Corporate governance refers to the set of associations among the organization's management, its auditors, its boards of directors, stakeholders, investors, and more. The vital aspects of effective corporate governance entail the transparency of corporate structures and operations. The responsibility of managers and boards towards shareholders; and corporate accountability towards participants (Glinkowska and Kaczmarek 2015). It is concerned with techniques of bringing the welfares of shareholders and managers into line and certifying that companies are run for the benefit of shareholders. Furthermore, it includes the structures, procedures, cultures, and systems that create the positive operations of companies (Achim, Borlea and Mare 2016). The Corporate governance issues that are identified in the MM Ltd case study are illustrated as follows:
Conflicts of Interest: This situation occurs when a controlling individual of the company has diverse and conflicting visions and insights that directly conflict with the goals of the organization. In corporate governance, it is preferable to avoid this situation as this may lead to worsening the faith of investors and pubic while making the company susceptible to the lawsuit (John, De Masi and Paci 2016). The issues regarding the conflicts arose due to family involvement in all aspects of the company's management. Moreover, Tim and lan always considered MM as their family firm and did not consider the implications of going public. Both of them were not able to abandon control despite the achievements of Catherine for resolving the operational issues. Furthermore, Tim was not happy with Catherine's decision for new international expansion. Also, Mario Crestani was blaming Catherine for missing out on the opportunities available. He was of the view that MM could have been more successful when run by Tim.
Ethics violation: There was leakage of the company's conflict information to one of the investors. However, Justin was unaware of the individual who leaked the information. This is the complete violation of ethics and a serious issue of corporate governance (Lending, Minnick and Schorno 2018).
Accountability issues: The Henan contract was an example to show the accountability issues since the management of Henan refused for payment after some time as it claimed that the harvesters were not suitable for Chinese conditions. That whole process put MM Company in trouble and under lawsuit in a foreign country and its language. Furthermore, Justin was not satisfied with the credit term of 180 days given in that contract by Tim.
Threats and Risks: The general manager of PMA ltd, Jerome Carvallo, talked to Justin about the poor performance and the ineffectiveness of board members along with the management team. He warned Justin of the conduction of re-elections if there is no action taken for improving the things.
Poor decision making: Bad decisions were taken by Tim for Henan's contract had led to a decline in the share price of the MM due to which their EPS (earnings per share) went to negative.
Compliance of laws: Tim broke the laws and sold a significant number of shares before the day MM disclosed the losses of Henan's contract to the ASX. This was a complete ethical breach that was not acceptable under the code of conduct made by Suzanne.
Strategic planning issues: The strategic plan is impacted by numerous factors of corporate governance and the role of the board's members. It is to be done ethically and transparently. However, the issue was that there was no strategic planning done by LAN and Tim for the MM Company. This situation has improved with the joining of Catherine, Justin, Suzanne, and Chrissy and they together worked hard to solve the financial difficulties of the company.
Transparency issues: The planning done by Catherine was not done in the presence of all board members and not even discussed privately before the final decision. This shows that MM had certain transparency issues also that were associated with disclosure of important discussions and information (Fung 2014).
Innovation: Each business indeed needs to take the risk of innovation in services and products as it plays an essential role in corporate governance. However, the MM Company had a lack of expertise and resources to produce the equipment for ethanol production. None of the fellow directors of Justin had experience in the energy industry and that prevented them to look for innovative solutions in their strategic plan (Amore and Bennedsen 2016).
Risk management issues: Since corporate governance is all about handling risks. Therefore, every company must have an adequate ability to take risks and manage them appropriately. As there was a plan to joint venture with sugar millers ltd, Justin had a fear that MM's current risk management systems were satisfactory or not. Also, it was aware that the board members had been satisfied to leave the implementation and reviewing of the company's risk management processes to the management (Klettner, Clarke and Boersma 2014).
Recommendations for each issue are demonstrated as follows:
Conflicts of Interest: It is recommended to the board of directors that all the essential information is to be reached to all directors and management via presentations, briefings, and other mediums so that there can be the availability of better information that could lead to better decisions. Furthermore, to avoid the conflicting situation, there must be separate roles and responsibilities of the CEO and the chairman of the board to promote the balance of power (Filatotchev and Nakajima 2014).
Ethics violation: It is suggested to the board that proper ethical codes of conduct must be crafted and distributed to the company's management and its directors. Also, it is a recommendation to keep a regular check on the outflow of private information from an organization to promote ethical conduct (Rothrock, Kaplan and Van Der Oord 2018).
Accountability issues: There must be a separate corporate social responsibility policy in the company to showcase a responsible behaviour with all the stakeholders. It is recommended to board that it must be responsible for each activity of the company and it must comply with the guidance for board accountability under the corporate governance code. Further, it is advisable to board that it must build robust relationships with the stakeholders like Henan management by being transparent to each concern (Jones Christensen, Mackey and Whetten 2014).
Risk management issue: One of the roles of the board is to establish an internal audit to design an effective risk management framework. This strategy is useful to monitor that the risk culture of MM Company is reliable with the board’s risk desire and risk primacies. Furthermore, the role of board members must be limited to risk oversight of management and business issues that affect risk (Ege 2015). Recognizing and managing risk is a crucial part of the role of the board and management. While the ultimate responsibility for a listed entity's risk management framework rests with the full board, having a risk committee (be it a stand-alone risk committee, a combined audit, and risk committee or a combination of board committees addressing different elements of risk) can be an efficient and effective mechanism to bring the transparency, focus and independent judgment needed to oversee the entity’s risk management framework. The meeting agenda and board papers are distributed on time (Hines et al. 2015).
Transparency issues: One such thing in this regard that the board must do is to non-delegation of responsibilities of providing financial oversight to the staff members. Further, they must ensure that report must be based on current and future operating and financial data to promote transparency. Additionally, they must commit to inclusion and diversity practices to foster transparency within the corporate culture. There is a need for greater transparency on the environmental and social risks faced by MM so that shareholders can properly assess the risk of investing in MM Ltd (Fuente, García-Sanchez and Lozano 2017).
Strategic planning issues: The board in MM Company must have to make a strategic plan by collecting and analyzing data associated with the industry's environment, business models, and the competition’s nature. Furthermore, the board should establish a platform for decision-making defining the fundamentals of a business portfolio that can assist businesses in the future allocation of capabilities and resources. Additionally, their role must include monitoring of the execution of the strategic plan frequently (Too and Weaver 2014).
Poor decision-making issues: It is recommended to board that they must develop a decision-sequencing policy that offers an opportunity to the management team to discuss the decision once before finalization. Furthermore, it is the best strategy to create better discussions and greater possession of decisions in particular. Also, there must be charters to define the decisions for which board members are responsible.
Compliance issue: It is advisable to board to remain vigilant in monitoring the compliance. Additionally, they must sometimes involve other advisors to help them in reviewing compliance risks. It may include evaluating whether the current compliance process and practices are suitable or not (Park et al. 2018).
Threats and Risks: By monitoring the performance of the organization, the board can be able to improve the effectiveness of the management team and hence the entire company. For this, the board must identify the key performance drivers of MM Company and develop suitable measures for defining success. Also, it is the sole responsibility of the board to appoint a competent CEO for the company who can be able to manage and suitably direct the company. Furthermore, an appropriate number of independent non-executive directors need to be appointed to MM's board. This recommendation supports the board in holding management to account and also benefits all stakeholders. The size and composition of the board need to be adequate to meet all requirements of the business. Board renewal is also critical to performance (Al-Matari, Al-Swidi and Fadzil 2014).
Strategic risks refer to those hazards that affect the corporate strategies or the strategic aims of a company. These risks may entail competitive pressure; legal changes; technological changes; changes in demands of consumers; stakeholder pressure, merger integration; and more (Buła 2014). In the MM Company, there are numerous strategic risks for which the board of directors must be vigilant for the environment in which the company operated to adapt to the strategic directions.
The top ten strategic risks facing MM Ltd are as follows:
Since the technological environment indeed creates numerous opportunities for the company and it may also pose certain threats. The risk that MM Ltd faced was that it has not invested in research and development activities while producing a range of equipment for the sugar industry over the years. Furthermore, the company has a lack of expertise in the energy sector and it wanted to enter the novel markets without even a fruitful strategy in respect of innovation to attain a competitive edge. However, this cannot be possible for an organization to excel in producing novel products without a proper strategic plan rather it would create threats and risks for the company in the market among efficient rivalries (Durán, Sepulveda and Carrasco 2018).
It usually refers to the probable loss to market share or financial capital resultant from destruction to the company’s reputation. It is one is the strategic risks that if not managed properly can have affected outcomes on strategic direction, leadership, and feasibility of the company in the long-term. MM has constantly incurred losses and there was no way found to overcome the financial difficulties. Many of the things we're responsible for creating the worst image of the company in the minds of people in the market (Gaudenzi, Confente and Christopher 2015).
An uncertain regulatory environment can indeed challenge the company's ability to do business. The risks that occur due to changes in regulations in certain areas like privacy, environmental safety, price reporting, and more (Miltgen and Smith 2015). MM Company was not adhering to the regulations concerning environmental safety in respect of noise levels, electricity, and water usage. It is evident from the environmental scorecard of MM Ltd.
There is no doubt that a new venture or new project is associated with numerous risks. There is the uncertainty that the project to expand overseas will prosper or fail (Willumsen et al. 2019). The same risk was associated when MM Company decided to expand in international markets and entered into a contract with the Henan agricultural company. Initially, that project was incurring profits for the company however; after some time the payments stopped altogether, and hence it was a drastic project for the MM that put it in a lawsuit.
Change Management Risk
The frequent changes in the corporate culture of the company lead to change management risks as in many circumstances, the company fails to adapt to the changes. Likewise, in the MM Company, the new individuals were brought to the leadership role, directors, CFO, and others. The management team felt harder to adapt to operate the business under their leadership. It is due to the conflicts of interest of members of the company (Kogila 2016).
It occurs due to an unexpected decrease in demand for the products of the company. In the case of MM Ltd, the stagnation risk aroused due to the decline in demand for the manufacture of harvesters and other agricultural equipment. It led to a decline in the shareholder value due to its inability to look for novel sources of growth and expansion (Chopra 2017).
It refers to the risk of financial as well as reputation loss resultant from non-adhering or complying with laws related to the business. In the case of MM Ltd, it was aroused due to Henan's contract, and that put MM under a lawsuit for not fulfilling the quality aspects of harvesters as per Chinese conditions.
Numerous risks arise due to a lack of information on the company's strategic plan entailing values, vision, and mission. It further occurs due to unclear goals and missions of the company. Likewise, MM Company has unclear and undefined missions, values, and vision and not having a strategic plan set for the management to operate the business. Therefore, it posed a risk of financial difficulties, and a decline in the motivation of employees (Les MacLeod EdD 2016).
It indicates the possibility that a competitor's actions are likely to negatively impact the business. The competitors of MM quickly improved their products due to the conservative strategy followed by the company in terms of minimal changes to its products. The contemporary era entirely relies on innovations and novelties. Therefore, MM must have to overcome this risk by keep advancing its products and retained a substantial market share (Dupire and M’Zali 2018).
The demands of the customer are indeed changing rapidly due to the changes in the lifestyle of people, new technologies, or any other aspects. Therefore, MM Company has to analyze the tastes and preferences of consumers via social media activities or other so that their perception about competitor’s product or their current products could be assessed (Al-Dmour et al. 2020).
The controls that must be put in place to overcome the above-stated risks facing MM Company are mentioned below:
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