility of the organization, avoiding jeopardizing the value of the company (Tourani-Rad, 2006). And what does good corporate governance have to do with business performance? According to in the area of ??Sustainability and Corporate Governance, good corporate governance generates more wealth, jobs and more economic activity, as it is indicated by several studies of the company,.
A management system aimed at making your investment profitable and safeguarding your assets, having access to timely and quality information, being able to participate in decision making, and proper reputation management, produces value.
Keys to Corporate Governance
They points out that in order to strengthen a company such as Walmart as a transparent, credible and solid institutional institution, a central element should be the governing body. It is a team of independent directors who will oversee the management of the company, adding value to strategic decisions. It should be made up of a group of people with a business vision, adding value to the quality of management. This council should discuss key issues such as the future, investments and even the appointment and removal of directors and managers (Mallin, 2016). According to the corporate governance analysts, there are five key elements that should define this team of advisors: 1. Strengthening the Directory 2. Risk management and internal control 3. Transparency in information 4. Protection of rights of members 5. Sustainability and permanence of the principles Corporate Governance is the set of principles that regulate the performance of the governing bodies of a company, such as the Board of Directors and the Committees that support it. This set of principles are known as Best Corporate Practices, and are embodied in a document that in each country receives a different name, but whose basic content is shared by all.

What Are The Basic Principles Of Corporate Governance In Companies
A Corporate Governance scheme should integrate the following concepts: Ensure equitable treatment of all shareholders. In addition to recognizing the rights of investors, promoting active cooperation with companies. As well as ensuring an adequate disclosure of all relevant matters of the company, including the financial situation, performance, ownership and management Ensure that shareholders and the market have access to the public information of the company. Establish internal control mechanisms and ensure that the company has the necessary mechanisms to check compliance with the legal provisions that apply to it (Mallin, 2016).
Recommendations
Against this backdrop, board members should ask themselves what they should do differently. First, the Australian Institute of Company Directors (AICD) should get rid of the phrase’ maximizing shareholders value”. They should now consider putting on the phrase maximizing the company’s value and other phrases like maximizing our company’s contribution to our economic system.
Second,the Australian Institute of Company Directors (AICD) , the board should feel free to change their behaviors and attitudes openly, because the reason for not verbalizing their belief for the stakeholders theory was due to fear of a takeover. Takeovers have proven to be less efficient in maximizing the company’s returns.
Third, when they embrace the stakeholders theory , the board should communicate to all the management levels so as to remove all the confusion about the company’s objectives.
Conclusion
The issue of Corporate Governance can be considered as a concept of recent development in many countries, and it will surely take on greater importance than it did in previous years. In the System of Savings for Retirement since its design and implementation, the main principles of this scheme were incorporated, both in the work of account administration carried out by the managers, and in the management of the social savings made by the corporate governance experts (Mallin, 2016). Examples include the Wal-Mart staff retirement schemes, Wal-Mart has a great retirement scheme for its employees and although it has not been particularly good to its customers and has often been criticized. The corporate managers are at the forefront with files such as the participation of independent Directors in the Boards of Directors of the company, the figure of the regulatory comptroller and the structure of the Investment Committee.

References
Berk, J. and DeMarzo, P. (n.d.). Corporate finance.
Farrar, J. and Hanrahan, P. (n.d.). Corporate governance.
Hilb, M. (n.d.). New corporate governance.
John, K., Makhija, A. and Hirschey, M. (2009). Corporate governance and finance. Bingley:
Emerald Group Publishing Limited.
Kim, K., Nofsinger, J. and Mohr, D. (2010). Corporate governance. Boston: Prentice Hall.
Mallin, C. (2016). Corporate governance. Oxford: Oxford University Press.
Tourani-Rad, A. (2006). Empirical studies in corporate finance and governance. [Bradford,
England]: Emerald

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