Paste your INTRODUCTION
Corporate governance as defined by ASX Corporate Governance Council (2014) is a combination of relationships, rules, systems and processes which make up a framework that allows authority to be exercised and controlled within organisations. It is used as a means to hold accountable those in control of a company and the company itself.
There are three main corporate governance theories recognised and utilized globally. They are, the Stewardship theory, Agency theory and Stakeholder theory (Pande & Ansari, 2014).
The agency theory was introduced in 1972 by Alchin and Demsetz, which was later developed by Jensen and Meckling (Pande & Ansari, 2014). This form of relationship involves the contracting of another party (the agents or directors) by the primary party (shareholders) to perform services on their behalf (Htay, Salma, & Meera, 2013).
The resulting problems of such separation of ownership from controls however, are moral hazards such as hidden actions, withholding of information and directors could prioritise their interests at the expense of the shareholder's (Htay, Salma, & Meera, 2013). Countries such as the United Kingdom and Malaysia make use of agency concepts (Pande & Ansari, 2014).
The stewardship theory centres on psychological and sociological aspects (Htay, Salma, & Meera, 2013). This theory is very similar to the agency theory in that it focuses on directors and shareholders. However, this view is the direct opposite of the agency theory. This theory believes that directors will always place the interest of shareholders before theirs in order to increase the wealth of their shareholders (Htay, Salma, & Meera, 2013). The United States of America, Germany and Japan make use of this concept.
The stakeholder theory was developed by Freeman in 1994 who defined stakeholders as 'a group of people who are affected or have an effect on the achievement of a corporation's objectives and goals' (Pande & Ansari, 2014).
As companies started to realise that they were more than just a production system, this framework began to evolve. Companies become aware that they were composed of numerous diverse and interrelated systems which all required equal attention and strategic thinking (Pande & Ansari, 2014).
In the 1950's, more and more companies became aware that their interactions with various stakeholders would ultimately impact in their success or failure. This concept was further supported by Porter's 5 forces framework in 1980 which assists in evaluating industry conditions and impact on a company (Pande & Ansari, 2014).
The stakeholder theory is used see to be used in countries such as South Africa as many organisations take into consideration their stakeholders and taking initiatives to better the societies they operate within (Htay, Salma, & Meera, 2013).
For the purpose of this paper, it will be assumed that the division of this multinational company we are addressing is operating in South Africa and makes use of the Stakeholder Theory of Corporate Governance.
DECISION MAKING PROCESS
When dealing with major decision within an organisation that will not only have an impact on the company, but its employees and certain stakeholders too, it is important to have and ethical decision making process that proves to be fair and just to all those affected by the end decision.
Therefore, rational decision making may be the best type of decision making process an organisations should employ. Rational decision making involves logical and sequential models which centre around listing many potential alternatives, their pros and cons, then evaluating each on in order to choose the best suited one (Decision Making Confidence, 2013).
Most commonly used is the ethical decision making process which consists of various steps normally ranging from 7 to 9 (Douglas, 2012). Douglas' ethical decision making process consists of 9 steps; 1. Gathering facts, 2. Defining the ethical issues, 3. Identifying the affected parties (stakeholders), 4. Identifying the consequences of the propose action, 5. Identifying the obligations (principles, rights, justice), 6. Considering your character and integrity, 7. Think creatively about potential actions, 8. Evaluate potential actions and 9. Decide on the proper ethical action (Douglas, 2012).
Which regards to the decision to, as the given example states, building a new factory, the manufacturing location of a new car an strategies to respond to a fall in demand, the proposed decision making will allow management to make decisions that are fair and just to all.
When taking the decision on new factory plant, organisations have to consider the implications the costs will have on shareholders returns, the impact on the allocation of human resources to the new plant and whether or not the decision with prove fruitful in future.
Deciding on the location where a new car will be manufactured, they have to consider the transport implications for employees, the cost, is it the location more efficient, will the current employees handle the added workload?
A fall in demand may mean that the organisation may have to make changes to its workforce through downsizing its organisation. However such a decision will not be favourable as it will result in employees' losing their jobs (Cascio, 2013). Management should then work with employees to find alternatives such as perhaps creating shorter shifts in order to accommodate everyone.
This form of ethical decision making has been proven to be the most commonly used process in most businesses in South Africa as it allows for a structured manner to deal with ethical decisions and allows for precedence to be set (Vitez, 2015).
WHISTLEBLOWING
Due to the fact that the organisation at hand is one that is rather large, there is a high possibility that ethical issues may arise amongst employees or between employees and management. It is therefore of imperative importance that the organisation puts in place a structure that allows employees to raise these issues in a procedural manner.
One option, often used in matters of ethical concerns is whistleblowing. This is a process whereby employees are afforded the opportunity to point out issues that concern irregularities in accounting, auditing, banking or matters that have got to do with bribery as soon as possible (Arcelor Mittal, 2011).
Whistleblowing has become important in today's corporate environment due to the realisation that almost every business is at risk of having things go wrong or even unknowingly harbouring a member of management of employee who is corrupt (Dehn, 2001).
Therefore, having a whistleblowing policy will ensure that employees within an organisation will have a structure to report any unethical conduct by their employees and have it addressed accordingly.
However, one has to note the fact that the two parties involved in whistle blowing always have opposing interests; the whistleblower has the right to freely express themselves and to fair labour practices, whereas on the other hand, the organisation has the right to its reputation and staff loyalty (Martin, 2010).
This poses as a problem due to the fact that the organisation often has greater power than the whistleblower, and without proper frameworks that govern whistleblowing procedures, it will prove to be fruitless (Dehn, 2001).
This results in employees choosing the path that is less resistant in efforts to avoid being in management's 'bad books' (Shawver, 2011). Such situations have been seen prevalent within business environments. An example being one that Barnett (1992) reported, an employee that exposed management on a possible kickback scheme was fired.
Hence the need for a strong regulatory framework for whistle blowing is based on the premise that power imbalances exist between the whistleblower and the organisation facing the allegations (Martin, 2010).
It is therefore essential that organisations and employees are familiarised with the current South African legislation that extends to both the public and private sector in protecting whistleblowing employees against employment detriment due to their whistleblowing acts (Holtzhausen, 2007).
BBBEE AND EMPLOYMENT EQUITY
BBBEE
Transparency has been noted as one of the characteristics of an organisation that operates ethically. This is with regards to its communications with stakeholders, its internal processes and the company profile, which includes their employee profiles (Stanwick & Stanwick, 2009).
It is therefore expected for a company to reflect the gender, ethnic and disability mix of their employees. Mainly for two reasons, BBBEE and Employment Equity.
Due to the past imbalances faced in South Africa due to Apartheid laws, government has put in place initiatives to redress these imbalances. One of them being BEE or BBBEE (BEE.co.za, 2013).
The BBBEE initiative launched by the South African Government aims to promoted fair participations of black individuals in the economy. BBBEE operates on a scorecard bases. Where the more black people and black women you employ and have in senior positions, the more points you obtain and the higher your compliance level will be (BEE.co.za, 2013).
Organisations should be aiming for level once compliance as this will afford them greater opportunities. By having a high level of compliance, companies may benefit from government contracts and procurement as government is the purchaser of goods and services (Izikhulubeee, 2014). Furthermore, BEE compliant corporations prefer to deal with other BEE compliant corporations, this entails that a company may lose out on fruitful business opportunities if it is not highly compliant (Izikhulubeee, 2014).
Though BEE compliance is voluntary, certain companies have been caught out faking their level of compliance in order to obtain the benefits that come with being compliant (Davis, 2014).
On the contrary, some companies have downplayed their turnover in order to be exempt from BEE compliance (Davis, 2014). As revised in 2013, BEE compliance is required once a company makes a turnover of over R10 million during a period of a year, being double the previously exempt amount of below R5 million (BEE.co.za, 2013).
Davis (2014) reported such as case where a company indicated that it was earning less than the then required amount of R5 million. It was later discovered on the company's website that they made an annual turnover of R1 billion employing over 4 500 people.
Employment Equity
The Employment Equity Act, No. 55 of 1998 was established by the South African Government in order to;
' Promote the constitutional right of equality and the exercise of true democracy (Department of Labour, 1998)
' Eliminate unfair discrimination in employment (Department of Labour, 1998)
' Ensure the implementation of employment equity to redress the effects of discrimination (Department of Labour, 1998)
' Achieve a diverse workforce broadly representative of all South Africans (Department of Labour, 1998)
' Promote the economic development and efficiency in the workplace; and
' Give effect to the obligation of the Republic as a member of the International Labour Organisation (Department of Labour, 1998)
It is therefore necessary that companies reflect the composition of their employees as it will enable officials to assess their compliance with the Employment Equity Act.
DONATION OR BRIBERY?
Depending on the motive behind offering a donation to a political party or individual, this may or may not be seen to be a bribe. Bribery entails the offering, giving and receipt of something with aims to influence the actions of an official or another person (Schoeman, 2007). Money, donations, gifts, a promise to do something or an advantage are some of the many forms of bribery (Schoeman, 2007).
In order to determine whether or not something is a bribe or not, one has to ask themselves one question: is something with regards to the business relationship expected in return or to be influenced? If so, then it constitutes a bribe (Institute of Business Ethics, 2012).
With regards to offering a donation to a political party or individual, it is highly unlikely that nothing was expected in return. Hence ideally, donations to political parties or individuals should be prohibited by organisations.
However, that may not always be the case. One has to firstly, take into consideration the 'corrupt culture' that exists amongst many South African corporations and political parties (Hartley, 2013). In an article by Hartley (2013) a survey revealed that it was believed that approximately 77% of political parties were corrupt. With this in mind, it is almost impossible to believe that a corporate body would, with no string attached, make a donation to any political party.
STAKEHOLDERS
The stakeholders of an organisation may include, political groups, customers, communities, employees, investors, government, suppliers and trade associations (Stanwick & Stanwick, 2009). Because an organisation's activities impact on not only the owners, but also their stakeholders, it is ideal that organisations also pursue the interest of its stakeholders (Stanwick & Stanwick, 2009).
Stakeholder Interaction
An organisations interactions with its stakeholders depends of course on the type of management an organisation has. An organisation can either have immoral, amoral or moral managers (Stanwick & Stanwick, 2009).
Immoral managers see little need to interact with its stakeholders. Employees are merely seem as a means of production, customers are exploited, and the local communities interests are not considered (Stanwick & Stanwick, 2009)
Amoral managers interact with stakeholders only to the required extent and nothing further. Thy treat employees based on legal requirements, customers are seen as a means of revenue but are not exploited and local communities a given minimal attention (Stanwick & Stanwick, 2009).
Moral mangers are the ideal managers in a business environment that acknowledges its stakeholders. Moral managers treat employees as human resources and treat them with respect and dignity. They treat customers as equal partners and provide them with safe products and full product information. They further partake in initiatives to uplift the communities they operate within.
Employees play an important role in the ultimate success of the organisation (Stanwick & Stanwick, 2009). It is therefore in the organisation's best interest to ensure that employees are offered favourable working conditions that allow them to retain the best qualified employees (Stanwick & Stanwick, 2009). This must be applied all the way down to the lowest level of employees.
Organisations have to adhere to any policies and laws generated and enforced by government and political groups (Stanwick & Stanwick, 2009). Policies may include Employment Equity, Skills Development and BBBEE.
Organisations should further select their suppliers based on similar practices and compliances as themselves due to the fact that their selection of suppliers has a direct impact on their reputation as well (Stanwick & Stanwick, 2009).
Customers of an organisation should be offered products of the best quality and product information that is truthful (Stanwick & Stanwick, 2009).
Investors and shareholders should be offered full transparency and honesty with regards to the performance of the organisation at all times.
Organisations should finally, pursue the interests of local communities by taking part in initiatives to uplift the 'quality of life' in surrounding societies and that of their employees (Stanwick & Stanwick, 2009). The one way that this can be done is through Corporate Social Responsibility.
Corporate Social Responsibility
Corporate Social Responsibility or CSR refers to the voluntary involvement or invest of a company towards social programmes or projects that will assist in improving the community in which they operate (Flores-Araoz, 2011). It is normally in areas such as housing, health care, education, safety, the environment and so forth (Flores-Araoz, 2011).
Engaging in CSR is in direct line with adopting a 'triple-bottom line' approach to business. Meaning that organisations consider not only Profits, but also People and the Planet (Flores-Araoz, 2011).
Hence all organisations should take steps towards becoming more active and proactive in CSR initiatives.
Although the South African Companies Act 61 of 1973 does not compel companies to partake in CSR projects, there have been numerous pioneers or CSR in South Africa (Flores-Araoz, 2011).
Sab Miller and the South African subsidiary SAM Ltd have initiated 10 sustainability development priorities which also include HIV/AIDS awareness, human rights, communities, enterprise development and water, energy and carbon control. Standard bank, one of South Africa's leading financial institutes has an annual social investment expenditure which it funds by not less than 1% of the previous year's after tax income (Flores-Araoz, 2011).
Closer examples to the case at hand are two car manufactures operating in South Africa, Toyota and BMW.
Toyota has declared in its CSR policy that it engages in stakeholder-oriented management. This enables them to contribute to sustainable development and aim to main to develop long-term relationships with stakeholders (Toyota Global, 2013).
BMW invests millions of rands each year towards empowering disadvantaged groups through upliftment and partnership programmes which include skills development and basic educational programmes (BMW, 2014).
These examples prove that many companies in South Africa consider the interests of their stakeholders with regards to how they operate and in that they aim to better the conditions of their surrounding communities.
CONCLUSION
Corporate governance has proven to be of vital importance to the operations of an organisations. They serve as a backbone to the ethical nature of all decisions and actions.
Corporate governance assists in directing senior employees and lower level employees in dealing with issues such as decision making and matters of corruption in an ethical and sound manner.
It further proves to create a culture of respect, fairness, honesty, transparency and justice within business operations and its interactions with various stakeholders.
It is therefore of paramount importance that all organisations, regardless of size and global scope of operations, develop and enforce corporate governance policies by which should be strictly abided by and closely monitored.
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