Corporate governance is now a very popular and important area in strategic management. However, corporate governance is poor in a number organisation. Explain FIVE(5) symptoms of poor corporate governance [10marks]
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1. Domination by a single individual
A feature of many corporate governance scandals has been boards dominated by a single senior executive with other board members merely act as a rubber stamp. Sometimes the single individual may bypass the board to action his own interests. This can result in management and directors awarding themselves remuneration and company perks that do not align with company performance or shareholder interests. This is an inherent problem in agency theory.
Even if an organisation is not dominated by a single individual, there may be other weaknesses. The organization may be run by a small group centered round the Chief Executive and Chief Financial Officer and appointments may be made by personal recommendation rather than a formal, objective process.
2. Lack of involvement of board
Boards that meet irregularly or fail to consider systematically the organization’s activities and risks are clearly weak. Sometimes the failure to carry out proper oversight is due to lack of information being provided.
3. Lack of adequate control function
Another potential weakness is a lack of adequate technical knowledge in key roles, for example in the audit committee or in senior compliance positions. A rapid turnover of staff involved in accounting or control may suggest inadequate resources, and will make control more difficult because of lack of continuity.
4. Lack of supervision
Employees who are not properly supervised can create large losses for the organization through their own incompetence, negligence or fraudulent activity. The behaviour of Nick Leeson, the employee who caused the collapses of Barings bank was not challenged because he appeared to be successful, whereas he was using unauthorized accounts to cover up his large trading losses. Leeson was able to do this because he was in charge of dealing and settlement, a systems weakness of lack of segregation of key roles that featured in other financial frauds.
5. Lack of independent scrutiny
External auditors may not carry out the necessary questioning of senior management because of fears of losing the audit, and internal audit do not ask awkward questions because the Chief Financial Officer determines their employment prospects. Often corporate collapses are followed by criticisms of external auditors, such as the Barlow Clowes affair were poorly planned and focused audit work failed to identify illegal use of client monies.
6. Lack of contact with shareholders
Often, board members grow up with the company and lose touch with the interests and views of shareholders. One possible symptom of this is the payment of remuneration packages that do not appear to be warranted by results.
7. Emphasis on short-term profitability
Emphasis on success or getting results can lead to the concealment of problems or errors, or manipulation of accounts to achieve desired results.
8. Misleading accounts and information
Misleading figures are often symptomatic of other problems (or are designed to conceal other problems) but clearly poor quality accounting information is a major problem if markets are trying to make a fair assessment of the company’s value. Giving out misleading information was a major issue in the Enron scandal as discussed previously.