Question

Provide your opinion on the strengths and weaknesses of the U.S. corporate governance rules.

Answer 1

Answer-

Meaning of Corporate Governance

Corporate governance is about enabling organisations to achieve their goals, control risks and assuring compliance. Good corporate governance incorporates a set of rules that define the relationship between stakeholders, management and the board of directors of a company and influence how the company is operating.

Importance of Corporate Governance

1. Changing Ownership Structure - In recent years, the ownership structure of companies has changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in most of the large companies. So, they have effective control on the management of the companies. They force the management to use corporate governance. That is, they put pressure on the management to become more efficient, transparent, accountable, etc. They also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. So, the changing ownership structure has resulted in corporate governance.

2. Importance of Social Responsibility - Today, social responsibility is given a lot of importance. The Board of Directors has to protect the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is possible only if they use corporate governance

3. Growing Number of Scams - In recent years, many scams, frauds and corrupt practices have taken place. Misuse and misappropriation of public money are happening everyday in India and worldwide. It is happening in the stock market, banks, financial institutions, companies and government offices. In order to avoid these scams and financial irregularities, many companies have started corporate governance.

4. Indifference on the part of Shareholders - In general, shareholders are inactive in the management of their companies. They only attend the Annual general meeting. Postal ballot is still absent in India. Proxies are not allowed to speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse their power for their own benefits. So, there is a need for corporate governance to protect all the stakeholders of the company.

5. Globalization - Today most big companies are selling their goods in the global market. So, they have to attract foreign investor and foreign customers. They also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive and succeed the global market.

6. Takeovers and Mergers - Today, there are many takeovers and mergers in the business world. Corporate governance is required to protect the interest of all the parties during takeovers and mergers.

Strength of Us Corporate Governance

• Shareholder recognition – Good corporate governance recognizes all stakeholders of the company. This includes people like employees, suppliers, customers, creditors and investors
• Equal treatment of shareholders - Besides acknowledging shareholders, corporate governance should treat them equally. This could mean involving them in major decisions which affect the company
• Clearly defined roles of the board – Each member of the board of governors has a specific role to fulfill. Corporate governance should clearly define the composition and roles of the board of directors
• Ethical behavior – Good corporate governance should have integrity and ethics at its core. Everyone who is part of the company must demonstrate ethical behavior and follow a clear code of conduct when carrying out their activities
• Transparency – Transparency is very important for winning the trust of shareholders. Corporate governance should allow stakeholders to have free access to materials such as financial records however, bring costs to shareholders.

Weakness of US Corporate Governance

1. Fiduciary Duty of Board - Officers and the board of directors have fiduciary duties to act in the best interest of the corporation. If they breach those duties by not exercising honest and prudent care, they can be held liable. This is why companies where shareholders elect non-shareholder directors often provide directors and officers, or D&O, insurance. D&O insurance does not protect against outright fraud, but it does protect against fallout from bad business decisions.

2. Increased Costs - Corporations have higher administrative costs because of greater administrative requirements than those required of LLCs and limited partnerships. Corporate boards must either meet or create resolutions to enter into financial arrangements or contractual arrangements. Corporations must maintain corporate documentation, including stock purchases and sales, legal compliance and annual registration

3. Maintenance of Separation - Corporations, shareholders and board directors and officers must follow all the corporate formalities, including keeping annual meeting minutes for both shareholders’ meeting and board of directors’ meetings, documenting major decisions as board-approved. Even corporations owned and governed by one shareholder in multiple director roles must adhere to all formalities. Shareholder-owners must sign all documents as their position, for example, “John Smith, President, ABC Company." Failure to adhere to these rules could result in a creditor getting a judge to pierce the corporate veil. When a court or judge “pierces the corporate veil,” the court sets aside the corporate protection and allows the creditors to go after the personal assets of the shareholders

4. Principal Agent Conflict - Conflicts arise when a corporation’s shareholders do not actively participate in the business and instead hire professional management to run the business. The manager represents the shareholders but often has different goals and perspectives.

Conclusion

The stockholder-manager alignment problem appears in two main forms. The first concerns diversion, the second competence. Managers can divert value from the firm into their own hands: they can have the firm transfer funds to their own bank accounts (or a relative’s), or have the firm sell goods at low prices to (or buy at high prices from) entities that the managers control. More transparently, they can pay themselves (excessively) high salaries.

The other form concerns the fact that managers may not be up to running the firm, either because one or another manager never was up to the task (their selection was a mistake) or more plausibly because changed circumstances made the manager no longer right for his company.Well-functioning corporate governance institutions put the right manager in the right place and give that manager the right set of incentives and constraints. This goal, however, hides a couple of issues. The first is that each specific corporate governance institution does not uniformly reduce both. Some affect one, some affect the other. Both problems,