Introduction
The issue of governance has been proved to be of paramount importance for organisations that wish to remain competitive in the ever-changing market. Organisations have to embrace it in an effort of attaining their goals and objectives. Corporate governance is an important part of any organisation. Many definitions have been formulated for this principle.
In one of the definitions, corporate governance encompasses “the whole set of legal, cultural, and institutional arrangements that determine what publicly-traded corporations do, who controls them, how that control is exercised, and/or how the risks and returns from the activities they undertake are allocated” (Blair 3). This paper looks at the practice of corporate governance at Ford Motors Company.
Corporate Governance
Corporate governance may be defined as a system through which companies are controlled and directed (Monks and Minow 31). The basic components include ethics in the organisation, answerability, information, good management, regulation, lucidity, truthfulness, investor action, financial liability, and asset safety (Monks and Minow 31). Some of the other components of corporate governance include responsibility and internal control systems. These components should work towards the benefit of the organisation.
Despite the existence of good corporate governance principles in organisations, some aspects are not within its scope. Corporate governance does not cure, for example, the failures that occur in an organisation because of incompetence by one or more of the employees or managers (Monks and Minow 21). Poor decision-making and the practice of poor strategies are some of the other aspects that corporate governance does not cure. In any organisation, the key players in governance include the shareholders (including employees, government, and shareholders), the company’s board of directors, the management, and the external audits (Alimehmeti and Paletta 66).
Some of the theories that are important in the discussion of corporate governance include the agency theory, the stewardship theory, and the stakeholder theory (Bar-Yosef and Prencipe 292). The agency theory describes two types of people, namely the principals and the agents (Starbuck 19). The principals are the major owners of the organisation. They include the shareholders, investors, or other owners (Starbuck 19). On the other hand, agents are the people who are delegated with different responsibilities to perform some functions on behalf of the owners or the principal (Bar-Yosef and Prencipe 292).
The stakeholder theory is similar to the agency theory, with the primary stakeholders being the principals while the other levels of the theory include the staff, management and external shareholders (government, suppliers, customers, and unions). The stewardship theory states that people are trustworthy and are able to interact with each other and other organisations in good faith (Bar-Yosef and Prencipe 300). In this theory, the management is considered to own the organisation. Besides, it (the management) is required to hold it (the organisation) in trust for the future owners (Alimehmeti and Paletta 66).
Ford Background
One of the companies that can be described as having a corporate governance policy in place is Ford Motors Company, which is a multinational car manufacturer that has its base and headquarters in the United States. The company was founded in 1903 by the world famous Henry Ford (Corporate Governance Policies Para. 1). The company is among the largest automakers in the world. It owns several other companies in many parts of the world. Many partners originally founded the company. They left to form their own companies while selling their part of the partnership to Henry Ford.
Initially, Ford experimented on the use of steam-driven vehicles before the breakthrough in engineering that led to the development of the internal combustion engine. The company has grown to be the world’s largest motor company, with competition coming from carmakers in Japan and the United Kingdom (Corporate Governance Policies Para. 2).
Currently, Ford Motors Company is the second largest car and truck manufacturer, with branches in more than 40 countries (Corporate Governance Policies Para. 3). The company also operates more than 100 manufacturing plants in these countries where it is located, thus employing more than 300,000 people (Bar-Yosef and Prencipe 292). The company also owns a host of other carmakers, including Volvo, Land Rover, and Aston Martin.
Ford Motors Company has an internationally recognised management system, with operations in countries such as the UK having different and independent management policies. The company has grown in profitability over the years, with the profits hitting the 180-billion mark in the last decade. The company is popular for its trucks and cars, which are sold in many markets around the world.
The corporate governance principles practiced in Ford Motors Company are some of the factors that have led to its productivity and profitability on the international front. Many authors have written on the corporate governance principles at the company, with these principles being praised as effective in the guaranteeing of profitability. How effective are the corporate governance principles at Ford Motors Company? This work looks at corporate governance in the organisation and the effectiveness that they have been associated with in the company.
Analysis
Ford Motors Company has a number of principles that it is associated with in relation to corporate governance. The board of directors at the company adopts and formulates these principles along with other committees such as the charters of the Audit Committee, the Sustainability Committee, Nominating and Governance Committee, the Finance Committee and the Compensation Committee.
These principles are important in the provision of the governance framework to be followed at Ford Motors Company. The corporate governance principles at Ford Motors Company are subject to annual review by the board. In the organisation, the board of directors has the mandate of performing various functions by the shareholders in the company. People who conduct the functions include the Chief Executive Officer, employees, and managers.
According to Genc Alimehmeti and Angelo Paletta (64), the use of different corporate indexes in organisations has positive relations to the value of the firm. These researchers also showed that the existing studies were insufficient in the use of governance indexes, with the published ones showing different results (Alimehmeti and Paletta64). Different models for governance have been applied. Ford is an example of a company that has tested many of models to arrive at the most efficient for its operations.
Some of the other authors that contribute to the topic of corporate governance include Sasson Bar-Yosef and Annalisa Prencipe (292). In their study, these researchers confirm that some mechanisms of corporate governance may be applicable in the improvement of efficiency in an organisation. According to Bar-Yosef and Prencipe (292), boards with better corporate governance mechanisms have higher trade volumes and a lower bid-ask spread. The researchers also conclude that the governance quality is an important influence on the performance of any organisation (Bar-Yosef and Prencipe 294).
The third article considered is that by William Starbuck (19) who stated that corporate governance is an important part of any organisation. It deserves serious consideration. Starbuck (15) states that the practices on corporate governance in different organisations should be based on the different environments existing within an organisation. Companies should adapt their corporate governance principles based on the global and local factors. These principles are incorporated in Ford Motors Company’s corporate governance principles as discussed below.
Board of Directors
The board of directors at Ford Motors Company is the highest-ranking institution that is charged with the monitoring of the CEO’s activities and monitoring of functions of senior managers. The board also guarantees that the interests of the various stakeholders are considered in the management structure. The board selection and size at the organisation depends on a number of factors as listed below.
Board Selection and Size
The process of selecting the board is an annual event. Shareholders are the people who are charged with the responsibility of selecting the individuals to serve in this board in their annual meeting. The shareholders are required to propose the names of individuals to serve in the board, with these the individuals being handed over to the nominating and governance committee of the board at the organisation within the stipulated period. The details of these members are also required. The shareholders may not nominate themselves to be board members. After the nominated names are handed to the respective committee of the board, the names are then compiled into a list for election by the shareholders.
Qualifications
The qualifications of members who may be elected for the posts in the board are outlined in the company’s policies. The most important considerations include the ethical standards of the officers. The company stated that the directors should be of the highest ethical standards at the personal and professional levels (Starbuck 19). These directors should also be of high integrity and with values that are complementary to the organisation’s values. They are also required to have the interests of the shareholders at heart and a mature judgement and practical wisdom (Alimehmeti and Paletta 66).
The company’s intention is to have directors from diverse backgrounds. However, the directors should also have an experience in business, governance, technology, and adequate training (Bar-Yosef and Prencipe 292). The company also highlights some important practices that the directors must not partake. These practices are associated with resignations where appropriate.
For the directors who are to serve as CEOs, the company has an extra requirement that they (directors) should not serve in more than two boards of public institutions (Corporate Governance Policies Para. 3). However, ordinary directors are not allowed to serve in more than four other boards outside of Ford Motors Company. The by-laws in the company are the main determinants of the principles to be followed in the nomination of directors. Among these determinants is the requirement that the directors shall not be nominated after their 72nd birthday except after the board unanimously agrees on the same.
Independence of Directors
The New York Stoke Exchange (NYSE) in which Ford Motors Company is listed provides important regulations to the operations of the company. These regulations include the requirements for the independence of the directors at the company. The majority of directors at the company must be independent in terms of keeping with the regulations set by the NYSE and the relevant authorities on companies of similar size and function in the United States (Bar-Yosef and Prencipe 292). Independence at Ford Motors Company means that the directors are not affiliated with the company, they do not have a material relationship with the company, and that the NYSE guidelines are respected (Corporate Governance Policies Para. 4).
The board at Ford has made a number of guidelines that are important in the determination of the independence of directors at the institution. The first rule is that the employees of the company or those that have worked with it in the past three years are non-independent, and are thus not eligible for nomination. The other relationship that determines the independence of employees is their work with the external auditors of the organisation. The company policies are that the independence of these individuals is only after three years since their termination of contract with the employer, or since the last audit of the company (Alimehmeti and Paletta 66).
The other independence determinant at the organisation is the amount of compensation that has been awarded by the company to the individual. The principles are that the directors are not eligible if they have received more than $100,000 from Ford in the form of compensation in the last three years. This compensation is not director fee, pension, or for services to the company (Starbuck 19). The company also subjects the same conditions to the proposed directors who may have families affiliated to the company.
Board Committees
The normal functioning of an organisation is guaranteed by the formation of committees of the board that are tasked with oversight on the various functions of the organisation. In the Ford Motors Company, the board has a number of component committees that are charged with different mandates. The five committees that constitute the board include the finance committee, the nominating and governance committee, the audit committee, sustainability committee, and the compensation committee. Each is tasked with the functions as indicated by the naming differences.
The compensation of the board is the chief function of the nominating and governance committee. It recommends the compensation to be paid to the board members. The principles that are applied by the committee in the determination of compensation include competitiveness and fairness, the interests of the directors, and transparency of the organisation. The compensation for these directors is reviewed annually at Ford. New directors are oriented on the organisation’s requirements and their requirements at the service of shareholders.
The corporation provides a conference for the fresh managers at the head offices within the first six months of their selection. They are expected to propagate these strategies. They are also required to participate in education programmes that enlighten them on the various management and organisational principles. The role of the directors in the various committees is oversight. They have unrestricted admission to the higher-ranking administrators of the different sections of the organisation.
Summits, Duties, and Responsibilities
Seven conferences are scheduled each year for the board, with the administrators taking the frontline to attend them. In these meetings, the board reviews the agenda and strategies that are developed in the course of the year in consultation with the shareholders. The board is responsible for the oversight of the company’s CEO and other managers within the organisation (Starbuck 19).
It determines the compensation for these individuals. Besides, it develops the succession plan for the CEO and the executives at the institution (Alimehmeti and Paletta 66). The other functions of the board include a review of the functions of the various institutions within it and the actions of the company in the market. The risks and strategies to address them are also assessed, with new strategies being made for the company (Bar-Yosef and Prencipe 292).
Conclusions and Recommendations
From the analysis of the literature and the company’s principles on corporate governance, it is possible to make some recommendations and conclusions. The analysis shows that any major company with the desire of being successful on the local and international fronts requires the right corporate governance principles in place.
Ford is one of the major companies listed in the New York Stake Exchange (NYSE). It has to adhere to the standards set for operations. Some of these requirements include the practice of corporate governance with which the company complies. However, there are areas that the company can improve in the implementation of corporate governance to allow it improve on competitiveness and productivity.
Conclusions
The corporate governance principles at Ford Motors Company are standard to the different institutions. The company has principles that are favourable to growth, with the board having oversight over the management and other employees. The analysed articles show that corporate governance is an integral part of any organisation, and that it should be professionally practiced. Different scholars have different opinions on the topic. The analysed works represent some opinions on the same. However, the works agree that corporate governance is a pivotal part of any company with the dream of success in the current age of globalisation.
In Ford Motors Company, the objectives of the corporate governance principles are mainly in the improved performance of the company and the continued presence on the international front. The principles are also protective to the interests of the shareholders and customers. The laws in the organisation dictate the creation of the board and the various committees within it. The laws are specific and related to the overall goals of the company. The article provides some recommendations on the corporate governance principles that Ford Motors Company needs to adopt to be more successful on the international front.
Ford has an existing audit committee in line with the requirements for the organisation. This committee oversees the accounting and financial reporting processes in the company. The established standards are that the appraisal team should have at least of three associates. In Ford Motors Company, the panel decides on the required size of parties in this team.
The members of this committee must fulfil certain conditions such as being directors, specifically independent directors, and/or have financial literacy. These characteristics are also demanded at Ford Motors Company. The other requirements include being a strong supporter of the organisation and its policies. The company requires that the members of the committee be independent, with no material relationship with the company. This requirement means that members may not have any interests that are in conflict with the organisation’s principles and functions.
The size of the board emerges as an important issue on corporate governance. The existing board members are crucial in deciding the size of the incoming board. The board size at Ford Motors Company is decided by the members of the sitting board in line with the requirements of such a company. The by-laws are also established as a major influence on the size of the board. The rules focus on the overall corporate strategy for the company. The number of board members suggested by some researchers is ten, with this number being standard for the organisation.
Firms can determine the number of board members based on their position in the market and the market share that they have. They can also use their position in the market to determine the board component. This means that smaller companies get fewer members.
This finding is true at Ford Motors Company, which has ten directors performing different functions. The different advantages and disadvantages of having small and large boards are evident in Ford Motors Company. Smaller boards are more focused on organisational goals. It is easy to have a consensus on some of the issues that are important to the organisation. These types of boards are also important since they allow trust building within the organisation and the board.
Having small boards has some disadvantages, including the ease of control that they are associated with. It requires a few individuals to influence the board on an issue. This process does not take much effort since only a few people need to be convinced as opposed to the larger boards where members are diverse. There is a high likelihood of taking longer to convince them. Small boards also have the disadvantage of having shallow talent as opposed to larger ones because the boards with the many members may have differently talented individuals that allow a grater pool of talent.
Ford Motors Company has a compensation committee in keeping with the requirement of the NYSE. The NYSE requires the compensation committee in any listed organisation to comprise independent directors. The directors at Ford Motors Company are independent. Therefore, the company fulfils this requirement. The three articles that are used in the analysis show that proper use of good corporate governance practices in an organisation can lead to better performance.
Recommendations
The corporate governance principles at Ford are suited for the organisation of its size and magnitude. However, the recommendations include the opinion that the company should adopt better ways of choosing its members. The company decides on the panel people through the suggestion and ballot vote of the parties chosen by the investors. This method may be subject to some faults, thus leading to the selection of members that are not dedicated to the organisation. Although the board is democratic and open to all shareholders, it should come up with new by-laws to ensure that the board members are devoted to the strategies of the organisation in totality.
The other recommendation is in the duration before the selection of the board members. The company allows the board to serve for a year before a new group is selected to lead the organisation. This period may be adjusted to a longer period since there is a period of transition between which members are not fully in control of operations at the company. A change of this period from the current one to about two or three years will enable directors to have a longer time to implement the policies and work towards benefitting Ford Motors Company.
Another recommendation is in the determination of compensation for the board members. The board is directly involved in setting the standards in the compensation of its members. This strategy may lead to unfair overestimation of the services of the members. The board should allocate this function to the human resource department, with some of the board members contributing indirectly. This plan will ensure fairness in the determination of their compensation. The company strategies will also be implemented more easily.
The board has five committees that are charged with different mandates at the organisation. Some of these committees have functions that can be merged to reduce the number of committees. The organisation should embark on an effort to reduce the committees to ensure that the board is efficient because members serving in the board are also expected to serve in these committees.
The other recommendation is that the company should reduce the number of organisations that the CEO is serving for them (organisations) to qualify for consideration in the institution. In the current structure, the CEO is allowed to serve in two other companies outside of Ford Motors Company. This may be a hindrance to the CEOs’ operation in the organisation, thus leading to underperformance. The company should reduce the requirement to one other organisation while favouring those that are not serving in other companies. These recommendations are appropriate for consideration by Ford Motors Company. If implemented, they will ensure that the company progresses to better performance.
Works Cited
Alimehmeti, Genc, and Paletta Angelo. “Corporate Governance Indexes: The Confounding Effects of Using Different Measures.” Journal of Applied Economics and Business Research JAEBR 4.1(2014): 64-79. Print.
Bar-Yosef, Sasson, and Prencipe Annalisa. “The Impact of Corporate Governance and Earnings Management on Stock Market Liquidity in a Highly Concentrated Ownership Capital Market.” Journal of Accounting, Auditing & Finance 28.3 (2013): 292–316. Print.
Blair, Margaret. Ownership and Control: Rethinking Corporate Governance for the 21st Century, Washington DC: Brookings Institute, 1995. Print.
Corporate Governance Policies. Ford Motor Company, 2013. Web.
Monks, Robert, and Nell Minow. Corporate governance. Malden, Mass.: Blackwell Pub., 2004. Print.
Starbuck, William. “Why Corporate Governance Deserves Serious and Creative Thought.” The Academy of Management Perspectives 28.1(2014): 15–21. Print.