Responsible Corporate Governance - Assignment Example

STRATEGIC MANAGEMENT (2) Number PART TWO ASSESSMENT 6 – AYUSO AND ARGANDONA (2007) RESPONSIBLE CORPORATE GOVERNANCE Summery Corporate governance refers to the structures, procedures, and information utilized in foreseeing and guiding managers of an organization. A successful corporate governance framework has different methods to make sure that there is accountability among the board, top management team, and shareholders, and at the same time, ensures that the stakeholder’s interests are secure. This also helps organizations to have a well defined structure that measures division of power in organizations. This paper looks at how companies should organize the composition of their board in order to have responsible corporate governance from both good governance and a CSR perspective (Argandona, 2007). The article applies the stakeholder approach to corporate governance to analyze the different arguments given by different theoretical approach for linking specific board composition with CSR and financial performance. Corporate social responsibility (CSR) is an issue in all companies. The article also tries to look at the relationship between good corporate governance and CSR. This looks at the stakeholder approach to corporate governance that states that companies to design their strategies while considering the interests of their stakeholders affecting and affected by the activities of the organization. Well defined corporate governance is crucial in supporting the management and the board to work towards the objectives that are in the interest of the organization and its stakeholders that encourage accountability in the organization, and those that improve the overall success of the organization (MALLIN, 2013). Evaluation criteria The evaluation criterion is based on the board composition which is a central issue in corporate guidelines and the code of best practices. 1. Independent Directors This evaluation criterion looks at the proportion of independent directors on the board. From the agency theory perspective, the function of the board is to monitor the actions of the managers on behalf of shareholders. The independence of the board is determined by the degree of the independence of the board to the CEO or organization (FERNANDO, 2009). A board is considered independent if it is composed of non-executive directors who are not associated with the company in terms of being employed, having family links at the organization, giving professional services, or the fiscal association. Directors who have an association with the company are considered less effective in monitoring the activities of the management team because of their dependence on the organization. Corporate social responsibility also recommends the role of independent directors who will provide more information, legitimacy, and resources to the board. Independent directors are also more efficient in indicating the interests of shareholders and in giving the required objectivity and neutrality in board conversations. However, the resource dependence theorists argue that, inside directors are better to evaluate managers effectively because they have more and better information. 2. Female and Minority Directors Good governance advocates for gender and minority representation in the board to be able to give a better reflection of gender and racial diversity of a company’s employees, customers, and others stakeholders. A company that has board members with a diverse background indicates that the company has fairness and equity. According to the agency theory, the more diversity a board is, the more independent it will be which in turn leads to better monitoring of managers. The resource dependence theory also supports the proposition of having diverse board in a company because this will increase the resources that are brought into an organization by individual board members. 3. Stakeholder Directors This criterion states that to have a good corporate governance framework in a company, it is crucial for the board to comprise members who are representatives of non-shareholder stakeholders. This is because; managers and shareholder’s interests are mostly focused to maximization of profits and not towards achieving the interests of the community at large. For this reason, it is important for organizations to look at directors who would protect the community over the shareholders and management (TRICKER, 2012). Applying Evaluation Criteria to current Position of affirm The British Airline is one of the biggest airlines in the world. This company’s corporate governance can be evaluated as follows; a. Independent Directors The organization’s board has non-executive directors who are from different business and other backgrounds. The non-executive directors in this company have the role of scrutinizing the performance of the management team in order to increase the strength and integrity of financial information and to be able to manage risks. They are also involved in succession planning, appointing, and removing senior management. They are also responsible for determining the amount of remuneration to give executive directors. The non-executive directors in this company are encouraged to attend the annual investor day in order to discuss with major shareholders on matters that concern corporate governance (British Airways, 2009/10). They are also encouraged to visit the company and see the operations of the company, and even talk with customers. The advantage that the company enjoys from having independent directors, who are from different professional backgrounds, is that they are able to bring into the company external expertise that will help in the growth of the company. Non-executive directors also help in increasing the independence of the board. This means that the directors also more efficient in indicating the interests of shareholders and give the required objectivity and neutrality in board conversations. The disadvantage of having non-executive directors in this company is that there is a risk of making decisions that are not informed. This is because, as the resource dependence theorists argue, inside directors or executive directors are better positioned to make decisions about the company and are able to evaluate managers more effectively as they have more and better information. b. Female and Minority Directors The board is comprised of people who are from different background; this means that even though it is not clearly stated in the company’s governance statement, the company also covers female and minority directors. The advantage of this is that the board is able to consider the gender and racial diversity of a company’s employees, customers, and others stakeholders when making decisions. This also improves the image of the company because this indicates that the company has fairness and equity and indicates that the company has better monitoring of managers. The disadvantage having female and minority director is that the company can overlook the qualifications of the directors so as to be able to meet the requirements of having a female and minority directors. This can end up affecting the quality of decisions made by the board leading to negative performance in the company. c. Stakeholder Directors Since the year 2000, British Airways has chosen its directors through annual voting, by way of polling. This aimed at making sure that the views of shareholders are taken into consideration. This means that it is possible for shareholders to be voted in the board. However, the company states under its corporate governance statement, that if directors feel that there is possible conflict of interest, they need to inform the matter to the directors in advance to get authorization. The advantage of this is that the needs of shareholders are taken care of as a result of having a representative in the board. However, this goes against good governance because managers and shareholder’s interests are mostly focused to maximization of profits and not towards achieving the interests of the community at large. Applying the Evaluation Criteria to future strategies The future strategies of the company include; cost leadership, differentiation, and focus. These strategies aim at performing better than competitors in the industry. With many years in the airline industries, it is clear that the company needs plans in order to continue being successful in the market. Due to increase in competition from companies that are low cost, one of the strategies applied by this company is product differentiation. This company gives different ticket classes that allow the company to attract customers from every social class. One main strategy is in evolving the culture of British Airways by improving the competences and capabilities of employees in the company. This aims at increasing the competitive advantage in the way operations of the company are being operated. I. Independent Directors To maintain the organization’s competitive advantage, there is need to maintain the composition of the board. Independent directors make sure that strategies are made for the benefit of stakeholders and not to only benefit managers. The advantage of this is that the company is able to enjoy having independent directors, who are from different professional backgrounds who bring into the company external expertise that will help in the growth of the company. The disadvantage of having non-executive directors in this company is that there is a risk of making decisions on future strategies that are not informed. II. Female and Minority Directors It is expected that the company’s future strategy is to maintain the composition of the board to comprised of people who are from different background to also covers female and minority directors. The advantage of this is that the board is able to consider the gender and racial diversity of a company’s employees, customers, and others stakeholders when making decisions on ways that the company can be able to perform better than the competitors. The disadvantage is that the company can overlook the qualifications of the directors in order to fulfill the requirements of having a female and minority directors III. Stakeholder Directors The company’s future strategy on continuing beings successful in the market through low costs and differentiation considers the stakeholders. It can be assumed that the company aims at maintaining strategies to avoid conflict of interest in the board. The advantage of this is that the stakeholders will be taken care of and their needs will catered for. On the other hand, this strategy is that the company needs to put in place measures that will make sure that shareholders are not in the board who will aim at maximization of profits and not towards achieving the interests of the community at large. Conclusion From this analysis; it is clear that the corporate governance framework is crucial to the success of any organization. Companies have a duty to go beyond the interests of managers and shareholders, and also look at the interests of stakeholders. Companies need to make sure that the composition of their board ensures that there is responsible corporate governance (COLLEY, 2003). This is by having independent directors, making sure that the board comprises of females and minority, and that there are no shareholder directors. British Airways has been able to apply good corporate governance by having non-executive directors and by making sure that directors are elected fairly through polls. However, future efforts need to be put in place in order to reduce the risk of conflict of interest resulting from having shareholders in the board who can be elected. Bibliography Argandona, A. &. Ayuso, S, (2007). Responsible Corporate Governance: Towards a Stakeholder Board of Directors?. Responsible Corporate Governance, pp. 1-17. British Airways, (2009/10). Annual Report and Accounts: Corporate Governance Statement, s.l.: British Airways. COLLEY, J. L. (2003). Corporate governance. New York, McGraw-Hill. FERNANDO, A. C. (2009). Corporate governance: principles, policies and practices. New Delhi, Pearson Education. MALLIN, C. A. (2013). Corporate governance. Oxford, Oxford University Press. TRICKER, R. I. (2012). Corporate governance: principles, policies and practices. Oxford, Oxford University Press. Read More