Corporate Governance Codes
• What are corporate governance codes and why do countries adopt them? Concerning the UK,) assess how useful corporate governance codes are in encouraging transparent agency and accountability.
Corporate governance codes are generally accepted and nationally sanctioned practice guidelines for how corporations have to perform. They are often formed in response to deficiencies in the current local governance conditions. They are not the law but rather compiled on voluntary grounds. Thus, corporate governance codes are considered the soft-law. Commence is high, and it is in the interest of organizations to comply with it because the failure to submit to the regulations will send wrong signals to investors. The specifics of the corporate governance codes will differ from state to state, but usually, they involve several issues. It can be industry representatives, organizations representing the interests of lawyers, financiers, bankers, civil servants, politicians, shareholders, and other stakeholder groups, as well as the stock exchange. Generally, the Cadbury Report is the first step in promoting transparency and accountability in companies on such a scale. This document became the response to the main corporate scandal related to the governance failure in the UK. Specifically, in 1991, it was found that 450 million pounds of investments were stolen from the pension funds of Robert Maxwell’s organizations. This sum left more than thirty thousand members in danger of losing their benefits. Hence, the corporate governance codes promote transparency through the broader use of independent non-executive directors, audit committees, divisions of the CEO and the chairman, the remuneration committee to oversee rewards, and the nomination committee for new board members according to the Cadbury Report that was applied in 1992. Several sections presented in the Report include information on effectiveness, accountability, leadership, etc. The document established several main recommendations such as the following: every board must have an audit committee with non-executive directors, boards must have at least three non-executive directors, and two of them must have no personal or financial relations with the executives, and the chairman and the CEO have to be separated in the organizations. Additionally, it states that directors must have long-term performance-related pay that has to be closed in the organizations' contracts and accounts annually and every board must have a remuneration committee involving non-executive directors. At the same time, the recommendations mentioned that all remuneration kinds involving pensions have to be disclosed, institutional investors have to consider voting the shares they held at meetings despite the rejected compulsory voting, and the chairman of the board has to be realized as the non-executive directors’ leader. Therefore, through such practices, the corporate governance codes foster transparency.
• Discuss how corporate governance codes help or hinder accountability in business.
States establish governance practices and codes that can lead to more natural ways of attracting investors. Hence, they are critical in promoting economic development that promotes improved Livingston, tax revenues, and creates jobs. Corporate governance codes propose to investors, broader stakeholders, and companions the assurance that the money will be invested and spent with good intentions. Additionally, they propose legitimacy. Corporate governance codes are applied to improve efficiency for legitimate reasons. They involve basic universal principles of companies’ running, specifically, substantially considering stakeholders’ interests. Firstly, the company must provide decipherable and balanced financial reporting and involve working internal control systems and transparent and formal procedures for appointing board directors. Additionally, the chairman of the board cannot be the CEO. Therefore, corporate governance codes due to such an approach can support transitional accountability. Numerous set rules established by the corporate governance codes assist in preventing inappropriate actions and approaches that can damage the organizations’ development and sustainability. Hence, it is critical to provide the application of the corporate governance codes to maintain accountability and appropriate strategies applied to the company.
• Explain what the problem with CEO pay is, and discuss the role of remuneration consultants in perpetuating the problem. Identify ways in which CEO salary can become more transparent.
Excessive CEO pay is a challenge because it does not proportionally equate the greater stakeholder wealth or longer-term economic growth. Beyond the specific income level, the wealth is not spent on services that develop work and broader well-being. Spreading the pay generates more economic activities. Excessive payment excessive a great challenge as it disturbs general financial statistics in society. These wages must be in balance with general ones.
The make-up and the level of directorial salaries and bonuses are the remuneration committee’s responsibility. Remuneration has to be set at the level that motivates, retains and attracts directors to the quality required to run the organization successfully. It has to involve a high proportion that is related to the personal performance and that of the company. Hence, remuneration consultants are hired to save the money and the time of organizations. They provide independent expert, and benchmark reports and realize how high the managerial labor market is. However, a consultant's motives can also be manipulated because the CEO hires the former, which leads to loyalty conflict. Thus, there is a fear of contract termination.
To promote transparency in CEO's pay, it is critical to place the precise values of all compensation forms. To identify what the CEO’s pay elements are, it is important to understand their additional tax and sum. Besides, there is a need to disclose the full cost and make it visible in the financial accounts and delineate stricter parameters of when the CEO can cash the share option. Additionally, it is significant to clearly and succinctly state when the CEO pays in on other wn share options and how much he or she made from them. At the same time, it is critical to clearly state the relations between performance and pay. The money has to be paid predominantly according to the company’s performance and less to the industry’s performance. The company has to stop spending packages generously to the CEOs who are fired and reconsider why the M&A activity has to form part of the pay and tie pay to long-term performance. Additionally, there is a need to define performance with its beyond financial ones.
Investors, governance reformers, and public officials must realize ways of keeping compensation arrangements transparent. It would provide stakeholders with an accurate view of the total pay and its relation to the performance, thus being a kind of check on departures from arrangements that serve stakeholders’ interests. Moreover, transparency would eliminate the distortions that are currently provoked when pay designers choose specific compensation forms for their camouflage clause instead of their efficiency.
• How might CEO pay be determined in theory, and practice?
There is a difference between theoretical and practical perspectives of the CEO’s pay. From the theoretical perspective, salary is a set of the e arm's length from the CEO. The latter can be defined as optimal and effic contracting. Hence, the pay is the objective set without the interference of the CEO. However, the arms-length perspective, in theory, is not evident in the practice. Rewards for the failure are still the most significant corporate governance regime limitation in developed economies. Broad directors do not always act in the shareholders’ interest, and the behavior of directors is also subject to agency issues. The remuneration committee’s outcomes are mitigated by personal interests while interpersonal relations lead to the CEO’s influence on the pay. CEOs still have the discretion to reach times that contradict the shareholders’ interests while dispersed share ownership leads to information asymmetry. In turn, the information asymmetry provides CEOs with the power, and targets set for the bonus payment can be manipulated.
• CEO pay theory suggests that CEO pay setting takes place under ‘Arm’s Length contracting.’ Research, however, suggests that CEO pay instead is set according to the principle of ‘Managerialism.’ Explain the difference between these two approaches, and discuss how CEO pay consultants help increase rates of CEO pay.
The managerial influence on the pay arrangement design has provoked considerable distortions in such arrangements leading to costs to the economy and investors. Such an impact caused the compensation schemes that weakened the incentives of managers to increase the company’s values and develop others to take actions that would decrease the company’s long-term value. The recent scandals shaped the public opinion that such arrangements do not serve the interests of stakeholders. Nonetheless, it is only one side of the issue. Vote equity and non-equity managerial compensation comments have been more severely decoupled from managers’ contributions to organizational performance. Hence, providing the relation between payment and performance can give great benefits to the stakeholders.
At the same time, the arm’s length perspective fails to consider the executive compensation realities. Both directors and managers experience the agency problem. They do not automatically aim at maximizing the shareholders’ value but rather self-interest. Directors cannot avoid deviations from the arm’s length contracting results in favor of executives. Another issue is the CEO’s power to provide directors with benefits. It was found that companies with higher CEO compensation have the same in terms of directors, and high pay levels seem to reflect insider cooperation instead of superior corporate performance. According to the theory, there has to be loyalty and friendship. The CEO engaged in involving directors on the boards. Such deviations have been standard in the analysis of the process by which the pay is set and the examination of the nontransparent, distorted, and inefficient structure of pay arrangements is developed from this process. Hence, the difference between these two approaches is the problem of the arm’s length perspective that lies in the lack of the understanding of executive compensation realities while the issue of the managerial approach implies structural obst5acles in the underlying governance structure that enables directors to exert influence on the boards.
A significant role is played by the pay consultancy. Efforts to raise the company’s independence by the compensation committee and its consultants can assist in assuaging doubts about the possible conflict of interest. Further attempts of companies to separate the compensation committee advising are welcome. The diverse positions of the efficient compensation consultants can be provoked in different ways compensation committees choose to engage their consulting organization and the range of tasks they may be asked to act.
• Concerning the critical dilemmas in corporate governance, discuss how the governance practices of nonprofit organizations might differ from those of corporations.NPF organizations involve coops, charities, social, and foundations. Charitable organizations in the UK have a board of trustees instead of directors. Trustees lead companies and decide how the operation is performed and ensure that the entity does not break the rules in the governing documents, follow the law involving preparing reports and sending accounts to the Charity Commission, and spend money on the activities that were the goals. Trustees are not paid, and they take the role for fundamental or altruistic reasons. Nonetheless, there are many issues and scandals related to nonprofit organizations. It is critical to understand how to save poor people and ensure that public funds are appropriately applied. There are challenges of failures to use funds for charitable aims, poor liquidity, governing boards’ adequacy, and transactions with trustees. The difference between corporate governance and philanthropic models is expressed through the boards. The philanthropic model deals with boards of a large size. Moreover, it emphasizes such aspects as mission preservation and asset, limits regarding consecutive terms for board members, and informal management accountability to boars among others. On the contrary, the corporate model implies a smaller board size. In this case, the stress is placed on such aspects as the entrepreneurial and strategic activities, the compensation for the board’s service, formal management accountability to the board, and many others.
Besides, there are other differences. While in nonprofit organizations, NEDs are not paid, in corporations, NEDs are spending a median of 61000 pounds. In the former case, NEDs are asked to volunteer to join with no fixed service terms and independence requirements. At the same time, in corporations, NEDs are nominated and voted on, and fixed terms of reelection are present, as well as independence requirements. In both cases, there are those responsible for monitoring and advising on the CEO’s pay. However, in nonprofit organizations, the average of the latter is 250000 pounds, while in corporations, it is 4 million pounds.
Nonprofit organizations are grounded on several principles. Firstly, the donors are philanthropic organizations or individuals while the management is expressed through the complete responsibility for the capital deployment in a way consistent with the organization’s aims and ambitions of donors. Moreover, clients and participants are people for whose direct or indirect benefits a nonprofit organization performs while volunteers and employees run entities and deliver the service.
• Discuss how different types of nonprofit organizations might approach CEO pay in practice.
The CEO’s pay in nonprofit organizations is based on several principles. The first one is transparency. It is critical to be clear about what exactly is paid to the CEO and explain the values and principles behind pay levels. The next aspect is proportionality. Specifically, one-third of the people surveyed consider that the charity CEOs should be unpaid and the published pay rations 3:1-5:1 is the norm, but it depends on the type of nonprofit organization. The third principle is retention and recruitment. Charities rely on a stable management structure, so it is critical to pay for perseverance and performance. Personal ethos has to fit with an organization’s beliefs. The last issue is paying for the performance. It is critical to have a performance review with the CEO regularly. Various types of nonprofit organizations pay differently. It depends on the size and the type. Religious-based charities have lower payment levels. For example, the Wellcome Trust paid its employees around three million pounds while Nuffield Health provided more than 1 million pounds. At the same time, such nonprofit organizations as Caudwell Children, the United Church Schools Foundation, and the Thrombosis Research Institute provide payment from 230000 to 240000 pounds. Generally, there is tension between the charity’s nature, image, performance, and pay because trustees are nervous that higher salaries could tarnish the public image, but the opposite perspective is that there is a need to have people who realize the actions of the charity.
• What is sustainability from a corporate governance perspective? Discuss the link between good governance, sustainability, and risk management, for today’s corporations.
From the corporate governance perspective, sustainability means the environment of confidence, moral values, ethics, and trust as the synergic efforts of all societal constituents that are the stakeholders, involving service providers, the general public, the government, and the corporate sector. Sustainable organizations will exist only through realizing the importance of social and environmental issues and incorporating them into strategic planning. To promote sustainability in the corporate sector, entities have to determine through planning their long-term, medium, and short goals. The application of the sustainable approach demands a longer time horizon and short-term performance evaluation of organizations that are aimed to integrate the performance from the sustainable development perspective. Its vision involves long-term scenario planning as well as proper management. The main difficulty in promoting sustainability is related to the business approach. Specifically, it is not only managerial decisions applied at some point by the management company but the possible continuous outcomes with the significant expenditure of time and resources for the organization’s planning and implementing such a system based on sustainability indicators.
There is a strong connection between good governance, sustainability, and risk management. The latter implies the correct objectives’ setup that concentrates on ensuring a favorable growing context for the organization on the condition of risk mitigation. It becomes the modality by which the entity’s values tend to increase even in the capital market imperfections context. The corporate governance framework has to be built on the principles of effective market and transparency and consistent with existing legislation to remove all misunderstandings about the different authorities’ roles engaged in the process. One of the critical duties of corporate governance is to manage the organizational risk level. Hence, risk management and corporate governance are strong relation to each other to promote the well-being of an organization. At the same time, the latter is realized as a transparent and sustainable environment that is focused on reducing negative outcomes of the organizations’ activities. Sustainability is also a critical part of effective corporate governance. Therefore, it is grounded in risk management and sustainability to promote a company’s development.
• What are the arguments for and against holding firms accountable for social and environmental problems? Discuss the academic literature.
There are arguments for and against companies’ consideration of environmental and social problems. Proponents believe that such a practice protects stakeholders’ interests. Labor forces are gathered in unions that demand the protection of their rights from firms. To reach the support of employees, companies must discharge responsibility toward their workers. Moreover, organizations that adhere to social and environmental responsibilities can experience losses in the short run. Nevertheless, meeting social obligations is important for long-run survival. Hence, the acceptance of organizations by society will be declined in case they avoid social challenges. To prevent self-destruction from the long-term perspective, companies improve their accountability for social and environmental issues. Another argument is the self-enlightenment that raises the education level and the business understanding as the society’s creations that are motivated to work for the social good. They ensure paying taxes to the government, quality products for customers, fair wages for employees, and dividends to shareholders. Hence, the consideration of such issues is a part of societal well-being.
The argument against accountability toward social and environmental issues is that any business primarily is an economic activity. The government has to pay attention to the societal interest rather than the companies because their primary goal is economic viability. Another issue is the social benefits (Chwistecka-Dudek, 2016). The measuring of accountability and the extent to which companies have to be engaged in it, as well as specific interests that have to be prioritized over those of others, are open questions with a highly subjective character that makes accountability toward environmental and social issues a challenging task (Chwistecka-Dudek, 2016). Another argument against social and ecological responsibility is often a problem with a lack of competence and skills. Professionally qualified persons might have no experience and understanding of social challenges.
• Discuss how corporate board gender diversity can contribute to improving accountability and firm performance. What are the national institutions associated with more gender-diverse boards?
The corporate board is the collective body that aims to reach a company’s goals and benefits. The former is furthered by the board because this body maximizes and protects shareholders. The committee involves a chairman, a CEO, and other executive and non-executive directors. A significant role in the council is played by gender diversity as it improves the company’s performance and accountability. The gender-diverse board promotes the board’s independence, which is critical for committees to function in the best of shareholders’ interests. Hence, gender diversity can foster the board’s independence by representing different perspectives and values. People of different genders can have various questions and perspectives that develop a more activist and effective board. Female board directors can broaden the human capital by representing unique information due to their different personal views. Moreover, diversity promotes the better realization of the market. At the same time, the engagement of broader perspectives in the process promotes innovation and creativity that improve leadership and performance outcomes.
Additionally, the representation of both perspective increase accountability as the company realizes the position of both parts of society. Diverse boards provoke a variety of views that tend to raise challenges or questions about the current strategy, solve difficult issues, and eliminate informational biases. As a result, it would benefit the general solution-making. At the same time, diversity develops legitimacy and provides support or commitment to the company in its external environment. The greater female diversity in the board’s representation manages the company’s legitimacy because gender equality has become one of the widely applied social norms. Another issue is that women represent female readership qualities and skills to the board. It involves less radical decision-making and risk averseness and more sustainable investment strategies. Females perform their leadership roles in a more transformational way in comparison to males, distinguishing themselves through the supportive and encouraging treatment of subordinates and colleagues. Therefore, such an approach leads to better levels of the company’s accountability and performance. It is possible to see the gender-diverse boards through the FTSE Boards rates. -FTSE 100 companies had exceeded the 25% target with the females’ representation more than double in 2011 while 55 FTSE 100 companies have above 25% representation in comparison to only twelve companies in 2011 (Fulbright, 2018). Such reports are gathered by Cranfield University through monitoring the gender diversity situation in the UK.
• What is the role of a board of directors? Concerning theoretical perspectives, how might board diversity affect board effectiveness and firm performance?
There are three main theories, which deal with the roles of boards. They include agency theory, resource dependence theory, and stewardship theory. According to the first theory, the goal of boards is to mitigate the agency’s problems; based on the second one, the aim is to act as the company’s stewards; and in terms of the third one, the purpose is to act as boundary spanners. Specifically, considering the resource dependence, the corporate board directors enable companies to have better management with the strategic uncertainty. Moreover, non-executive directors provide the access to resources demanded by those who are lawyers and may ensure legal advice, financiers to finance, etc. Such resources enable organizational survival and performance. According to the agency theory, great corporations were led by professional managers who not always had an emotional attachment to the main values of the company and its survival beyond the professional tenure. Shareholders are named the principals of the company while managers are agents. Hence, the board has the oversight role and is implied to monitor the management to ensure that the CEO performs in the shareholders’ interests and that the company remains successful. According to the stewardship theory, the CEO’s aims and those of the organization are naturally united. The motivation of the former is non-financial. The CEO maximizes utility through the successful running of the company, meeting challenges, gaining recognition from seniors and peers, and implementing and devising winning strategies. His or her ability to reach a goal has complete authority. This theory has no interest in the CEO’s motivations. Nonetheless, it focuses on the corporate structure that has to ensure the CEO’s role fusion while the chairman of the board has to provide superior returns to the stakeholders.
The diversity of the boards has a tremendous influence on the companies’ performance and effectiveness. From the agency theory perspective, agents would experience a conflict of interest in some situations and would act on their own without control. Hence, fiduciary functions were introduced to companies to counter the misaligned interests’ effect. The agency theory means that the board’s diversity is critical to decreasing the likelihood that goals and initiatives will be dominated by the CEO. Hence, diversity within the boards can be realized as a chance to rising its independence and ensure that its balanced interest leads to better control and alignment. According to the resource dependency theory, companies perform in ways relevant to their dependence on specific resources. Organizations respond to issues from the external environment to decrease dependency and save independence over resources. More diverse boards provide access to information and networks for reaching the organization’s aims regarding resource dependency by raising the ability to manage uncertainty. Therefore, gender, national, and cognitive diversity is critical for companies’ performance.