Question

"Corporate Governance" Please respond to the following:

Analyze the three internal governance mechanisms (ownership concentration, boards of directors, and executive compensation) and recommend a possible fourth mechanism that would help align the interests of managerial agents with those of the firm’s owners. Provide specific examples to support your response.

Use the Internet to research basic approaches to corporate governance outside of the U.S. (excluding Germany, Japan, and China), determine how U.S.-based corporations could incorporate elements of the corporate governance practices you researched to help top-level managers make better ethical decisions. Provide specific examples to support your response.

Answer 1

Corporate governance is a kind of interrelationship among the elements of the corporate such as stakeholders. This relationship is used to determine and control the firm's strategic direction and its performance. The Effective governance produce the competitive advantage for the firm. This includes control over the conflicts among stakeholders.

There are three internal governance mechanisms such are as follows:

1. Ownership Concentration
2. Board of Directors
3. Executive Compensation

Ownership concentration is based on the number of group of shareholders and their percentage of shares they own. The share of ownership influences the top executive decisions and actions. It actually provides the active and effective monitoring of top executives.

The Board of directors are elected by the shareholders. They are either insider, outsiders or related outsiders. They are the governance shareholders of the company in order to run the firm in order to maximize the shareholder wealth. Outsiders are more independent of the firm’s top-level executives than are those who hold top management positions within the firm. If the insider percentage is more then the decisions of the firm would be weak.

The executive compensation is highly visible and often criticized. This executive compensation is based on the Salary increment, bonuses, long term incentives to the firm’s top-level executives. These decisions are based on the financial measures hence they are less reliable and effective too. It can be subject to performance manipulation. It is far from perfect governance mechanism.

I suggest that the External Mechanism such as the market of corporate control actually binds all the measures would help align the interests of managerial agents with those of the firm’s owners.

For example, When the External Mechanism such as the market of the corporate control is used on the firm decision making then the firm actually grows in the ethical way too. The market elements such as other companies’ governance system, board of directors, compensation strategies would help to compared and analyses the governance of the firm. The firm top-level executives would take the better decision when they able to compare their governance with another firm’s governance. This would help to make the standard for the decision making and growth in the ethical way.

The above mentioned are the internal mechanisms hence their might be partially in the governance but if the external mechanism is used with them then the governance would be appropriate.

U.S.-based corporations could incorporate elements of the corporate governance practices to help top-level managers make better ethical decisions is that they do not corporate with the ethical management team in overselling all the practices of corporate management.

For example, in US the firm’s top-level managers are paid highly so as they perform the according to the company plans for the growth. But here some time manipulation happens within the top-level team as the experienced executives are not chosen for the good governance. Hence, they arise the conflict in the firm which effects the firm’s effectiveness and growth.

So, there would be a team who supervise this conduct inside the premises. They might use the stock options of the firm or alter the decision while was taken earlier. Some of the top-level executives have their own benefits from the company payments. These situations might be avoided if taken certain action such as a governance team over every one, level of duties and limits of the executive and punishments if done unethical can control to some extent.