What are the responsibilities of the board of directors to stakeholders other than shareholders?
The board of directors (BOD) is appointed to act on the shareholder’s behalf in running an organization’s diverse operations. The BOD is directly accountable to the shareholders and must present fiscal records during an annual general meeting to elaborate on the companies’ performance and future strategies. The directors are responsible for the prosperity of the organization, meeting the affairs of the company, and interests laid down by the stakeholders. The executive conducts meetings and their duties include organizational control as well as policies, and strategies establishment while still monitoring delegated authority.
The executive establishes the organization’s vision, values, and mission and ensures they are aligned to the company’s future growth. Notably, the unit is expected by the stakeholders to develop the company’s strategies and structure, while reviewing and evaluating future opportunities, risks, and threats that may affect production. The leaders are expected to delegate authority to the managers to ensure policy implementation, strategic planning, and establishment of proper business management structures. As a result, the board creates an efficient channel of communication among different the stakeholders and the organization in order to increase production.
What ethical issues surround executive compensation? How can we determine whether top executives are paid too much?
There are many ethical issues surrounding executive compensation, such as whether or not the settlement is seen as excessive compared to the services provided. The process is judged by whether the means of payment was compromised through transparent and adequate negotiations. High compensation packages have, since the very beginning of industrialization, caused trifles between the junior employees and the chief executive officer (CEO), especially when the latter is driven by self-interests instead of working toward the firm’s value increment. According to Al Dunlap, the writer of Mean Business, the best bargain is to have an expensive CEO since it is virtually impossible to overpay a decent executive or underpay a depraved one (Dunlap & Andelman 1997). A good president is one who creates wealth for an organization; hence, his compensation should attributed to the returns of the shareholders and not previous successes.
Determination of Compensation
Workers should be compensated according to their performance. Eleanor Bloxham, Value Alliances’ founder, and CEO believes that the employees lose morale when their seniors get paid too much (Saunders, 2017). Notably, the extremely high wages create a disconnect between the executive and employees, and the latter respond by not sharing information with the management, regarding what needs immediate attention in the organization. With the leaders high compensated, ego influences them to disconnecting from the junior employees, resulting in losses. Several fortune 500 CEOs make an average of 9-12 Million dollars a year, although the pay has not skyrocketed as it did in the year 2001, where the wages increased by 400-600% (Gabaix & Landier, 2008).
Executive salaries are determined through the recommendations by a special committee within the board of directors. The salary package can be inclusive of the basic pay, bonuses, stock options, deferred compensations, and other niceties such as the use of the company jet, among others. However, evidence suggests that not all of the highly paid executives do a better job than the ones with modest paychecks; notably, many highly-paid CEOs do not get along well with their employees due to the class gap. Leaders who are not paid well do not necessarily fly the company jet or use the limo, but research has it that they work the hardest.
What is corporate governance? Why is governance necessary to control manager’s decision?
Corporate governance refers to a set of laws and processes through which most business organizations operate, structure, or even control their diverse activities. The concept is a combination of both the internal and the external factors that affect the stakeholders’ interest in an organization. The interested parties may include the shareholders, the executive, customers, suppliers, management, as well as government regulators. Consequently, corporate governance is established to ensure that there is transparency in an organization, hence leading to a healthy, stable economic growth plan, ultimately affecting the company’s sustainability.
The role of governance is controlling the manager’s decision since such management, if practical, aligns the manager’s decisions and the shareholders’ interests in the company. Subsequently, the shareholders are removed from the daily organizational activities as the chief executive officer, and the board of directors run the corporate duties. Stakeholders and shareholders get notified of the progress the organization makes through the company president, who also makes organizational decisions through the same channel.
How Corporate Governance Fosters Ethical Decisions
Top-level managers are easily influenced by internal and external mechanisms of governance to create an ethical decision set at affecting both shareholders and stakeholders. The BOD is responsible for taking any action necessary against unethical behaviors to develop restrictions between stakeholders and employees for the entire company to enhance respect and accountability. In general, a code of ethics is designed to ensure communication in the organization on its intentions on trade. As a result, corporate governance increases ethical decision-making from both the managers and the agents. Indeed, the concept offers managers the insight to make tactical choices with the knowledge that there are consequences for every decision.
Dunlap, A. J., & Andelman, B. (1997). Mean Business: How I save bad companies and make good companies great. Simon and Schuster.
Gabaix, X., & Landier, A. (2008). Why has CEO pay increased so much?. The Quarterly Journal of Economics, 123(1), 49-100. https://doi.org/10.1162/qjec.2008.123.1.49
Saunders, M. (2017). The labour market. Speech given at the Resolution Foundation, Bank of England, 13.