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Corporate Governance

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Issues Raised in an Article of the Magazine 'The Guardian'

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OUTLINING AND SUMMARISING ARGUMENTS

The key argument made in the article of The Guardian published on 19 March 2017 is that large scale organisation of Britain are given warning that they have to face a wave of rebels in the emerging annual meeting season and a risk of suppression by government for redundant pay-scales unless they depict restraints on remuneration of executives. The IA chief executive Chris Cummings asserted in the article that because the beginning gun is fired on the current year's Annual General Meeting season, business firms in UK will perform well to consider the learning from Brexit. Most of the individual will still hold a feeling that they have not contributed in the prosperity of the country. Businesses can either become responsible now and frame a more responsible 21st century corporate Britain or they can continue with the past only. The warning made by him shows that key investors are readying for a lively AGM round. Royal London Asset Management aims to vote against any type of long term bonus schemes that grows the possible maximum pay-scales for executives of firm. The corporate governance manager of Royal London has anticipated to vote against projected increase in maximum bonuses and long term incentives that are generally consisting of providing executive shares as multiple times of their remuneration. She has argued that their default stand is to deny the proposal. She has asserted that there should be line for the maximum increase and increase in bonuses caused due to promotion of executives can be treated in a different manner. She expressed her consent for simplifying the pay-scales plans. The IA chief executive has given warning on three areas which are significant growth in total pay-scales for executives, complicated pay deals and fragile relation betwixt pay-scales and performance.

CORPORATE GOVERNANCE ISSUES

In the article published in The Guardian, mainly three issues were raised. The first issue is of remuneration of company director and if momentous increases are prearranged for future pay-scales of executives. Numerous firms still does not know that sentiments of general public are very strong regarding the excessive remuneration of top managers and executives. The remuneration of executives have been a hot topic from some time in UK. The chief executives of Britain are highly overpaid and it is expected that is their salaries are slashed then there will be no negative influence on the economy (Cummings, 2017). The level of pay-scales of majority of senior executives are wildly high. The highest paid chief executive Martin Sorrell has to give only 45 minutes to earn his salary of £ 70 million and on the other hand, an average employee has to work for the whole year for this salary. His annual pay-scale can be paid the salaries of 2,218 nurses, 4,479 teaching assistant or 1,920. CEO of Morrisons, Dalton Philips almost twofold his pay-scale before he was dismissed, whereas boss of Tesco Dave Lewis gets £ 4.1m which is about triple of remuneration given to his predecessor. This issue is very important in corporate governance and thus given attention in the article also. Moreover, the significance of this issues can be understood by using ethics theory of corporate governance (Tricker, and Tricker, 2015). Business ethics is studying the business activities, decisions and situations in which right and wrong are paid attention. The major reasons for this is power and influence of businesses in a society is powerful as compared to past. Business organisations are a key provider in the society regarding jobs, goods and services. The collapse in business makes a significant impact on the society and the demands of stakeholders are becoming very complicated and challenging. It is unethical on the part of executives of top firms in UK to get a very high remuneration. Due to this, the lower and middle level employees are not able to receive good pay-scales. This theory fits best with this issue as compared to other theories of corporate governance (McCahery Sautner and Starks, 2016). The chief executive should care for other people also and not just be concerned about themselves. This issues can also lead to conflicts and disputed in business organisations. When conflict arises between top management and lower or middle management, then it becomes difficult to resolve it. This can make a negative affect on the performance and growth of business organisations. Also this kind of situation arises inequality in the society. The gap betwixt rich, middle class and poor person increases. Also, it creates economic imbalance in the country.

Another issues is how to simplify and award pay-scales of top executives because the present pay-scales are very complicated that they are making shareholder scrutiny even more hard. The Member of Parliament of in UK has warned that executive remuneration is out of control. They have prepared a new report which is stating certain measures to control salaries of executives which is not correlated with their performance. The Business, Energy and Industrial Strategy (BEIS) select committee is trying to suppress pay-scales as a portion of widespread review of corporate governance (Crane and Matten, 2016). The committee has pressurised Sir Philip Green to pay £363 million in the pension fund for BHS parliament of UK. While doing this, the committee asserted that the faith and trust of public in corporate governance has got jolted due to some scandals and thus highlighted the need to take some tough measures to bring the firms back into line. The Chairman of Committee Iain Wright quoted that the executives pay-scales are so much high that it has become impossible to make a relation betwixt pay-scales and performance. He said that pay-scales must be reformed and simplified for encouraging decision-making to attain long term success in business and to follow broader organisational objective compared to share value.

The last and the most significant issue is the link between the performance of the company and the pay. There are many companies that have failed to conquer the support of the main investors. The major reason behind this was the inefficient link between the performances and pay. There are number of employees whose performances have efficiently increased with the time but the pay given to them does not match their efforts and efficiency. On the other hand there are employees who are at higher positions and take high payments without giving much efforts and showing growth in their performances. Investors demands rewards to reflect the performance of the organisation.

The financial reward method for the workers refers to a system in which all employees are given monetary compensation on the basis of their performance in relation with the cited criteria. The funders demand the performance related pay system which deals with paying according to their performance for a specific span of time. The issue of high payments to the top level employees has been raised significantly over the years. The salary progression is not at all linked to the individual performances in most of the big brands and organisation.

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The theory of corporate governance can be used to deal with these issues. The theory of motivation shows the management opinions for performance related pay. A popular approach MBO (Management by objectives) focuses on the work of employees towards the attainment of goals and objectives of the company. More importance is given on motivating the employees rather than determination of procedures for them. This theory suggests that individual behaviour, perceptions, capabilities and self motivation could be increased by conducting activities like awards, rewards, acknowledgements, appreciation etc. This in turn increases their potentialities which enhances the performances and hence the productivity.

IMPORTANCE OF THESE ISSUES FOR BUSINESS AND GENERAL PUBLIC

Corporate governance has seeked major importance over the years across all the countries of the world (Bivens and Mishel, 2013). It is the manner implementing of self corporation policies. The method involves governance of the organisation as a sovereign state. It includes implementation of own customs, laws, regulations and policies for all the workers right from the higher level to the bottom level. It is aimed to enhance the organisation's accountability and prevent huge losses prior they happen. The corporate governance is similar to the unit of internal affairs of police department which intends to resolveand eliminate various issues with prejudice.

Internal meetings are conducted by the company involving shareholders, funders, leaders, suppliers and customers in order to address the needs and demands of affected group. It is essential to apply the principles of corporate governance to smooth the procedures and functionality of the firm. The principles are as follows:

  • Share holder recognition – In order to maintain the stock price of the company it is essential to give recognition to its shareholders. Corporate governance gives voice to all the shareholders and ensures their active participation.
  • Stake holder interests – For creating positive relation with the media and community it is essential to give time for addressing the non shareholder stakeholders. Corporate governance seeks to recognise the interests of the stakeholders.
  • Outlining board responsibilities – The board members of the firm are required to function on same page and have a similar future vision for the company. It involves clearly outlining the responsibilities of the board members towards the major shareholders.
  • Ethical behaviour – Violation of ethical behaviour supporting the high profits leads to huge legal as well as civil problems. Ignorance of underpayments, abusing, skirting of environmental laws etc. can also affect the company badly. Corporate governance involves establishment of a code of conduct for taking the ethical decisions for the entire work force.
  • Transparency of business – The significant for gaining the trust of shareholders is to practise business transparency. Fiscal reports, profit reports and forward assistance is to be stated clearly to the shareholders. Corporate governance deals with ensuring business transparency (Berger, Imbierowicz and Rauch, 2016)

The principles of corporate governance discussed aids the organisations for streamlining the functionalities and providing effective accountability to the people involved. It mainly helps in the decision making and clear explanations of the board members, shareholders, stakeholders by stating them their duties and responsibilities. The clear explanation aids the people in determining their accountability in the firm. Knowledge of accountability helps in decision making process like terminations, promotions, rewards, acknowledgements, punishments etc. It also helps the organisations to reduce the risks involved in the business processes or decisions. Practising corporate governance can help the owners to identify frauds, scandals, cheating, criminal involvements, etc (Bell, Filatotchev and Aguilera, 2014.). It also aids the company to gain public acceptance as it involves transparency which gains trust and loyalty of public for the company. It enhances the public image of the corporation which helps to run a successful business.

CONCLUSION

The above report gives a brief idea about the corporate governance and the issues raised in an article of the magazine 'The Guardian'. The report discusses the three major issues. The first issue is the remuneration of company top designated employees. High salaries are given to the CEO's and directors which does not do justice with other employees which could be resolved by the business ethics theory of corporate governance. Second issue is the simplification of the high pay scales to the top employees of the organisation. The pay scale system of the companies is very complex and needs to be simplified. The last issue deals with problem in link between the payments and the performances. There is not proper link between the pay scale and performances. Financial reward system needs to be practised. Theory of motivation could also help to offer efficient link between the payment and performance.

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The report also concludes that principles of corporate governance helps the company to improve its image in the public and gain public loyalty and trust. It provides immense benefits to the companies. Corporate governance should be practised in all the companies and all the principles should be implemented. The issues raised are of major concern and must be resolved.

REFERENCES

  • Donaldson, T., 2012. The epistemic fault line in corporate governance. Academy of Management Review. 37(2). pp.256-271.
  • McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance.
  • Tricker, R. B. and Tricker, R. I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
  • Bell, R. G., Filatotchev, I. and Aguilera, R. V., 2014. Corporate governance and investors' perceptions of foreign IPO value: An institutional perspective. Academy of Management Journal. 57(1). pp.301-320.
  • Claessens, S. and Yurtoglu, B. B., 2013. Corporate governance in emerging markets: A survey. Emerging markets review. 15. pp.1-33.
  • Berger, A. N., Imbierowicz, B. and Rauch, C., 2016. The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking. 48(4). pp.729-770.
  • Gerhart, B. and Fang, M., 2014. Pay for (individual) performance: Issues, claims, evidence and the role of sorting effects. Human Resource Management Review. 24(1). pp.41-52.
  • Olafsen, A.H., and et. al., 2015. Show them the money? The role of pay, managerial need support, and justice in a self‐determination theory model of intrinsic work motivation. Scandinavian journal of psychology. 56(4). pp.447-457.
  • Crane, A. and Matten, D., 2016. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
  • Bivens, J. and Mishel, L., 2013. The pay of corporate executives and financial professionals as evidence of rents in top 1 percent incomes. The Journal of Economic Perspectives. 27(3). pp.57-77.
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