ACC706 Accounting Theory and Issues: Corporate Governance

Introduction

This paper has been constructed with the help of four articles and it is seen that each of the four articles are related to the functioning of an organization. The paper is being prepared by concentrating on the article that is based on the explanation of corporate governance and how it improves the operations and the relationship among the stakeholders associated with the organization. The paper tries to relate with the topics that have been discussed about in the other three articles and tries to draw a similarity and the dissimilarities that are pertinent with the same idea but in different articles.

Identification of the theoretical issues covered in the articles that are associated

The first article that is provided in Week 4 explains about the corporate governance mechanism that is implemented in various organizations in order to improve their operations and activities. It is seen that corporate governance refers to the process with the help of which the board of directors control the operations of a firm and the processes that are in the right place to make sure that the management functions efficiently with integrity. The growth of corporate governance has taken place at a considerable rate due to several failures of companies mainly due to the presence of a weak and ineffective corporate governance structure.

The theoretical issue that has been included in this article refers to the explanation of corporate governance, the particular rules, explanation of several mechanisms with the help of which effective corporate governance can be accomplished and the recommendations that can improve the operations of a firm (Bolton et al., 2015). The article even provides a discussion regarding the role of the audit committees, the directors who are independent and the executive compensation. The article even discusses about the problems that are related to the activities of the shareholders the declaration requirements that are associated with the operations of corporate governance in a firm.

In relation to the issues that are included in the articles that have been discussed earlier, it is seen that there are various issues that are related to the most salience regarding the contents of the other articles that will be discussed later on. One of the articles discusses about the role of executive compensation and tries to discuss about the major issues that are related to executive compensation and what are its benefits and faults. This topic is similar to the executive compensation that is explained in the first article as well. The next article that is in line discusses about the same of executive compensation and tries to explain how the investors undertake a revolt with respect to the rewarding of bonuses by the management (DeYoung et al., 2013). The final article undertakes the explanation regarding the rise in the actions of the shareholders because of inefficient functioning of the companies as they have not been straight with the shareholders and have hidden much information regarding the firm. It is seen that all three articles have a connection with the first article and therefore, in the next segment of the paper a proper discussion about the similarities and the dissimilarities will be discussed.

Comparison of the articles

In this section of the paper, similarities and the differences between the first article and the other three articles will be discussed individually to gain a proper knowledge about the articles.

Article 1(Corporate Governance) vs. Article 2(What is wrong with executive compensation?)

In the first article that talks about corporate governance, it is seen that executive compensation is a big role. It is seen that large organizations paying their top executives are of great attention. It is seen that new declarations requirements have made this topic more flexible and transparent. It is seen that executive compensation if implemented in a proper way can improve the mechanism of corporate governance.

The paper states that a good corporate governance mechanism is possible with the help of the remuneration committee who will look after the process, practices and policies of remuneration. The process of compensating the managers in order to encourage them to work efficiently for the benefit of the stakeholders does not have a standard solution.

The purpose of providing remuneration is to attract and encourage the managers and the executives and it is due to this fact that the performance and other processes regarding remuneration has gained so much attention in the mechanism of corporate governance. The article explains that executive compensation motivates the managers and the executives to work harder and give out their best performance in order to enhance the activities of the firm and improve the benefits of the shareholders (Pepper & Gore2015). On the contrary, it is even seen that better executive compensation can encourage the opportunistic and incompetent managers to take advantage of this process to make false statements and false earnings of the firm they manage. This process hampers the operations of the firm and can have an impact on the profit of the firm in the long run thereby lowering the benefit of the stakeholders.

Article 2 in this respect agrees to the fact that rise in the revenue of the firm should not always lead to the rise in the compensation of the management and the executives. This paper has shown that most of the companies in their annual general meeting has proposed to increase the complementation of the executives but the shareholders has objected this initiative and with the help of the non-binding votes, the decision was overruled. They have even explained that the remuneration packages have become very complex and it is seen that remunerations are not given according to their performance. This process will make the executives reluctant to work as they know that they will be receiving the compensation one way or the other. This reduces the performance and has an impact on the shareholder’s benefits. Therefore, both the articles agree that executive compensation should be given on the basis of the performance and the process should not be complex.

Article 1(Corporate Governance) vs. Article 3(Smith and Nephew Holders)

As discussed earlier, Article 1 talks about the implementation of a good corporate governance mechanism and considers proper executive compensation should be given to the directors and the executives in order to improve the performance of the firms and the managers.

Article 3 on the other hand, contradicts with article 1 and Smith and Nephew Holders oppose the deal of executive pay as they feel that the remuneration committee undertakes complex mechanisms and pay off a huge part of the profit earned in a year to pay off to the directors and the managers. The shareholders have opposed this system as by paying higher compensations to the executives the dividend of the shareholders is getting hampered. It was discovered that the total shareholder’s return was very low with respect to the median of the executives and the directors (Gopalan et al., 2014). An ideal firm should maintain parity among the shareholders and the management and thus the profit should be distributed in an equal manner so that proper corporate governance can be maintained.

Article 1 (Corporate Governance) vs. Article 4(Rise in Shareholder’s Actions)

It is seen that article 1 has stated that putting more stress on the executive compensation can influence the incompetent and the opportunistic managers to use their power and to create false financial statements that can have an impact on the proceedings of the firm.

Article 4 agrees to the statement of Article 1 and has revealed that the executives hide the actual proceeding and the financial performance of the firm from the shareholders. This restricts the shareholders from reaping the real benefit of the firm. The shareholders revolt in order to pressurize the firm to reveal the true statement.

Thus it can be seen that the four articles have certain similarities and differences with respect to the executive compensation.

Comparison of Article 2((What is wrong with executive compensation?) Vs. Article 3 (Smith and Nephew Holders) and Article 4(Rise in Shareholder’s Actions)

The comparison of the three articles reveal that Article 2, Article 3 and Article 4 have a similar features and agree to each other as they feel that executives do hide real proceedings of the firm and therefore, it is seen that the preparation of the a proper financial statement is not possible and the shareholders do not receive the actual interest they deserve. All the three articles are against the high compensation of the executives and it is seen that they are in the idea of creating a structure that would equalise the revenue payment among the shareholders and the management executives.

References

Bolton, P., Mehran, H., & Shapiro, J. (2015). Executive compensation and risk taking. Review of Finance, rfu049.

Gopalan, R., Milbourn, T., Song, F., & Thakor, A. V. (2014). Duration of executive compensation. The Journal of Finance, 69(6), 2777-2817.

DeYoung, R., Peng, E. Y., & Yan, M. (2013). Executive compensation and business policy choices at US commercial banks. Journal of financial and Quantitative Analysis, 48(1), 165-196.

Pepper, A., & Gore, J. (2015). Behavioral agency theory: New foundations for theorizing about executive compensation. Journal of management, 41(4), 1045-1068.