A Report on a Study of Corporate Governance Principles

Introduction

This is a Report to the Board of International Extractive Industry on various subjects which require immediate attention and study for the company to move on smoothly in the midst of mounting problems about the absence of Corporate Governance Principles.

We investigated the Corporate Governance Principles of the OECD, the Australian Stock Exchange, important stock exchanges throughout the world, and the United States legislation pertaining to corporate governance known as the ‘Sarbanes-Oxley Act of 2002’

We found an array of principles that could be used for the company. Along with this are brief studies on CSR practices and the principal-agent theory.

The Report

After being appointed to the Board of International Extractive Industry, I am obliged to work on the following tasks.

Compose the Corporate Governance Principles

The Australian Securities Exchange has recommendations that can be adopted to the International Extractive Industry. The recommendations provide best practice to provide optimum corporate performance. There are also principles from the OECD that can be adopted for the company. This means that a mix of the corporate governance principles extracted from the ASX and OECD can be applied to our company.

The principles are well organized and can provide long-lasting benefits for the company in the form of organizational structure, motivations, corporate social responsibility, and success of organizational objectives.

We can provide explanation for the company’s adopted principles.

Principle 1 Strong Management Foundation

The company should have a good and sound management foundation. Functions reserved for the board and functions that will be delegated to executives should be properly identified. (ASX Corporate Governance Council, 2007, p. 10)

Principle 2 Rights of Shareholders

Shareholders should be properly issued their ownership registration, and if there is a need for transfer of shares, the deed should be duly recognized. They have the right to obtain regular and timely information pertaining to the corporation. They must be notified during shareholder meetings and have the right to vote for or remove members of the board if necessary. (OECD, 2004, p. 18)

Shareholders are part owners of the corporation, thus they have the right and the power to be informed of important decisions of the Board that will affect the course of the company operations. Shareholders should be informed on matters regarding changes of the articles of incorporation, assets of the company, additional shares, and other important business transactions that may lead to the sale of assets of the company. Shareholders should have an amount of control on the company although to a limited extent.

Principle 3 Ethics and Corporate Social Responsibility

Ethics is the unwritten moral code of the company while corporate social responsibility is our responsibility to the community where we source our profits and strength. The Code of Conduct should contain our policy for trading securities and this should be explained to the directors, executives and all the other shareholders. Transparency is one of the moral codes of the company.

Principle 4 Integrity in Financial Reports

Financial reports should be conducted by an audit team composed of individuals with good reputation who are non-executive directors, independent in thinking, and the chairman is not the chairman of the board.

Principle 5 Balanced Disclosure

The company should be able to disclose balanced policies, decisions and accountability at the proper time. Information disclosure should also be in compliance with government guidelines.

Principle 6 Risk Management

Policies should be geared towards management of business risks and other kinds of risks such as fire and natural disasters. Risk management is a responsibility of the company. It is a necessity considering that in the age of intense globalization, risks and uncertainties abound.

Risk management should first identify risks followed by analysis and control. (Tchankova, 2002, p. 290)

Principle 7 Fair remuneration

The company should ensure that remunerations are balanced and fair. Remunerations should be handled by a select committee. Awards are made to motivate senior executives and employees to do more for the company. Excessive remuneration for executives and directors is discouraged. Remuneration must be commensurate with performance.

Corporate social responsibility initiatives that I would encourage the Board to adopt

Corporate social responsibility is an obligation of an organization and not a mere organizational practice or exercise. It aims to maximize the positive sides of business and minimizes the negative impact. (Jobber and Lancaster, 2003, p. 709)

A corporate social responsibility initiative that is very much in vogue and which is related to management good practice is green supply chain. Green supply chain management is strategic management while CSR is already regarded as part of legal and ethical framework of an organization. (Emmett and Sood, 2010, p. 3)

CSR is a common practice of organizations that focuses on community involvement. CSR and green supply chains have strong correlations. Organizations find that applying green supply chain management (GrSCM) will help fulfil their SCR objectives and thus improve their business.

Green supply chain is focusing on the environment while extracting raw materials for the manufacturing of products. It is for sustainable development, which means meeting the needs of the present generation but also thinking of the needs of the next generation. (Arlbjorn et al., 2010, p. 328)

Green supply chain starts with the planning stage in production, to transport and delivery to end users and then to disposal of the product. Green supply chain adds value to the product. It is also linked to value added chain. Porter (1985) says that value chain refers to adding value to products through support activities in production and processing. Green supply chain is value-added chain in that it emphasizes environmental preservation at the time of extraction of raw material, to production and delivery.

Businesses are introducing environmentally friendly processes in supply chains. This also correlated with green logistics which refers to reducing the environmental impact of supplies and materials in organizational facilities. Here, there is closer relationship between business owners and suppliers in order to effectively implement the good practices in green supply chain. (Wisner and Stanley, 2008, p. 598)

Green business is an example of CSR. Green supply chain, green logistics and green business all focus on the preservation of the environment. We know that producing a product requires extraction of raw material from the environment; it is synonymous with exploitation of the environment. Green business provides antidote to environmental abuse.

Green business also includes best practice in the workplace, such as providing high wages and benefits and health and safety in the workplace. Green business promotes social justice.

Within the green supply chain, each business partner is motivated to encourage others to be part of the green supply chain. Information and other valuable data are shared between partners with the aim of improving the supply chain.

Green business as CSR should be practiced along with consumer groups or organizations that have environmental objectives. Working with these environmentally-concerned organizations will help fast track CSR projects of the company.

Q3 Key motivations (and disincentives) for large companies to address their social responsibilities

Social responsibility seems to be an abstract term but it connotes something that must be done – a responsibility or a duty of an organization to the community. A business cannot be successful if it is not able to determine its responsibility in terms of what customers want, including the responsibility imposed upon it by government inspectors, other organizations and the public in general. (Jobber and Lancaster, 2003, p. 753)

A very significant social responsibility issue that we want to tackle is the consumer movement. This refers to the efforts of concerned individuals and groups or organizations to safeguard the rights of consumers. There are many consumer groups worldwide. In the United States alone, consumer groups fight for legislation to protect consumer rights. This is true with other countries that have citizens with strong awareness on matters that pertain to consumer welfare.

Legislation on safety features in cars like installation of seat belts, stronger door catches, etc. are the results of consumer activism. In the UK, consumer activism led to the passage of consumer protection laws such as the Consumer Protection Act 1987, Trade Descriptions Act 1968, etc.

Other key motivational factors for large companies to address their social responsibilities revolve around environmental issues. The green movement is gaining ground among organizations and businesses around the world. Managers would like to go ‘green’ and make the processes and operations in business linked to environmental protection.

People running businesses have realized the environmental impact supply chain has caused the environment. Where before, traditional supply chain was concerned only with sourcing the material and manufacturing the product, the new trend in supply chain is to make it ‘green’. There is a strong relationship between supply chain and the environment.

Organizations have realized this; thus many of the global organizations of the new century have applied green supply chain management as a way of aiding to the rescue of the environment. Global warming and climate change are slowly eating up the remains of the environment and we will soon all be reduced to heated dust if businesses will continue to destroy the environment by producing more and more products that harm the environment.

From the concept of green supply chain management, there is also what we call green marketing which is about the ‘specific development, pricing, promotion and distribution of products’ that help in environment preservation. (Jobber and Lancaster, 2003, p. 755)

We can cite here a group of environmentalists, scientists and marketers who are involved in evaluating products and their environmental impact. This group has produced an astounding document called ‘The Green Guide’. This guide has been used to provide labels on certain products that are environment-friendly. The Department of the Environment (UK) has called this the energy label.

Another one, which has been introduced in the United States, is the ‘The Green Business Plan Guide’, which has the following key points:

• Enhancement of environmental protection
• Support for family-oriented salaries and benefits, and safe and healthy workplaces
• Promotion of training and development and sustainable career for the working individual, and
• No discrimination. (The Green Business Plan Guide, n.d.)

Q4 Discuss the issues or problems arising from the application of principal-agent theory to corporate governance

An agency relationship occurs when an individual delegates power and right to another; the individual doing the action is the agent and the individual who depends on the action of the agent is the principal. The theory that can be applied in this action is called the contract theory. (Brink, 2011, p. xi)

An example of this scenario is the shareholder-manager relationship. The shareholder is the principal while the manager is the agent. The shareholder hires the services of the manager to act on his behalf and his/her interests so that the capital that the shareholder has invested might gain interest.

According to the capital market theory, management has the responsibility to direct the entire corporate strategy to the benefit of the shareholders.

There is a problem in corporate governance if we take into account the principal-agent, or the agency, theory. Corporate governance that promotes agency theory questions the motivation of managers in promoting and maximizing shareholder value. Managers can demand stock options as part of their pay so that they can deliver what shareholders want. In other words, managers’ interests and incentives have to be so high – as high as the directors’ – so that they work well for the shareholders. (Ghoshal, 2005 cited in Brink, 2011, p. xi)

Another problem of the agency theory is the behaviour of the manager or the agent with respect to his/her job as soon as the contract is signed. This is known as moral hazard, i.e. with reference to the agent’s opportunistic behaviour. The agent or manager’s activities cannot anymore be controlled. A term for this is ‘shirking’, wherein the agent takes advantage of his/her position, does little effort and work for the assigned tasks, takes insurmountable risks which he alone cannot handle, wastes the company’s resources, and enjoys the good fortune of the company without thinking what will happen.

This opportunistic attitude is sometimes happening in the corporate world. Managers use the company’s resources for personal advancement. Moral hazards like these are also called ‘hold up’. Some assets of the company are redirected to alternative uses, mostly for the agent’s personal interest, and the company suffers (Williamson, 1989, 1996, cited in Brink, 2011, p. xi).

In order to solve this problem, the employer or principal creates a monitoring system or committee to detect any opportunistic activity of the agent or manager. In some organizations, they create supervisory boards, independent of the management to work on this function. In Germany, they have they called Aufsichtsrat, a supervisory board that conducts monitoring on management activities.

Accounting frauds in the annals of corporate America are unprecedented. Were the principal-agent theory followed to the letter, functions of both principal and agent could inhibit one from doing unscrupulous acts. At Enron, auditors were investigated for making it appear that the company was in good state although it was not. Investors, employees and shareholders were outraged (BBC News, 2002). This is a concrete example of a moral hazard.

Principal-agent problems have to be dealt with, beforehand, in the formulation of the corporate governance principles. This has to be well-defined in the assigning or hiring of managers so that there will be no problems as stated in the scenario above.

Conclusion/Recommendation

Corporate Governance Principles are an important guidelines that should be implemented and followed by corporations, particularly the board, the shareholders, and senior executives, including the employees. The principles can be considered the moral backbone of the organization. Without it, the organization is working without a guide.

Corporate social responsibility is not a mere organizational activity but a corporate duty and responsibility to the community and the environment. The environment should be of prime importance in conducting business nowadays. Green supply chain management is an important CSR practice for organizations in the age of intense globalization.

References

Arlbjorn, J. et al., 2010. Supply chain management: sources for competitive advantages. UK: Academica.

ASX Corporate Governance Council, 2007. Corporate governance principles and recommendations. Web.

BBC News, 2002. Wall Street scandals at a glance. Web.

Brink, A., 2011. Corporate governance and business ethics. Heidelberg; London; New York: Springer Science+Business Media.

Emmett, S. and Sood, V., 2010. Green supply chains: an action manifesto. United Kingdom: John Wiley & Sons Ltd.

Jobber, D. and Lancaster, G., 2003. Selling and sales management, sixth ed. England: Pearson Education Limited.

OECD, 2004. OECD principles of corporate governance. Web.

Tchankova, L., 2002. Risk identification – basic stage in risk management. Environmental Management and Health, Vol. 13 No. 3, 2002, pp. 290-297.

The Green Business Plan Guide, n.d. Green for all CAP green business content. 2011. Web.

Wisner, J. and Stanley, L., 2008. Process management: creating value along the supply chain. United States of America and Canada: Thomson South-Western.