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Ethics, Corporate Governance and Company Social Responsibility
OCED state-owned enterprises and Privatized companies
In the past few decades, emerging economies have launched ambitious plans to privatize their state owned enterprises (SOEs). The volume of privatization in emerging economies has increased from $8 billion in 1990 to about $65 billion in 1997 (Dharwadkar, George, & Brandes, 2000). In privatization, ownership is transferred from the state to new private and public owners, which may include management, employees, local individuals, institutions, and foreign investors, with the state also retaining a certain percentage of ownership after privatization. The new diversified ownership structure after privatization makes corporate governance an important issue in emerging economies (Rajagopalan and Zhang, 2008).
On the one hand, the new ownership structure creates the traditional principal agency problem whereby self-interested executives aim to maximize their private interests rather than the owners' interests. To address this problem, it is necessary to design effective incentive mechanisms to align management interests with owners' interests and/or to design effective control mechanisms to regulate management behaviors. On the other hand, the new ownership structure can also create principal -- principal agency problems that are unique to emerging markets. In these unique agency contexts, large or majority shareholders often control the firm and expropriate minority shareholders' interests in the firm (Dharwadkar et al., 2000). As a result, it is also important to design governance mechanisms and safeguards to protect minority shareholders' interests from expropriation by majority shareholders (Rajagopalan and Zhang, 2008).
Corporate Governance as practiced in various OCED countries
One can see within the OECD countries, there are many different approaches to governance. The national administrative system in different countries is different with regards to shareholder return, stakeholder contentment, and corporate social responsibility. Many analysts have been busy analyzing the options to create harmony among various approaches of corporate governance with same objectives. Some of key models under discussion are listed below (Windsor, 2009).
The Anglo-American method emphasizes the accountability of directors as well as the agency problems of monitoring and controlling executives by investors. The U.S. And U.K. are stranger economies with comparatively subtle publicly-listed company ownership. The common law method does not strictly command pro-t maximization; the business judgment rule, legal examples approving corporate charity, and in approximately half of the states so-called district statutes afford broader carefulness for the boards. A distinctive feature of the Anglo-American method is a single-tier board. The Italian corporate governance law enacted in 2003 accommodates companies' selection of in the three choices of the traditional Italian system, the German two-tier structure, and finally the Anglo-American single board structure (Ghezzi and Malberti, 2008).
The supervisory board employs the management board and thereafter is given access to specific information. The German approach, an example of a civil law system, emphasizes double company responsibilities to two types of stakeholders (i.e., investors as well as employees). The labor involvement is different with different ownership styles and number of labor. By a law passed in 1972, each organization with five or more stable voting staff has to have a works council. The EU has shaped a European-level registration (Societas Europea or SE) that constitutes a single board (on the Anglo American pattern) but connecting the issue of works councils. Where this Societas Europea SE is formed in Germany, German law applies. However, international mergers caused some problems in this regard as well (Windsor, 2009).
There is some legal evidence for the German governance (Government Commission, 2002) might be directed in connection to employee relations. A shareholder value index for the 40 major listed German firms had been constructed by Hopner (2001). Internal factors like decreased monitoring by corporate networks and banks and higher compensation of executives, are often found to have been in interaction with the exposure of external market. In this way more emphasis is laid on the shareholder value. The study also found that the varying conditions can cause various complications for the every layer of management and employees. This drives the industrial relations as per the market conditions (Windsor, 2009).
The Japanese approach is a mixture of all approaches with single tier board and largely company unions, and lifetime job security. Banks usually have more importance as compared to investors. The firms are owned by network of families. Japan Corporate Governance Forum, 2001 resulted in a very different evolution to the flexible decision making and while keeping the certain aspects of Japanese company (Buchanan and Deakin, 2007). Another study found that in Japan an investment portfolio of well governed companies (those using an index of several features thought to be associated with profitability and market value) underperforms very much as an investment portfolio of poorly-governed companies (Aman and Nguyen, 2008). The experiential relationship between governance and resulting performances is complicated (Windsor, 2009).
Development in this field outside of OCED countries is much more variable (Oman, 2006). Some examples endorse that there is progress in corporate governance outside the developed countries. The Securities and Exchange Board of India (SEBI) has rules for listing companies. Similarly, Tata Group, originating in India, aims to advance shareholder and stakeholder values by implementing the Tata Code of Conduct, as well as Tata Business Excellence Model, Global Reporting Initiative (GRI), along with group core values (Waknis, 2007). While adopting IFRS voluntarily the countries' company specific factors are more prominent as compared to the national level institutional factors. In the developing countries the entirely opposite can be visible (Francis et al., 2008). When we compare the cost and benefits of good governance and its choices, in the developed countries, its benefits exceed the cost while in the developing or less developed countries the situation still needs improvement (Windsor, 2009).
OECD guidelines on Corporate Governance for State-owned enterprises
OCED in their handbook titled, "OECD guidelines on Corporate Governance for State-owned enterprises" outline six key aspects and standards for governing state-owned enterprises. These are as follows:
1. The legal as well as regulatory framework for state-owned companies ought to work and function in a level-playing ground in marketplaces where both state-owned companies and privately-held corporations exist. The regulatory governance framework ought to be built on and become completely suitable for, the OECD Axioms of Corporate Governance (Directorate for Financial and Enterprise Affairs, 2005).
2. All governments should behave and act as an informed and proactive owner and begin an ownership policy that is not only clear but also consistent. This will make certain that management of state-owned companies is being done in an accountable and transparent manner, along with the required level of effectiveness and professionalism (Directorate for Financial and Enterprise Affairs, 2005).
3. Furthermore, governments and their state-owned companies should acknowledge the rights and authority of shareholders. These rights and authorities ought to be in line with the OECD standards of Corporate Governance. This will make certain that there is unbiased and impartial treatment and equal utilization of corporate data (Directorate for Financial and Enterprise Affairs, 2005).
4. In addition, governments and their state-ownership policy ought to completely acknowledge the role and responsibilities of the state-owned companies towards their stakeholders and that they should regularly report and update this aspect of their business (Directorate for Financial and Enterprise Affairs, 2005).
5. State-owned companies ought to observe higher principles of transparency. These standards and principles ought to be in line with the OCED Corporate Governance guidelines (Directorate for Financial and Enterprise Affairs, 2005).
6. The boards of state-owned enterprises must have the required power, ability and objectivity to handle their function of strategic guidance and tabs on management. They ought to act with integrity and ought to be held responsible for their actions (Directorate for Financial and Enterprise Affairs, 2005).
Other vital standards and guidelines for previously-held state owned enterprises (currently privatized) are given by the OCED are as follows:
• Transparent procedures must be established to select the board of directors (Rajagopalan and Zhang, 2008).
• If the controlling shareholder owns a stake in excess of 30%, a cumulative voting mechanism must be adopted to ensure that the voting interests of minority shareholders are given appropriate consideration (Rajagopalan and Zhang, 2008).
• There must be at least two independent (i.e., outside) directors; and one-third of the board members must be independent directors (Rajagopalan and Zhang, 2008).
• Members of the board of supervisors must be given access to information related to operational status and must be allowed to hire independent intermediary agencies for professional consultation (Rajagopalan and Zhang, 2008).
• Corporate governance-related information (e.g., the composition of the board of directors and the board of supervisors, the attendance records of independent directors) must be disclosed (Rajagopalan and Zhang, 2008).
• Prices of related-party transactions must be fully disclosed, and listed companies cannot provide financial collateral to related entities (Rajagopalan and Zhang, 2008).
• Detailed information on controlling shareholders must be promptly released, and controlling shareholders are required to honor the independence of the listed companies and to avoid interfering or directly competing with the listed entities (Rajagopalan and Zhang, 2008).
• The establishment of functional subcommittees and their operating…[continue]
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