Corporate Governance and Financial Regulation - Case Study Example

Corporate Governance and Financial Regulation Section A a) Bank of England Central banks are envisaged with the responsibility of maintaining economic stability. This involves monitoring the level of debt and liquidity floating in the markets. Central banks are known as the lender of last resort as they provide banks and other financial institutions with the necessary support when they are in financial distress. Price stability and controlling inflation rates are also some of the important functions performed by the Central Bank. The central banks act as the regulatory authority for the entire monetary system by implementing different policies relating to the same. The Bank of England, being the central bank of UK also aims at fulfilling such similar roles. The primary function of the Bank of England is to ensure that there is adequate stability in the financial markets and in the supply of money in the economy. This is done through the implementation of different regulatory policies. The important functions performed by the Bank of England are discussed below (Singh, 2012). Monetary stability Stability in prices and adequate supply of money are the two important aspects considered in respect of monetary steadiness. The stability in prices is maintained by the bank through adjusting the base rates of interest. The rate of interest that needs to exist in the financial markets is determined by the monetary policy committee of the government. The rates of interest are set in accordance with the government’s inflation related targets. Similarly, adequate money supply is maintained in the economy by the bank through monitoring the volume of credit. Credit volume can be regulated through the increase or decrease of minimum rate of reserves that commercial banks are required to maintain with the government. By adjusting the bank rate it is possible for the central bank to influence the rate of interest that is charged by the commercial banks from the common people (Mahadeva and Sterne, 2000). Financial stability In order to maintain financial stability it is important to protect the economy from different types of threats. Such threats can get detected through the careful scrutiny of the financial markets and the operations of the financial institutions. It also involves analyzing the financial stability of other nations which posses England’s investments. A downfall in another nation’s economy can have a ripple effect upon England due to shared investments and trade related aspects. As a lender of last resort, the Bank of England provides financial help to other financial institutions when they are facing a crisis situation. In such circumstances, the bank provides necessary financial aid and also suitable management strategies for operations so that financial institutions are able to thrive and come out of the emergency situation (Robert and Peel, 2003). The Bank of England also acts with other government institutions and the central banks of other nations for formulating different policies for the better management of the economy. The bank is also the banker to the government and maintains the country’s foreign exchange and gold reserves. Bank of England also has the monopoly power of issuing currency notes (King, 2001). 1) b) FCA behaviour in respect of gold price fixing In UK, regulatory authorities are involving themselves towards understanding the mechanism by which the prices of gold are set in the market. The FCA (Financial Conduct Authority) of UK is mainly responsible for conducting this scrutiny. Investigators from the institution are visiting all the five member banks including GDI (Gold Dust Industries) who are involved in London fixing of gold prices and have supposedly manipulated the benchmark rates. FCA’s visit to these banks themselves is indicative of the aspect that the government is keeping a watchful eye in this matter. The FCA themselves are trying to get deeper knowledge regarding the mechanism of gold price fixing. It is important to know the system before suggesting changes and reforming the same. Although the FCA is not involved in regulating the gold market, it is responsible for the derivative market operation which includes the spot prices that get fixed by the banks. Economists have pointed out that the FCA’s regulation in this aspect is quite late. The system that is followed by the banks to fix prices is considered to be outdated and therefore highly susceptible towards getting manipulated. Regulatory authorities have taken very less efforts towards understanding the manner in which the commodities market operate. The investigation had revealed that the unusual patterns of trading in the afternoon, on a daily basis are a matter that requires deeper inquiry. It has been pointed out that lack of knowledge of the regulatory authorities in this matter and insufficient cooperation on behalf of the banks has been the main difficulties in this matter. However the authorities are considering implementing modernized methods of price fixing so as to avoid manipulation. The investigation has caused the decrease in the relevance of London fixing. 2) GDI’s corporate governance failings The corporate governance failings of GDI gets revealed largely out of the different price fixing scandals that the bank was involved in. The scandals were largely associated with the manipulation of prices of commodities and their associated financial products that are trade in the derivatives market. GDI has been accused of taking advantage of the regulations and construct supply in order to drive up prices of aluminium. In the similar manner the company along with four other banks was stated to manipulate the benchmark prices of gold. GDI was also involved in the manipulation of the interbank rates by lying about their real borrowing cost. One of GDI’s subsidiary firms CP Futures was involved in a foreign exchange scandal that led to a huge loss arising out of unauthorized betting on foreign exchange derivative contracts. Also the company’s reputation was at stake in relation with the development of the Inner City Airport which is said to have violated environmental regulations. A company’s success largely depends upon the regulations, values and beliefs that the corporate authorities sets up. The organization is required to adhere to such values in its operations. When an organization gets involved in numerous scandals, it damages its goodwill that in turn affects the value of the organization as whole. Therefore it is necessary for organizations such as GDI to ensure that they do not adhere to malpractices. For this authorities must pay close attention to the different strategic decision and planning’s of the firm. GDI’s board of directors comprise of 12 directors, of which 9 are independent. The team of directors of the company is stated to be highly efficient but they lack monitoring skills and long term planning because of which the company has lost much of its reputation (Andres and Vallelado, 2008). It is necessary for the company to consider ethical aspects which has been highly overlooked in their operations. A business, irrespective of the type of work it is involved into, should focus upon benefiting the society at large. It must engage in delivering honest services so as to maintain the trust of consumers and business partners. The company’s directorial board is stated to deliver high standard of leadership due to the existence of independent leaders. However the lack of good performance of the company reveals that the company has failed to exercise leadership effectively within the organization. The board of directors engages outside consultants from outside for providing valuable advice related to management. This indicates the weak capabilities of the organizations administrators in managing the organization themselves (Andres and Vallelado, 2008). Section B 3) a) Role of GDI’s board of directors The scandals in which GDI has been involved of late inevitably prove the fact that the company’s management system is poor in terms of risk and internal control. The firm has failed to detect the risk associated with manipulation of prices of commodities in which it trades. The fact that such manipulations can get detected sooner or later and can thereby jeopardize the reputation of the company was completely overlooked. Similarly the internal control sytems of the organization was also faulty and weak due to which the strategic decisions taken by the firm did not help the company much to advance ahead. Risk management would include analyzing the future market conditions and accordingly developing strategies for growth, expansion and investing in different business strategies. It is also important for the organization to understand theta some of the techniques followed by the company for fixing prices are outdated and are highly subject towards getting manipulated. As a result it is important to incorporate operating techniques that are advanced and support the needs of the organization positively. The manner, in which the organization functions, also reveals the fact that it lacks insight upon different matters. Decisions are not strategically being taken and there is insufficiency of futuristic thinking. It is important for a firm to strategically determine the consequence of its actions upon the future environment. GDI’s management team lacks such foresighted thinking. The company also fails in respect of adhering to ethical considerations when it comes to taking business decisions (Andres and Vallelado, 2008). 3) b) Specific and generic risk assessment Managing specific risks should always be given higher priority in comparison with managing generic risks .Specific risk gathering involves gathering structured information regarding the subject matter so as to take decision relating to different types of actions. On the other hand generic risk assessment involves analyzing those type of risks that are associated with the subject matter and a highly likely to arise. Generic risk are easy to determine and as they are directly related with the subject matter. Generic risks are essentially the operational hazards that are associated with an activity. Measures that are taken against such generic risks are essentially protective and preventive in nature. A company should lay greater emphasis upon developing its specific risk management capabilities that is seen to have greater impact upon organizational success (Koller, 2005). Specific risk assessment involves three stages of analysis. In the first stage the actual problems that are likely to arise in the future are determined. Specific risks are not easily identifiable and require careful and in depth analysis of eth situation or the subject. The consequence of an action from different angles is required to be analyzed. This can be done through surveys and simulation studies. The second stage is to identify the duration and the extent of the impact of the risk if it actually takes place. In the third stage, the potential results arising out of the risks are analyzed (Koller, 2005). The third stage determines the type of precautionary measures that are required to be taken by the organization so as to minimize the impact of the risk. Specific risk analysis helps to identify those types of risks that are common and arise only under specific conditions. It therefore involves predicting the future economic scenario. Generic risks are easily identifiable and it is easier to take precautionary measures upon the same. Generic risks can easily be associated with an activity due to its high frequency of occurrence and direct visible impact. Specific risk assessment helps an organization to analyze those situations that are less likely to arise. When sufficient measures are taken against such specific risks, it helps a firm to remain highly protected. GDI should lay greater emphasis upon analyzing specific risks. This may help the company to estimate the risks involving in fixing a price of a commodity at a particular level. The analysis needs to be done from different viewpoints. Specific risk analysis is a more advance method to study different scenarios of the future and how an organization should equip itself to meet them (Koller, 2005). 4) Compensation System GDI and its subsidiary CPF follow a performance based payment structure. It is observed that the company pays a high level of bonus to its employees. This may causes the employees to exhibit a lower level of dedication towards their work after reaching a particular level. Once their target remuneration is achieved the level of dedication towards work declines. Therefore it is essential for the company to raise the levels of expected employee performance. This would drive employees to work harder in order to achieve the benefits. GDI therefore requires remodelling its payment structure. Employees should be remunerated as per their performance. If employees continue to receive higher pay for work that has not been done properly, they may take their responsibilities for granted. The remuneration structure of the company can be considered as one of the reasons behind its poor performance and lack of efficiency. The remuneration structure requires matching aptly with the performance of the employees and managers. It should also motivate them deliver a higher level of performance (Jordan and Lenschow, 2008). Section C 5) Stakeholders and Corporate social responsibility The primary stakeholders of an investment banking and finance company such as GDI are: Employees- Employees are responsible for the working efficiency of a firm. Organizational success lies in the aspect that every employee works dedicatedly towards achievement of their individual as well as organizational goals. Therefore firms must pay special attention towards employee motivation and satisfaction. The growth of the employees is also related with the growth of the organization as it helps them to receive timely and adequate levels of remuneration. Shareholders- Shareholders are particularly interested in an organizations success as their investments are at stake. Also when organizations perform better and generate higher revenues, it increases the shareholders wealth. Shareholders who are essentially considered to be the owners of an organization show high interest in monitoring the performance of the firm on an annual basis (La Porta, Lopez-de-Silanes, Shleifer and Vishny, 2000). Customers- Customers help an organization to earn sufficient revenues. Therefore it is important for an organization to give significant importance to the aspect of customer satisfaction. For this it is essential for the company to accurately measure employee needs and their expectations from the company’s services and products. Suppliers- In case of GDI, suppliers are the providers of finance. The continuity of operations of the firm and liquidity of the firm are provided by such suppliers and are essentially important for the growth of the firm. Industry associations- These include the company’s business partners and other institutions who are related with the company’s operations. Government- The different policies and measures that are taken by the government, effect the operations of the company. For instance if the government raises tax rates, it may render the firm with lower excess reserves. Society- A Company is considered to be a part of the society and functions to deliver valuable services and products having utility to the society as a whole. It is important that every firm operates in a manner that benefits the society and accounts for its growth and development (Jordan and Lenschow, 2008). Corporate social responsibility Corporate Social Responsibility (CSR) refers to the different duties that a firm is expected to deliver towards its different interest groups. CSR activities include ensuring that employees are treated well in the organization and their rights are protected. It also includes providing timely returns on investments to shareholders and suppliers of credit. CSR additionally also includes the responsibilities that an organization has towards the environment and preventing the same from being degraded. 6) a) Environmental Audit The environmental audit that was conducted in respect of the fourth runaway that is to be build at Inner City Airport, reveals that the impact on the environment due to such an expansion is not very adverse as feared by many. The fourth runway is to be constructed in order to ease the pressure upon the other three runways in respect of air traffic pressure. Therefore the fourth runway will be used only during peak hours and during the holiday seasons when the number of flights in and out of the city are high. The new runway will be constructed in a manner that it passes from above a stretch of woodland, avoiding residential areas. Hence the noise pollution that nearby residents will endure will be significantly low. The number of flights going in and out of the city will not be increased due to the new runway. Its main purpose is to manage the air traffic in a better way and not increasing it. Furthermore the land that would be used for the purpose of constructing the runway is biologically less fertile. Hence it cannot be suitably used for agricultural purposes. So wastage of any productive land due to the project is not an issue. 6) b) Benefits of environmental audit for GDI Through conducting an environmental audit, GDI can convince the campaigners and the society at large that the steps taken by the company in respect of expansion is carefully thought of so that there is no negative impact upon the environment. This can help to convince the campaigners to sell their land. The environmental audit report will be distributed to the campaigners and will also be published in the form of a journal and distributed to the public at large so that greater awareness can be generated in the minds of the society in respect of the measures that are being taken by the company to minimize he negative impacts upon the environment. Through such an environmental audit, it is possible for the firm to analyze environmental aspects more minutely and be able to critically inspect even those elements that perhaps might be overlooked by the firm (Stafford, 2006). c) Environmental footprint Environmental footprint refers to the influence of environmental activities upon the environment. It is measured in respect of the environment that is required for producing goods and servicing. Adequate care will be taken in respect of the Environmental impact of the Inner City Airports new runway project. The impact will be kept at a minimum as desired by the campaigners and the society at large (Hammond, 2006). Environmental footprint helps to analyze the amount of land, atmosphere and sea that is being used to support the development of the human society, which otherwise could be utilized to preserve the biodiversity. Human activities have a significant impact upon the environment and cause it loose its productive capacity. It is therefore important for the firm to understand the impact of their activities upon the environment. GDI should therefore closely study the impact of its new business project upon the environment and accordingly take measures to reduce negative environmental impact. Reference list Andres, P. D. and Vallelado, E., 2008. Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance, 32(12), pp. 2570-2580. Hammond, G. P., 2006. ‘People, planet and prosperity’: The determinants of humanitys environmental footprint. Natural Resources Forum, 30(1), pp. 27-36. Jordan, A. and Lenschow, A., 2008. Innovation in environmental policy: integrating the environment for sustainability. Northampton: Edward Elgar Publishing. King, M., 2001. No money, no inflation the role of money in the economy. Economie internationale, 1(4), pp. 111-131. Koller, G., 2005. Risk assessment and decision making in business and industry: A practical guide. Florida: CRC Press. La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R., 2000. Investor protection and corporate governance. Journal of financial economics, 58(1), pp. 3-27. Mahadeva, L. and Sterne, G., 2000. Monetary policy frameworks in a global context. London: Psychology Press. Robert, N. A. and Peel, D. A., 2003. Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences. The Economic Journal, 113(489), pp. 657-665. Singh, D., 2012. Banking regulation of UK and US financial markets. Surrey: Ashgate Publishing Ltd. Stafford, S. L., 2006. State adoption of environmental audit initiatives. Contemporary Economic Policy, 24(1), pp. 172-187. Read More