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III. Question 5: Corporate Governance System(s) Revisited
References: Brickly, Bhagat, and Lease: “The Impact of Long- Range Managerial
Compensation Plans on Shareholder Wealth,” 1985
Lorsch, “The Future of
Boards,” HBS 2010
Mallin, “Corporate Governance” 2010
Vishny and Schleifer, “A Survey of Corporate Governance,” 1997
Moran and Beggs, Various Articles and In Class Discussions on
Corporate Governance, Harvard, 2013.
Various in class articles and
discussions, Harvard, 2013.
(Part
a) The governance rules and
standards discussed in class, in our various readings in both the articles and
in Mallin, and in section that I find most effective are the Blair reform
proposals, the Sarbanes-Oxley Law, the NYSE Corporation practice law, and the
Code of Best Conduct and Cadbury Code. These laws are most effective because
a.) they increase transparency within management and in the board room, hold
executives accountable for the roles that they are assigned (and ensure that
they have the proper credentials, such as CEO/CFO certification of finance),
and ensure that those responsible are held accountable for their actions (such
as taking inordinate risk. Additionally, they aim to make sure that the Board
is aware that they are agents to the shareholders and as such must aim to
increase shareholder value, and that the Board and Management are responsible
for all stakeholders. In particular, what sticks out to me is: Blair Reform: One share-one vote (so all
shareholders have at least some say), majority vote to change state of incorporation
and majority vote of share for issues regarding directors and shareholders.
When it comes to the Sarbanes-Oxley Law,
which was very prominently featured in class and is provides standards for
corporate governance today, I find the real
time disclosure of material events, independent audit and nomination
committees, private public oversight of accounting professions, and the fact
that counsels must report violations, as the most effective standards.
Lastly, the NYSE Corporation Practices
of Director independence, proper accreditation of senior management and mandatory
sessions and shareholder approval as most effective in protecting both
shareholders and stakeholders. I think that to be most effective, a
corporate governance system should also make the standard, by law, of a requirement of a supervisory board (within a
dual board) as discussed below in part b and all throughout the summer.
(Part
b)
In addition to the corporate governance
rules that I find effective from the course—including but not limited to The Code of Best Practice, the OECD codes for
protecting shareholders and stakeholders, Sarbanes-Oxley Law, Cadbury Code (1992), and the NYSE
Corporations Practices as detailed in (Part a)— I believe, as discussed in
class with others, that a required by law Dual Board in the U.S. (and
abroad either by law or convergence) is, in the long run more effective. The
Dual Board will implement the aforementioned rules standards from the codes /
laws listed, such as transparent accounting and compensation systems, ensuring
effective and qualified, by law, individuals in management (qualified CFO/CEO),
independent external committees etc. Such implementations will ensure that the
corporate governance of the board will a. have a clear and distinct separation
of ownership and management, and 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. I believe that if the Dual Board is implemented,
disastrous outcomes are more likely to be avoided (Moran, 2013).
The Dual Board consist of two parts:
first, one should be comprised of management-type individuals aim to abide by
the Code of Best Practice (1992). The rules and standards that I find that the
Dual board will be able to effectively implement also come from the
Sarbanes-Oxley Law: real time Disclosure of materials events, independent audit
committee and Auditors, and both private and public oversight of accounting
professions (I’m thinking of avoiding an Enron scandal here). (Mallin, Moran,
2013). The other board should be the Supervisory Board. This would be compromised
of individuals who are independent of the company’s interest, as much as
possible in application. The Supervisory Board members should also be members
of an internal audit committee (to independently audit company reports and
management’s actions) and Finance Committee (to independently audit the
financials). This comes straight from Code of Best Conduct, Sarbanes-Oxley law,
and the NYSE Corporate Practices (Mallin, et., al, 2013). There also be an
independent external audit committee. There should not be an executive
committee as already discussed in class, in that it fosters exclusion.
The Dual Board should have the management
board report to the supervisory board. Corporate Governance should implement Code of
Best Practice, ethical agreements, and have the audit committee address the need
of social responsibilities outlined in Sarbanes-Oxley, the roles of individuals,
both directors and management should be properly defined. Also 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; and the Chairman of the Supervisory Board should be accountable for members
of the Supervisory Board to communicate with themselves and 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.
(Conclusion)
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
her actions and replace her with someone they and the Supervisory Board can
agree on after doing their due diligence in research. 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.
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