Introduction
Corporate governance is the process of directing and controlling the corporation activities with an aim of ensuring efficient growth and development. The governance process, therefore, integrates the organizational processes, customs and policies and ensures proper coordination within them. Transparency on the other hand is a process of bringing openness and accountability in the organizational operations.
It, therefore, assists the organization to secure the interests of the stakeholders and creditors. Moreover, transparency in the corporate governance has recently been emphasized in all corporations since it assists the organization to grow and also to relate well with the general public. This paper seeks to analyze the key benefits that the McBride organization achieves for ensuring transparency in its corporate governance.
The key parties to corporate government
Both the internal and external stakeholders are greatly involved in corporate governance. The internal stakeholders are also known as the regulatory body and comprise the CEO, board of directors, auditors, management, and the shareholders. The external stakeholders on the other hand comprises of the suppliers, creditors, employees, customers and the general public. Although the shareholders are the core owners of the business, they usually delegate the management and supervisory roles to the board of directors. There is therefore a creation of a principal-agency relationship in the McBride organizational management.
Transparency benefits
Many firms have recently proposed to move towards improving the transparency levels in their firms. McBride organization also seeks to increase transparency in its corporate governance to ensure efficiency in its operations. It is believed that transparency not only improves the profitability level of a firm but also eases conflicts within the management team. The senior management body of the McBride organization should therefore prefer to incur costs to realize the overall transparency benefits which tend to exceed the costs. Some of the costs incurred to ensure transparency includes incentives provisions.
The complete disclosure provides empirical evidence to the shareholders on how their capital is being utilized. Transparency also enhances timely and responsive mechanisms within a firm (Solomon, 2007, p.143). The efficiency of the board is mostly determined by the level of transparency in the McBride organization. It should also be noted that the firm’s directors are the ones who usually set the level of transparency in a firm. More power should be encompassed by the directors since they should dictate the actions of the chief executive officer and also determine the amount and quality of disclosure within the firm.
It is inevitable that for a firm to attain a high transparency level, some managerial costs will have to be incurred. The McBride organization will have to increase the managerial incentives such as salaries which will harm the firm’s profitability level. These incentives are mainly aimed at enhancing improved and quality performances among the management teams. Although the firm’s profitability goes down due to salary and incentives increase, the overall firm value increases.
Market risk
Firms should clearly define their internal controls together with the risks that might affect their smooth operations. This move will enable the management to effectively undertake their roles in the firms. As McCarthy (2004) argues the conflict arises due to the rising suspicions between the professional managers and the business owners. To clear these suspicions, transparency in corporate governance is very critical. Since professional managers tend to pursue their interests, conflict mostly arises where there is a cooperative engagement of interests in the firm. But it should be clear that conflicts are inevitable as long as the shareholders delegate the management roles to the professional managers. Among the major cause of internal conflicts arise from the increased investment risks.
The McBride management should therefore ensure that it excellently handles the market risks since they may lead to value reduction. Among the major market risk that the firm should consider protecting includes the equity and interest rate risks. Firms should try to hedge their risks by ensuring that they are currently updated with the market rates at all times. For instance, the management team will always ensure that the current stock value does not decline. The management should therefore safeguard the shareholders’ interests by ensuring that the value of the stocks appreciates with time.
Although the move will help the firm maintain its reputation to the general public, such trends will always attract external investors who wish to invest in the firm. The management may also opt to diversify their capital portfolio to lower their equity risks. This move aims at expanding and increasing the revenue channels of a firm. The firm may therefore invest some of its capital in real estate or any other profitable ventures.
To regulate the interest rate risk, McBride management should utilize the swap advantage. This will not only enable them to enjoy the floating rate but will also seek to maximize the LIBOR (London InterBank Offered Rate) which shields the firm. Interest rate increases the cost of productions within a firm thus lowering the profitability level. For instance, if a firm undertakes a long-term contract, a rise in interest rate will eventually lower the price of the contract as the firm will be required to incur more than the budgeted costs.
To ensure proper management of interest rate risk, the firm should ensure that it maintains a constant watch on the leading interest rate indicators. They should also effectively adjust the debt-to-equity ratios to ensure that the ratios reflect the market conditions. Firm should also be cautious of the market volatility as they can translate to huge loss if not taken care of.
Credit risk
As it is well known that most of the firm operates not only with their internally generated capital, but they also use some externally sourced capital. Firms should therefore have well-established credit policies which will ensure efficient utilization of the resources. Among the ways that McBride firm can utilize to ensure credit policies viability includes the use of credit bureaus to analyze the firm’s financial history.
The bureaus will enable the firms to be up dated with the current financial news including the security exchange currency fillings. In order to ensure that the firm has a positive progress, McBride should seek to regularly examine its current credit policies. This will not only ensure that the timely measures are undertaken, but it will also ensure that the firm consistently follows the proper guidelines (Chew, 2005).
To reduce the firm’s cost the top management should discourage quarterly incentives review. This is because such reviews will only add more costs to the organization which consequently lowers the profitability level. Regular checks on the account receivables should be encouraged to ensure that the firm’s consumers pay their dues on time. The McBride marketing team should therefore plan to meet their customers regularly and enquire on how they intend to pay their arrears.
The team should seek to adjust the existing payment programs if they sense that difficulties may be realized in future. Measures such as extending the payment period may be used to ease the customer’s debt burdens. The McBride credit financial officers should also ensure that all the credit guidelines are followed to the later in order to reduce chances of problems development within the firm.
The financial statement and reporting risk
The McBride organization should ensure that it uses proper accounting techniques. This will not only improve the reliability of the statements, but will also enable the firm to compare itself with other forms within the same industry. The firm should therefore ensure that its financial statements are transparent. That is they reflect the true and fair value of the firm. It is only under such scenario that the internal and external users can be able to use the statements in analyzing their performances. In this case the disclosure should describe the true, quantifiable, and describable risks (Chew, 2005). This is because the users may not have the knowledge and skills to understand the complexity involved in the financial statements preparations.
For instance the shareholders can only be able to check the firm’s performances by comparing the current profit with the previous one. McBride should ensure that it effectively submit its tax liability on time. The compliance will prevent the firm from paying penalties and fines associated with tax avoidance. To improve the reliability of their statements, McBride should purposely invite an external auditor who should file up the final report to be presented to the board. The use of an external auditor will enhance transparency in the firm’s accounting department. The external auditor helps in revealing fraudulent misrepresentation by the internal auditor and the accountants.
McBride organization should consider replacing the current board of directors with more competent and experienced personnel. This move will not only help in the improvement of the managerial status but will also add creativity and fresh ideas to the firm. In order to improve the transparency, the power and authority of the senior officials should be checked by the board. The subordinate staff should also be empowered to maximize their creativity and innovativeness.
Their ideas should be incorporated in the firm’s decisions since by so doing they will be motivated to work more. Incorporating the employee’s ideas will also make them accountable to the firm’s decisions which improves transparency. The firm’s recruiting body should also exercise transparency when employing new employees. This is because any attempt to violate transparency later builds up a negative culture which might immensely harm the overall operations of the firm. Recruitment of competent personnel will also increase confidence levels among the McBride workforce. Strong and effective ethical guidelines should be enforced to adherence to the staff. In case of violation, strict measures should be taken to discourage such actions in the future.
Conclusion
Transparency in corporate governance should be encouraged within a firm as it improves the image and reputation of the firm to the general public. Both the internal and external stakeholders are greatly involved in corporate governance. Many firms have recently proposed to move towards improving the transparency levels in their firms. McBride organization also seeks to increase transparency in its corporate governance to ensure efficiency in its operations. It is believed that transparency not only improves the profitability level of a firm but also eases conflicts within the management team.
The senior management body of the McBride organization should therefore prefers to incur costs in order to realize the overall transparency benefits which tend to exceed the costs. The firms should aim at reducing their market risks as the move will better the agency relationship that exists between the board and the shareholders. Among the major market risk that the firm should consider protecting includes the equity and interest rate risks.
Firms should try to hedge their risks by ensuring that they are currently updated with the market rates at all times. Firms should therefore have well-established credit policies that will ensure efficient utilization of the resources. To reduce the firm’s cost, the top management should discourage quarterly incentives review. This is because such reviews will only add more costs to the organization which consequently lowers the profitability level. Regular checks on the account receivables should be encouraged to ensure that the firm’s consumers pay their dues on time. The firm should therefore ensure that its financial statements are transparent. That is they reflect the true and fair value of the firm. It is only under such scenarios that the internal and external users can be able to use the statements in analyzing their performances.
References
Chew, D.H. (2005). Corporate Governance at the Crossroads. New York, McGraw-Hill. Web.
McCarthy, M. (2004). Risk from the CEO and Board perspective. New York, McGraw-Hill. Web.
Solomon, J. (2007). Corporate governance and accountability. New Jersey, John Wiley and Sons. Web.