Involvement Of Stakeholders In Corporate Governance Mechanisms example essay topic

What is meant by corporate "accountability"? it has been proposed that, to enhance corporate accountability and profitability, corporate stakeholders should play an active role is the governance of the corporations in which they have an interest. This would also safeguard the interests of the stakeholders. What are the arguments for and against this view? Discuss some possible ways whereby corporate stakeholders may play a more effective role in corporate governance.

Identify some of the issues that might arise from your proposals. The recent corporate collapses of such companies as Enron, WorldCom, HIH Insurance and One Tel have made corporate governance an increasingly important issue. Corporate governance is designed to monitor and control the management of corporations to ensure there is no misconduct and that shareholder value is enhanced. Good corporate governance is about responsible investors and boards cultivating long term sustainable economic growth.

It has several characteristics, which includes transparency, responsibility, fairness and accountability. It is important to note that corporate governance concerns the whole community, not only shareholders, managers and regulators. The corporate governance mechanisms that currently exist have proved to be inadequate. The government and public interest groups are failing to keep corporations in check.

Consequently, I uphold that there should be greater stakeholder involvement in corporate decision making. This will enable a more democratic system to be in place. Corporate accountability is ensuring that management is effectively overseen, and where necessary, replaced, by appointing an independent and competent governing body. It concerns the responsibility of management of a corporation to affirm that inappropriate acts engaged in within a corporation either for individual benefit or for the benefit of the corporation as a whole do not occur. Corporate accountability should be of utmost importance. The reason being that society places considerable trust in company directors who are well respected.

They are perceived to be people of integrity, knowledgeable and honest. However, when there is misconduct and mismanagement amongst corporations, the public loses this confidence as they feel betrayed and violated, and as a result, the communities' morale is shaken. When the misconduct and mismanagement leads to a corporate collapse, it has further implications on society. Corporations provide social and economic development in society as it creates jobs and generate revenue for goods and services - they are engines of economic growth. However, corporations need investment but people will only be willing to invest their money if they are confident that it will be used appropriately and earn dividends. Therefore, corporate collapses result in a decline in investments.

This has adverse effects as production suffers, there is minimal cash flow, living standards would fall, an increase in unemployment, hence, the community at large suffers. Accordingly something must be done to combat this issue. Building accountability into the governance of corporations themselves may be the most urgent reform society should make. Although it is true that the government and public interest groups play an important role in keeping corporations in check, but it is no secret that corporations control much of the dialogue in both government and the nonprofit sector.

Corporations have become the dominant mediating structures between the individual and society. Unfortunately, unless corporate governance itself becomes more democratic, "we may be fighting a losing battle". Effective corporate governance requires several principle characteristics. The first is transparency.

In order for a corporate governance system to be transparent, there must be full disclosure of financial and non-financial information. In other words, everything must be out in the open. "There is no greater threat to investments and retirement savings than a lack of transparency". Therefore, in order for transparency to occur, in the most basic form, executive salaries should be open, and it may be necessary for corporate governors to declare their assets before taking office and on leaving office. Responsibility is another characteristic and it involves ensuring that corporations fulfill their proper role in societies corporate governance systems. The other characteristics of effective corporate governance are accountability and fairness.

Corporate governance systems vary in how they achieve these goals, but by focusing on one group - in this case stakeholders - we can further develop the notion of how a stakeholder group can strengthen the corporate governance system. It has been proposed that to enhance corporate accountability, corporate stakeholders should play an active role in the governance of corporations in which they have an interest. A corporate stakeholder is any person or entity that has a vested interest in the efficient, accountable and profitable running of a corporation. They are many different forms of stakeholders. Shareholders provide funds for the business. Company creditors are interested in the corporate management because if the corporation becomes insolvent, the creditor runs the risk of not being repaid the money owing to them.

In the situation of a corporate collapse, employees will lose their job as well as their entitlements such as superannuation. The government is a stakeholder and is concerned about corporate management because it needs profitable companies to create jobs and generate revenue in the economy. As a result, it acts to prevent company failures and has to restore their impact on society. Other stakeholders include consumers, the workforce, other businesses and the community in general, all of which can play a part.

If the numerous recent corporate collapses are considered, the current system of corporate management has proved to be inadequate. Something must be done to promote more efficient and transparent corporate governance. One way in which this can occur is by promoting greater stakeholder activism in corporate management. In fact, stakeholders share the blame for the corporate collapses of Enron, HIH Insurance, One Tel and WorldCom too. In fact, they are one of the fundamental problems of corporate governance. My reason being, that stakeholders', shareholders in particular, have taken a "free ride" on the monitoring efforts of others.

The risk of this is that if everybody takes that attitude, nobody does the work of holding management or the board accountable. Governments wont and have been already unable to manage the management of corporations, mainly because they are often too closely associated with the businesses that generate government revenue, therefore, stakeholders would be more appropriate. However, stakeholders must become more assertive in their approach. After all, it does protect their investments. In order to achieve this, stakeholders should be involved in all the major corporate governance and accountability structures such as boards of directors, and audit committees. This will entail having representatives of a cross-section of stakeholders as well as including professional accountants and auditors on these various mechanisms.

The stakeholders of most importance that should participate in such systems should be shareholders, employees and consumers. With regard to shareholders, there are well motivated to ensure their investment if handled properly. Consumers are motivated also because in the case of a corporate collapse, the consumer has the possibility of losing money already paid for goods and services. Employees are ideal for such a system because they have additional knowledge of the corporation. Their motivation would be their reliance on the corporation for their own prosperity through employment.

As the Enron collapse has proven, .".. regular employees - not executives, not directors, not shareholders - have the most to lose when a company fails. With their jobs, pensions, and stock option wealth on the line, it follows that they have a greater incentive than anyone to act as company watchdogs". Hence, stable policies and sharp decisions emerge from a broader consensus. There are several arguments that are for and against the involvement of stakeholders in corporate governance mechanisms, some of which are discussed below. The primary argument for their involvement is that "two heads are better than one". Stakeholders represent a large spectrum of the community.

The larger the involvement of the community on corporate management would result in better governance. Stakeholder involvement would enable them to be better informed of the corporations operations and they will be prioritised and motivated by it. Employees would be able to bring experience and knowledge and consumer representatives can bring insights into the impact a decision will have on the consumer community. In addition, if stakeholders are able to participate in a company's decision making process, it will enable that particular company to be transparent and accountable - principles of good corporate governance. The reason why there has been so much corruption in the corporate sector is because of a lack of transparency.

Fraud thrives on secrecy; stakeholder involvement would therefore be able to minimise this crime from occurring. Finally, as there have been several corporate collapses due to misconduct and mismanagement, investment in the corporate sector has declined due to the loss of faith. However, active stakeholder involvement should restore people's confidence in this sector because such conduct would be minimised. As society knows that a corporation belongs to all those with vested interests in it, they also know that stakeholders would not do anything to jeopordise the long term health and prosperity of the company. The main argument opposed to stakeholder involvement is that "too many cooks spoil the broth".

It might create a more complex bureaucracy and slow down the decision making process. It is also believed that stakeholder representatives might have agendas that compete and conflict with one another. However, having this variety of interests will enable company decisions and policies to be balanced in a way that does not favor one segment at the expense of others. Therefore, it really is an advantage. A disadvantage of stakeholder involvement is that it will increase costs for the corporation. This is due to the fact that stakeholders should receive some form of remuneration for their efforts.

However, if you consider the costs involved with a corporate collapse or fraudulent acts, the costs of paid representatives is minor. The stakeholder involvement concept directly challenges existing structures and mechanisms. As a result of this, several issues arise. The amount and which type of stakeholders to be part of the regime is an issue. Relevant stakeholders vary according to the firm's circumstances.

If any group, which is affected by the operations of a company, were considered to have an equal stake in it, then the idea of this concept would be unworkable. A procedure needs to be in place which ascribes weight to different stakeholder interests and who will define specific rights of such things as ownership, a vote on the Board, veto powers, a right to consultation and compensation. Should every stakeholder have the same rights? I believe that there should be representatives of the various stakeholders discussed above - consumers, shareholders and employees and they should come together as a board and given equal rights. Professional accountants and auditors should also be party to it and depending on the individual situation, certain creditors should be included. The stakeholders chosen and their numbers should be depended upon the individual corporation's circumstances.

My own belief is that all stakeholders, shareholders in particular, ought to have a duty to take a more active interest in the financial status of a company. They have a responsibility to ensure the corporation is running efficiently, and that in the event of a corporate collapse, I believe the onus of blame should not be placed solely on corporate management. Stakeholders should be granted the ability to demand information on all aspects of the company when needed, which will better enable the stakeholders to act as a "watchdog" in the corporation. I advocate greater stakeholder involvement in governance and I believe they should be involved in all the major corporate governance and accountability structures such as boards of directors, and audit committees. All corporations should have a "stakeholder committee" whose main function is to overlook management's operations. I believe that the current system is not effective and that reform is of utmost importance.

We cant just sit back and let all this corruption take place. It is argued that enforcing good corporate management is a difficult task, and that there will always be corrupt management amongst corporations. I agree with this, however, I believe that if we do not attempt to enforce it and hold management accountable, or just let things be as they are, then the situation will aggravate. For example, littering is against the law in Australia. However, the majority of the community commits this offense - even if they do not admit to it. The reason why people are not deterred from committing this offense is because they are well aware that they are capable of getting away with it - it is because the laws against littering are not enforced.

There are no policemen roaming the streets ensuring that the citizens of Australia are correctly disposing of their rubbish. If there were such policemen, then I am sure that everyone would abide by the littering laws. The point I am getting at is that the mismanagement in corporations exists because, in the context of the litter example, there are no policemen roaming the streets. I believe the stakeholders should be the policemen and overlook their corporation's operations.

Stakeholders would be the best watchdogs because they have a vested interest in the corporation and therefore would not do anything to jeopordise the long term health and prosperity of the company. In conclusion, good corporate governance is central in ensuring that there is efficient use of corporate capital and that company boards are accountable to their shareholders, management, employees and other stakeholders. To ensure that there is a good corporate governance system, there should be stakeholder involvement. This will enable the misconduct that takes place to be minimised.

Stakeholders have a greater incentive to act as watchdogs compared to anyone, as they would search for methods of ensuring the long term health and prosperity of the corporation so their investment would be well looked after. In fact, the advantages of implementing a stakeholder system outweigh the disadvantages. Genuinely engaging stakeholders can lead to improvements in societal and financial goals. As there would be a cross-section of people involved, it would lead to stable policies and sharp decisions.

In addition, stakeholder involvement is not just a trendy term - it is about companies factoring in the pensioners who lost their superannuation, the workers who lost their jobs, the community organisations that received donations, in their corporate planning from the beginning. In other words, it is a pro-active approach to corporate governance and should deter management from engaging in any corrupt practices.

Bibliography

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Corporate governance in the new millennium / The role of senior executives in defining corporate character", web [Accessed: 2nd September 2003] Thomas, C.
Good Corporate Governance: quality people or rigorous guidelines?" , web [Accessed: 2nd September 2003].