Corporate Governance in UK - Assignment Example

?Corporate Governance Introduction The term corporate governance reflects a broad concept that clearly defines the way in which a company operates its day to day business activities. Corporate governance could be defined as “the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled” (Solms & Solms, 2008, p.2). This concept has an elaborated framework by which it tries to eradicate the principal-agent problems. The collapse of American corporate giants including Enron, Parmlat, and WorldCom persuaded policymakers to improve their corporate governance strategies (Euromoney Research Guides, 2007). The 2008 global financial crisis was another incident which influenced regulators to give specific focus on the improvement of corporate governance practices. This paper will critically analyse the different aspects of the corporate governance practices in the UK and will compare them with those of other countries. Corporate governance The concept of corporate governance underwent tremendous changes over the last few decades, especially after the emergence of globalisation and associated industrialization. Corporate managements always work on corporate governance strategies so as to meet the increasingly changing market trends. The corporate governance policy also helps to manage the interrelationship between stakeholders and the organisation’s fundamental objectives which shape the way the firm operates (OECD, 2004). The top management is always eager to know whether its corporate governance policy is efficient enough to meet the shareholder values even though the management also focuses on impacts of the policy on the firm’s operational efficiency. Nowadays corporate governance frameworks specifically target internal check policies as a series of corporate failures in 2001 were ascribed to accounting fraud. In addition, corporate scandals of various forms throughout the last decade attainted public and political interest. Consequently, managements adopted more regulative approach towards the development and execution of corporate governance practices. As Laura (2008) points out, Continental Europe’s multi-stakeholder model specifically emphasises on the interests of workers, customers, managers, and suppliers whereas the Anglo-American corporate governance model values shareholder interests. However, every organisation takes into account the rights and privileges of its shareholders while framing its corporate governance policies. In addition, a corporate governance framework clearly states the roles and responsibilities of the board of directors, integrity and ethical standards of the organisation, and concerns of disclosure and transparency. It is observed that corporate governance practices vary from organisation to organisation and country to country. Corporate governance laws Corporate governance laws in UK clearly define rights, powers, and duties of directors, managers, and auditors, and the position of stakeholders including employees and communities in which companies operate. Since board of directors are the persons at the helm of affairs of a company, the corporate governance policies intent to establish a mechanism to ensure their accountability. According to Fairley (2010), the UK corporate governance law is “shareholder friendly” and it allows shareholders to enjoy their sole voting rights in the general meeting. Likewise, directors possess a series of basic rights including issue of resolutions and removal of board members. At the same time, directors have also a set of duties to be carried out toward their company. Directors are obliged to carry out their duties and responsibilities with competence, in good faith, and strong loyalty to the organisation. If the voting mechanisms seem to be inadequate to meet the interests of shareholders, directors’ rights may be questioned in a court of law. The UK Takeover Code protects the interests and rights of shareholders to a great extent and assists them to freely trade their shares (European Corporate Group, 2010). According to the corporate governance framework, every company is established as a separate legal person and this practice channels the rights and duties of all mangers and investors. This concept clearly defines various management levels and distributes duties and responsibilities among the mangers on the ground of their skills and experience. In addition, the corporate governance assigns mangers to effectively supervise their subordinates and perform specified tasks. At the same time, managers can defend their unlawful acts if there are sufficient reasons to justify their unfair practice. Similarly, the corporate governance policies specifically focus on the rights and duties of stakeholders, employees, and communities. In order to preserve the rights of employees, corporate governance principles greatly emphasise on the significance of a healthy worksite environment. In addition, every firm’s corporate governance framework defines its employee compensation policies and other incentive packages. However, the employees have a contractual obligation to perform their assigned tasks timely and effectively. Otherwise they will be held liable for legal punishment. As O’Brien (2001) points out, nowadays organisations design corporate responsibility polices with intent to serve communities better way because society plays a notable role in the market operations of every firm. Corporate governance laws also influence organisations to disclose all material facts in their financial statements so as to provide necessary company information to its stakeholders. Finally, this policy obliges auditors to check the reliability of a company’s financial statement and to ensure whether the financial report exhibits a true and fair view of the current state of affairs of the company. At the same time, this concept allows the auditor to examine each and every document of the organisation that he considers relevant to conduct the audit work. Corporate governance developments in UK As Roberts (2010) states, the corporate governance structure of the UK represents the balance of power between the board of directors and the general meeting. Generally, principles defined in the UK Corporate Governance Code are indicated by the term “governance”. As Harbottle and Lewis (2010) states, the UK Corporate Governance Code 2010 constitutes a set of corporate governance principles that specifically focus on the performance improvement of the listed companies on the London Stock Exchange. As per the Listing Rules of Financial Service Authority, public listed companies are legally obliged to explain to what extent they have complied with the code in practice and to disclose why and where they have ignored the rule. In case of public and listed companies, central importance is given to securities market which is typified by the London stock exchange. Although the Financial Service Authority encourages private companies also to follow this code, they may or may not adhere to these corporate governance principles as it is not mandatory for them. This Code represents a principles-based approach as well as a rules-based approach. The principle-based approach suggests best strategic practices whereas some compulsory operational policies constitute rules-based approach. The failure of Polly, a major UK company, resulted in the formation of a committee in 1991 in order to improve the accuracy of financial management. This committee put forward a set of recommendations according to which an organisation must have a separate chairman and CEO, a minimum of three non-executive directors in its every board, and an audit committee for each board. These recommendtions came into force in1994 when they were added to Listing Rules of London Stock Exchange. Although, companies were given the option to accept or ignore these principles, they had to justify their option. However, these policies were not adequate enough to meet the operational standards of firms. Hence, a committee was appointed under the supervision of the Marks & Spencer Sir Richard Greenbury’s chairman to deal with issues in executive compensation and thereby to improve the operational efficiency of companies (Well Gotshal & Manages, 2002). This committee proposed a set of recommendations, and subsequently, the Hampel report strongly suggested the integration of both Cadbury and Greenbury principles. The development of Corporate Governance Code 2010 was a major landmark in the UK corporate history. This Code has specifically defined the strategies regarding director remuneration, accountability, and audit section, and shareholder values. A two-tiered director board system is in practice in Continental European countries like Germany and Holland, because these countries hold the view that such a structure would improve the corporate governance practices. In the United Kingdom, CEOs do not take up the position of a chairman of the board whereas in the United States, CEOs hold the chairmanship of board. This is the major difference between the UK and the US in respect to corporate governance framework. While analysing the Asian corporate governance framework, it seems that many of the Asian countries are planning a family based system in order to eliminate the weaknesses of principal-agent approach. Currently, China adopts a control based corporate governance model so as to strengthen its performances and to preserve shareholder interests better way. Road map for international corporate governance The corporate scandals in the US and Europe during the past decade persuaded regulators worldwide to restructure their corporate governance policies. If fraudulent activities are committed by persons at the helm of affairs including board of director, auditors cannot easily detect them. Hence, it is advisable for the companies to re-elect the board of directors annually so as to ensure the accountability and stability of their business operations. In addition, non-executive directors can have a great role in preventing business fraud by conducting surprise checks. It would be effective if there is an ‘investment forum’ where key shareholder gets an extensive exposure to sit together and express their views (Legal& General, 2009). Recent corporate governance developments in Asia, particularly in china, provide an exemplary framework for other countries. Stringent corporate governance policies were the major factors that assisted most of the Asian countries to effectively overcome the impacts of the recent global financial crisis. The Asian Corporate Governance Association, which is a non-profit organisation working for effective corporate governance implementation throughout Asia, specifically focuses on shareholder values and transparency of accounting transactions. At the same time, China follows more regulative approaches towards corporations. References Euromoney Research Guides 2007, ‘The 2007 guide to corporate governance in the GCC’, pp.1-21, Viewed 11 December 2011, European Corporate Group 2010, ‘Review of the UK takeover code’, Sherman & Sterling LLP, pp.1-8, Viewed 11 December 2011, Fairley, J 2010, ‘Compliance in a multinational world’, Corporate Secretary, Viewed 11 December 2011, Harbottle & Lewis 2010, ‘Corporate governance for smaller AIM companies’, Viewed 11 December 2011, Laura, GV 2008, ‘Corporate governance in developing and emerging countries. The case of Romania’, MPRA, Viewed 11 December 2011, Legal & General 2009, ‘Corporate Governance in the UK needs improvement says Legal & General Investment Management’, Viewed 11 December 2011, O’Brien, D 2001, ‘Integrating corporate social responsibility with competitive strategy’, The Center for Corporate Citizenship, pp.1-23, Viewed 11 December 2011, OECD: Organization for Economic Co-operation and Development 2004, ‘OECD principles of corporate govrnance’, pp.1-66, Viewed 11 December 2011, Roberts, J 2010, ‘The theories behind corporate governance’, Havingtheircake.com, Viewed 11 December 2011, Solms, SHV & Solms, RV 2009, Information Security Governance, Springer, New York. Well Gotshal & Manages 2002, ‘Discussion of individual corporate governance codes relevant to the European union and its member states’, pp.1-311, Viewed 11 December 2011, Read More