Corporate Governance: A Short Essay on Reform Measures

By Bledar Blake Zenuni                                                                                 July 23, 2013

Professor: XX XX and XX XX

HUID: XXXXX3626

Hourly Exam 2: Lectures 5-8, An Essay of Around 500 Words on Corporate Governance

According to Schleiffer and Vishny, Corporate Governance deals with the ways in which suppliers of finance assure themselves of getting a return on their investment. Because shareholders provide the funds (and other stakeholders provide time and services), and because management is supposed to have the appropriate knowledge to effectively run the company yet have their own interests to consider, there exists an agency problem in which the agents (or managers) of the company do not always act in the best interest of the principles (or shareholders). The agency problem also can exist between the CEO (agent) and Board of Directors (principle). In my mind, the system of corporate governance should aim to reduce as much as possible the agency problem by improving transparency in the Board Rooms and ensuring accountability in management. In order to do this, the Corporate Governance structure should: a. have a clear and distinct separation of ownership and management, b. should be implemented by properly defining the CEO’s role and ensuring that the Board of Directors have proper channels of communication with management, and c. should avoid disastrous outcomes by implementing a dual board (supervisory and management), as well as independent committees (audit and finance).

The Dual Board should have one comprised of management-type individuals aiming to abide by the Code of Best Practice (1992). The other board should be the Supervisory Board, compromised of individuals who are independent of the company’s interest, as much as possible in application. The Supervisory Board members should be members of an internal audit committee (to independently audit company reports and management’s actions) and Finance Committee (to independently audit the financials). There should also be an independent external audit committee.

It is imperative that the management Board reports honestly and truthfully to the Supervisory Board to ensure that enterprise risk-or the company’s long term survival-is addressed. Corporate Governance should implement Code of Best Practice, ethical agreements, and have the audit committee address the need of social responsibilities.  It is only through properly defining the roles of the individual board members themselves that this honest reporting and proper channel of communication can be established in the dual board. Therefore, the leader of the management board should be held responsible for calling meetings and ensuring that the directors themselves have the necessary information at that moment. The Chairman of the Supervisory Board should be accountable for members of the Supervisory Board to take on their clearly defined roles and communicate with others. The Dual Board should not micromanage the CEO, CFO, COO and other senior management, but instead embrace them after having executed a clearly defined process of selecting the CEO that included listening to shareholders/stakeholders concerns either during a shareholder’s meeting or shareholder’s voting event. There should be no Executive Committee, at least not one vested with a lot of power, because it creates an atmosphere of exclusion and poor transparency.

            In my mind such a Dual Board will be more effective at ensuring the important outcomes of increasing shareholder values (accountability to shareholders) and addressing the concerns of other stakeholders (responsibility to stakeholders). In addition, the Management Board should personally hold the CEO and senior management responsible for their actions. Through not micromanaging, they enable the CEO to have the ability to act and to avoid disasters before they happen (given they act properly).  Through intervention, when Board members know there is a problem, they should hold the CEO accountable for his or her actions and replace him or her with someone they and the Supervisory Board can agree on after doing their due diligence. In short, my view of Corporate Governance comes down to this: have a dual Board-Supervisory and Management-with independent committees, ensure the Dual Board selects qualified and communicative management, ensure the Dual Board doesn’t micromanage, ensure the Dual Board holds senior management personally responsible for their actions, and ensure that the Dual Board is confident that management is acting not in its own interests, but in preserving and creating shareholder value and in effectively addressing the concerns of other stakeholders, from employees to environmentalists and regulators.

Word Count: 678