1.
Corporate Governance refers to the mechanism or system in which enterprises are directed and controlled, especially in which the interests of stakeholders are balanced. It is also known as the relationship between various stakeholders of business such as shareholders, management, the board of directors, etc. (Tricker & Tricker, 2012). Corporate governance system varies from country to country due to the differences in the economic and political system. It can be observed in a way that American corporate governance is entirely different from that is followed in Japan and Germany.
In America, corporate governance system is controlled and directed by Stock Exchange Commission (SEC) who is entitled to create a balance between various stakeholders of public limited companies. However, Japanese and German corporate governance also include commercial banks that play an important role in maintaining this balance. Banks influence and monitor the business affairs of corporate borrowings that is they take part in the overall corporate governance mechanism. It is criticized that banks should be involved in controlling corporate borrowing as financial institutions can do this task efficiently and it will help in competing with European and Japanese companies. The main reason for not including them is that American banks are limited in size and cannot perform the same task as German and Japanese main banks. However, the involvement is possible by making significant changes in the American Banking Law so that they can provide expected outcomes (Brigham & Ehrhardt, 2016).
In my Opinion Sarbanes-Oxley Act has reformed corporate governance in the United States by introducing criminal punishment for any fraud committed by key stakeholders of the business. The reform represents that strict action will be taken for any misconduct by the management or the board of directors of the company. Also, the Chief Executive Officer (CEO) of a public limited company is entitled to sign the company’s tax return according to the relevant section of the law. The law has prohibited misconducts that were ignored previously, so I believe that this is the viable step to improve corporate governance in the country.
2.
Corporate restructuring takes when a firm splits up into small firms or when it decides to merge with another firm to change its financial position. Corporate structuring may include changing of infrastructure, merger or amalgamation, or restructuring of assets. There are many motives for the corporate restricting of firms while common motives are discussed below.
Limiting Competition
Competition is the core reason for acquisition and merger between two large firms by creating a monopoly. It can be observed in this way that if two giants of the market operating in free or mixed economy amalgamate with each other then they can set pricing and product strategy to earn profits.
Access to big market
Merger and acquisition are done to increase the size of the market as it is difficult for that firm to sell its product in another market that requires time. For example, if a company is selling food product in the US market then it intends to sell the same product in the UK market, it requires creating partnership or any other type of agreement with local food provider to hit that market rapidly.
Large size firms believe in expansion as their primary goal is to increase the profitability of the company to satisfy its stakeholders. It can be done by acquiring and taking the ownerships of small firms operating in the market. It will help in increasing sales of the company. For example, if a company is a leader in the industry, it can acquire small company that may not earn high profits, but the amalgamation will increase the number of customers due to the reputation of acquiring company.
If a company intends to grow its business in other market or country, it requires a long time and high start-up costs to start a business in that country. It is the best option to acquire existing firm in that country and boost the sales without wasting time and resources.
3.
Mezzanine financing is the type of debt that gives right of ownership to the lender in case of non-payment of the full amount of loan within an agreed time. Banks and financial institutions provide this type of financing for the completion of the specific task of the company (Nijs, 2013). Its main characteristics are mentioned below.
The amount of return on this financing is usually high that is 20 to 30 percent.
The amount can be borrowed in less time as compared to other modes of financing.
It is made for the expansion projects of public limited companies.
The debt will change into equity if the amount is not repaid in full within agreed time.
Banks and other financial institutions attract towards it due to low risky investment.
Mezzanine financing is advantageous when a company has an expansion plan to move to other market or project. It will help in gaining competitive advantage by borrowing from banks in less time. However, the option should be exercised by the company if it has effective expansion plan and the estimated outcomes of the project can be measured by using financial techniques such as payback period. The type of financing is beneficial for the construction company that is engaged in building huge projects and requires finance for the completion of such projects. They have effective project plans along with the estimations of desired returns on them so they can utilize this option to finance their high investment projects.
4.
Financial distress is a critical position that arises when the promises made to the creditors are broken or difficult to fulfill within agreed time. At this stage, the company may move to bankruptcy on account of debt burden
Causes of Financial Distress
The main causes of financial distress are listed below.
The accounting practices are insufficient that lacks in using advanced techniques to record business transactions.
Budgeting on unrealistic sales may lead to a financial struggle for the company.
Inefficiency in managing debts such delay in repayment of loan result in increasing interests charges.
Credit sales for three to four months will not allow paying expenses in a current month associated with those sales.
If total costs are higher than total sales and the company has ignored the fact.
Cures of Financial Distress
Following are the cures that should be adopted to overcome financial distress.
Raise the prices of unprofitable products by assessing the performance of each product through the use of advanced technological software.
Stop distributing non-demanded products to customers as they involve high costs.
Develop an effective strategic plan that also considers risks so that effective decision can be made.
Target new customers of the existing products to gain advantage of economies to scale.
Assess the marketing techniques and tools that may not prove to be effective in current scenario.
References
Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Mason : Cengage Learning.
Garman, E. T., & Forgue, R. (2014). Personal Finance. Mason: Cengage Learning.
Nijs, L. (2013). Mezzanine Financing: Tools, Applications and Total Performance. Wiley: Hoboken.
Tricker, B., & Tricker, R. I. (2012). Corporate Governance: Principles, Policies and Practices. Oxford: Oxford University Press.
