May 7, 2012
McBride: Transparency In Corporate Governance
Many recent corporate governance scandals have caused government to implement a number or regulatory modifications. One factor in relation to these changes is improved disclosure requirements. An example, Sarbanes-Oxley (SOX), created because of Enron, WorldCom, and additional public governance malfunctions, with detailed reporting of off-balance sheet financing and extraordinary use entities. Furthermore, SOX amplified the punishment to executives for misrepresenting. The association between governance and transparency is clear in the community’s discernment; transparency was amplified for the purpose of improving governance. The most common benefit of transparency is the reduction of asymmetric information, and therefore lowers the cost of trading the firm’s securities and the firm’s cost of assets. To counteract this benefit, reviewers typically spotlight the direct costs of disclosure, as well as the competitive costs arising because the disclosure provides potentially useful information to product-market rivals. The main concern is the affiliation between the chief executive officer (CEO) and the firm’s owners (alternatively, between the CEO and the directors acting on behalf of the owners). “Nowhere has this been more true than in the case of Enron. The evidence suggests that Enron’s board and audit committee were aware of numerous red flags, including concerns about Enron’s accounting policies; yet they approved the adoption of the firm’s financials year after year” (Chew & Gillan, 2005, p. 136). McBride must develop an understanding of transparency in corporate governance and ensure this format is used within the corporate governance framework. Hugh has to analyze the result that disclosure has on the contractual and scrutinizing involvement between the board and his role as chief executive officer. The impact of transparency on corporate governance creates a higher quality disclosure both offers benefits and compels costs. The advantages echo the fact that more precise information about presentation allows boards to make improved personnel decisions about their executives. The board of directors for McBride would be required to focus on the best interest of the company and stakeholders with the insurance that everything is performed within the law. Directors have to be made aware of what the courts require as their basic fiduciary responsibility, including care and how to get the protection of the business judgment rule, for the purpose of protecting the directors. “Basically, if a board acts in good faith on an information basis and in a manner they reasonably believe to be in the best interests of shareholders when they do not act in a self interest, the courts will not second-guess their decisions” (McCoy, Martin, & Diamond, 2010, p. 1). A board of this nature would evaluate the suggestions of punishment that has the potential to affect the motives of the CEO to misrepresent the information coming from their firm. Hugh has to suffer some form of punishment if wrong doings are used from the start of the company. The board should ensure that punishment embellishing effort can be successful when severe enough to stop this effort; however, relatively slight penalties can be counterproductive. Transparency with in the McBride Financial Services governance will create a customary where everyone concerned can contribute on any given project and obtain a greater level of proficiency. Transparency can also support in bringing everyone onto the same level within the process and details of the project and includes buy-in to the governance. “Elements of transparency help foster any change process an organization may endure. This is especially true when change needs to occur to bring a company into compliance with any regulator constraints, such as...