Corporate Governance and Strategic Leadership
Evaluation of Sir Adrian Cadbury’s key legacy of a "comply or explain" approach to corporate governance
Essay 2018 8 Pages
Corporate Governance and Strategic Leadership
Drawing on relevant academic literature, first, explain the role that corporate governance plays in strategic management, the factors it enables and the nature of the relationship between owners and managers. Second, discuss and evaluate Sir Adrian Cadbury’s key legacy of a “comply or explain” approach to corporate governance with a specific focus on the development of corporate governance in a country or countries of your choosing. Illustrate your explanation and discussion with corporate examples. Third, what conclusions can be drawn for good governance and strategic leadership in organisations?
Increasing business complexities, tightening regulatory frameworks, maturing organisational structures, disseminating digitised information, growing rights, shrinking diversity, inevitable societal participation, decision-making independence, conflicts of interest, and the changing nature of business transactions have certainly amplified the worldwide focus on transparent and honest corporate governance to win shareholders’ confidence. Contrarily, lack of dispersed ownership, uncertain institutional integrity, leadership self-interests, deficient accountability, incompetent executives, multiple directorships, selective rewards, misalignment of objectives, ineffective monitoring and the poor risk management are causing corporate frauds and governance failures. Indisputably, improving corporate governance systems, and complying with reputed financial-institutional principles and codes of conducts are the secrets to effective and ethical decision-making for sustainable growth and boost investors’ confidence.
THE ROLE OF CORPORATE GOVERNANCE IN STRATEGIC MANAGEMENT AND THE RELATIONSHIP BETWEEN OWNERS AND MANAGERS:
Corporate governance empowers businesses which is the driving force for the effectiveness of robust governance mechanism (Mishra, 2018) to mitigate risks and to eliminate agency conflict between managers/agents and owners/principles (Pinheiro, Carriero & Joaquim, 2013). Corporate governance demands effective stewardship and leadership to develop implementing policies, practices and processes to direct, administer and control a company’s operations to ensure balanced integration (Kimball, 2017) by evaluating decisions on honesty, transparency, integrity, inclusivity, accountability, and responsibility as described by PricewaterhouseCoopers (PwC-2013). Moving forward, CEO, chairman, board of directors must also vigilantly identify their collective roles to meet shareholders’ demands, expectations and needs (Price, 2017). The separation of ownership and control generates agency costs arising from the misalignment of managers and owners’ interests to maximize their profit and/or minimize their risk at the expense of the shareholders (Gebba, 2015)
Letza et al. (2011) argue that corporates are rationally bound by agreements for better governance to maximise economic interests of shareholders and stakeholders. The pluralist views of a dialectical relationship can operate unconstrained by some single-valued objective (Mitchell et al., 2015). The 2017 Good Governance Report evaluates the 100 largest UK-listed companies and confirms Diageo, Aviva, GKN, Barclays and Smith Group at the top five spots mainly due to higher level of commitment of companies’ audit committees and the greater independence and objectivity of the firms’ board leadership. In parallel to success stories, corporate scandals are also spotted around the globe in years 2017-2018. Apple for purposely slowing down older iPhones to compensate for decaying batteries, Equifax for the worst data breaching in USA history (Shen, 2017) and the Commonwealth Bank-Australia for interest rate rigging and prioritising insurance and superannuation funding (Bartholomeusz, 2018) are currently facing forensic investigations.
THE LEGACY OF SIR ADRIAN CADBURY AND THE DEVELOPMENT OF CORPORATE GOVERNANCE INTERNATIONALLY:
The short and smart definition of corporate governance and two pages long code of best practices which were provided by Sir Adrian Cadbury around 25 years ago is still considered the heart of international standards of corporate governance around the world (Thornton, 2017). The backbone of corporate governess codes is the voluntarily comply-or-explain mechanism of long-term rethinking and recalibration of alternative best practices, suited to the shared beliefs and formal measures providing innovative market-based solutions (Iwasaki, 2014). Instead of box-ticking, and mindlessly conforming the requirements, the comply-or-explain approach provides firms more flexibility with accountability to willingly comply with a set of cooperate governance standards or explain the reasons of noncompliance in their financial reports justifying alternative ways of sustaining growth (ICAEW, 2013).
The fundamental principles of comply-or-explain approach are jointly governed by firms’ goodwill, openness, integrity, morality and accountability (SpencerStuart, 2015). The key idea of comply-or-explain is based on self-regulation, modernisation, proportionality, and the spirit of law which allows organisations to choose higher standards of corporate governess rather restricted by old practices and rigid set of codes (Nedelchev, 2013). Ahmad (2014) expresses that the legal position of the comply-or-explain approach of corporate governess lies between voluntary soft-law (non-compliance with some provisions/ deviations to support with an explanation) and mandatory hard-law (compulsory to apply corporate’s code). Aliyev (2015) emphasises that comply-or-explain philosophy requires strong functioning intuitions having a common sense of self-regulation to update principles of generic rules.
Although the comply-or-explain approach enjoys wide acceptance in the EU, USA, Africa and OECD countries however, explanations defending non-compliances to the codes can be misleading in different circumstances. The codes’ flexibility creates uncertainty and may not stop firms from circumventing unpleasant rules (Sturm, 2016) and potentially tends to avoid compliance with the actual best practices which is against the spirit of code (Nerantzidis, 2014). Sanderson, Seidl and Robert (2013) share that comply-or-explain mechanism allows noncompliance but only where regulatees provide a convincing explanation acceptable to shareholders about the desirability or indeed superiority of an alternative course of actions.
After the initiatives of London Stock Exchange in the 90s, this concept of voluntary code of corporate governess was propagated internationally through interconnected financial institutes and industry associations and thus marked the beginning of the great re-alignment among securities exchanges (Jordan, 2013; Rita & Njuguna, 2016). Nearly all jurisdictions now have national codes or principles with 84% following a comply-or-explain” framework (OECD-Factbook, 2017). Further, countries seeking to implement these principles must also monitor their corporate governance frameworks to promote ethical, accountable and transparent practices (G20/OECD, 2015). Despite an increased global awareness of the need for corporate governess, its adoption remained sluggish in UAE during the twenties (Bhatia, 2013). In addition to 1984 Commercial Companies Law, Abu Dhabi Securities Market successfully released first local corporate governance codes in 2004 (Shehata, 2015).
During the 2007 global financial crises, UAE government had felt the need for good corporate governance and accordingly, Securities and Commodities Authority (SCA) issued the corporate governance code expanding the governance rules and regulations to companies listed on UAE stock exchanges (Hashem, 2013). The 2009 Ministerial Resolution had introduced a more comprehensive set of corporate governance regulations (Moniem, 2014) which made it mandatory for publicly traded companies to strengthen their corporate governance (Hashemi, 2013). UAE Central Bank also issued corporate governance guidelines for UAE banks in 2014. Later, in 2011, UAE government issued new decree outlining corporate governance rules and regulations for State-Owned Enterprises (SOEs). All previous 2009 corporate governance code for SME were replaced in year-2016 by the new set of rules developed by SCA (PwC-Middle East, 2016) to steer UAE into a global business environment by introducing better corporate governance (ElGammal et al., 2018). At present UAE is developing new corporate governance principles for SOEs to drive prosperity uniformly across the country.
In modern economies, the role of government is limited to the tasks of regulations and supervision generally without any direct intervening into the businesses’ transactions. The key responsibilities of transparent, legal and ethical trades are therefore on the commercial and financial entities. Both public and private stakeholders to intensify their efforts to elevate governing principles and establish more productive benchmarks to foster mechanisms of shareholders’ activism, innovation, and self-regulation for better capital allocation. The corporate governance should also voluntarily promote elasticity in the adoption of global best practices to maintain a balance between a “comply or explain” approach and formal regulations among varies jurisdictions by replacing the conventional one-size-fits-all approach. To summaries, integrating corporate behaviour that optimises the triple bottom line (performance, social and the environmental outputs) constructs a broader framework of good governance and corporate citizenship without diluting the effectiveness of corporate governess standards.
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