Corporate Governance and Responsibility
Introduction
Companies in different regions often operate in various legal, social, cultural, and economic environments. As such, every country has created its own corporate governance system that is deemed best for the country’s business operations (Cioffi, 2006). Corporate governance is a process that directors often employ to direct and control the company’s management such as ensuring that the owners achieve the highest returns. A comparison of the corporate governance in German and the United States shows that the systems are different mainly because they adopt different governance models; while the United States adopts a one-tier model the Germans adopt a two-tier model.
Key Features of Corporate Governance Systems in Two Countries
Corporate Governance in the US and German
Germany
The German model sometimes referred to as the continental model or European model, is carried out by two groups. The supervisory council and the executive board. The executive board is in charge of corporate management while the supervisory council controls the supervisory board. The supervisory council is chosen by employees and shareholders. Government and national interest are strong influences in the continental model, and much attention is paid to the corporation’s responsibility to submit to government objectives and the betterment of society. Banks also often play a large role financially and in decision making for firms.
United States
The governance system in the United States is a one-tier model that often combines the executive and monitoring functions of a particular company and assigns the inherent duties to one particular board. Corporate governance in the United States is often explained as a set of managerial and fiduciary responsibilities that often bind a company’s shareholders, management, and the board within a large societal and context that is defined by various forces such as competitive, ethical and economic forces. It is often referred to as the Anglo-US model that represents the shareholders and board of directors as the main controlling parties such that the chief officers and managers have secondary authority. The managers often acquire their authority from the board that is obligated to voting the approval of shareholders (Dietl, 1997). However, it is important to note that the companies in the United States under this system often have legislative controls over the ability of shareholders to assert control on daily practical activities in the company. There is also a high distribution of shareholder structure and capital in such markets. The U.S. Securities and Exchange (SEC) – that was created to protect the interests of investors often maintain efficient, fair, and orderly markets – implements and enforces legal frameworks that often govern the country’s security transactions. The SEC also supports the function of shareholders above that of the board of governors.
Differences in Corporate Governance
Germany’s governance system has a two-tier model that assigns the executive and monitoring functions to two distinct boards; the executive and supervisory boards. These independent boards are the general corporate structures of governance for most of the listed corporations. This model is often referred to as the German model whereby the executive board takes control of corporate management while the supervisory council takes charge of the executive board.
Shareholders and employees in this system have the mandate to choose the supervisory council. The corporation is expected to submit to the stipulated government objectives for organizational growth and wellness (Baums & Scott, 2005). Banks also have a significant role to play in the decision making and financial role of firms.
The corporate governance in the U.S. corporates is founded on aspects of control, ownership structure, and separation of power. The system has a dispersed capital structure that finds it most efficient to provide the power of management to professionals since stakeholders are assumed to lack sufficient knowledge to undertake such activities. The ownership structure in the German governance system is a dual board that separates the responsibility for managing and monitoring the corporation.
In relation to legal aspects, corporate laws often impose various fiduciary duties on the directors in order to undertake monitoring and reduce the associated agency costs. The federalism system in the U.S. often imposes various law rules on independent directors.
The goal of corporate governance in the United States is to maximize the interest of shareholders although there exist debates in the tension between shareholder interests and other constituents. On the other hand, the dual-board in based on a co-determination concept whereby capital and labor tend to co-determine the activities of the corporation. As such, labor is often given particular influence in the management through continuation participation in the selection of management.
The governance system in the U.S and Germany are also separated on the basis of the role of banks in corporate governance. In Germany banks often serve as an embodiment of debt holders and shareholder power in that they have a significant impact on the mechanism of governance. Additionally, investment banks and commercial banks do not have any division (Baums & Scott, 2005). On the other hand, the Glass Steagal Act in the United States often separates investment banks from commercial banks, and commercial banks are often prevented from engaging in the investment business.
Baums, T., & Scott, K. E. (2005). Taking shareholder protection seriously? Corporate governance in the United States and Germany. The American Journal of Comparative Law, 53(1), 31-75. https://www.jstor.org/stable/30038687
Cioffi, J. W. (2006). Corporate governance reform, regulatory politics, and the foundations of finance capitalism in the United States and Germany. German Law Journal, 7(6), 533-561. https://doi.org/10.1017/S2071832200004855
Dietl, H. (1997). Capital markets and corporate governance in Japan, Germany, and the United States: Organizational response to market inefficiencies (Vol. 12). Routledge.
Considerations when Establishing Risk Management Committee for an Organization
The significance of risk management is often negated in most organizations owing to the fact that most of them are of the belief that risks are less likely to occur. However, organizations are likely to face various types of risks that can range from business risks, financial risks, and management risks (Thomas, 2017). However, failure to establish an experienced risk management committee can cause an organization to suffer collapse such as the UK-based travel company, Thomas Cook. Due to its inability to plan in anticipation of changes in economic risks, Thomas Cook got lost in debts as a result of failure to adapt to online travel experiences and to handle worries associated with the Brexit scenario. In order to avoid similar circumstances, organizations should engage in the creation of an able and experienced risk management committee to ensure the adoption of relevant risk management strategies.
When establishing a risk management committee, organizations should consider the selection of individuals with characteristics and qualifications that enable them to promote the governance of risks through various formal processes that entail the risk management of the entire system. In all its undertakings, the risk management committee is expected to perform an oversight function and consider the risk plan and policy to ensure regular management and risk assessment. Factors that should be taken into consideration when establishing a risk management committee include the need to align risk strategy with governance, oversight of the infrastructure, and the need for the risk environment. Additionally, the organization should consider the responsibility amongst the risk committee, communication, and cooperation, amongst the stakeholders.
Inherent Risk Environment
The organization should consider the integral risk environment when establishing a risk committee. The complexity, extent, and impact of the risk should be considered against the ability of the selected board committee to handle the workload sufficiently. According to Berg (2010), inherent risk refers to the likelihood of loss on the basis of an organization’s nature without making changes to the existent environment. In relation to the risk environment, the organization should consider estimates, complexity, non-routine transactions, and judgment of the committee members. For instance, judgment is required in business transactions, an aspect that should be prioritized amongst the committee members. Having the members who lack the required degree of judgment can introduce risks of inexperienced individuals, an aspect that could cause errors. The members of the risk committee should understand the aspect of estimates that should be included in transactions, without which an estimation error is likely to occur.
Business transactions are complex, an aspect that creates the need for a risk committee to understand the inherent complexity. For instance, an organization should consider the committee’s ability to engage in a derivative transaction among other complex activities that are likely to affect the success of a particular project (Zoet, Welke, Versendaal, & Ravesteyn, 2009). Lack of this level of expertise amongst the risk management committee can cause the escalation of the project complexity. Additionally, the risk environment should be considered in relation to routine or non-routine transactions when choosing the committee. This is because, organizations that engage in non-routine transactions without controls or procedures are likely to increase the chances of error especially when the committee members lack the necessary expertise.
Needs of Stakeholders
When establishing a risk management committee, it is imperative to consider the needs of stakeholders and the enterprise. The board in charge should assess the comprehensiveness and quality of the oversight structure, risk governance, and risk environment (Thomas, 2017). It should also consider the needs of the organization in the future in relation to stakeholder specifications. At this, the organization should consider the activities and composition of the risk committee and inherent relationships with the board committee that would reflect on the assessment of such factors.
Stakeholder needs often relate to the views of the individuals at the business operations level such as customers, users, and stakeholders, and the manner in which they relate to the problem or issue at hand. The risk committee should be selected while considered stakeholder needs that can range from strategic objectives, business goals, targets, challenges, problems, and risks in relation to the business. In other words, the committee should be selected such as to showcase the needs of the enterprise and what particular groups need to support the business satisfactorily.
Communication
The board that is in charge of the selection of the risk management committee should consider the fluency of communication between the committee members. This is important because, the success of projects is dependent on the existent of smooth communication and the ability of the members involved to understand each other. For instance, an organization should consider how the committee will keep the board informed on the risks and practices involved in risk oversight. Effectiveness and efficiency of inherent communication channels between the committee members should be considered when selecting individual members to the committee (Popescu & Dascalu, 2011). For instance, a committee would be unsuccessful when the members are in different locations since their ability to brainstorm on risky issues would be affected. In the same manner, individuals in the committee who lack clear boundaries may require the board to define such elements explicitly to avoid unnecessary conflicts. As such, it is necessary for the board to prioritize the ability of the committee members to communicate with each other, without which, the success of the committee in relation to risk management will be affected.
References
Berg, H. P. (2010). Risk management: procedures, methods, and experiences. Reliability: Theory & Applications, 5(2 (17)).
Popescu, M., & Dascalu, A. (2011). Considerations on integrating risk and quality management.
Thomas, K. (2017). Incorporating risk considerations into planning and control systems: The influence of risk management value creation objectives. In The Routledge companion to accounting and risk (pp. 150-171). Routledge.
Zoet, M., Welke, R., Versendaal, J., & Ravesteyn, P. (2009, September). Aligning risk management and compliance considerations with business process development. In International Conference on Electronic Commerce and Web Technologies (pp. 157-168). Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-03964-5_16
Triple Bottom Line Reporting
Triple Bottom Line (TBL) by Elkington (1998) is a perspective that often identifies the performance of a business in relation to environmental, economic, and social issues. In simple terms, TBL refers to the responsibility of an organization for environmental, financial, and social outcomes that are likely to result from business operations. In the recent past, TBL has been appreciated as a framework for reporting and measuring the performance of business particularly in large multinational companies such as Dow Chemical Company, Microsoft Corporation, and DHL, among other companies (Henriques, & Richardson 2013). In achieving business goals, TBL includes social and ecological measures that are founded on the belief that improvement in a single sector causes consequent improvement in other sectors.
The application of TBL in business is founded on the reporting and measurement of social justice, environmental quality, and economic prosperity.
Economic Prosperity – In business, the aspect of economic prosperity often entails taking into consideration the social and natural capital alongside financial, physical, intellectual, and human capital.
Environmental Quality – The aspect of environmental quality takes into consideration both the natural capital that is necessary for a healthy eco-system and the replaceable, substitutable, and renewable natural capital.
Social Justice – In social justice, the business should take into consideration social capital in terms of the existent trust between society and businesses (Elkington, 2013).
TBL has been applied as a goal for businesses in organizations such as DHL, Better World Books, White Light Fund, and Patagonia, among others. For instance, the DHL shipping company improved its delivery trucks to hybrid vehicles that more efficient and with the ability to run on alternative energy. In a bid to remain relevant in relation to its social, environmental, and economic impact, the company adopted a GoGreen initiative that streamlines its logistical operations while ensuring that the trucks take a shorter route. The company electricity is obtained from renewable energy and often takes advantage of couriers in most of the European countries, which often go a long way in the reduction of emissions by a large proportion. The company has also implemented other practices that have enabled it to secure the social status of a mindful neighbor. Its support on the U.S. efforts of disaster management often assists various airports to equip themselves for natural disasters while partnering with other organizations to enhance the livelihood of the communities in which they operate.
These activities among others have assisted in the achievement of organizational objectives in terms of economic, social, and environmental objectives. The application of the triple-bottom-line strategy by DHL has enabled individuals to gain additional interest in the company since the community is often interested in working with organizations that show exemplary performance in its dimensions. Individuals have a higher probability to make their purchases from the companies that are environmental and social conscience (Sala, 2020). As such, the social and environmental consciousness often results in increased economic advantage as a result of higher sales owing to people’s desire to associate with such organizations.
References
Elkington, J. (2013). Enter the triple bottom line. The triple bottom line (pp. 23-38). Routledge.
Henriques, A., & Richardson, J. (Eds.). (2013). The triple bottom line: Does it all add up. Routledge.
Sala, S. (2020). Triple bottom line, sustainability, and sustainability assessment, an overview. In Biofuels for a More Sustainable Future (pp. 47-72). Elsevier.