Ã¯Â¿Â½PAGE Ã¯Â¿Â½2Ã¯Â¿Â½ Transparency in Corporate Governance
Transparency in Corporate Governance
University of Phoenix
Businesses in the United States are overcoming the financial corruption and malfeasance of earlier decades. Government intervention of applicable laws and stock exchanges regulations has put a new spin on corporate governance. Corporate governance philosophy has shifted from the agency theory of providing management incentives to create value for shareholders to demand for transparency, disclosure, honesty, fairness, and accountability by shareholders, the corporate governance industry, the media, and the public. CEO power has shifted to independent board of directors. Laws and regulations mandate that financial information is the oversight of the Audit Committee. Pay-for-performance of executive compensation emergence pressures management to be accountable and responsible of resources to create value. The development of ethical behavior is spilling from top to bottom that reaffirms a company's commitment to high standard values. Transparency and compliance have become crucial to a firm's reputation.
This paper illustrates McBride Financial Services, Inc (MFSI) need to reduce the CEO's self interests to provide transparency and compliance to create shareholder wealth.
MFSI is a public trading mortgage lender (University of Phoenix, 2010). The company has attracted an institutional investor, Beltway Investments, to purchase shares of the company (University of Phoenix, 2010). Beltway Investments wants MFSI to deliver the best practices in corporate governance (University of Phoenix, 2010). Good governance rests on the issue of transparency. Transparency discloses information used by management to base business decisions subject to checks and balances (Millar, Eldomiaty, Chong Ju, & Hilton, 2005). Transparency reduces management self-interests through the owners' ability to monitor the company's internal control processes (Millar, Eldomiaty, Chong Ju, & Hilton, 2005). The CEO of the company self-interests hampers transparency and compliance by the desire to control the company through unethical decision-making.
Hugh McBride, the CEO of MFSI, desires to control every facet of the company. The CEO wants to elect a board of directors he can control. Transparency in the internal controls of a company ensures compliance with laws and regulations that govern public trading entities (COSO, 2010). For MFSI to be in compliance, the control environment must include an independent board of directors to monitor management's business activities. An independent board of directors exists if members are not in the control of the CEO. The shareholders proxy votes should create charters and bylaws that shift authority from the CEO to an independent board of directors. According to Manual (2007), there is a need to separate control of a company to allow an independent board to monitor management, and assess if the company is creating value for shareholders. An independent board would curtail the CEO's self interest to manipulate a weak board composed of complacent members and monitor management's business actions to comply with the laws and regulations and create value for shareholders. To create shareholder wealth, the accounting and financial processes must be transparent, which is not the intention of the CEO.
McBride wants to control the financial aspects of the company's internal controls. Effective internal controls achieve reliable financial reporting compliance (COSO, 2010). According to Bushman and Smith (2003), financial accounting information composition includes accounting and reporting processes to measure and provide routine disclosed audits, quantitative data of the company's financial position, and performance of public trade entities. The United States Securities and Exchange Commission (SEC) has oversight of the Sarbanes-Oxley Act and mandates disclosure of financial reports (Bushman & Smith, 2003). Hugh McBride, CEO of MFSI lacks knowledge about internal controls, accounting and financial reporting and compliance to the Sarbanes-Oxley Act and the security exchanges regulations. It is critical that the CEO learn how the internal controls are affected by these laws. An example is how an Audit Committee is a mandatory regulation of stock exchanges for publicly trading organizations.
The laws and regulations mandate that an Audit Committee oversights financial accounting information and auditors to reduce risk of non-compliance (McCarthy, Flynn & Brownstein, 2004). The CEO needs to become knowledgeable about finances to create transparency and compliance in financial accounting information. Hugh McBride's unwillingness to learn about internal control mechanisms, financial disclosure, and compliance shows a non-rational behavior because of his reluctance to assimilate new information to adapt to the new changes mandated by applicable laws and regulations (Chew & Gillan, 2004). The CEO is making unethical decisions based on self-interest and includes executive compensation.
Hugh McBride, the CEO of MFSI, wants to control the tone of how executive compensation will issued. The CEO plans to ask for a fair salary, but leave the stock options status quo in self interest to increase personal profit, and as a mechanism to control his hand-picked board members (University of Phoenix, 2010). The agency theory states incentives by shareholders to management reduces self-interest to provide better performance to create shareholder wealth (Chew & Gillan, 2004). However, the new school of corporate governance has shifted from agency to ethics, transparency, disclosures, responsibility, and accountability (Gill, 2008). The investors will benefit by creating a pay-by-performance compensation incentive such as an Economic-Value-Added (EVA) incentive plan.
The board of directors, Beltway Investments and other shareholders should create an EVA incentive plan that allows managers to share profit with investors or penalized management if the targeted strategies shortfall by reducing bonuses (Chew & Gillan, 2004). The EVA incentive or similar pay-for-performance plans provides investors transparency to determine management's performance. The transparency will increase management's efficiency in due diligence, fairness, and fiduciary responsibility. Hugh McBride's unethical decision-making shows reason to develop ethical codes.
MFSI needs to develop Codes of Ethics for an ethical philosophy will state the values and standards that define the purpose of the company. The board of directors should design Codes of Ethics and require that employees, including the CEO, make a personal commitment to the highest ethical standards and compliance to applicable laws and regulations. A Code of Ethics integrated into the company's culture reduces the CEO's self interest, adds value, and instills trust in the company's reputation as a fair, honest, accountable, and transparent publicly trading organization in compliance with the applicable laws and regulations.
It is critical that MFSI is in compliance with the Sarbanes-Oxley Act and the security exchanges regulations. The company has become a public trading organization. The laws and regulations want an independent board, mandatory Audit Committee as oversight of financial information, and suggest corporate governance that displays ethics and transparency. Corporate self regulation is just as important as the laws and regulations to avoid damaging a company's reputation and other consequences. The SEC and the Sentencing Guidelines are policing public trading entities and violations have received penalties from prison to severe fees for noncompliance. Transparency reduces the risk of financial and compliance issues and allows investors to evaluate management's performance to assess risk tolerance in business strategies, operations, and financial risk tolerance (McCarthy, Flynn & Brownstein, 2004). A transparent company disclosure of finances, an independent board, and ethical behavior will develop the trust of investors and attract potential investors and talent. Transparency and compliance in MFSI will affect how customers, suppliers, global trading, and the corporate governance industry rate the company to achieve a sound reputation and a competitive advantage.
MFSI is a publicly trading company and has the responsibility to show transparency in the internal controls and corporate governance policies. The CEO, Hugh McBride's primary self-interest is to control every aspect of the company's business activities. However, it is not possible because of the Sarbanes-Oxley Act and the security exchanges regulations. An independent board of directors shifts power from the CEO and reveals transparency through checks and balances. The CEO needs to have the authority to make strategic and daily operational decisions. However, the board should be objective enough to monitor and question unethical decision-making similar to Hugh McBride plans.
The accounting and financial processes are not strong areas for the CEO and it is critical to have an independent board that can create an Audit Committee as oversight of accounting and financial information and auditors to comply with applicable laws and regulations. Creating an Audit Committee demonstrates transparency from the disclosure of financial reports scrutinized by the committee before submission of quarterly and annual reports to the SEC. Financial disclosure of truthful information provides transparency to investors and builds trust. The company needs to build trust and demonstrate ethical values of fairness, honesty, accountability, and responsibility. Creating a transparent company is the responsibility of the entire organization. However, transparency starts from the top down and shareholders votes to create charters, bylaws, and ethical codes is a start for MFSI to develop an independent board, sound financial disclosure, pay-for-performance executive compensation, and ethical behavior that will create corporate transparency and compliance.
Bushman, R.M. and Smith, A.J. (2003, April). Transparency, financial accounting information,
and corporate governance. FRBNY Economic Policy Review.69-79. Retrieved March 30,
2010 from www.ny.frb.org/research/epr/03v09n1/0304bush.pdf.
COSO - Committee of Sponsoring Organizations of the Treadway Commission. (2010).
Internal Control - Integrated framework. Retrieved March 30, 2010 from the
University of Phoenix, eResource database
Manuel, E. (2007). Corporate governance. Case studies. Retrieved March 12, 2010 from
McCarthy, M.P., Flynn, T.P., and Brownstein, R. (2004). Risk from the CEO and Board
perspective. New York: McGraw-Hill Companies.
Millar, C., Eldomiaty, T., Chong Ju, C, and Hilton, B. (2005) Corporate governance and
institutional transparency in emerging markets. Journal of Business Ethics, 59(1/2), 163-
174. Retrieved March 30, 2010 from University of Phoenix, EBSCO database.
University of Phoenix. (2010). Supplement: McBride Correspondence [Computer Software]. Retrieved from University of Phoenix, Simulation, MMPBL570 - Corporate Governance website.
Great job. Well done!
Transparency in Corporate Governance Criterion - Week 6
Knowledge of Course Concepts (65%)
Apply the concept of transparency to corporate governance
Evaluate the relationship between self-interest of management and effective corporate governance
Critical Thinking (10%)
Demonstrate Critical Thought in Analyzing Information
Written Communication (15%)
Demonstrate Quality and Effectiveness in Written Communication
Format, Style & Citation Standards (10%)
Adhere to University of Phoenix Writing Style (APA) Requirements