Finance Plan
- Restoring confidence through reforms
The past few years have seen an increased necessity to hold the board of directors accountable for performance of the investors’ organisations and the demand for greater transparency and engagement. The investors’ interests in more interaction and disclosures have arisen out of the successive waves of scandal in the corporate world has in turn restructured the corporate governance landscape. Globally, such scandals involving big multinationals have made the stakeholders to demand for more adherence to standards of stating earning, profits and the need for having reliable auditing. The loss of stockholders’ confidence in early 2000s resulted from the financial scandals and economic downturn (Rezaee, 2007). There is a need for a standard way of stating earnings and profits so that financial information can be meaningful to the stakeholders and such information can be subjected to a reliable auditing. This will eliminate incidences of manipulation which will build trust and thus restore confidence in governance.
There have been reforms in United States regarding corporate governance which include implementation of rules related to SEC. This involves new requirements involving corporate governance for listing at NYSE developed in August 2002.the Sarbanes-Oxley Act of 2002 have mandated some a list of best practices in governance and outlines new offences concerning corporate fraud (Chang, 2008). This happened in line with the actions of institutional investors as they strive to increase their monitoring efforts for their investments in many public companies. The challenge of these investors has been getting to know the directors they elect to manage their investments. Furthermore, SEC as the main watchdog against corporate fraud has small staff and does not perform direct tasks of rooting out this fraud. Along with the assumption that SEC can rely on private entities as the fundamental restraint against massive wrongdoing, the result has been complete failure. There has also been an alarming turnover rate at SEC that has seen experienced staffers leaving to look for higher paying employment. The case has been worsened by the tendency where SEC collects more funds for the government that it receives back. Since the 2008-2009 financial crisis the congress has been pushing for responsibilities on the agency regardless of the limitations it faces (Prial, 2013).
- CEO compensation
The schemes used to pay CEOs and which are tied to organization’s performance have constantly been manipulated by the companies, a practice that can seem to bilk taxpayers’ big amounts of money. Significant portions of executive compensation have been a contingent once the companies hit certain threshold of good performance (Mullaney, 2015). These remunerations have been attached to the perception that CEOs are more important than other employees and their performance has the biggest influence on the overall performance of the organisation. The astronomical salaries and bonuses paid to the top executives have resulted to a compensation scale that is skewed towards top management. Since CEO compensation is tagged to the performance of the firm, there was a pairing back of CEO compensation in the early 2000s due to the fall in stock market that was experienced then, but the compensation returned to its normal level after the stock market had mostly recovered by 2007. The financial crisis in 2008 made the level of CEO compensation to fall again which made the CEO-worker compensation ratio to fall in tandem (Institute for Policy Studies, 2015). The differing payments between the CEO and the workers can thus be attributed to compensation systems that encourages and rewards to employees with short-term incentives like bonuses which is then funded while ensuring that whole pay budget is not blown off. These changes do not mean that the top notch employees are performing better. In fact, it is not surprising to conclude that only about half of annual incentives for top employees result to better performance. Furthermore, the high and rising CEO compensation reflect income that would have used to assist others in an economy (Davis and Mishel, 2014)
- Independence of board members
The widespread accounting and corporate scandals in the early 2000s made regulators and U.S stock exchange to approve various regulatory reforms so as to attain improvement on corporate governance which included the need to increase the board of directors’ independence. The approval of new rules by the Securities Exchange commission made it a requirement for listed companies to have most of the members of boards being independent directors (McKnisey &Company, 2013). A primary aim of the reforms has been to enhance the monitoring function by the board more so financial reporting monitoring. To achieve the benefits of these reforms and increased value, a lot of training for these independent directors would be necessary. This involve directors with less impact and experience learning from those with high impact and experience especially when it comes to developing strategies. This would include increasing information accessibility since independent directors do not have as much information as the managers. To further improve the board performance, there have been proposal to separate the titles of chairman and CEO so as to avoid management that has de facto control (Tonello, 2011). Moreover, to avoid the case of individual compensation especially the board members, being done at the expense of maximising stockholder value, there have been proposals to involve separate compensation programs that include unions, proxy advisories, human resources, executives and federal or regulatory agencies (Tonello, 2011). This will ensure that the stockholders are involved in decision making and more so the decisions that involve the determination of CEO compensation and how it should vary with that of other staff.
- Involving institutional investors in decision making
The institutional investors have increasingly become part of corporate governance but have relied heavily on the decisions made by management, which includes the board of directors, to in performing their roles in corporate governance. The investors, however, represent the interest of the shareholders by ensuring that they look after the safeguard their rights and shares and ensure that they access basic information on their investments. The effectiveness of the whole system of corporate governance depend to a great extent on the assurance that the institutional investors will make use of the rights of their shareholders and thus fully exercise effectively their ownership roles in the firms that they invest in. Issues have arisen from the misdirection of management boards of directors on the investment in the NYSE (OECD, 2011).
The lack of independence on the institutional investors has resulted to them welcoming the board’s requirements and their recommendation. Despite the institutional wishing to get involved in the various decisions made by the management and the board of directors, they finally let go off their guards due to this increased dependence. They are thus by-passed in implementation and determination of very important issues such as compensation of the executives, investment portfolios and other NYSE investment decisions (OECD, 2011). The investors on the other hand have tried to engage shareholders through voting. Many laws and policies mandate voting by some institutional investors or encourage them to do so. Portfolio stocks institutional voting has largely been removed from the hands of money managers except in cases where the votes have economic significance that is bigger like mergers and elections. Most institutional investors have resulted to delegating the voting decision to voting function from within or outsourcing of this function from proxy advisory organizations. The failure by institutional investors to disclose voting policies, whether the voting is done internally or outsourced would amount to misrepresentation of the rights of the shareholders. This is because any voting by the institutions is supposed to be done on behalf of the shareholders, thus the requirement for them to disclose the procedures put in place for decisions relating to their voting rights (Small, 2014).
- Transparency of board members
With increased pressure for the separation of CEO and the roles of board chairman by activist shareholders, proxy advisory organizations, regulators and institutional investors there have been suggestions for elimination of CEO roles in the board of directors including determining its compensation (Tonello, 2011). This has also included call to increase independent board members to deliberate in privacy issues. There has also been greater call for Corporate Reporting Dialogue in order to achieve greater consistency, coherence and compatibility the reporting frameworks, standards and other related requirements. This has been aimed at ensuring great transparency now that the CEO does not determine who will be on the board of directors list (The Institute of Internal Affairs, 2015). A fair dialogue will be achieved if the board does not consist of people with conflicting interests such as family members. The overall effect where there are conflicting interest would be the board rubberstamping the management decisions without questioning. This also would worse if the managers are unqualified. There is a need for the board of directors to fulfil their oversight roles in the process of financial reporting and audit process with audit committee being given the authority to authorize or carry out investigations into matters they are responsible for.
References
Chang, J.-C. (2008). Earnings informativeness, earnings management and corporate governance under the Sarbanes-Oxley Act of 2002. Baltimore: Morgan State University.
Prial, D. (2013).SEC: Self-Funding vs. Congressional Appropriations. Retrieved from: http://www.foxbusiness.com/politics/2013/05/16/sec-self-funding-vs-congressional-appropriations.html
Rezaee, Z. (2007). Corporate governance post-Sarbanes-Oxley: Regulations, requirements, and integrated processes. Hoboken, N.J: John Wiley & Sons.
Almadani, A. (2015). Globalization and Corporate Governance. International Journal of Innovation, Management and Technology, Vol. 5, No. 5.
Mullaney, T. (2015).Why corporate CEO pay is so high, and going higher. Retrieved from: http://www.cnbc.com/2015/05/18/why-corporate-ceo-pay-is-so-high-and-going-higher.html
Statement of Common Principles of Materiality of the Corporate Reporting Dialogue. http://corporatereportingdialogue.com/wp-content/uploads/2016/03/Statement-of-Common-Principles-of-Materiality1.pdf
Institute for Policy Studies, (2015).Money to burn; how CEO pay is accelerating climate change. Retrieved from: http://www.ips-dc.org/wp-content/uploads/2015/09/EE2015-Money-To-Burn-Upd.pdf
Davis, A., Mishel, L. (2014).CEO Pay Continues to Rise as typical workers are paid less. Retrieved from: http://www.epi.org/publication/ceo-pay-continues-to-rise/
OECD (2011).The Role of Institutional Investors in Promoting Good Corporate Governance, Corporate Governance, OECD Publishing. doi: 10.1787/9789264128750-en
Small, C. (2014). The Role of Institutional Investors in Voting. Retrieved from: https://corpgov.law.harvard.edu/2012/05/14/the-role-of-institutional-investors-in-voting/
McKnisey &Company, (2013).Improving board governance: McKinsey Global Survey results.1.
Matteo Tonello, (2011).Separation of Chair and CEO Roles. Retrieved from: https://corpgov.law.harvard.edu/2011/09/01/separation-of-chair-and-ceo-roles/
The Institute of Internal Affairs, (2015). Quality ensuring excellence. Model Audit Committee Charter. Retrieved from: https://global.theiia.org/standards-guidance/Public%20Documents/MODEL_AUDIT_COMMITTEE_CHARTER.pdf
