How dos good governance provide potential solutions to the abuse of corporate power?

By | May 1, 2014

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1. How dos good governance provide potential solutions to the abuse of corporate power?

1.1 Basic concepts

1.1.1 Corporate governance and good corporate governance

Defining from the perspective of a corporation, corporate governance is the relations between owners, management board and other stakeholders (the employees, customers, suppliers, investors and communities) where emphasis is given to the board of directors to balance their interest to achieve long-term sustained value (Fernando 2009, p. 143). In another definition, the term Corporate Governance refers to the system by which a company is managed and controlled in the development of its economic activities. It focuses on the responsibilities and rights of each member of the organization and on the rules that must be followed when making decisions. In particular, corporate governance refers to formal or informal practices that establish the relationship between the Board of Directors, who define company goals, its management, those in charge of the day-to-day administration, and the Shareholders, who invest in the company (caf.com 2010).

From the these two definitions, because in a large sense the corporate governance will not only involve the management and owners of the company but also other stakeholders, we can assume that good governance practices are desideratum to the growth and development of companies. Features of good corporate governance usually include being responsible, accountable, transparent and fair not only to shareholders, but also to the key stakeholders of the companies (Fernando 2010, p. 10).

1.2 Corporate power and abuse of corporate power

According to Randy Hodson and Teresa A. Sullivan (2008, p. 361), the power of large corporations creates the possibility of corporate actions with grave consequences. Public concerns about the abuse of corporate power involve many issues which include: (1) the exercise of concentrated economic power; (2) the exercise of concentrated political power; (3) the creation of highly bureaucratized organizations which are inflexible and resistant to changes; (4) downsizing of the workforces and the intensification of work; (5) the exploitation of consumers; (6) the degradation of environment and (7) control of the media. Below we will talk about the benefits of good governance in combating the some kind of abuse of corporate power as mentioned here and also in the assignment case.

1.3 Benefits of good governance in combating the abuse of corporate power

1.3.1 Independent directors

An independent director means a non-executive director who (a) apart from receiving directors’ remuneration, does not have any material pecuniary relationship or transaction with the company, its promoters, directors, and senior management (i.e. personnel who are member of the core management one level below executive directors/holding company/subsidiary company and associates), (b) is not related to the promoters/persons occupying management position at the Board, (c) has not been an executive in the preceding 3 financial years, (d) not a partner/executive during the preceding 3 years, (e) is not a material suppliers, and (f) is not a substantial shareholder owning 2 percentage or more voting shares (Khan & Jain 2007, p. 37).

Besides the definition of independent directors which mainly talks about the independency of the directors in order to be qualified in the position, independent directors are also usually professionals with special skills and knowledge. For example, according to Xinting Jia and Roman Tomasic (2010, p. 72), in China most independent directors are either legal professionals, experts in the company’s industry or in accounting and/or auditing, it is suggested that one of the important roles of independent directors in the listed companies in China is to provide professional advice such as accounting, auditing and legal advice to the company. Based on the fact that in China, like many other Asian countries, lack the professionals in the field of corporate governance, the independent directors could help monitor the business practice and decisions making of the company and ensure the unintentional abuse of company power. For example, many leaders in China in the large and medium sized companies are also founders of the companies, as it is common in the Chinese culture that they will tend to concentrate the corporate power by nominating directors who are have personal relationship with the head of the company, these closely related directors could share similar background and thus could probably lack some necessary professional knowledge such as knowledge about the business law, the introduction and well functioning of the independent directors as required by the legal system in China would help ensure that the unintentional illegal behaviors as well as concentration of corporate political power will be well controlled in the Chinese large companies.

1.3.2 Audit committees

According to Marie-Thérèse Camilleri Gilson, Tonny Lybek and Kenneth Sullivan (2007, p. 3), the duties performed by an audit committee are at the heart of the governance framework of an organization, the narrowly defined function of an audit committee is to exercise oversight of an entity’s internal control, financial reporting and disclosure process. For example, in Singapore, Audit committees (“AC”) are recognized as the cornerstone of a successful and credible financial reporting system. The Singapore Companies Act (Cap. 50) places various responsibilities on the AC, and the Code of Corporate Governance lays out guidance for the AC to follow. The role of the AC is to lend creditability to the integrity of the internal control and financial reporting system. The AC has an oversight function over internal controls and risk management, and serves as a liaison between management and the external and internal auditors, providing an authoritative avenue for resolution of divergence in views between the various parties (deloitte.com 2009). Therefore we can see that the normal functions of the audit committee through various professional tasks could ensure that high risk business decisions made by the leaders of the companies could be suspected and examined in a professional perspective before they could be finalized.