Corporate governance in perspective of control in organization


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Corporate governance in perspective of control in organization

  1. 1. Corporate governance in perspective of control in organization Shahril Budiman Raja Haji College of Social and Political Science Department of Government Science Abstract Corporate governance nowadays plays a big role into corporation or privatecompany. The raises number of implementation of corporate governance has been affect tomade trust among companies, shareholders, management system and involve customer toensure equity among them. Besides that, getting public trust through clear of regulation,standard of work even assurance according business performance in long term also one ofmany reasons how investors started thinking to join once company. Other than, profitoriented of course is the main important thing why people join once business or became ashareholders. When the discourse of corporate governance we will highlights into U.K andU.S. both of these country have expert with corporate governance and formulate code ofthat. In U.K and U.S wherein the failure of companies cause happened with lack of clearfinancial system, minim participation of board directors make results of collapse of thecompanies and impact to other such as government. Meanwhile, corporate governance inAsia was introduce after Asian financial crisis (AFC). There are several countries such as:Indonesia, Malaysia, Thailand, South Korea encounter to monetary crisis circumstances.There are many State Owner Enterprises‟ (SOE) and private enterprise/company has hadtrouble with that condition. Regarding to go out from that circumstances Malaysia forinstance has been conduct the Malaysia Code on Corporate Governance (MCCG). Thepurposes MCGG is to conduct more accountability, transparency and effectiveness intobusiness assurance and applying the principle of good governance. In addition, when wediscuss about corporate governance we could not rule out to organization and management.The most important of management function is control besides planning, organizing anddirecting. Therefore, there is necessary in corporate governance as organization play therole of control in organization. According to control in corporate governance there are alsocreate space to relation government and companies. In area of specialization how shareholders, board directors even government conduct the external and internal control intoensure corporate governance walk away as well as possible.Keyword: Management, control, companies, corporate governance, government, goodgovernance, shareholders, boards of directors.Management of control One part of the management function is control, as one of step to goal starting fromplanning to set standard, objective and set the direction before project will be starting.Afterward continue to leading addressing to inspire effort and controlling to ensure whathas be settling in the beginning would be same in the progress and what is out come orControl in organization: corporate governance perspective |1
  2. 2. result will achieve as well. Controlling in organization in management will encourage withword “organizing”, this is to set the structure of organization to execute and run theorganization. Following to Schermerhorn as he said, control plays a positive and necessaryrole in the management process and to have things “under control” is good; for things to be“out of control” is generally bad (Schermerhorn:2011). In addition, Robbins also mentionedthat in control management involves monitoring activities to ensure that they beingaccomplished as planned and correcting any significant deviations. Besides that, theeffectiveness of control system is determined by how self it facilitates goal achievement(Robbins, Cenzo: 2008). One of the most important in control management in theorganization is the control process there are such as figure in bellow: Figure I The Control Process Is standard Yes Compare actual being Do performance attained? Nothing with standard No Is variance Yes Do acceptable? Nothing Measure Objectives Standard actual performance No Is standard Yes Identity acceptable? Cause of variation No Revise standard Correct performance Source : Robbins, Cenzo : 2003 Organization purposes is make what the plans are goes with the goals at the end. Atthe same time, what has be done in the beginning will work with their action or we called“Organization Performance”. In Corporate governance, these necessary ensure what was setControl in organization: corporate governance perspective |2
  3. 3. in the annual of year for instance, will be reach in the end of year or in the other words istarget. However, there is not easy to get the target as well following the planning because ofsurely in the progress stage invariably face the problem. even in big company such Toyota.Inc, General Motor .Inc and Ford Motor .Inc. Case in below show that giant company likeToyota face the problem with their product. Furthermore, in example case how Toyota have failure to control they are car in thecases of “Toyota to recall 7.4 million vehicles over power window glitch” (Kobuta;2012).There are some fatalities of control Toyota Motor Corp (7203.T) said it would recall morethan 7.4 million vehicles worldwide as a faulty power window switch was a potential firehazard, the latest in a series of setbacks that have dented the reputation of Japans biggestautomaker. There is some fact that missing of control-out of control will affect into thereputation as mentioned in news above and if we related with the management whichprocess had been missing of attention?. There is case when we are looking into the Toyotagroup company was establish in 1937 and now with 668,186 shareholders and includingselling in five continents, see figure I. Thus, how they are have mistake during productionand affect to their customer? .Reflect to management system principle, they are must tocheck into the process what wrong an in which step must to resolve directly even they aresell but at the same time they can more delivered their control. Figure II Toyota Sales by region Region 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 North 1,908.9 2,031.3 2,230.3 2,436.1 2,738.3 2,822.2 2,441.8 1,975.4 1,935.5 1,806.9 America Latin 128.8 162.1 214.9 270.5 339.4 379.4 370.2 293.6 342.1 333.5 America Europe 764.8 851.5 946.9 995.2 1,124.1 1,238.6 1,119.5 886.0 785.8 801.9 Africa 139.8 160.6 206.7 227.2 265.7 313.5 288.1 201.4 197.6 211.9 Asia 493.4 682.4 846.3 1,062.9 1,106.7 1,329.6 1,438.6 1,533.9 1,895.9 1,998.2 Oceania 182.2 215.1 232.8 236.9 250.3 275.9 277.7 231.2 249.6 215.9Middle East 220.3 251.4 270.9 325.3 404.8 482.7 590.1 482.5 532.0 527.5 Overseas 3,838.3 4,354.5 4,948.8 5,554.1 6,229.3 6,841.9 6,526.1 5,604.0 5,961.1 5,895.9 total Japan 1,680.5 1,715.9 1,758.8 1,713.1 1,692.3 1,587.3 1,470.0 1,375.5 1,566.1 1,201.0Worldwide 5,518.8 6,070.4 6,707.6 7,267.3 7,921.6 8,429.3 7,996.1 6,979.6 7,527.3 7,096.9Control in organization: corporate governance perspective |3
  4. 4. total(1 unit = 1,000 vehicles)Note: Regional classifications are those of the Japan Automobile Manufacturers Association, Inc. The number ofvehicles produced includes the Toyota and Lexus brands. As a result of rounding, the numbers do not necessarilyadd up to the total shown hereSource: Toyota Motor Corporation Table in above shows the number of selling in Europe, Latin America, Africa, Asiaand Oceania. However, the number of recall because error in power window system makepublic trust decrease because fatality management control of quality by Toyota. In Addition,Toyota must fix as fast as possible if they are do not want to lose more consumer. There isexample shows how is it control play into corporation because of market will madeassessment into their products.The importance of corporate governanceGood corporate governance is key to the integrity of corporations, financial institutions andmarkets, and central to the health of our economies and their stability. Corporategovernance has become talk of the day in the corporate world, especially with when thelarge scandals that befall companies in the UK and the United States in the 1980s. In theUK in late 1980‟s following the scandals of UK listed firms such as Poly Peck andMaxwell. Polly peck was reported that healthy profits at that time but afterward in the nextyear they are declared to collapse. Following of that there was Bank of Credit andCommerce International (BCCI) lost of billion dollars for its depositors, shareholders andemployees (Shamsul: 2009). The UK initiative to launch Cadbury Report by 1992 the aimsfor Financial Aspects of Corporate Governance and sets out recommendations on thearrangement of company boards and accounting systems to mitigate corporate governancerisks and failures. Moreover, Malin (2003) Published in the United Nations Conference OnTrade And Development, selected issues in corporate governance: regional and countryControl in organization: corporate governance perspective |4
  5. 5. experiences explain there are actually many different definitions of corporate governancebut they all address the following elements:  Systems of controls within the company  Relationships between the company‟s board/shareholders/stakeholders  The company being managed in the interests of the shareholders (stakeholders)  Greater transparency and accountability to enable users of corporate information to determine whether the business is being managed in a way that they consider appropriate Therefore, system of control in the company will be playing the important stage intothe organization as mentioned in above. Besides that, in corporate governance thatmentioned by Steger and Amann (2008), Corporate governance key task to establish thisaccountability and create transparency in this regard for stakeholders. In the other word,managerial definition of corporate governance namely: “Corporate governance establish clear structures regarding accountability, responsibility, and transparency at he head of company, And defines the role of boards and management” (Steger, Amann: 2008). Moreover, The Organization for Economic Cooperation and Development (OECD)define that "The primary role for regulation is to shape a corporate governance environmentcompatible with societal values that allows competition and market forces to work so thatcorporations can succeed in generating long-term economic gain. Specific governancestructures or practices will not necessarily fit all companies at all times" (OECD 1998a).The OECD identifies the following key elements of good corporate governance:  The rights and obligations of shareholders  Equitable treatment of shareholders  The role of stakeholders and corporate governance  Transparency, disclosure of information and audit  The board of directors  Non-executive members of the board  Executive management, compensation and performanceEach of these is discussed in more detail below.The rights and obligations of shareholdersControl in organization: corporate governance perspective |5
  6. 6.  A corporate governance framework should protect shareholder rights. It should ensure that there is one vote for one share. It should ensure that management provides sufficient and relevant information. It should encourage shareholders to participate in annual general meetings and vote. Shareholders should be able to share in residual profit (dividends). Minority shareholders should be protected. It should ensure fairness and transparency in the operations of the company.  Obligations: use voting rights.Equitable treatment of shareholders  A corporate governance framework should ensure equitable treatment of all shareholders, including minority and foreign shareholders;  Same voting rights (within same class of shares etc);  All shareholders of same class should be treated equally.The role of stakeholders in corporate governance  A corporate governance framework should ensure that the rights of stakeholders are protected by law and that these rights are respected.  It should provide effective redress for violation of rights.  It should encourage stakeholders to assume a role in the corporation that enhances the performance of the corporation and the market;  It should provide for disclosure of information relevant to the interests of stakeholders.Transparency, disclosure of information and audit  A corporate governance framework should ensure the full, timely and detailed disclosure of information on all material matters, including the companys financial situation, performance, ownership structure and governance.  It should include the establishment of an (internal) audit committee.  Transparency/disclosure includes disclosure of information on:  Financial/operating results  Ownership structure  Members of the board of directors and management  Quantitative and qualitative matters concerning employees and  Other stakeholders in the corporation  Governance structures and policies  Corporate targets and prospects  Execution of unusual and complex transactions, transactions  Including derivative products and their level of riskThe board of directors  A corporate governance framework should ensure the strategic leadership of the corporation, the efficient monitoring of management by the board of directors.  Accountability of board to its corporation and shareholders.  Meetings, for example one a month; process; Chair/CEO (separation of duties and responsibilities) etc.Non-executive members of the boardControl in organization: corporate governance perspective |6
  7. 7.  These members should form independent judgements, especially with respect to the corporation‟s strategy, performance, asset management and management appointments;  Non-executive members should be independent from executive members of board (e.g. family members should not be admitted) and should not have a business relationship with the corporation or any other commercial involvement that may affect their independent judgment  Interlocking directorships should be avoided.Executive management, compensation and performance  Management compensation should be tied to the corporation‟s general level of profitability and overall performance.  Total compensation should be disclosed in financial statements.  Procedures for determining compensation should be disclosed.  A remuneration committee (or review committee) should be established.Internal and external control into corporate governance Achieving good corporate governance by control process by two approachesnamely, Internal and external control. Internal control defined as corporation should domonitoring into their progress of work by them self. In contrary, external control defined byperforming by outside of corporate delivered their assessment. It is related to controllingfunction in term of measurement and correction of performance in order to make sure thatenterprise objectives and the plans devised to attain them are accomplished (Koontz:1980).The important thing that corporate governance have to do inside of organization is internalmonitoring whether from shareholders, board of directors, management system or byemployees. This step to ensure that overall planning will be goon as well as possible. Thus,first step of control of corporate governance following the internal control bystandardizations establish by internal organization. For instance, in the case of stepping up the privatisation plan by the IndonesianGovernment has its critics. Privatisation frequently creates a negative impression as it canlead to large-scale job losses, contract labour and outsourcing, thus generating publicresistant. Economists also argue that there were serious problems with the privatisationControl in organization: corporate governance perspective |7
  8. 8. process in Indonesia (Bullard, 2008). There is one of corporate governance control shalleffectively to deliver assessment for government if not probably it would dysfunctionamong private and public trust.Internal control Nowadays, there are many country adopted corporate governance into their nationalsystem for ensure doing business and effort from country to safe them from financial crisis. In addition, COSO define internal control as a process not merely at the event. It is aseries of occurrences that permeate an entity‟s activities see in figure III (Keasey & Wright:1997). On the other hand, The analyses of Fama (1980) and Fama and Jensen (1983)suggest that various aspects of organization structure (including the board of directors)whereby the management and the control of decisions are separated can alleviate the agencyproblem. In complex organizations, diffusion of ownership among a large number ofshareholders creates the need for delegation of decision control (ratification and monitoring)and decision management (initiation and implementation) to agents within the corporation(Rediker, J, K and Seth, A.: 1995) For instance, in U.K established the Cadbury Report to consider that all directors,whether or not they have executive responsibilities, should take position and carrying out of„the necessary controls over the activities of their companies are in place and working‟(Code of Best Practice, 1.8, p. 58). Regarding of that statement, board directors also have toinvolve to control of management even they subordinate job description (Keasey, Wright:1997). Figure III Communication InformationControl in organization: corporate governance perspective |8
  9. 9. The COSO Framework for internal controlExternal control External corporate governance controls encompass the controls externalstakeholders exercise over the organization, see figure IV. Examples include: Competition Debt covenants Demand and assessment of performance information (esp. Financial statements) Government regulations Managerial labour market Media pressure Takeovers However, external control nowadays giving more benefit into corporate andgovernment and make customer even shareholders will be easy to have inform extra fromoutside corporation. Nevertheless, in my opinion also we can found sometimes lack of clearof external control by media into corporate governance and it make public trust throughmedia change. In spite of that, there is pro and cons and hope it would be deliver benefitinto those have been involve with corporate governance whether as shareholders, board ofdirector or employees to improve their productivity and performance to achieve goodgovernance .Control in organization: corporate governance perspective |9
  10. 10. Figure IV: External control influences to corporate governanceConclusion Finally, control in corporate governance basically come from management and thatis in organization system management play the important role to be effective and efficient.In addition, corporate governance emerge in the past because several fault by whominvolve in contrast not taking position into management system also lack of clear aboutregulation. The role of government at this time also necessary to control the corporationeven they are SOE‟s because it will related to national financial system. The important of control in corporate governance addressing good corporategovernance and equity principle for those may concern in corporation. In the same way,public also could be agent of control to CG and improving to be better in the future.Therefore, control in CG distinguish as two approach. Firstly, internal control define asmonitoring treatment conduct by inside organization. Secondly, external control define asControl in organization: corporate governance perspective | 10
  11. 11. outsiders control into CG for giving impact process and assessment what wrong and whathave to be done. Thus, what has planning through control management system willachieving good result. In the end, control in the company even conduct in internal or external have purposeto create healthy organization system. One most important thing could not forgetting is howmade healthy economic competitive climate without fraud in the organization and deliverequity. Lastly, sharing the data and information through technology access probably makeeasier to control management system, check and balance what arrive and what was deliver.References:Abdullah. Nahar, Shamsul. (2009). Corporate governance in Malaysia: Towards stronger boards and audit committees. UMT Inagural Lecture Series : 1. Terengganu: Universiti Malaysia TerengganuBullard, N. (2008), “Indonesia‟s privatisation plans run into troubled waters”, available at:¼com_content&task¼view&id¼186&pop¼1 &pa (accessed 1 July 2009).Cadbury A (1992). Report of the Committee on the Financial Aspects of Corporate Governance, London.: Gee.Astami W. Emita, Tower. G, Rusmin Rusmin, Neilson. J, (2010), The effect of privatisation on performance of state-owned-enterprises in Indonesia, Asian Review of Accounting, Vol. 18 Iss: 1 pp. 5 - 19Keasey, K., & Wright, M. (1997). Corporate governance: responsibilities, risks, and remuneration. Chichester: Wiley.Koontz, H., Donnell, C., & Weihrich, H. (1980). Management (7th ed.). New York: McGraw-Hill.Kubota, Y. (2012, October 10). Toyota to recall 7.4 million vehicles over power windowglitch Reuters. Retrivied from, C. (2003). The relationship between corporate governance, transparency and financial disclosure. Newyork: United Nation.Selected issues in corporate governance: regional and country experiences. New York u.a.: United Nations.Control in organization: corporate governance perspective | 11
  12. 12. Organization for Economic Cooperation and Development (1998b). Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets.Rediker, J, K. & Seth, A. (1995) Boards of Directors and Substitution Effects of Alternative Governance Mechanism. Strategic Management Journal, Vol. 16, No. 2, 85-99Robbins, S. P., & Cenzo, D. A. (2008).Fundamentals of Management (6. ed.). Boston, Mass.: Pearson.Schermerhorn, J. R. (2007). Exploring management: In modules. Princeton, NJ: Recording for the Blind & Dyslexic.Schermerhorn, J. R. (2011). Introduction to management (11th ed.). Hoboken, N.J.: Wiley.Steger, U., & Amann, W. (2008).Corporate governance how to add value. Chichester, England: John Wiley & Sons.Vallabhaneni, S. R. (2008). Corporate management, governance, and ethics best practices. Hoboken, N.J.: Wiley.Toyota. (2012) “Figures : Market / Toyota Sales and Production Toyota. Retrieved from in organization: corporate governance perspective | 12