Corporate_Governance

Running head: TRANSPARENCY IN CORPORATE GOVERNANCE Transparency in Corporate Governance Tanya Garcia University of Phoenix Corporate Transparency Recent corporate scandals brought about a number of regulatory changes. Transparency in corporate governance is a result of these scandals, requiring increased disclosure in financial reporting (Hernalin & Weisback, 2007). The situation with corporations such as Enron and Worldcom reveals the need for full disclosure reporting in publicly traded companies. Sarbanes-Oxley (SOX) is a regulation that mandates increased disclosures and offers “penalties to executives for misreporting” (Hernalin & Weisback, 2007, p. 2). This increases awareness of the need to improve corporate governance in the public’s mind. This paper addresses McBride Financial Services and the opportunities the organization has to increase transparency in corporate governance, therefore improving the perception of investors, employees, and the public. Concept of Transparency #1 In Hugh McBride’s memo to Paul, he describes how closely Beltway will be watching the organization, especially the financial reporting aspect. At this point, McBride Financial Services still owes the SEC quarterly and annual reports. Rather than asking the brokers for input or support, Hugh requests Paul to handle the accounting himself (Supplement: McBride Correspondence, 2010, p. 2). This does not provide for transparency, but rather keeps financial data in a silo. In addition, Hugh’s lack of awareness of SOX requirements puts the organization at risk, not to mention the perception he is creating for his employees, investors, and the public. According to Hernalin and Weisback (2007), they make an assumption about the chief executive officer’s (CEO) ability on his current performance or past performance. Beltway has no guarantee of how Hugh McBride will perform as CEO; however, the organization’s past performance is an indicator of how the company will perform in the future. As a leader of the organization, Hugh has a responsibility to all owners to demonstrate honesty and integrity in all his activities. Honesty and integrity promote prosperity for companies and help comply with laws such as SOX (Marshall, 2005). Hugh’s current and past performance demonstrates his inability to act with integrity. In a memo to Betty and Beth, Hugh states that he does “not plan on allowing the money men to dictate how I’ll run this company” (Supplement: McBride Correspondence, 2010, p. 2). Furthermore, Hugh is choosing his own board of directors, requiring only the members to provide a “flowery” biography to sell the investors on approval. Again, this violates SOX requirements of boards of directors. Hugh’s self-interest is evident in his mission to run the business as he sees fit. By exhibiting forthright and timely information with investors, Hugh will make his organization more transparent, specifically with quarterly and annual reports. This enables investors to understand the financial performance of the company. Concept of Transparency #2 In another memo to Betty, Hugh relays his thoughts on incentive compensation and decision to hold off on providing stock options to the board members. In this case, Hugh’s self-interests of not wanting to dilute his shares will eventually cause his business to fail. In an article by Gerety, Hoi, and Robin (2001), it states that “the market reaction depends on whether the CEO is involved in director selection” (p. 1). In addition, “stock markets react negatively to plans proposed by firms without nomination committees” (Gerety, Hoi & Robin, 2001, p. 1). In a publicly traded corporation, the CEO is responsible for sound corporate governance, including ensuring proper incentive plans are put in place for directors. The incentive plans provide a motivational tool for senior managers and include “stocks, stock options, and other equity-based compensation as an integral part of managerial compensation contract” (Gerety, Hoi & Robin, 2001, p. 1). In recent years, incentive pay is becoming a way of life for corporate directors and uses “equity-based compensation to align the interests of shareholders and directors” (Gerety, Hoi & Robin, 2001, p. 1). Hugh McBride must acknowledge and implement this concept to ensure shareholders and directors get the most out of the success of the business. Moreover, this type of compensation will facilitate increased performance from those with a direct link. This should ultimately result in a positive stock market reaction with the assistance of a sound corporate governance structure. As part of a compensation plan, specific metrics must be set to help establish a level of achievement. The level of performance should encompass stretch goals, which helps create shareholder value. According to Barnes (2010), the plan should include: • Incentives that appropriately balance risk and reward • Compatible with effective controls and risk management • Be supported by strong corporate governance, including active and effective oversight by the board of directors At this point, it will be difficult to establish appropriate metrics because of the lack of financial reporting. To comply with corporate governance, McBride Financial Services should have an audit committee to ensure proper financial reporting. Once Hugh understands the financials and apparent risks, he can establish an incentive plan that will motivate his senior managers to exceed expectations on his or her performance. Moreover, this will provide clear transparency to the organization, investors, government regulators, and the public. Concept of Transparency #3 The third example of self-interests of Hugh McBride is the information he communicates to his board of directors relative to his or her roles. Hugh makes it clear that the board does not have any bona fide responsibilities and that all the real work will be left to him as the Chairperson. Hugh communicates to the board that his or her reward is to include “Board Director” on his or her resume’. As a sole proprietor, Hugh McBride’s role as CEO “sets the direction and oversees the operations” (McNamara, 2010, p. 1). In an organization that has a board of directors, this usually means the CEO “is primarily responsible to carry out the strategic plans and policies as established by the board of directors” (McNamara, 2010, p. 1). Because Hugh has set the expectation as Chairperson that he will handle the real work, this creates a conflict of interest because the CEO’s reporting relationship is to the board of directors. Conaghan and Popat (2010) believe that one of the issues with corporate governance is the risk associated with combining CEO and Chairperson titles in the same person. The reason for this risk is that the board’s primary responsibility is “to oversee and provide a “check” against a misguided management team” (Conaghan & Popat, 2010, p. 1). Hugh McBride clearly represents a misguided management team, as he is the heart of the issue. Further, Conaghan and Popat (2010) indicate that “over the past five years, most large U.S. public companies have either split the roles of the CEO and Chairman, or, to the extent the CEO also carried the Chairman title, appointed one of the independent (non-management) directors to the role of Lead Director” (p. 1). New disclosure rules put in place by the Security Exchange Committee requires public companies to disclose why they believe the dual roles by one individual is appropriate and the role of lead director in leading the company (Conaghan & Popat, 2010). To comply with best practices of corporate governance and demonstrate transparency in the organization, Hugh McBride needs a lead director if he is to retain the Chairperson title. A lead director role includes responsibilities such as (Conaghan & Popat, 2010): • Focus on governance relative to meeting calendars, committee membership, board recruitment, dealing with underperforming directors, strategy and the “big picture” • Act as focal point for the independent directors and the consensus builder for the entire board • Carefully review the agendas for board meetings as a means of control • Clearly delineate the division of responsibilities with the CEO and Chairperson and communicate the division to the board and management. Conclusion Corporate leaders understand the importance of a healthy corporate culture and the implications to good corporate governance. In a healthy culture, employees are empowered to question unethical situations before the impact becomes detrimental. Hugh McBride has not built a healthy culture at McBride Financial Services because the employees do not question his tactics or methods. Hugh relies more on self-interest than the good of the organization. Failure to begin acknowledging transparency in his organization will potentially lead to serious fines or even events of a scandalous nature. In situations such as Enron and Worldcom, the information is not distorted but rather concealed. McBride Financial Services is well on their way to a scandal if Hugh McBride continues to conceal information and operates from the respect of self-interests. References Barnes, T. A. (2010). Interagency guidance on sound incentive compensation policies. Retrieved November 19, 2010 from http://www.ots.treas.gov/_files/25354.pdf Conaghan, T. P. and Popat, M. V. (2010). How to be a good lead director. Retrieved November 19, 2010 from http://www.boardmember.com/Article_Details.aspx'id=4338 Gerety, M. Hoi, C. and Robin, A. (2001). Do shareholders benefit from the adoption of incentive Pay for directors' Retrieved November 19, 2010 from http://findarticles.com/p/articles/mi_m4130/is_4_30/ai_82273332/ November 19, 2010 from http://www.hbs.edu/units/am/pdf/HWTransparencyJan2007.pdf Hermalin, B. E. and Weisbach, M. S. (2007). Transparency in corporate governance. Retrieved November 19, 2010 from http://www.hbs.edu/units/am/pdf/HWTransparencyJan2007.pdf Marshall, M. (2005). Corporate governance must stress transparency. Retrieved November 19, 2010 from http://www.law.virginia.edu/html/news/2005_spr/pitt.htm McNamara, C. (2010). Basic overview of role of chief executive. Retrieved November 19, 2010 from http://managementhelp.org/chf_exec/chf_exec.htm#anchor1529448 University of Phoenix (2006). Supplement: McBride Organizational Charts. Retrieved October 15, 2010 from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx