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Issues in Corporate Governance

Updated on December 22, 2014

Corporate Governance

Major Issues in Corporate Governance

Issues in Corporate Governance

Major issues in corporate governance reports have included the role of board, the quality of financial reporting and auditing, directors’ remuneration, risk management and corporate social responsibility. In order to clear the above statement I need to expand on these issues in later articles but for now let’s examine the major areas that have been affected by the corporate governance.

Duties of Directors

The corporate governance reports have aimed to build on the directors’ duties as defined in statutory and case law duties of directors. These include the fiduciary duties to act in the best interests of the company, use their powers for a purpose, avoid conflicts of interest and exercise a duty of care.

Composition and Balance of the Board

A feature of many corporate governance scandals has been boards dominated by a single senior executive or small ‘cabinet of kitchen’ with other member of board who are working just as a robot toy. It is possible that a single person may bypass the board directions to meet his own personal interests. The report on the UK Guinness case suggested that the Earnest Saunders’ chief executive paid himself a reward of £3 million without the consent of other directors.

In the case where the organization is not dominated by a single person, there may be other problem in the composition of board of directors. The organization may be run by a minority group revolve around CEO or CFO and recruitment and appointments may be done by personal recommendations rather than formal system. So in order to run a smooth business a board must be balanced in sense of talents, skills, and competence from numerous specialisms related to the organization’s situation and also in terms of age (in order to ensure that senior directors are bringing on newer ones to assist in the planning of succession).

Remuneration and Reward of Directors

Directors being paid excessive bonuses and salaries have been identified as significant corporate abuses for a large number of years. It is, however, unavoidable that the corporate governance codes have been targeted this significant issue.

Reliability of Financial Reporting and External Auditors

Financial reporting and auditing issue are seen more critical to corporate governance by the investors because of their main consideration in ensuring management accountability. It is the reason that they have been must debated and the focus of serious litigation. Whilst considering the corporate governance debate only on reporting and accounting issues is insufficient, the greater regulation of practices such as off-balance sheet financing has directed to greater transparency and a reduction in risks faced by investors.

The necessary questioning may not be carried out by external auditor from senior management because the auditors may have threat of losing audit assignment. In the same way internal auditor may not ask an alien question to senior member because their employment matters are determined by the CFO. But generally the external auditors become the reason of corporate collapse, for instance in the case of Barlow Clowes that was poorly focused and planned audit failed to determine the illegal usage of monies from clients.

Board’s Responsibility for Risk Management and Internal Control

If the board does not arrange the regular meetings in order to consider the organizational activities systematically show that the board is not meeting their responsibilities. But this thing also occurred sometime when the board is not provided by full information to properly oversight on business activities. All this mess results in the poor system that may unable to report and measure the risks associated with business.

Shareholders’ Rights and Responsibilities

Shareholders’ role and rights is subject of particular importance. They should be informed about all those information that are material to them because these information may influence their amount of investment. They should also be given the right to vote on policies affecting the governance of organization.

Corporate Social Responsibility and Business Ethics

The lack of mutual decision and sense of responsibility for businesses and stakeholders has unavoidably turned out the business ethics and social responsibility a significant part of corporate governance debate.

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