Corporate governance in perspective of control in organization

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 private
company. The raises number of implementation of corporate governance has been affect to
made trust among companies, shareholders, management system and involve customer to
ensure 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 of
many reasons how investors started thinking to join once company. Other than, profit
oriented of course is the main important thing why people join once business or became a
shareholders. When the discourse of corporate governance we will highlights into U.K and
U.S. both of these country have expert with corporate governance and formulate code of
that. In U.K and U.S wherein the failure of companies cause happened with lack of clear
financial system, minim participation of board directors make results of collapse of the
companies and impact to other such as government. Meanwhile, corporate governance in
Asia 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 had
trouble with that condition. Regarding to go out from that circumstances Malaysia for
instance has been conduct the Malaysia Code on Corporate Governance (MCCG). The
purposes MCGG is to conduct more accountability, transparency and effectiveness into
business assurance and applying the principle of good governance. In addition, when we
discuss about corporate governance we could not rule out to organization and management.
The most important of management function is control besides planning, organizing and
directing. Therefore, there is necessary in corporate governance as organization play the
role of control in organization. According to control in corporate governance there are also
create space to relation government and companies. In area of specialization how share
holders, board directors even government conduct the external and internal control into
ensure corporate governance walk away as well as possible.

Keyword: Management, control, companies, corporate governance, government, good
governance, shareholders, boards of directors.

Management of control

One part of the management function is control, as one of step to goal starting from

planning 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 what

has be settling in the beginning would be same in the progress and what is out come or
Control in organization: corporate governance perspective |1

result will achieve as well. Controlling in organization in management will encourage with

word “organizing”, this is to set the structure of organization to execute and run the

organization. Following to Schermerhorn as he said, control plays a positive and necessary

role 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 mentioned

that in control management involves monitoring activities to ensure that they being

accomplished as planned and correcting any significant deviations. Besides that, the

effectiveness of control system is determined by how self it facilitates goal achievement

(Robbins, Cenzo: 2008). One of the most important in control management in the

organization 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. At

the 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 set

in the annual of year for instance, will be reach in the end of year or in the other words is

target. However, there is not easy to get the target as well following the planning because of

surely 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 like

Toyota face the problem with their product.

Furthermore, in example case how Toyota have failure to control they are car in the

cases 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 more

than 7.4 million vehicles worldwide as a faulty power window switch was a potential fire

hazard, the latest in a series of setbacks that have dented the reputation of Japan's biggest

automaker. There is some fact that missing of control-out of control will affect into the

reputation as mentioned in news above and if we related with the management which

process had been missing of attention?. There is case when we are looking into the Toyota

group company was establish in 1937 and now with 668,186 shareholders and including

selling in five continents, see figure I. Thus, how they are have mistake during production

and affect to their customer? .Reflect to management system principle, they are must to

check into the process what wrong an in which step must to resolve directly even they are

sell 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 182.2 215.1 232.8 236.9 250.3 275.9 277.7 231.2 249.6 215.9
Middle 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 1,201.0
Worldwide 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 7,096.9


total
(1 unit = 1,000 vehicles)
Note: Regional classifications are those of the Japan Automobile Manufacturers Association, Inc. The number of
vehicles produced includes the Toyota and Lexus brands. As a result of rounding, the numbers do not necessarily
add up to the total shown here

Source: Toyota Motor Corporation
Table in above shows the number of selling in Europe, Latin America, Africa, Asia

and Oceania. However, the number of recall because error in power window system make

public 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 is

example shows how is it control play into corporation because of market will made

assessment into their products.

The importance of corporate governance

Good corporate governance is key to the integrity of corporations, financial institutions and

markets, and central to the health of our economies and their stability. Corporate

governance has become talk of the day in the corporate world, especially with when the

large scandals that befall companies in the UK and the United States in the 1980s. In the

UK in late 1980‟s following the scandals of UK listed firms such as Poly Peck and

Maxwell. Polly peck was reported that healthy profits at that time but afterward in the next

year they are declared to collapse. Following of that there was Bank of Credit and

Commerce International (BCCI) lost of billion dollars for its depositors, shareholders and

employees (Shamsul: 2009). The UK initiative to launch Cadbury Report by 1992 the aims

for Financial Aspects of Corporate Governance and sets out recommendations on the

arrangement of company boards and accounting systems to mitigate corporate governance

risks and failures. Moreover, Malin (2003) Published in the United Nations Conference On

Trade And Development, selected issues in corporate governance: regional and country


experiences explain there are actually many different definitions of corporate governance

but 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 into

the organization as mentioned in above. Besides that, in corporate governance that

mentioned by Steger and Amann (2008), Corporate governance key task to establish this

accountability 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 environment

compatible with societal values that allows competition and market forces to work so that

corporations can succeed in generating long-term economic gain. Specific governance

structures 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 performance

Each of these is discussed in more detail below.

The rights and obligations of shareholders


 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 company's 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 risk

The 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 board


 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 approaches

namely, Internal and external control. Internal control defined as corporation should do

monitoring into their progress of work by them self. In contrary, external control defined by

performing by outside of corporate delivered their assessment. It is related to controlling

function in term of measurement and correction of performance in order to make sure that

enterprise 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 internal

monitoring whether from shareholders, board of directors, management system or by

employees. 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 by

standardizations establish by internal organization.

For instance, in the case of stepping up the privatisation plan by the Indonesian

Government has its critics. Privatisation frequently creates a negative impression as it can

lead to large-scale job losses, contract labour and outsourcing, thus generating public

resistant. Economists also argue that there were serious problems with the privatisation

process in Indonesia (Bullard, 2008). There is one of corporate governance control shall

effectively to deliver assessment for government if not probably it would dysfunction

among private and public trust.

Internal control

Nowadays, there are many country adopted corporate governance into their national

system 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 a

series 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 agency

problem. In complex organizations, diffusion of ownership among a large number of

shareholders 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 to

involve to control of management even they subordinate job description (Keasey, Wright:

1997).
Figure III

Communication Information


The COSO Framework for internal control

External control

External corporate governance controls encompass the controls external

stakeholders 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 and
government and make customer even shareholders will be easy to have inform extra from
outside corporation. Nevertheless, in my opinion also we can found sometimes lack of clear
of external control by media into corporate governance and it make public trust through
media change. In spite of that, there is pro and cons and hope it would be deliver benefit
into those have been involve with corporate governance whether as shareholders, board of
director or employees to improve their productivity and performance to achieve good
governance .


Figure IV: External control influences to corporate governance

Conclusion

Finally, control in corporate governance basically come from management and that

is 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 whom

involve in contrast not taking position into management system also lack of clear about

regulation. The role of government at this time also necessary to control the corporation

even they are SOE‟s because it will related to national financial system.

The important of control in corporate governance addressing good corporate

governance 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 as

monitoring treatment conduct by inside organization. Secondly, external control define as

Control in organization: corporate governance perspective | 10

outsiders control into CG for giving impact process and assessment what wrong and what

have to be done. Thus, what has planning through control management system will

achieving good result.

In the end, control in the company even conduct in internal or external have purpose

to create healthy organization system. One most important thing could not forgetting is how

made healthy economic competitive climate without fraud in the organization and deliver

equity. Lastly, sharing the data and information through technology access probably make

easier to control management system, check and balance what arrive and what was deliver.

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