Essay Example on Corporate Governance and Ethics

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Middlebury College
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Corporate governance refers to the guidelines, policies, and processes followed by investors, business owners, and shareholders to control and direct large organizations. Corporate governance encompasses the way power is shared between the founders, shareholders and the management in big institutions. The administration of a business organization is selected through consultation with the shareholders who vote, create laws and illustrate the powers and privileges that will be conferred to different levels in the organization. The shareholder and business owners hire the overall manager whose task is to protect their interests and catapults the business to greater heights. The top level manager (CEO) reports to the board of directors on the status, prospects, plans, and directions intended to be taken by the business to realize its mission and vision. The CEO appoints like-minded professionals who share the vision and mission of the company to ensure that the interests of the shareholders are safeguarded in all the business operations. Corporate governance deals with the smooth flow of power from the top management to the lower tiers of the hierarchy, and the flow of accountability from the bottom upwards. The process above in entrenched and guided by the rules and policies of the company. Governors in the business are bound to be honest in their dealings and be responsible for their decisions by ensuring they are channeled to augment the realization of organizations overall goal. The decisions making process whether profit oriented or shareholder driven is entrenched in ethics. This research essay will examine the parameters of corporate governance and how investors can exploit the latter to exercise control in business entities.

Methods Used By Investors to Control Companies they Invest In Shareholder Activism

The emergence of activist shareholders across the globe has sent Business Corporations into a disarray, the latter buy shares in companies and try to maximize their returns by interfering with the organizations management through replacement of board members and the top hierarchy in the firm. Shareholder activism is the phenomenon where intuitive investors acquire shares in a business organization and use their ownership stakes to impose managers and a board of directors who are consistent with their primary goal of maximizing returns (Uysal & Tsetsura, 2015, pp. 210-219). Shareholder activists have been on the rise in the United States of America and other developed countries where upcoming companies with a high potential for success become the prime targets. Shareholders in most cases have a lot of capital at their disposal which is used to fund campaigns in all business sectors in the economy to catalyze corporate changes consistent with their selfish interests.

As an activist, one can start a campaign that resonates wells with the consumers in a particular firm and base it on the existence of new opportunities, an unexploited window for creating more efficiency in production. Shareholders promise an increase the quality of output once a new face is installed in the top management. Activists can employ aggressive campaigns in the social media and mainstream media to force a company to initiate change desirable by the latter in its hierarchy of the directorate. Activists at time cleverly purchase a sizeable amount of shares in the company and compel the organization to give them powers to call board meetings where the latter can champion their input and pin point areas that desire a change according to the shareholders assessment (Uysal & Tsetsura, 2015, pp. 210-219). When the company counters this move, a shareholder has an option of threatening legal action knowing very well that the phenomena can taint the good will and image of a firm.

The move illustrated above compels the company to submit to the will of the shareholder, and thus their interests of making high returns in the short run are taken care off. Target companies have previously been able to paint such shareholders as selfish individuals whose motive is to get returns in the short-run. However, shareholders can overcome the latter by rebranding themselves as honest people whose goal is to safeguard the consumers interests. Activist shareholders can first engage the other owners of the company in order to ensure they resonate with their ideologies which are well packaged. This way their campaign for change looks genuine and thus stand a chance for negotiation consensus with the top management to initiate the desired change (Uysal & Tsetsura, 2015, pp. 210-219). Activist shareholders take advantage of the fact that companies are under pressure from the public to deliver high returns, thus the latter champion for change in the pretext that the installation of new blood in the management will result in an improved governance which translates into high returns.

The emergence of corporate governance has worked to the advantage of shareholder activism. Globalization ensures that shareholders have access to information that the public cannot access. Shareholders capitalize on the information to campaign for change by branding part of the management as being corrupt and harboring hidden motives. Lastly, shareholders can drum support from organizations such as ShareAction which assist investors to maximize returns from their investment in companies (Uysal & Tsetsura, 2015, pp. 210-219). The following objectives should guide shareholders: initiating change into the organizations management, improvement of the business operations through control of the policy makers in the form and maximizing returns for the shareholders. The advantages of activism is that is can make firms more responsible and keep at bay board directors who might want to enrich themselves by maximizing stock options and in the long run lead to the collapse of business corporations. Shareholder activism has been known to push companies to higher levels of ethics and social responsibility in management practices. On the other hand, shareholder activism can be entrenched on the quest for maximizing returns and dividends in the short run which is detrimental to the future growth of the business.

Transaction Cost Theory

Transaction cost theory propounds about the reason why companies exist, factors that contribute to the expansion of the latter and how firms should minimize the cost of operation and management to maximize returns. The proponents of the theory site that companies strive to compare the cost of doing all business processes internally against the cost of outsourcing resources externally (Goshen & Squire, 2017, pp. 767-829). The companys expansion is based on performing its operations in the cheaper alternative between outsourcing versus internally conducting its activities. Shareholders in many instances provide a cheaper alternative for funds to get capital to expand its territories and operations in comparison to loans from auxiliary financial institutions which charge high interests and require security on the financial assistance extended (Goshen & Squire, 2017, pp. 767-829). The features highlighted in this theory include bounded rationality, risks, opportunism, core company assets and environmental uncertainty. The factors highlighted can in one way or another increase the costs of business operations in the firm which in turn affect the level of returns in the company.

Shareholding is viewed as one factor the transaction costs in the corporate governance perspective. Shareholder activists can take advantage of the opportunities that exist where a firm decides to outsource funds for the purpose of expanding the firm. The limited capacity to predict the future of business situations present shareholders with a window to invest in the company by banking hopes on the enterprise to be successful in future (Goshen & Squire, 2017, pp. 767-829). This way, shareholders can change the management of the firm to ensure their interests of making returns in the future are safeguarded by limiting the directors from following their own selfish interests. This theory propounds that the shareholders interests are to enhance efficiency in the firm's operations and reduction of costs, unlike the agency theory that propounds that the latter champion for their selfish interests. Activist shareholders should base their arguments on this theory to paint themselves with positivity to the public and the board of directors in business corporations.

Incentive Schemes

Incentive schemes are options set up by business organizations to give their employees and shareholders a leeway to buy shares (stocks) at a given price in future. The most common incentives schemes will be discussed in this research essay which will cite their advantages and disadvantages accordingly. When one buys the stock, he stands a chance to make a profit when the price of the stock increase value in the future, on the other hand, if the value of the stock goes down the shareholder stands to make a loss. Incentive schemes give the participants the right to purchase shares of the stock for a particular time frame. The majority of the incentive options go up to a period of 10 years, this is meant to limit employees from going to other firms and thus lead to workforce stability which is attributed to high returns (Rodriguez-Lopez & Diz-Comesana, 2016, pp. 655-677).

Incentive stock options allow the employees to share ownership with their employers and thus, in the long run, assist the company to align its interest with those of their workforce. Some of the draw backs of stock options include the dilution of ownership in business organizations. In the event the market collapse, the shares become worthless leading to a significant loss. There exist several incentive options which include: nonqualified stock options, restricted stock and performance shares. The nonqualified tax option allows the employees and investors to buy the shares at a current fixed price in a fixed time frame (Rodriguez-Lopez & Diz-Comesana, 2016, pp. 655-677). After the elapse of the fixed specified period, any profit from the shares is subjected to taxation at the prevailing rates in the market. The pros of this option are that it is instrumental in aligning the interests of the board of management (executive) and intuitive investors who have shares in the company.

The demerit of the above option is that it is subjected to manipulation of the short term price of the stocks and there is a requirement that the executive must invest in the stocks. The limited (restricted) stock option is a phenomenon where the shares in a company are only made available to the executive members of the organization, and they cannot be sold, shared and transferred to any individual who is not on the executive board of management. When a shareholders term of employment come to an end, his/her shares are forfeited in a similar way the salary of the member is terminated (Curtis & Myers, 2016, pp. 291-347). The merits of this option are that the executive and shareholders interests are matched, and the executive is not compelled to invest in the latter. The major drawbacks of the restricted stock option is the dilution of the earnings per shares for all the shares granted.

The third option is the performance shares, here employees are granted a fixed amount of shares at the beginning of a particular period, and the member (Executive) is debited with the portion of the award if he/she reaches the set targets. This option improves the returns in the family because it is performance oriented, the organization earns from the deductions at the payout of the stock earnings, and there is no requirement for executive members to have a stake...

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