The President,
United States of America.
Introduction
The concept of corporate ethics is widely accepted today. In order to stabilize the growth and development of the overall U.S economy, industries regardless of their nature or size must be instructed to follow certain ethical guidelines. In the current corporate environment, it is advisable for the U.S government to introduce three key changes to its corporate governance framework. First, there should be a single body or statutory regime to deal with corporate governance affairs in the country. Second, corporate ethics is essential to distinguish the roles of chairman and chief executive officer in a corporation. Third, it should be mandatory for listed U.S companies to establish audit committee, remuneration committee, and nomination committee to enhance the effectiveness of the Board.
Importance of the policy
Currently, there is no single authority or statutory regime to deal with corporate governance affairs in the United States. Obviously, corporate governance is a function of state law, and hence the U.S Federal government is required to supervise corporate operations in the country. Many other countries worldwide have already established a separate legal authority to deal with the governance of corporations in their territory. It is identified that establishment of a single authority for dealing with corporate operations is crucial for the United States to enhance transparency and effectiveness of corporate governance. Reports indicate that the government often fails to identify corporate offenders and the situation often poses serious challenges to the concept of sustainable development. For instance, the U.S government fails to identify and respond to environmentally harmful activities by corporations, such as increased release of toxic gases into atmosphere; unscientific e-waste disposal; and excess utilization of natural reserves timely. In addition, there were instances when the government failed to respond to thoughtless business practices proactively, and this resulted in corporate failures later. Undoubtedly, the establishment of a single statutory regime for corporate governance can assist the U.S government to improve those inefficiencies and exercise better control over U.S corporate sector.
In addition, separating the role of chairman and chief executive officer (CEO) is also vital for U.S companies for several reasons. When a single person assumes the roles of both the chairman and CEO, it becomes a leading cause of conflict in the Board during a move to increase executive pay. Undoubtedly, increase in executive pay has been a troublesome task for the Board due to conflict of interests between executives and shareholders. The major reason for this conflict is that this increase in pay comes at the expense of shareholder profits, and in most circumstances, shareholders would be reluctant to support an increase in executive compensation. It is clear that the power to increase executive pay is vested in the hands of Board of Directors. When the CEO is also the chairman of the Board, he/she will be voting to entertain his/her own financial interests thus leading to conflict of interests (Hengartner, 2007, p.173). Although the Board is legally required to include some independent members, the chairman can greatly influence the decisions of the Board. In addition, one of the important roles of the Board is to monitor the operations of the company and to ensure that the firm’s operations are in compliance with existing legal policies and standards and meet the interests of shareholders. It is obvious that CEO is responsible for driving the operations of the company. When CEO acts as Chairman too, the same person will be assigned with the task of monitoring his/her own activities, increasing the likelihood of abuse of the position. Hence, a Board led by an independent chairman is crucial to identify and respond to areas where the company fails to protect shareholder values.
Similarly, appointment of separate committees such as audit committee, remuneration committee, and nominations committee is important for the company to reduce the burden of the board and to enhance the efficiency of its operations. When these functions of the Board are divided among various committees, the Board can concentrate more effectively on the overall management of the organization. In large corporations, the roles of CEO and Chairman will be extremely demanding and hence they alone may not be able to deliver expected level of efficiency in Board operations. Here, the service of independent committees can assist CEO and Chairman to carry out their duties and responsibilities effectively and enhance shareholder values constantly. When different committees are comprised of people having expertise and long years of work experience in the particular area, the situation can help these committees perform their tasks with utmost efficiency and effectiveness (Awan & Akhtar, 2014). In addition, this change in Board structure is important to avoid unnecessary managerial conflicts and to ensure smooth flow of the Board’s operations.
Critical Comparison
Currently, the United States corporate law covers corporate governance policies and practices in the U.S and a distinct corporate code is maintained by every state and territory (International Finance Corporation, 2012). Legislative policies such as the Securities Act of 1933, Securities and Exchange Act of 1934, Sarbanes-Oxley Act of 2002, and Dodd-Frank Act of 2010 covers rules and regulations concerning corporate governance in United States. Currently, the responsibility of monitoring the corporate governance of companies is vested with states and territories. With the establishment of a single legal body to deal with corporate governance, the U.S government can ensure that all companies are treated equally and an unfair advantage is not rendered to companies operating in a particular state. In addition, this policy change can aid the national government to effectively coordinate its corporate governance monitoring activities across the country. Likewise, currently it is up to companies to decide whether or not to separate the roles of Chairman and CEO (Rosenblum, et al, 2014). It is identified that over half of the U.S companies have not separated the roles of Chairman and CEO. To illustrate, n the S&P 500 Index (US), 48 per cent of companies have split the chair/CEO role” (Connolly, 2016). Although there has been a momentum in American corporations towards the separation of CEO and Chairman roles, it is still not significant when compared to the splitting momentum in other countries like UK. As discussed in the previous section, splitting of CEO and Chairman roles assist a company in several ways. In contrast to the current scenario, strategic managerial decision such as executive pay can be taken indisputably if the roles of Chairman and CEO are split. In addition, it can assist the Board to ensure higher level organizational performance. In contrast to the combined role situation, splitting of roles is beneficial to prevent Chairman/CEOfrom taking unfair advantages of the combined position. Similarly, establishment of different committees such as auditing committee, remuneration committee, and nominations committee is not mandatory under the current U.S corporate law. When this provision becomes mandatory, the situation would help the Board and management to perform their roles and responsibilities more effectively in a time-oriented manner. In addition, this policy change can help the management to take decisions faster and respond to potential opportunities/threats emerging in the market environment.
How to Address Corporate Malfeasance?
The term corporate malfeasance gained significant attention during the last decade that witnessed a series of major corporate scandals. In a broad sense, the term corporate malfeasance can be defined as major and minor crimes committed by executives of a corporation. An attempt to mislead investor by issuing false financial reports or corporate espionage comes under the scope of corporate malfeasance. Today, the scope of this term is broadened so that activities such as polluting the environment knowingly or discriminating employees in the workplace on the ground of race, gender, or age is also called corporate malfeasance. Enron scandal, the biggest corporate scandal in U.S history, occurred as a result of corporate malfeasance. Identifying the dreadfulness of this issue, corporate policy makers are considering several measures to fight the threat of corporate malfeasance. Although regulatory agencies are always there to fight corporate malfeasance, it would be impractical for them to identify and respond to every instance of unlawful corporate activities. In this circumstance, employees can play a significant role in assisting regulatory agencies to prevent corporate malfeasance by reporting instances of unlawful corporate practices (Dyck, Morse, & Zingales, 2010). Unfortunately, majority of the employees are reluctant to do so as they fear retaliatory actions such as suspension, demotion, or harassment from supervisors/managers. The U.S government has formed Whistleblower Protection statute to protect employees, who have reported unlawful executive practices to or cooperated with an investigation agency, from management retaliation. However, in many circumstances, the Whistleblower Protection statute fails to protect the interests of whistleblowers appropriately. Here, the U.S Federal government is recommended to take appropriate measures to ensure that whistleblowers are properly protected and compensated. The government should try specifically to enforce the statutory provision that prevailing employees “shall be entitled to all relief necessary to make the employee whole” (cited in Cross and Miller, 2014, p.700). This would encourage employees to raise their voice against unlawful managerial practices and to ensure that no unlawful corporate activities go unnoticed. Since employees are in direct touch with daily activities of an organization, they can provide valuable information to the SEC regarding fraud committed by executives/managers.
Similarly, interim audit can be a potential strategy to prevent corporate malfeasance to a great extent. The auditing of books of accounts periodically can help the Board to make sure that everything is on track or to detect issues if any. This strategy is really helpful to prevent executives from hiding their fraudulent or unlawful activities for a long period of time. In addition, the practice of interim audit may put a moral check on employees who tend to engage in unlawful activities. Though interim audit may impose additional financial burden on the organization, the long-term benefits of this practice can outweigh its costs. Therefore, it is advisable for the U.S Federal government to make it mandatory for listed companies to perform interim audit. A government-appointed auditor should be there in the audit team so as to enhance the transparency and reliability of the audit process. Likewise, it is advisable for the Board to perform background checks including employment, credit, licensing, and criminal history while hiring candidates to key managerial positions. In addition, it would be a good strategy to limit executives’ access to data, money, and important documents to a sensible extent. A single executive should be never allowed to deal with a key area of business that involves huge money transactions. Thoughtful segregation of duties appears to be a potential strategy to reduce a single employee’s control over a specific area or duty. Finally, development of an effective internal control system meeting all established standards can help organizations to prevent the issue of corporate malfeasance to a large extent.
Recommendations
In the current day business environment, improving corporate governance is important for organizations to sustain their business growth and to remain in the market for a long period. In order to improve corporate governance, firms should first recognize the fact that corporate governance is not just about complying with legislation and codes of practice but it involves constantly improving the performance of the business through strategy formulation and policy making. In addition, there should be a clear distinction between the functions of the Board and management. The Board’s role in strategy formulation and implementation should be clearly defined as today Boards have a significant role to play in setting the strategic direction of the organization. Considering the nature of the business, Boards should determine what role they must play in strategy formulation and decision making. Most importantly, there must be a mutual understanding of these roles between the Board and the management. The Board should be vigilant in monitoring the organizational performance constantly and ensuring that the firm’s operations are in strict compliance with existing legal policies. This practice can assist the Board to make sure that corporate decision making does not contrast with organizational objectives and shareholder expectations. For this, it is advisable for the Board to identify the firm’s key performance drivers and to set appropriate measures for determining organizational success. There should be a healthy and effective relationship between the Board and CEO as this relationship is crucial to promote corporate governance. In addition, the Board-CEO relationship is the link between the Board’s task of setting the organization’s strategic direction and the management’s tasks of meeting the corporate objectives. There should be an understanding among directors that risk management and governance is a key responsibility of the Board. The Board is strongly recommended to establish a sound risk forecasting system and internal control mechanism to respond proactively to potential risk elements. It is crucial to note that an effective risk management system can better support decision making as it provides deep insights into the cost-benefit relationship concerning a specific business situation. Another way to improve corporate governance is to ensure that proper information is supplied to directors timely and constantly because better information can enhance the soundness of decisions. Director development programs, site visits, briefings, and presentations can assist directors to meet their information needs in an effective manner. Appointment of independent professional advisors shall be a good strategy for directors to find solutions to troublesome business scenarios. Likewise, the Board should focus specifically on designing and maintaining an effective governance infrastructure as this practice can better assist the Board to guide organizational behavior efficiently in various organizational scenarios. In order to make sure that organizational responsibilities are effectively distributed between the Board and the management, it is advisable for the Board to formulate sensible policies with regards to delegations. Inevitably, enhanced communication between the Board and the management is required to keep directors and managerial personnel mutually informed of various organizational matters. As research evidences point out, the culture and trust created by the chairperson have a more crucial role in improving corporate governance than board structure and formal governance regulations have. Therefore, appointment of a competent chairperson should be a key task of the Board. As the leader of the Board, the chairperson must have improved decision making skills and other managerial abilities. Finally, the Board should seek ways to maintain a balance between directors with managerial knowledge and experience and directors with specialist knowledge and expertise. Such a skills-based board is very important to frame sound strategic policies and guide organizational activities effectively.
References
Awan, A. G & Akhtar, M. S. (2014). Problems of corporate governance in USA. European Journal of Business and Innovation Research,2 (2), 55-72.
Connolly, P. Q. (Sept 26, 2016). Splitting the CEO and chairman roles. Ethical Boardroom. Retrieved from http://ethicalboardroom.com/leadership/board-composition/splitting-the-ceo-and-chairman-roles/
Cross, F. B & Miller, R. L. (2014). The Legal Environment of Business: Text and Cases. US: Cengage Learning.
Dyck, A., Morse, A & Zingales, L. (2010). Who Blows the Whistle on Corporate Fraud? The Journal of Finance, LXV (6), 2213-2253.
Hengartner, L. (2007). Explaining Executive Pay: The roles of managerial power and complexity. US: Springer Science & Business Media.
International Finance Corporation. (2012). Who’s Running the Company? A guide to reporting on corporate governance. Retrieved from http://www.icfj.org/sites/default/files/Whos%20Running%20the%20Company%20Rev%20-%20Lo%20Res.pdf
Rosenblum, S. A., et al. (eds.). (2014). NYSE: Corporate Governance Guide. NYSE. Retrieved from https://www.nyse.com/publicdocs/nyse/listing/NYSE_Corporate_Governance_Guide.pdf
