Law ESSAY ON: Corporate governance Analysis

Corporate Governance:

When corporate governance is considered, it refers to the relationship at the top of an enterprise including the executive directors, non-executive directors, managers and other stockholders. In this context, the main role of corporate governance is considered to make sure that the strategic decisions are made in the interest of the stakeholders with organizations’ effective results. For this, boards of directors play a significant role and concentrated on corporate governance of their enterprises but the changes in terms of shifting have started occurring. Non-executive directors (NEDs) have also started focusing on that. Therefore, considering this, role of non-executive directors have been discussed in this descriptive essay.

Moreover, concept of corporate governance and its theoretical frameworks have also been added as a part of the entire description. Further, it also has included that how non-executive directors’ best fit into that concept and framework. In support, an established structure of the boards, a few challenges faced by NEDs, their impact have been explored. Although, these non-executive directors are independent in sense and have no enduring link with the enterprise, their role and effectiveness have great impact upon the decisions and systems of the organization. Therefore, some case studies have been illustrated in support to explain their position and role in corporate governance. At the end of the body part of the essay, recommendations also have been made with respect to the best and most preferred framework for corporate governance.

Before defining the role of non-executive directors in corporate governance of an organization, it is required to give a brief outline of corporate governance and its concept. Corporate governance refers to a framework through which companies work under control and manage their business effectively. The corporate governance framework specifies the distribution of rights and responsibilities among different members in the organization, such as the board, managers, shareholders and other stakeholders. Consequently, it defines the rules and procedures which are used to make the decisions for an organization (Thomson, 2009; Judge, 2012).

By making this, it offers a system through which the objectives of an organization are well-established and the means that are used to achieve those objectives and monitor the performance. It can also be noticed out that that corporate governance talks about the relationship of an organization with its shareholders and to the community. Afterward, it also includes the promotion of justice or equality, precision and accountability. It demonstrates the reference to mechanisms that are used to “govern” managers and ensures that actions which are taken regularly are with the key stakeholder groups’ interests (McQueeny, 2006). Therefore the main points of interest in corporate governance which have been discussed about are the issues regarding transparency and responsibility, legal and controlling environment, measurement of risk management, flows of information and the senior management’s & board of directors’ duties and responsibilities (International charter, 2012).

Furthermore, Harshbarger and Holden pointed out that while many of the governance issues that corporations face are not new, the atmosphere in which they deal with them is more challenging than ever. Accordingly there a number of aspects that has brought ethical issues into sharper spotlight, including globalization, technology and growing competition (Harshbarger & Holden, 2004).

When, role of NEDs is considered in corporate governance, entire board structure is reviewed and taken into consideration. The board structure is regarded with the total number of executive & non-executive directors, alternate directors, duties and responsibilities of board committees and other leadership arrangements. In this structure, executive directors work on full time basis and are involved in day-to-day operations of the company. They refer to a senior executive of the organization who performs the boards’ responsibilities.

While, non-executive directors are on part time basis ant are not involved in company’s regular day-to-day activities. Although they are considered as a part of board of directors, they keep independent view on company’s strategies and depend on executive directors for the knowledge and information of the company. Non-executive directors (NEDs) are also referred to the outside directors. Their main role in an organization is to develop and to contribute in the crafting of an organizational strategy. They also relate to the performance and risk factor of the company in order to make sure that the financial information provided to them is accurate, examined and monitored by the executive directors of the company (Starovic & Hayward, 2012).

Additionally one of the authors commented that independent or outside directors help providing the valuable right of entry to the resources and related information. On the other hand, they also concern the interest of stakeholders while they do not consider about their employment and opportunities for growth and advancement with the organization. Alternatively, it also has been noticed out that NEDs have part time interest with the organization and in this sense they have other commitments also to accomplish (Steele, 2009).

Nonetheless, the task is different in cases of diverse organizations. In big companies, non-executive director is considered as an industry regulator who monitors, primarily depicts the shareholder’s interest, and also oversees the activities and performance of the executive directors. On the other hand, role of non executive director has less significance in corporate governance. Here, some of the case studies have been put across to understand the role of NEDs.

• Financial growth advice: Non-executive directors hold good experience in noticing financial aspects of an organization very closely and accurate because they are involved with more than one company in terms of decision-making process, planning, reviews. Hence, they can provide most suitable advice for financial growth of the company. They suggest that small enterprises should not go for most expensive and risky borrowings because they exit on unorganized short-term plans and in this order they can b unhealthy for them (Siladi, 2006).
• Capability to encourage standards, procedures and disciplines to be followed: NEDs ensure that regular board meeting, performance reviews and other tactical debates are conducted properly as they become a part of those. Therefore, their presence automatically makes sure that all the company’s standards, procedures, formalities, and disciplines are being followed properly.
• Propose unbiased advice. Non-executive directors have no personal interest vest with the organization because they are attached with many organizations simultaneously. So, it can be articulated that in this manner they play a vital role in corporate governance and provide impartial advice which is independent in nature (Colin, 2001).
• Help with strategy formulation and execution: There are strategies linked to projection plans, budgets and others which is the main duty of the directors of a company. If NEDs are involved in the strategy planning, formulation and execution, they add value to it and make it successful and efficient for future prospect.
• Organize the business for an exit: The effectiveness of NEDs’ role in corporate governance has been absolute because they have the competencies to prepare a business for an exit. It has been found that companies having non-executive directors are prone to refuse the takeovers, and on the same way take out the greater premium for the organization’s business. In the condition of an acquisition, firms become capable enough to negotiate with the acquiring enterprise with the support of independent directors (Colin, 2001).

Furthermore talking about the corporate governance and its theoretical framework, two main traditional approaches; both institutional and functional approaches are taken into consideration for support. This framework also talks about some theories such as agency, Stewardship, stakeholder theories. In an institutional approach, the capability of a firm to produce more effectively is monitored and considered. Therefore, the key points concerned by this approach seek the improvement of areas to be developed and also ensure that governance is automatically influenced by such improvement (Monks & Minow, 2011).

Alternatively, functional approach takes care of the functioning of diverse management institutions in different modes. This specific approach makes a note of some common views that there are various devices available to focus on corporate governance. Some of the factors it considers are the economy at international level, development of organizations, deregulation and globalization as well, finally, corporate scandals and financial calamity (Mallin, 2010).

Additionally, one of the case studies related to large organization of UK, its corporate governance and role of non-executive directors in that has been taken into account as a part of the essay. On the basis of analysis, it was pointed out that, companies involving non-executive directors can avoid the risks and can also generate profitability for their business. In this overall framework of analysis, some major points were drawn (Higgs report, 2003).

First, Non-executive directors can monitor the risk and opportunities for a business. The benefit to having them involved in the meeting and decisions is that they offer the expertise and helps in independent judgments. Although, it can be made a point to notice that there are some limitations on the role’s effectiveness of NEDs in corporate governance. First, as they work on a part time basis and are committed to many more organizations, they cannot provide sufficient time with reference to understand the needs and to know what exactly is going in the company currently (Weir & Lain, 2001).

Furthermore, another case study has been reviewed in order to seek the role of independent directors in Australia. The duties of non-executive directors include the duty of care, diligence & disclosures of important information of the company. The key decisive point made out was the independent directors will not have knowledge of the company’s daily basis affairs and their activities will be limited to the board’s decision making meeting (Cortese & Bowrey, 2008). The study of Australian’s corporate governance and the role of NDEs demonstrate that the largest organizations of Australia are adopting the ASX principles with reference to good corporate governance. However, they involve non executive directors to their corporate board; the main concern of their independency is stick with level of remuneration the NDEs receive from the company. It was also argued that the presence of NDEs usually benefits the company’s stakeholders and especially stockholders & regulators (Pass, 2004).

On the basis of analysis, it can be said that NDEs can be advantageous for a company by establishing strategy for business’ effectiveness, and performance monitoring. A non-executive director should have following qualities to make their presence effective in the organization.

• Integrity: At a legal and commercial level, non-executive directors refer to significant guarantee of integrity of the company. Therefore, it is discussed that the interest of stakeholders of the company will be protected by the presence of NDEs.
• Expertise and experience: They should have good experience in terms of understanding and over viewing the business from profitable aspect. As they are attached with several organizations, they can offer best of their experience to a newly established company and can benefit them based on their level of expertise.
• Qualitative and quantitative: One of the key qualities which are expected out of the NDEs is that they should be qualitative and quantitative in nature so that they could assess the future growth of the company. They are supposed to have a good knowledge of monitoring and examining statistical and financial data of a company quickly which is reviewed in the board of directors’ meeting (Christopher, 2008).

After providing an over view of the role of NDEs in corporate governance on the basis of case-studies presented, a few recommendations can also be made to make their role effective and to develop the structure of corporate governance.

First, board of directors should appoint the non executive directors who have ample caliber to take the decisions and to evaluate the risks and opportunities for the firm. This step will provide significant weight to the decisions taken by the directors. Next, non-executive directors should also bring independent decisions in light which will avoid the issues related to organizational strategy, resources, performance and standards of conduct. Apart from this, the remuneration which is paid to them by the directors should reflect the time they have committed to the company. In addition, NDEs should be selected through a formal screening process which should involve all the executive directors as a whole. Further, time limit committed by the non-executive directors can be increased in order to get more time for company’s effectiveness. Finally, directors can take a step to provide more access to NDEs in order to increase their involvement in understanding the requirements of the business (Thomas, 1998).

On the basis of overall study, a conclusion can be drawn out summarizing the concepts, framework and role of non-executive directors in the corporate governance. The essay demonstrates that corporate governance is a set of principles, systems through which companies are governed effectively. It mainly links to the senior level of management consisting of executive directors and non-executive directors. Non-executive directors are concerned as the independent or outside directors of a company whose work generally limited with the board of directors. Further, their role and effectiveness have also been included as a part of the discussion. Studies revealed that they advice the companies for financial growth and offer their expertise. Apart from this, they also help in strategy formulation and implementation, making unbiased decisions for the company.

Case-study’s analysis depicted that in UK, companies having non-executive directors are able to avoid the risks and to seek the better opportunities. Moreover, NDEs prepare a god business for company’s exit. They make the firms capable to negotiate with the acquirers. On the other hand, in Australia, role of NDEs in corporate governance is related with the disclosures of significant information of the company. In addition, recommendations have been made in terms of increasing the level and role of NDEs, reflection of their remuneration according to their committed time to the company.

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