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Corporate Governance

Introduction

The claim thats “We rely on shareholders to impose morality in the global marketplace” is valid since the ultimate benefits of corporations rests on the owners. With weak interventions and internal control of the operations of firms including the existence of information asymmetry between the agent- principle arrangements, leads to an adverse effect where agency problem creeps in. Companies’ executives and managers amass much wealth and benefits when the incentives to do so exist. This paper seeks to identify the validity of the claim and the solutions proposed as alternative corporate governance strategies and their possible positive and negative implications to the corporations and society.”

Validity of the claim

The concept of corporate governance concerns the management of relationships between different corporate shareholders (Malek 2004, p. 46). The concept is all about the management of the principle- agent relationship that aims at maximising the shareholders’ long term interest (Goodpaster1991, p.53-73). With slack and undefined directions of the company, the interests of the share-holder and the agents (management team) may conflict leading to an agency problem. Activities like tax evasion, interest rates rigging, illegal consumer products inflation and “horsemeat sales in place of beef’’ are some of the institutional abuses that arise when measures to regulate the companies/ corporations activities are feeble or non- existent or when there is an incentive of divergence of interest between the principle and the agents (Schwalbach et. al, 1997, p. 3) .

The cost of illegitimate and unethical corporate dealings whose liability rest entirely on the shareholders could be very high if intervention is not taken into consideration (Waygood 2006.). Companies like Enron and Worldcom in US are just but examples of companies that lost their glory and the shareholders long- term interest buried.

Shareholders have therefore been considered accountable over the action and activities of their companies since they are the ultimate owners (Schwalbach et. al 1997, p. 3). Erturk et. Al (2006) points out the assumptions that the shareholders and the owners of a company who bear risks have a function to monitor the agents. The study further points out that ownership rights enforcement does create shareholders’ value as claimants of residuals. They should therefore monitor the managers’ actions that aim at value creation to minimise wastages and facilitate growth.

Although the general assumption is that the shareholders are held accountable upon any misalignment of the corporations’ objectives, study shows that there exists a limitation to such reality on the basis of the law. According to Mitchell( 2009, p. 171 ), the law excepts the shareholders and creditors from the corporations duties and the productive entities based on the doctrine of limited liability- a situation that has risen ethical concerns. To strengthen the isolation of the shareholders from the blame of moral depravity in the market place, Freeman et. al (2004, p. 364- 369) suggest that managers and executives should inculcate values necessary for doing business. These will define the clarity of the strategies used to achieve corporate performance and the kind of relationships to create with the stakeholders to deliver their objectives.

Over the years, the incentive to align the management interests and effort with the shareholders interests has seen to an increase of management compensation. A study done by Erturk et al (2006) on the comparison of workers and executive pay in UK and USA found out that the pay-ratio between the executive and the workers rose from 50 to 109 from 1980 to 1990 and 109 to 525 from 1990 to 2000 in USA. In UK the ratio rose from 9 to 54 from 1978/79 to 2002/03.

For far too long, the shareholders have been relied to “impose morality in the global marketplace”, although it comes with a cost the appointment of non- executive directors to help in scrutinising of companies dealing on behalf of the share- holders. Having the non- executive director share the same legal responsibility with the executive directors places them all accountable to the shareholders. Rotational retirement and democratic elections too have been used to regulate the activities of the directors. The directors are task with the responsibility of managing performance, compliance, control and behaviour within an organization. The shareholders therefore are responsible for the companies’ compliance with all regulatory measures and standards. Therefore the general claim that it’s the responsibility of the shareholders to define and ensure companies’ morality within the marketplace is not in question since the shareholders are expected to monitor the firm managers activities in shareholder’s value creation at all cost.

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