Corporate Governance Essay
Conduct a review of the governance of your organisation (or one with which you are familiar) in the form of a report to the Chairman (or President) of the Governing Board of Directors. In the brief report use the concepts, tools and techniques learned in this subject to review the structure, process and effectiveness of the governance of the organisation and make recommendations for appropriate improvements.
This report sets out to review corporate governance at a private company, namely, Paramount Insurance Company. The specific objectives were to identify the relevant codes the organisation follows, why they are important and review the structure, process and effectiveness of the governance of the organisation. Throughout the report, it was evident from the findings that Paramount although once a successful organisation, had some governance issues that can and should be improved for the best interest of the company and its policyholders. Finally, several recommendations for improvement of the organisation’s governance were outlined.
Corporate Governance has evolved from the early days of merchants and monopolists and the concept of corporate governance is as old as trade but the phrase is new. (Tricker 2011).At its simplest, corporate governance can be regarded as being ‘about promoting corporate fairness, transparency and accountability’ (Wolfensohn 1999). All corporate entities need governing however, good corporate governance that takes into consideration a variety of frameworks, including various perspectives such as the relationship, stakeholder, financial, and societal. This report will review the corporate governance policies of Paramount Insurance Company Limited (“Paramount”). Firstly I will supply an overview on the company’s profile and define corporate. Then the report will look at the composition and criteria for the Board of Directors of Paramount and demonstrate any corporate governance issues that the company may be facing. Finally recommendations are given for modifications or improvements in the company’s practices relevant to this business.
Paramount was an insurance underwriter predominantly writing motor business for individuals in the United Kingdom. Based in Watford, Paramount Insurance Company Limited (“Paramount”) wrote motor insurance over a period of around forty nine years until May nineteen ninety six when it ceased underwriting. Initially, the company primarily provided motor package insurance, that later expanded into also writing some legal expenses cover. Paramount was incorporated in Guyana and therefore the company complied with the Insurance Act 1998 and the Companies Act 1998 of Guyana.
These acts provided a guide to Paramount along with the Guyana Corporate Governance Code (GCGC) to some of its corporate governance practices. The Corporate Governance Code of Guyana is not mandatory or enforceable but simply provides a list of principles for best practice. Throughout this report, it is evident that Paramount has a number of issues in relation to corporate governance. This eventuated with issues for policyholders as was estimated that there may be 40,000 current policies at the time of the provisional liquidation. Definition of corporate governance
The term “governance” is derived from the Latin “gubernare” which means “to lead”, suggesting rather that “the governance” (Corporate, in this case) implies more the steering function than the control one. BALC et al. (2013, pp. 14-17). Corporate governance has many definitions as it is often used in a variety of perspectives, operational, relationship, stakeholder, societal, and a financial economics perspective. For the purpose of this report, corporate governance is defined as the relationship that exists between company management, stakeholders and the board.
Objectives of the company are usually set, attained and monitored through the structure corporate governance provides. (Balgobin 2008).The Guyana Corporate Code of Governance is similar to the UK codes of corporate governance and the Organisation for Economic Co-operation and Development (OECD 2004).These principles serve as a reference point that can be used by companies to develop their own frameworks for corporate governance that reflect their own circumstances or situations.
Composition and criteria at Paramount
The Chairman and the Chief Executive Officer
There is extensive research on board composition and the importance it places on different aspects of organisation performance. (Kang H, et al 2007). At Paramount the unitary board exists, where according to the textbook, a unitary board is when a company has a single governing body (Tricker 2009). A non- executive director is defined as a person who is not involved in the day to day management of an organisation but rather in business tasks such as strategic planning, and monitoring of executive directors. An executive director tends to be more involved in the managerial aspects of the company. The Chairman and four other directors are independent non-executives, and the CEO and one director are non- executives.
Diversity of board members
A diverse board is defined as a varied composition of a number of parameters for example, gender and age. ( Jhunjhunwala, S et al. 2012). It is often believed that women bring a somewhat different approach to leadership in an organisation. They are seen as better at building relationships, are perceptive in decision-making, etc. (Hughes et al 2012). Paramount’s board consists of one female executive director, Ann Estorffe, out of its eight members. She previously worked for one of the company’s subsidiaries in the Caribbean and thus was deemed fit because of her experience, knowledge and competency on insurance and policymaking. In addition, there are no young directors on the board. According to the Company Secretary, all of the board members are in excess of sixty five years of age. This is well above the retirement age outlined by the company, which is 60 years. Some in the company may argue that it is risky to have appointed younger individuals on the board as they lack the experience that comes with age and they are higher risk takers.
However, studies have shown that diverse boards may help in formulating strategies, improving productivity and creative problem solving. (Jhunhunwala & Mishra 2012).Appointment to the board and subcommittees Tricker et al. 2009 makes reference to two reasons why unitary boards create subcommittees: To enable independent directors to meet separately from the board as a whole, in order to fulfil their oversights roles; To delegate board activities to reduce the burden on the boards as a whole. All the directors are subject to re-election by policyholders every three years but this system is fraught with ineffectiveness to implicit pressure to re-elect the current directors. Paramount had several subcommittees consisting of the audit, remuneration, nomination, marketing, government and compliance committee, finance, and strategic planning subcommittees. This report specifically will be outlining the three committees, which are responsible for providing oversight to management. These are Audit, remuneration and nomination committees. (Tricker 2009)
It is the impression of the Board that this power resides with them as they can choose the best person for the committee. In other words, some still feel that the right to appoint board members is the heart of corporate power. (Tricker 2009).Paramount’s audit committee considered and made recommendations to the board on rules, corporate governance codes, and the law. This committee also assists the company to comply with relevant accounting standards and legislation. Hence, this requires a company to have effective internal audit functions to manage the monies entrusted on them. The effectiveness of the audit is reflected in annual reports, with the intent to create transparency aimed at improving accounting and auditing standards and promoting good corporate governance. The Remuneration Committee of Paramount consisted of two independent nonexecutive directors and one chair.
This committee is responsible for setting remuneration for all executives and the chairman however; it is the board or the policyholders that determine the remuneration of non-executive directors. (Guyana corporate governance code 2011) It is said that the remuneration committee is where in interest of the shareholders conflict with that of management. (Carson 2002). The amount of remuneration received by directors and chairman are disclosed in the company’s annual reports In addition, this monitoring ensures that when profits are low, director’s remuneration can be adjusted and the issuing of incentive payments. Directors of Paramount were not viewed as self-serving and were viewed as effective in this aspect of corporate governance.
Board performance evaluation
One of the principles of Guyana code on corporate governance states that a board should have an annual evaluation of its own performance, its committees and individual directors. In addition, every three years this evaluation should be externally facilitated. This principle aligns with the UK corporate governance code. Studies have suggested that corporate governance markers such as the uses of sub-committees, independent directors, and an appropriate board structure may not be the best forecasters of board effectiveness. (Tricker 2009) In other words, a form of performance appraisal for directors may ensure they act in the best interest of the company and of the shareholders. Performance appraisals give feedback to individuals and facilitate changes or improvements. (Noe et al 2009).
Corporate social responsibility (CSR) in essence can be defined as corporate entities acting as good citizens not evident within Paramount. UK Companies Act 2006 highlighted that quoted companies have to provide information on environmental matters, employees and social and community issues. Early attitudes towards corporate governance were a voluntary bureaucratic, expensive box-ticking exercise. Board members focused delivering on creating wealth not complying with principles. The changing expectations in the governance of organisations saw CSR strategies and policies developed, along with CSR competency frameworks created to increase shareholder value.
This report has given an account on corporate governance of a business in the private sector, namely the Paramount Company. The investigation first set out to discuss the laws and corporate governance codes the company complies with and then reviews the governance in the organisation. The research suggested that organisations should have adapted to principles of corporate governance, however. These included the lack of a nomination committee, and an inactive performance evaluation board and the development of a ccorporate social responsibility framework. It was also apparent that the re-election of directors was ineffective and that retirement age seems not to apply to board members. This may be due to lack of proper succession planning or to the belief that people like similar minded people and in this case age was a commonality.
If the above mentioned areas of opportunities were addressed earlier could this have prevented the outcome? That outcome being on the twenty first of May in the year nineteen ninety six the Department of Trade and Industry withdrew authorisation for Paramount to write new insurance business, and avoid having the directors of Paramount petitioning the court to wind the company up. The paper concludes that for too long emphasis of corporate governance has been around the relationship between managers, boards and shareholders and not so much on how corporations are financed and managed. There needs to be a multiple theoretical perspectives employed to allow for a better understanding of issues like allocation of resources and return and overall economic development.
Based on the report, there were a number of approaches that could have been actioned to improve governance at Paramount. Firstly, the organisation needed to embrace diversity, the acknowledgement that people are different and harnessing this diversity would have provided great benefit to Paramount. Promoting the health, well-being and opinions of staff, promotes individuals being valued. Fitness programs supported by the company with exclusive membership offers is an example of building a stay and thrive culture. This can be achieved through fair and transparent employment practices, regularly communicated to employees. Secondly, to eliminate the subjectivity of nominating board members and also the complacency.
Developing a nomination committee consisting of independent nonexecutive directors, will help to establish criteria for selection of board members, which will help to ensure directors chosen, are truly independent to contribute effectively to the board, to reduce the chances of a dominant director. Thirdly, Paramount should have developed a system to allow for the anonymous re-election of board members by not only outside policyholders but also inside policyholders e.g. employees as well. Fourthly to assist with CSR responsibilities and commitment a corporate policy statement can be generated, focusing on the six core characteristics of;
Questioning ‘business as usual’
Swire Pacific Ltd. developed a decentralized approach to generate its Sustainable Development Policy and appointed Director of Sustainable Development, Robert Gibson, in 2007. The intent was to create a long term approach to the sustainable development of their businesses and excel as corporate citizens. Finally, performance evaluation of board members is important to determine their effectiveness. Paramount took the initiative to form a sub-committee for this process however; it remained inactive for a number of years. This is an imperative function for a company to establish such a committee to see real long-term change and benefits in the governance of the organisation. Feedback on performance is critical for a board to improve any dysfunctional behaviour.
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