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CORPORATE GOVERNANCE AND ACCOUNTABILITY

Автор Доклада: 
J. Orumwense

CORPORATE GOVERNANCE AND ACCOUNTABILITY

Dr Jones Orumwense

The recent spate of corporate collapses globally has drawn attention to corporate governance failures in preventing or forewarning these events. The need for such governance was well expressed by Adam Smith remarks a long time ago:

Jensen & Mecklin (1976), in their celebrated seminal work, defined firm or a company as “one form of a legal fiction which serve as a nexus of contracting relationships which is also characterized by the existence of divisible residual claims on the assets and cash flow of the organization which can generally be sold without permission of the other contracting individuals”.

The collapse of notable industrial and financial giants, like Enron, Worldcom and Parmalat, has brought the matter into public view. An unprecedented number of earnings restatements and claims of blatant earnings manipulation by the Chief Executives of failed corporations resulted in a number of Corporate Governance (C.G.) reforms and enactment world over. The Blue Ribbon Committee 1999; the Sarbanes-Oxley Act, U.S. House of Representatives 2002; the Securities and Exchange Commission 2002; the Business Roundtable 2002; and SAS No. 89, AICPA 1999a; SAS No. 90, AICPA 1999b) are good examples.

In Nigeria, the Prudential guidelines of 1990, the CG codes of SEC, 2003, CBN, 2006 and the Insurance Code of 2009 were some of rules instigated to control and correct the governance activities and structure of corporate bodies in the country. The enactment of these rules and guidelines became necessary to safeguard corporate polity from collapse and create a clean investment atmosphere. Saving the corporations from decaying is as important as saving the polity. As Wu Ei (2007) said: “Companies are fundamental cells of commercial society. One of the unique characteristics of corporate economic units is that those that own them are not generally involved in running their own affairs. Where ownership is dispersed, directors have the power to run the affairs of the company to their own desires. As a fiduciary duty, directors are expected to act in the best interest of the owners and maximize their stake at a reasonable bearable risk. However, from a practical point of view conflict of interests definitely exist. While the owners interests are, after return (dividend & capital appreciation), reflected in the share price, directors are set to target short-term returns for lucrative compensation. Persistence of these conflicts leads to an agency problem. In early history of there existence, corporations or what was referred then as Join Stock Companies employed the services of professional accountants (auditors) to check the affairs of directors; in particular to ascertain whether the interest of directors were congruent with that of the owners.

Nowadays, corporations occupy and contribute immensely to the development of industrial capitalism. In fact they are the main stay of the capitalist ideological paradigm. They are the main powerhouse of wealth creation, accumulation, intermediation, exchange, distribution, and sustenance. Failure of these economic agents is tantamount to the collapse of an economy, a nation and a polity. This was evident in the 1990’s Asian crisis in which several governments lost power.

The recent collapse of companies together with the associated socio-political and economic consequences, have encouraged efforts at both international and local levels in the development of bench mark rules and guidelines in managing and controlling the affairs of these vital institutes. Such efforts are codified and issued mostly by regulatory agencies across the globe in the name of corporate governance code. The sole purpose of the codified rules has been to ensure maximum accountability arid transparency in the running of the affairs of corporations. In line with this, this paper addresses two basic questions:

• What role does corporate governance agents and structure plays in sound accountability?

• What are the synergistic interactions between corporate governance mechanisms and accountability?

A review of the historical development of CG is presented along with concepts of Corporate Governance and Accountability, some comments on synergistic interaction between CG components/ mechanisms with Accountability and a summary and some conclusions.

THE CONCEPT OF CORPORATE GOVERNANCE

The concept of governance is as old as human civilization. Put simply, it is:: ‘the process of decision-making and the process by which decisions are implemented (or not implemented)’. Governance is found in several contexts, e.g. corporate governance, international governance, national governance, and local governance.

The term ‘corporate governance’ (CG) was first used by Richard Ealls in 1960, to denote the structure and functioning of corporate polity. The term was derived from an analogy between cities, nations or states and the governance of corporations. Early writers in finance literature used representative government as an important advantage over partnerships. But depending on the perspective and theoretical axis viewed, CG has attracted many definitions, e.g.:

The Anglo- Saxon perspective

CG was viewed from a narrow perspective to mean the relationship between corporate managers and shareholders: ‘a complex set of socially defined constraints that affect the willingness of shareholders to make investments in corporations in exchange for promises’ (Dyk, 2000). Meyer (1997), views the concept as ‘ways of bringing the interest of investors and mangers into line, to ensure that firms are run for the benefit of investors’. Cadbury saw it as the way in which corporations are managed and controlled (Cadbury, 1992). Shlefier & Vishny (1997) defined it as ‘the way in which suppliers of finance to corporations assure themselves of getting return on their investments, while, in a more elaborate definition Denis and McConnell (2003), view the concept as ‘a set of mechanisms both institutionally and market based that induce self- interest controllers of a company, those that make decision on how the company can be operated, to make decisions that maximize the value of the company to its owners, the suppliers of capital.. All these definitions stress the investor’s interest ignoring other objectives of corporations. In essence, these definitions are rooted in two party conflicts: Agent and Principal.

The Franco-German Perspective

Upholding to Franco-German philosophy of governance Aguilera (2005), posits CG as ‘the study of the distribution of rights and responsibilities among different participants in the corporation such as managers, shareholders, the board of directors, employees and customers’. From the same perspective, Daily et al (2003), view the term as ‘the determination of the broad uses to which organizational resources will be employed and the resolution of conflicts among myriad participants in organizations’. In essence, the Franco-German view sees CG as a set of relationship between a company, its management, its board, its shareholders and other stakeholders, and spells out the rules and procedures for taking decision on corporate affairs. It also provides the structure through which the company’s objectives and monitoring performance are defined.

The basic deference between Anglo Saxon view and Franco German view is that, while the former focuses CG on management and owners and agency theory, the latter encompasses all corporation stakeholders and stakeholder theory. Both stress and share a common boundary on the issue of how managers are made accountable to interested groups.

ACCOUNTABILITY

Accountability is construct made up of the two concepts ‘account’ and ‘ability’. Understanding each separately gives a clear appreciation of the combined word. The term ‘account’ had its origin in the Feudalistic Period; it was a stewardship term meaning ‘to narrate the happenings’. Feudal Lords employed stewards to manage their estates and the steward was required to narrate to the Lord what had happened while he was away. The accumulation of wealth in various forms transforms the role of a steward from that of a narrator to someone that is expected to be accountable to the owner. The word account therefore means ‘to record the events or transactions that have financial implications’.

Te term ‘ability’ refers to a state of physical and mental capacity to carry out an assignment responsibility and, by extension, ‘the liability to reveal, to explain, and to justify what one does, how one discharge his responsibilities assigned, financial or any other. Thus, financial ‘accountability’ is a legal liability to establish a pattern of control over receipts and expenditure that permits a determination either by an executive or legislatures, that corporate money has been used for the intended purposes.

Accountability aims to achieve the following:

• To ensure faithful, efficient, economic, and effective use of funds
• To provide information necessary for corporate action.
• To improve information that aid policy formulation and implementation.
• To serve as a mechanism for effective control.

A good system of accountability should mandate a person to submit accounts for examination by either the trustee to whom he/she directly accountable or an agent appointed to act on trustees behalf.

Accountability is a key requirement of good governance. Not only governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. Who is accountable to who varies depending on whether decisions or actions taken are internal or external to an organization or institution. The major players in CG: auditors, managers, auditors and directors must work together to ensure that the highest quality of financial information is provided to the stakeholders who make important decisions based on that information. When such is achieved with probity and honesty then accountability is said to be achieved.

From a wider perspective, accountability should be extended not only to investors but also to general users of financial information.

THE RELATIONSHSIP BETWEEN CORPORATE GOVERNANCE AND ACCOUNTABILITY

Good CG provides a smooth infrastructure for accountability and accountability characterises good governance, as shown in Figure 1.

Figure 1: Characteristics of good governance

Financial reports serve as a medium of manager’s accountability to owners in a corporation. This financial accounting information is a product of corporate accounting and external reporting systems that measures and publicly disclosed audited, quantitative data concerning the financial position and performance of publicly held firms. Financial accounting systems provide direct input to corporate control mechanisms by contributing to the information contained in stock prices.

As a fundamental objective of governance, investigations into accounting have been tailored to providing evidence that the information provided by a financial accounting system mitigates agency problems. The reliability and timeliness of information are the two major important quality that manager set out to ensure. In which case, both internal and external controls are inevitable.

The importance of quality reporting is not limited to owner’s needs but also more importantly serves as an impetus to capital market efficiency which in turn reflects the manager’s performance. As Wu (2007 notes, capital market efficiency depends on the free flow of reliable timely and relevant information from the stewards of capital to its providers.

The following CG mechanisms ensure reliability of information.

Internal mechanisms

i. Director monitoring
ii. Internal labor market

External mechanisms

i. Debt holding monitoring
ii. Market for corporate control
iii. Competition in product market
iv. External management labor market
v. Security laws that protect outside investors against expropriation by corporate insiders.

THE EVOLUTION OF CORPORATE GOVERNANCE

Several factors contributed to the growth and interest In corporate governance. Some of the major identifiable factors are:

• World wide privatization
• Pension fund reforms and the growth of private savings
• The take over waves of the 1980’s
• Deregulation and the integration of capital markets
• The 1998 East Asian crisis
• Several financial crisis in Western economies
• The current global financial turmoil

The Cadbury Report of 2002 led to proliferation of governance codes world over. In Nigeria though some issues relating to CG could be traced to the CAMA (what is this – spell it out) of 1990 and the Prudential Guidelines of 1990, the celebrated codified governance rule was found in the NSE code of 2003. This code stressed on three aspects of governance:

• Boards of directors
• Shareholders
• Audit committees

To ensure prudence and accountability the codes set out the following as benchmarks for Boards:

• Board size between 5 to 15
• A board seat to shareholders with 20 % or more of equity stake
• As protection of minority one person to represent them on the board
• CEO duality was abolished
• A vice-chairman where the CEO is also the chairman
• Non executive directors to fix the remuneration of the Executive Directors
• Prominence to audit committee, with a single seat for Executive Directors to serve as a chairman.
• Board meeting to be distance wise and frequently. (what does this mean?)

However, despite all the provisional measures to ensure accountability, prudence and transparency, the code failed to prevent corporate failures and mismanagement by corporate executives. (Do you have a reference?) Therefore, another Code was specifically issued for Banks in 2006 and for insurance businesses in 2009. Some of the major areas of improvements and concerns directly related to accountability are:

• Restriction of government stake to 10%
• Mandatory approval by the Corporate Bank of Nigerian for equity investments above 5% by any investors.
• Abolishing the post of vice chairman and separation of chairman with CEO.
• Limiting board size to 20
• Board composition: Non-Executive Directors to be greater in number than Executive Directors
• Directors tenure: maximum three terms of four years
• Welfare of directors to be determined by
shareholders at AGM.
• Mandatory establishment of specific board committees: remuneration, finance and general purpose, credit risk management and audit
• Restriction imposed on the tenure of external auditors to ten years after which the firm will not be eligible for appointment until after ten years.

Complying with these codes by banks and insurance companies is mandatory. Notwithstanding, the entire financial sector is still not sanitized. Recently, the Central Bank of Nigeria fired some chief executives for gross mismanagement. Nigerian CG at the time was more of Anglo Saxon mode but current modes exist of importance to policy makers, viz:.

• Take over models
• Block holder models
• Delegated monitoring model
• Board model
• Executive compensation model
• Sharing control with creditors
• Sharing control with employees

SUMMARY AND CONCLUSIONS

Good governance is crucial not only in preventing major financial reporting disasters but also in ensuring that significant issues impacting the financial reporting process are appropriately accounted for by the corporation. Ensuring high-quality financial reporting requires that all stakeholders, not just the management, take an active role in the governance process. This can be attained through sound internal control and checking, capital market efficiency and sophisticated reporting and disclosure provisions.

The efficiency of capital markets rests on the free flow of unbiased, objective information from the stewards of capital to its providers. Research as well as recent corporate mal-practice scandals provides ample evidence for the importance of high-quality financial information to the efficient functioning of the capital markets. The issue of CG and Accountability will be a perpetual issue and will continue to interest academics.

References:

  • 1. Aguilera, R.V.(2005): “Corporate Governance”,
  • 2. International Encyclopedia of Economic Sociology.
  • 3. Bushman, R.M. & Smith, A.J. (2001): “Financial
  • 4. Accounting Information and Corporate Governance”
  • 5. Journal of Accounting and Economics 32(2).
  • 6. Business Roundtable. (2002). Principles of Corporate
  • 7. Governance. Available at: http: / / www.brt.org.
  • 8. Cadbury Report (1992): Report on the Committee of the Financial Aspects of Corporate Governance. Gee Publoications, City?
  • 9. Glautier, intials & Underdown initials (2003): (Title), Pitman Publications, London.
  • 10. Jensen M. and Mechling, W. (1976): “Theory of Firm Managerial Behaviour, Agency Cost and Ownership Structure. Available at: http/:www.SSRN. corn.
  • 11. Kaplan, R.S. & Norton, D.P. (2001): “The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive” in The New Business Environment, Harvard Press, Boston.
  • 12. Klein, A. (2003): “Likely effects of stock exchange governance proposals and Sarbanes-Oxley on corporate boards and financial reporting” in Accounting Horizons (December); 343-355.
  • 13. Securities and Exchange Commission (2002): “Pitt seeks review of corporate governance, conduct codes”, Press Release. February 13. Washington, D.C. Secretariat.
  • 14. U.S. House of Representatives, Committee on Financial Services. (2002): The Sarbanes-Oxley Act of 2002. Public Law No. 107-204. Washington, D.C.: Government Printing Office.
  • 15. Wei, Y. (2007): “China’s Capital Market and Corporate Governance: The Problem of the External Governance Mechanism”, Mqjbl. Vol 4.
  • 16. Wu, M. (2002): “Earnings Restatements: A Capital Market Perspective”, Working paper, New York University.
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