Sample Business Studies Coursework Paper on Corporate Governance

Corporate Governance-Week8

Corporate governance is the association between stakeholders in a firm that assists in determining, the control, strategic directions and performance of the firm. Ownership concentration refers to the amounts of measurable stock held by the institutional investors and individual shareholders. A huge block of shareholders is a strong incentive for shareholders to supervise managers closely. Holding a higher stake motivates them to take more of their time and funds in close monitoring. Moreover, they can get seats in the Board, which boosts their monitoring ability. The monitoring may be practiced through their voting power, proxy fights and meeting to discuss the firm’s direction.  However, this is not possible for institutional investors (Misangyi & Acharya).

Board of Directors refers to the persons given the responsibility to represent the owners of a firm by supervising and controlling the strategic decisions of top-level managers such as asset acquisition or disposal and stock splits decisions. They hold the power to provide direction on the organization affairs, award or penalize executives and protect shareholders interests from opportunistic executives. The Board is comprised of the CEO and other top-level executives, persons who have a relationship with the firm but no involvement in its daily operations and persons independent of any relationship or daily operations of the firm. Boards are sometimes criticized for issues like readily approving initiatives that only serve managers interests and failure to exercise care while hiring and supervising the behaviors of the CEO. To increase the Board’s efficiency, it is important to have members with diverse backgrounds, stringent controls, formal performance evaluation processes and compensation reviews (Misangyi & Acharya).

Executive compensation is the way salaries, long-term performance incentives and bonuses are used in aligning the interests of executives with those of the shareholders. Complications in executive compensation arise from the complexity of their strategic decisions that are non-routine and meant to affect the firm over long periods. Unintended stock options and size of the firm are some of the factors that affect the effectiveness of executive compensation. To help in aligning the interests of the executives with those of the owners of a firm the market for corporate control can be used as an external governance mechanism. In this case, a corporation that has been undervalued may be bought or taken over by other organizations or individuals. A takeover threat can also help in aligning the firm management and operations (Misangyi & Acharya).

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References

Misangyi, V. F., & Acharya, A. G. (2014). Substitutes or complements? A configurational examination of corporate governance mechanisms. Academy of Management Journal57(6), 1681-1705.