Corporate governance refers to a set of policies, laws, customs and processes which dictates the manner in which a corporation is managed. It also involves the relationship between the various stakeholders that work together towards attainment of the organization goals. The main stakeholders are the board of directors, management team and shareholders of the corporation. Others are the suppliers, customers, creditors, regulators and entire community. The main objective of corporate governance is to ensure that every stakeholder is accountable to his or her responsibilities within the corporation.
To ensure that there is compliance within a corporation, there are various recommendations that every corporation ought to adhere to. Some of these are regular compliance monitoring by board of directors, implementation of internal control procedures and internal auditors, balance of power within the corporation and role management. These mechanisms facilitates in ensuring that there is compliance within the corporate thus eliminating the numerous risks associated with non-compliance. Despite these mechanisms reducing non-compliance costs, they are also associated with various costs within the corporation.
Costs associated with corporate compliance
Monitoring by board of directors
In every corporation, the board of direct ors have the mandate to hire, compensate or fire top management. Board of directors regularly organize for meetings where they identify the various problems affecting the business and come up with mechanisms for mitigating them. Different corporations have different structures of their board of directors. Whilst the board of directors is deemed to be autonomous, it may not be effective in ensuring that there is compliance within the corporation.
Some of the costs associated with ensuring compliance through board of directors are time and salary for the board of directors. Ability of board of direct ors to ensure compliance depends on their ability to access information regarding the management within the corporation (McCarthy, 2004, p. 243).
This takes time as they have to go through all departments within the organization to gather information on problems affecting operations in these departments. The board them has to organize for a meeting where they discuss and come up with the way forward in solving compliance problems affecting the organization. All these processes take a lot of time which could be used in doing constructive activities within the business. For corporations to effectively use board of directors as a tool for monitoring compliance, it requires to recruit a team of board of directors comprising of experienced personnel.
They need to have clear knowledge of the organizational policies, customs and other laws that affect management of the corporation so as to ensure that they are always obeyed. To recruit such a team, it incurs the corporation a lot of expenses as it have to offer them a competitive package for them to be willing to assume this responsibility. Failure to recruit qualified personnel would lead to the board not being effective thus not increasing performance within the corporation.
In spite of these expenses, failure to ensure compliance through board of directors proves to be even more costly. The board of directors ensures that the top management is always on toes in striving to attain organization goals. Thus, the management ensures that all regulations are kept with by all employees. Consequently, the corporation is able to increase its performance. Board of directors facilitates in ensuring that there is good relationship among all the stakeholders of the corporation.
This in return enhances corporation’s profit as well as competitive advantage. Failure to monitor operations within the corporation may result in top management as well as employees relaxing (McCarthy, 2004, p. 247). They may fail to keep to processes, customs and policies established thus affecting organization’s performance. Poor performance from employees and management may lead to the corporation operating at cost as well as failing to increase its market share.
Internal control measures and internal auditors
Internal control refers to regulations and policies established by a board of directors, auditing committee, management and other staffs in an organization to warrant that it is able to attain its goals which comprise of enhancing its operations as well as ensuring compliance with the set laws and conventions. On the other hand, internal auditors are employees within the corporation who has the responsibility of evaluating and implementing the established internal controls aimed at helping the organization undertake its activities with minimum constraints.
There are various costs incurred by a corporation for using internal auditors to ensure compliance. There is a tendency by corporation owners to rely heavily on information provided by internal auditors. They trust in everything that is provided by the auditors as well as recommendations provided (McCarthy, 2004, pp. 252-264).
This gives the auditors an opportunity to meet their personal interests within the organization. Overreliance on internal auditors gives them an opportunity to conduct frauds without the management noticing. Cost of maintaining internal auditors within a corporation is expensive. This is due to high cost associated with paying the staffs. Internal auditors are not accountable to reports they compile. This makes them not conduct their auditing diligently. The fact that they are not accountable to their report may lead to internal auditors giving misleading information about the corporation. His may result in corporation incurring cost in correcting errors that are not actually there.
They may also fail to cater for some compliance problems affecting the corporation thus increasing problems within the corporation. As internal auditors are staffs within the corporation, they may liaise with others staffs in defrauding the organization. Internal auditors may collude with staffs within the organization and record wrong information in bid to gain something from the organization. In the end, the corporation may suffer from misappropriation of resources.
On the other hand, failure to implement internal control procedures and internal auditors in compliance management may lead to the corporation incurring cost with respect to errors which may arise in its accounts. Internal auditors regularly evaluate organization’s accounts thus identifying errors which may have resulted from human error or failure of personnel responsible of maintaining corporation’s accounts to comply with the required procedures. Internal auditors also help the corporation in ensuring that it has strong internal controls with respect to various operations (Gandossy & Sonnenfeld, 2004, p. 24).
Lack of implementation of internal auditing may lead to corporation suffering from poor coordination of its activities. Consequently, it may be hard for it to offer quality products or services to its customers leading to it losing customer loyalty.
At times, dishonest employees may misuse organization assets. These may range from vehicles to others assets such as telephones. Failure to execute internal audit within the organization would give staffs an opportunity to use these assets for their personal gain. Internal auditors require every employee to account for how he or she has used organization resources. This discourages staffs from misusing organization assets. Internal auditors have knowledge on operations within the organization having worked with it for a long time.
As a result, they help in advising employees on how to carryout various responsibilities within their areas of specialization effectively and with limited problems. This helps in improving employee efficiency. Corporations that do not implement internal auditing do not benefit from its ability in improving organization’s efficiency in delivering its services. As a result, corporations continue offering inefficient services and poor quality products. This leads to such corporations failing to increase their sales volume. It becomes hard for such organizations to increase their market share.
Role management is another tool used in enhancing compliance within corporations. This helps organizations ensure that all stakeholders comply with the established regulatory requirements. It entails transforming corporation’s provisioning from one that is decentralized to a centralized one. This helps in ensuring that the organization manages users’ access to various assets and activities within it. Role management requires the corporation to automate its method of assigning duties and assets to employees.
Some of the costs associated with this mechanism are need for organization to have qualified personnel to come up with methods of automating duty allocation process (Gandossy & Sonnenfeld, 2004, pp. 25-32). This leads to organization incurring cost on employee training and recruitment of persons with experience on the process. For the automated process to operate, it requires the organization to establish a strong infrastructure to support it. This can not be achieved without the organization incurring some cost.
Conversely, failure by a corporation to apply role management in ensuring compliance may result in mismanagement of its assets. Lack of the organization to effectively regulate users’ access to various assets and activities would lead to some employees taking the advantage to utilize corporation resources for their own gain. Role management helps in integrating provisioning and auditing. This helps an organization in enhancing its efficiency. It is hard for a corporation to identify auditing violations without use of role management.
As a result, internal auditor in a corporation that does not implement role management in ensuring compliance may take this advantage to defraud the company. Auditors may go to an extent of colluding with other staffs to defraud the corporation. In the end, the company may end up incurring loses. Use of manual process in role management can cost a corporation a lot of time which could be spent in improving its productivity. Manual [process are also susceptible to human error (Clarke, 2004, pp. 45-67). This may result in corporation gaining wrong information thus failing to effectively address problems affecting it.
Use of Committees in compliance mitigation in organizations
Ensuring compliance within an organization is a difficult task. It requires the organization to regularly monitor its operations. As a result, various organizations opt to use different committees in ensuring that different departments comply with the established regulations. Some of organizations that use committees in mitigating compliance problems are Apple Company, Motorola Company and International Business Machine (IBM).
Apple Inc., is one of the American international corporations that deals with designing and producing commercial servers, computer software and other electronics. Some of its popular products are Macintosh computers, ipod, and ipad and Mac OS X operating system. The company has numerous branches cross the world that deal with production and sales of its products.
As a way of enhancing its brand, the company ensures that every branch complies with the established regulations regarding production and sales of its products. It size makes it hard for top management to ensure that there is compliance within different departments (Linzmayer, 1999, pp. 234-265). As a result, the company use committees in its governance structure to assist in seeing that there is compliance in the organization. Some of the committees found in Apple Corporation include compensation committee, audit committee, nominating committee, finance committee and others.
Through compensation committee, Apple Company is able to regularly evaluate performance guidelines for top management and evaluate executives’ performance. It is from this evaluation that the committee comes up with compensation mechanisms for different employees within the company. These include salary, benefits, incentives and other privileges offered to employees. Apple uses audit committee in identifying risks facing the company thus coming up with internal controls to mitigate these risks. Earnings management is a problem that affects most of corporations. This is especially when senior management are pressured to increase organization earnings so as to receive high compensation. The company uses audit committee to ensure that senior management team does not result to using aggressive or inappropriate policies in bid to increase organization earnings.
Motorola Inc. is an American multinational corporation that deals in telecommunication industry. It deals with manufacture of mobile phones as well as production and selling of wireless network infrastructures like signal amplifiers and cellular transmission base stations. In bid to ensure that the company achieves its goals and targets, Motorola Company use various committees in managing its governance process. Some of the committees present in its governance structure include compensation committee, audit committee, finance committee, nominating committee and others. Nominating committee helps the board of directors in ensuring that the due process is followed when nominating staffs to occupy positions left vacant within the organization. The committee ensures that nomination is conducted based on merits and not on how the nominating team know the nominees. The committee is mandated with organizing and monitoring all nomination processes within the company. Poor management of finance within an organization may result in it operating at expenses. It is in this respect that Motorola Company has come up with a finance committee. The company use the committee in seeing that proper procedures are followed when coming up with budget allocations for projects aimed at attaining organization’s goals. The committee helps in ensuring that every project is allocated funds based on the amount of activities in it.
IBM is an international computer technology and information technology consulting corporation based in New York. The company produces and sell computer hardware and software. The company also offers consultant services with respect to nanotechnology and mainframe computers. There are numerous committees within IBM’ governance structure which helps in ensuring that there is compliance in its activities. Some of these committees are auditing committee, compensation committee, executive committee and corporate governance committees. IBM’s corporate governance committee reviews all candidates proposed by shareholders to ensure that they qualify for positions they are appointed to. On the other hand, the company use executive committee to educate its staffs on compliance requirements implemented within the company (International Business Machines (IBM), 2010, para. 2-5). The committee also supervises employee and contractor hiring, evaluation and termination of their tenure. The team also gives board of directors recommendations on measures that need to be taken to enhance management practices within the company.
How McBride can use committees to mitigate compliance risks
There are various risks associate with using internal controls and internal auditors, role management and board of directors in ensuring that there is compliance within corporations. To overcome these risks McBride can make use of committees. Different committees found in governance structure of corporations significantly help in reducing risks associated with compliance enhancement. Using board of directors in enhancing compliance may suffer from biasness in employee promotion and appointment.
Some employees may be appointed to various posts based on how the board of directors knows them. As a result the company may suffer from poor quality of services due to these employees not being competent with what they are expected to deliver in these positions (Denis & McConnell, 2003, pp. 1-24). To mitigate this, McBride can use executive committee to ensure that all employees or contractors are hired based on merit. The committee can also inform the board of directors on measures it need to take to enhance performance within the organization.
Internal auditors if not well supervised may defraud a company a lot of money. This is because most companies trust on their reports. They may also collude with other staffs in the organization to seal from the company. McBride can make use of audit committee to check on these problems. The committee can go through reports compiled by internal auditors hence identifying areas where they have come up with false reports and make the necessary corrections. Role management as a method of enhancing compliance suffer from costs associated with coming up with an automated method of allocating different responsibilities to employees.
Allocating fewer funds may lead to organization coming up with poor system thus affecting operations in the company (Denis & McConnell, 2003, pp. 25-36). McBride can use finance committee to ensure that the project is allocated enough fund that will help in developing an effective system. Apart from using the system the company can also use executive committee in helping the board of direct ors come up with a viable method of allocating duties to employees.
Clarke, T. (ed.) (2004). Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance. London: Routledge.
Denis, D.K. & McConnell, J. J. (2003). International Corporate Governance. Journal of Financial and Quantitative Analysis, 38 (1): 1-36.
Gandossy, R. P. & Sonnenfeld, J. A. (2004). Leadership and governance from the inside out. Hoboken: Wiley & Sons, Inc.
International Business Machines (IBM). (2010). Board of directors. Web.
Linzmayer, O. W. (1999). Apple Confidential: The Real Story of Apple Computer, Inc. New York: Wiley.
McCarthy, M. (2004). Risk from the CEO and Board: Governance from the Inside Out. New Jersey: John Wiley & Sons, Inc.