New and innovative mechanisms in modern systems

¶ … Innovative Mechanisms

Mechanisms

What new and innovative mechanisms, laws or practices could corporate America put in place to address the corporate misconduct that we often find in the news?

Corporate Misconduct' has always been creating newspaper headline for the past twenty-five years. Most of the Fortune 500 companies have become the part of this news by breaking or by violating the law. Major corporate misconducts against the law include taking or giving bribes, avoiding payment of tax, involvement in fraud and manipulation of accounts, providing false or fraud securities and political contribution. Corporate misconduct relates to the activities of some unscrupulous officials or corrupt managers. Great financial losses are caused to the country by the misconduct of the corporate sector. Corporate misconduct also causes a major threat to the public such as in the areas of public safety and health. As many as 20 million consumers suffer physical injuries in a year according to the statistics of U.S. Consumer Product Safety. This loss is the result of defective goods, low quality food and duplicate drugs that are made available in the market by violating laws of protection. Another major issue in the area of corporate misconduct relates to 'Computer fraud'. (Sims; Spencer, 1995)

The spread of this unethical behavior of corporate misconduct in the recent years in the U.S. might be because of the failure of prevention by the corporate governance. To gain back the confidence of the public, corporate America has introduced new mechanisms to control the issue of corporate misconduct. "The first line of defense is to be our basic legal structure consisting largely of state-based corporate law and federal securities laws. Federal securities laws seek to empower shareholders by requiring enough corporate disclosure to make the operations of corporations transparent to shareholders." (Edwards; Burns, 2003) Hence if the company is found to be involved in manipulations the shareholders can always decide further course of action, which means they can very well decide not to buy or sell the stocks. This legal structure also enables the shareholders the right to sue the corrupt managers. Further the "federal securities law provides a proxy voting system that empowers shareholders to elect corporate directors and to impose their collective will with respect "material" changes in the organization or operations of the company. The proxy system, however, is typically not cost- effective for shareholders who hold only small stakes in the company." (Edwards; Burns, 2003)

Secondly, it is the corporate law that can be another 'line of defense' with regard to corporate governance mechanisms. The state law generates a controlled structure with regard to the corporation, attributing certain duties and rights to the shareholders, managers as well as directors. The duties as also rights have led to directors and managers owing fiduciary duties to the shareholders, particularly loyalty, duties relating to care as well as condor. The failure to these duties enables the shareholders to sue the directors and managers to "stop certain actions from occurring or for damages stemming from actions that were not in the interests of shareholders. State corporate law, therefore, attempts to better align the interests of managers and directors with those of shareholders by imposing various obligations on managers and directors and then penalizing them if they fail to meet those obligations." (Edwards; Burns, 2003)

The third mechanism relates to the executive compensation. Here shareholders or the elected board of directors decides the structure of compensation. In addition to that the compensation is to be based on the stock performance of the company. These mechanisms are supported by two concepts commonly known as the 'gatekeepers' and 'hostile takeovers'. In other words these two concepts strengthen the already mentioned three 'lines of defense' mechanisms. The concept of 'Gatekeepers' is mostly used by lawyers, auditors, underwriters, securities analysts and the credit rating departments. The concept of 'gatekeepers' relate to supervising the corporate officials and the whole company for the shareholders. The gatekeepers who are skilled professionals work independently or are authorized to certify the accuracy level of the company's legal behavior. A company which fails to have the necessary certifications" is being penalized by denying the total accessibility to the capital markets. The concept of the 'Hostile Takeovers', argue for the replacement of the managers who are questionable or unfit with the people who have the ability to increase the stockholder value. These hostile takeovers are a costly affair, so this option is to be used only when the costs of the agency are very high. (Edwards; Burns, 2003)