The UK Combined Code and Financial Performance in the UK Banks - Essay Example

YOUR COMMENTS ARE IN RED MY COMMENTS ARE IN BLUE Chapter 1.INTRODUCTION The purpose of the dissertation The reason for the investigation mentof the problems Research question ( could you make sure all above is in the introduction , and use it as heading) 1.1 Research Question: This research is intended to find out the answer of the question that; Does the UK combined code on the effective board structure add value to the financial performance in the UK banks? Furthermore, two of the major companies of the UK are examined to bring out the facts that resulted in the downfall of the banking sector of the United Kingdom. ( state clearly on what are the areas you are going to exam the question, and on the conclusion part, you have to clearly answer the question, if you did, could you make clearly with heading and sub heading, my supervisor just want to be easy to read and mark the paper. This is give me good chance to pass, thanks) (THE AREAS THAT ARE COVERED THROUGH THIS QUESTION ARE DISCUSSED IN THE “THE PURPOSE OF THE DISSERTATION” and THE QUESTION IS ANSWERED IN THE CONCLUSION) 1.2 The Purpose of the Dissertation: On the basis of the main purposes that resulted in the banking crises in the UK, this report examines if the UK combine Code has proven to be valuable in terms of accelerating the financial performance of the UK banks. However, investors expect a lot more from the financial institutions including banks of the United States of America. This report is aimed to review two companies as criteria, in the United Kingdom corporate governance, on board structure and if the United Kingdom combined code is effective on the financial performance. The dissertation clearly identifies the weaknesses, strengths, current performances and failures of the banking industry of the UK. 1.3 The Reason of the Investigation: The collapse of the banking sector of the United Kingdom was followed by the bankruptcy of the Lehman Brothers, the largest banking institutions in the United States of America. Since then, the UK went in to deep recession, which was considered to be the worst by many economists. In the corporate governance sector, the United Kingdom is considered as the world leader (Shah, 2009). The most important factor behind the collapse of banks in the United Kingdom is the ineffective and inefficient progress of the board members. This investigation is aimed to review and analyze the major issues and factors that took part in the failure of the banking and financial institutions, more specifically, RBS and HSBC. These banks are compared and examined deeply, aiming to discover out if the entities act in accordance with the combined code generated good financial results. 1.4 Objectives, Opportunities and Issues of the UK Combined Code: The rigidity of the financial sector provides no room for abidance (Berndtson, 2009). The business and management corporate entities, at earlier, were governed in harmony only with the basic principles of the agency. This includes only the utmost faith, transparency and accountability. Governance is the manner, by which a task is conducted, hence corporate governance is the manner by which, and the corporation should be conducted. The major scandals of the UK corporate governance provoke Adrian Cadbury to place suggestions, by which the company board and accounting system can be designed or arranged (Boyd, 1996).  After the Cadbury report, several efforts have been made to refine the code. The combine code summarized the role of board as: Ensuring the availability of human and financial resources to achieve objectives. Well equipped with the financial information. Trying to be the successful leaders. Examining the outcome and results of management. To take action within the authority. “Faith, trust, competency, professionalism, transparency, and accountably” (Scribd.com. 2002) are the major pillars of the corporate governance. To further refine and enhance the laws, and practices that as a whole makeup for the corporate governance framework, the corporate governance principles are extremely important (Scribd.com. 2002). 1.5 Several Recommendations and Suggestions: This paper also highlights the reviews of FRC and Sir David Walker. A set of numerous recommendations and suggestions, concerning the role of the directors, were given by Sir Walker. The Government Commission requested Sir David Walker to evaluate the governance of the banks and other financial institutions (BOFIs). After reviewing the important areas, Sir Walker published 39 recommendations (Linklaters, 2009). On the other side, the FRC also reviewed the combined code to find out that the recommendations of Walker must pertain to each and every listed company. FRC proposed the significant structural changes in emphasizing more on the elements that support a successful and efficient board. Walker presented his report by the end of 2009. In the same year, after a month or so, the FRC also presented its report on combined code, which was also known as the UK Combined Code after the publication of the final report of the FRC. Some believes that for the succession plan, the argument on the board’s accountability for the senior executives is not adequate in almost both the reports. To clear the points, David Walker and the FRC were supposed to discuss in detail. The major imbalance, in remuneration structure, is the risk adjustment which is crucial to compensate the managerial balance to raise the threat. Directly or indirectly, any company’s performance will be influenced or affected by the decisions that the share holders take or refuse. The recommendations enhanced the disclosure of compensation measures. Banks have been the focus of the report but in a way its conclusions are more relevant to the financial institutions as well. In the UK as well as in the European countries, the US and the gap in the banks has widened leading for call of new regulations under the company’s legislations in the UK. The growth, expansion and importance of the Code have gradually enhanced the requirements and responsibilities of executives in the boards of the listed companies. Financial Reporting Council stated that “The UK Combined Code is not a rigid set of rules; rather it is a guide to the components of good board practice results from consultation and widespread experience over many years” (2008). The amendments in the provisions of the Code will be applied in the beginning or at the end of June 2010. FRC (2008) summarized that: The board ought to seek assist from the shareholders and other experienced members not only in the board appraisal but also in the board re-election. The board to present the effective risk management system and to fulfill company’s requirements to meet any surprising or known risk. The provisions of the revised Code emphasize the significance of the persuasive duties and tasks of not only the chairman but also of the non-executive directors. The value is given to the counseling, trainings and improvement of the board executives and the board directors. 1.6 Comparison of RBS and HSBC: The report also highlights the financial crises in the banking sector of the United Kingdom. Two of the major banks of the UK, the HSBC and the RBS, are also in comparison to evaluate if the entities act in accordance with the combined code generated good financial results. The objective of RBS was to be the leading bank delivering world class services to their clients. The annual report of RBS for 2007 reassured that the RBS had an opportunity to accomplish in 2008, however, also had an incomparable position of chances. Mark Fisher, Chairman of ABN AMRO once stated that ABN AMRO was not in bad phase, although, RBS’ decision to takeover ABM AMRO turned out to be an unintelligent move rather than the intention for which it was purchased i.e. to sustain impressive growth trajectory. The biggest loss in the history of British corporate in February 2009 was suffered by RBS (Spin Profiles, 2009). The Forbes magazine HSBC, the UK based public limited company, is not only the world’s leading banking group but also the 6th largest company (Absolute-Astronomy, 2009). HSBC’s headquarter in Hong Kong until 1992. However, it was after the acquirement of the Midland Bank, London became the centre point of HSBC. Furthermore, Hong Kong still got the solid stand in the bank’s history as it is the sufficient source of income for HSBC (Green, 1997). The bank was the United Kingdom’s best capitalized bank in 2008. HSBC was named among the top 50 safest banks of the world in February 2008. In banking circles, HSBC’s trading goes back to the 19th century and its conservative approach in its business methodology is very well known (Yell, 2008). However, HSBC suffered a series of headlines in its technical management area recently and although there were no large repercussions but the group’s image did suffer a lot of embarrassment (Kategori, 2009). HSBC declares itself to be the 2nd leading bank by mean of the scales. As far as the market value is concerned, HSBC holds the leading position as well (2010). In 2007, As compared to the Bank or America, HSBC was supposed to be the most cost-effective and money-making bank on the globe in the net income. HSBC holds the leading position in the UK in world’s financial market and the largest part of the Hong Kong’s home currency is printed by the bank in its own name (HSBC, 2010). The sustainable business model is the key to a long-term success and HSBC believes in this motto. The four essentials of HSBC are: shareholders; relationship with customer, high quality, committed staff and promise to handle not only the social but also the environmental influence of business (HSBC, 2008). HSBC business was built by focusing on the grooming markets around the globe. HSBC has brought concrete results to the markets during the period of recession. The HSBC has contributed towards the economy by “delivering the sustainable business”. This action of the bank permits it to pay taxes to the government, allows paying dividends to their investors, and also making sure that the employees should get their salaries on time. Below are the statistics shared by HSBC (2008) for their stakeholders for the period of year 2005 to 2008: Statistics for the Shareholders (HSBC, 2008) According to Peter Lee, editorial director of Euro-money, HSBC is one of a few banks of the world who survived without government assistance. HSBC is the most stable bank in the emerging economies. The global market and business of the bank is thriving. Other banks are forced by the regulators to copy the lines of HSBC. The best part of HSBC management is that it admitted its mistakes and is trying to compensate them. As HSBC holds the strongest position in the financial market of the Unites Kingdom, it has the ability to maintain its significant effect. It is also worth mentioning that the bank does not rely, for its future growth, on the market of mortgage, housing or credit. Despite maintaining a significant presence in the United States, the United Kingdom, along with other developed economies; HSBC bank barely relies on housing, mortgage and credit market for future growth (Staas, 2009). By the end of 2009, HSBC announced the major staff bonuses. In contrast to that RBS, majority of which is now owned by the government, ordered to stop paying bonuses. During the recession period, when economy is slow, the bank is advised to stop paying huge bonuses. However, HSBC is not been criticized as it managed to maintain a strong performance all throughout the recession period and the market collapse. Moreover, HSBC does not require the support of government (Costello, 2009). In comparison to the RBS and other companies, HSBC is regarded as very cautious about giving bonuses, but after facing some problems and difficulties during the financial crisis, the company is expected to pay considerable bonuses to their employees. The reason behind this is perhaps because the company is expected to post more effective and profitable reports. Whereas, RBS losses massively, revealed 1.5 billion losses, after another bailout offered by the government which holds 85% of its shares (Aaron, 2009). HSBC is listed in the stock exchanges of many countries around the globe, which includes London, Paris, New York, Hong Kong and Bermuda (Global Custodians Directories, n.d). It also has dual prime listing not only in Hong Kong but also in London. The bank is dedicated to act in accordance with whichever is further difficult provision. The bank is not only owned by more than 200,000 shareholders but also has the capitalization of US$177.6 billions. Moreover, HSBC has 510 regulators around the world (EuroChamvn, n.d). HSBS, like a lot of other organizations and financial institutions, was also attacked by the global financial crisis. It affected the stakeholders, customers, employees and business of the bank (HSBC, 2008). The takeover of HFC (Household Finance Corporation) was known as the major drawbacks in the downfall of HSBC but HSBC has, with no trouble, managed the situation while many failed to do so in the UK. It is probably because when HSBC was listed as the UK bank, it was impacted by the Asian markets, which were uncovered to the venomous debt of the United States. HSBC essentials are: Efficient and skilled board. Marvelous Customer Care. Stable financial standing, liquidity and capital. Effective leading policy. Board works collectively as one. Sensible and perfect information disclosure practices (Turner, B. 2008) The RBS board of directors is held responsible for the RBS failure as they approve business strategies that actually caused such damage. Boards should accept that they actually failed in their duties and in accomplishing their managerial tasks for the reason that they were responsible for approving the business strategies. The CEO of RBS concentrated on the position of the non-executive directors in testing the higher managers (Berndtson, 2009). Furthermore, causes of RBS failure are: SME Banking (Small Medium Enterprises) was more of a weakness previously as other banks had acquired better SMEs resulting in RBS to lack in this particular area. The stiff policies and procedures. Lack of the competency and board capability. Not very aggressive style of operating. The primary purpose of the combined code is to include the same figure of not only the executives but also the non-executives, who all would be equally responsible for the outcome of any decision that is taken by the board (Parliamentary, 2009). Many severe charges came up in opposition to the efficiency and usefulness of the non-executive directors. As per a few arguments, the boards of the most important financial institutions in the listed companies of the UK contain non-executive directors without any time to audit their functions properly (Parliament.UK, 2009). 1.7 Research findings: After the analysis and the examination of the literature and condition of the financial sector of the United Kingdom, it has been found out that a many amendments are done in the provision of the UK Combined Code, to make it effective. However; it is worth mentioning that the code maintains its principle based approach rather to emphasize on the more perspective framework. Moreover, the report also brings before us several approaches and suggestion made by the FRC. In the methodology section, the result that we acquired from the questionnaire provides us more information about the factors that played important part in the financial disaster of the UK. The research shows that the majority of the participants, of the questionnaire, believe that: The over confidence and over optimistic approach are the factors that results from the low interest rates and misplaced faith in financial innovations. The inefficient boards have played an important role in the banking failure, not just in UK but also around the world. They also agree that the lack of interest and insignificant role of the shareholders is another factor behind the disappointment of the corporate governance. Majority of the participant agree that the news of the collapse of the RBS is shocking new. They also believe that the HSBC contains the high quality customer services and it has high standard values. The result shows that the people regard HSBC as a strong bank. Chapter 7 CONCLUSION Could you read through and put the reference. YOUR COMMENTS ARE IN RED COLOR. MY COMMENTS OR ADDITION IS IN DIFFERENT COLOR. This report is to bring about the objectives of the corporate governance. It also inquires the effectiveness of the United Kingdom combined code on the effective board structure.(work is related to the current title as given in the initial description, putting the new title is not suggested) ( my dear, I have not seen at anywhere of the work above , you refer to the effectiveness of the uk combined code, do you think the work and title is related, I have a question. My formal title of this dissertation is “AN EXAMINATION OF THE CONTRIBUTION OF THE COMBINED CODE TO EFFECTIVE FINANCIAL PERFORMANCE OF U.K. BANKS - A CASE STUDY OF RBS AND HSBC “ feel free to amend the title, I just work the title and work is related). As the business or an organization in the corporate governance increases its structure, its complexities and needs also increases. In order to manage the proper framework, it is necessary to amend and implement new rules and laws that would be appropriates for the business and management. The UK combined code works on Comply and Explain basis (Jill, 2007). It means that corporations and organizations could select not to act in accordance with the definite requirements but will have to present an appropriate open justification on their decision. As a whole, the greater source of waste in your business and in our economy is the unmanaged risk. In other words, a company needs a better and responsible management to gain money and respect in the corporate world and the society as well. According to the UK combined code, all the directors and the board essential to offer the commercial management of the business inside the frame work of cautious and valuable control, which enable risk to be controlled (Herbertsmith.com, 2010). To an extent, in the corporate governance,( what do you mean ‘ incorporate governance) the financial crisis attributed to the failures and to the weaknesses. And the corporate governance failures are the chief among the economic crisis. The Greenbury Report gave birth to the first Code of the best practice for the executive remuneration which was later combined into the Hampel Code. The growth of the Code over time has, increasingly and noticeably, improved the necessities for the tasks of the self-sufficient directors on the United Kingdom listed company’s boards. The crisis in the banks of the United Kingdom was due to their mismanagement and lack of responsibilities. While it is noteworthy that the breakdown of the corporate governance in the banking and financial sectors also included the boards of the banks. The boards should include the balance of directors and the non-executive directors. The ranking has become a recognized and trusted standard for credit worthiness for the entire financial world and also for the corporate governance.(source) (provided below.) HSBC appears to have sustained the high standards of corporate governance. According to the report of brand and innovation strategists Prophet, (SORRY IT CAN NOT BE CHANGED AS THE WORD PROPHET IS NAME OF THE INNOVATION STRATEGISTS). ( use simple words)HSBC is one of the banks which offer the top retail banking customer dealing or customer care in the United Kingdom (Prophet, 2009). Both in online banking and branches, HSBC topped for customer experience. Regardless of the economic crisis and stock market crashes, investors’ trusted HSBC highly. And, working closely with the customers in difficult times can help to adept the demanding financial condition. This has been proven as not only to continue businesses working, but it also allows the bank to continue performing an essential place in the financial system and expand relationship with the customers. During these crises, the financial sector has been under extensive inspection and it is because of the bank workers who have had to go through the distress (( use simple words )while operating to assist its clients. The employees of HSBC support the bank’s procedures to sustainability that is a proper and crucial element in the retention of dedicated and enthusiastic workers. HSBC was the top most bank and was highly rated in the year 2008 for climate change governance by the US investor’s coalition. The bank also supports numerous set of rules and code of activities in association with the customers, workers, shareholders, speculation and lending actions. The UK was hit much harder than any other developed country in these financial crises, except the USA, because the UK is more independent on the financial sector than the other economies and also because the UK is probably the most indebted, developed country in the world. Sir David Walker was asked by the Government to review the governance of banks and the other financial institutions, which encouraged 39 recommendations. While, FRC initiated its review to examine that these suggestions are supposed to be applied to all the entities which are in list and which of these might be relevant to the non-financial listed companies. A general characteristic of corporate governance failure is the board, in particular, their non-executive directors. This is not untouched to the ability and the propensity of; the senior executives to be in charge of the execution of the points to the boards; and that the boards manage. The UK combined role has played a significant role in the corporate governance. In the boards of the listed companies of the United Kingdom of all sizes and operating in all sectors of the country, the UK Combined Code is widely respected. The people responsible for creating the effective and efficient board are the chairman, the executive directors, the non-executive director and company secretaries. The Combined Code is a crucial indicating tool in the development of good corporate governance. The Combined Cod, as a whole, is a unitary body of a number of different reports, that are elaborated and enhanced from the Cadbury recommendations, Greenbury report, Hampel report. The UK Combined Code is a conduct to the component of high-quality board activities rather than a set of rules and principles. The essential part is its principle based approach which makes it valuable in the corporate governance structure. Regardless of size, sector or maturity, the beliefs ( use simple words) and realistic necessities opportunities, and the finest action guidance to be functional and successful to the entire industry. As quite different to a more perspective based system, the principles based approach is a crucial element of what make the Combine Code valuable, letting the entities to work out and formulate a governance structure, policies and procedures that are in accordance to the Combine Code for themselves which could be helpful. During the disaster of the year 2008, results in business failure, particularly banks in the United Kingdom were affected. But, it could be not the right thing to do to finalize the points that the UK governance has, consequently, unsuccessful further than fix. A few boards did not certainly get over with the financial crises, such as the Royal Bank of Scotland and many other banks, but so did the controller, the government and still the financiers who were pleased to support strategies that we can now see were out of control. The RBS, once fine bank, now 70% owned by the taxpayers, thus both the private shareholders and the taxpayers lose out. Until the simplicity is re-established and the external investors and depositors can assure themselves, it stays balanced to refuse believing any financial institute or a bank intended for any comprehensive era. Following all, the financial entities ought to be the best well-versed in link to their financial standings and stability. The core elements of the combined code stay efficient and appropriate. Despite the fact that, a few boards fail to deliver what was expected, but the comply or explain rule continuous to do well for nearly all of the parts. Furthermore, a slight foundation for innovative provisions and principles can be seen. It can be seen that if a board fail to govern and direct an entity properly, then it diminish the value. The shareholders and the directors have got to be responsive to the consequences of executing the governance in a correct and right way. Weaknesses in many areas are apparent. In many cases, due to the ineffective procedures of the corporate governance, the risk management has failed. Information of the strategies and the procedures did not reach to the board. While, at the other side, in many cases, approved strategies were not put into suitable operations to monitor its implications. More so, in other cases, remuneration structures and programs are not exactly associated to the company’s strategies and their interests. Inefficient accounting values and the poor narrow necessities have also proven to be insufficient. The level of the crunch in the financial segment and the sternness of the existing recession mean that indicates no space for compliancy. The board should comprise the balance of directors and non-executive directors. Good governance is not the exact solution for all; however the tick box compliance exercise one way or another assures sound strategic philosophy, judgment and efficient oversight. The good governance is not ensured by the mere Code. The corporate governance, preserves in the Combined Code, is commendable; it can be helpful in synchronizing the processes, practices and work. The bank encourages its employees to take internal actions when it feels that the functions and policies ( use simple words ) are not being addressed adequately. All the members of the Board; executives, non-executives,( I do not understand the term’ managers’ in which level, too confuse, state clearly or change the works, remember, this is forcus on board) are responsible for ensuring that their employees are aware of the business principles and that they are able to comply with them in their work. Compliance with business principle is a major element in the assessment of managers and employees. Banks business principles reflect the extent of their responsibilities towards their clients, with whom they are actively developing open communications to explain actions with the framework of these responsibilities. HBSC not only maintains its business values but also is dedicated to the high standards of business principles. HSBC has an outstanding customer services; a prudent leading policy and a strict expense discipline. The recommendations and reviews of FRC and Sir David Walker are supposed to be considered as a harmony to the principles of the corporate governance. The principles based approach is to be retained instead of moving to the more prescriptive framework. The context for the review is certainly the banking crisis of 2008. The reviews and recommendations are unambiguously sloping to issue that are specific to the corporate governance, focusing on the policies that would ensure good corporate governance. Nonetheless, the recommendations are not intended to discourage the listed or the non listed companies of the United Kingdom from undertaking any policies or programs. The analysis of Walker and the FRC reports emphasized that the corporate governance and the equilibrium among the governance, management and the rights is vital. The key essentials of the Walker’s Recommendations and the FRC’s report are: The significance is prearranged to the role of the chairman and the non-executive directors. The board should be efficient. The board is supposed to carry out a prescribed and rigorous assessment of progress with the external facilitation to evaluate them in the best possible manner. The board must consist of the stability and equilibrium of directors and the non-executive directors. The shareholders should engage with the board, in which they are investing, on regular basis. The recommendation committee must appraise and assess the equilibrium of capabilities, efforts, knowledge, liberty and the familiarity on the board. Improvement of revelation of the remuneration and compensation committee. The risk committee ought to concentrate on the fundamental prudential risk of the institution. The risk management committee should be like any other board committee. Moreover, the collapse of several banks results, including RBS, from managerial failure. The risk management and lack of responsibilities are the key factors in the failure of the RBS. Further, the board should be held responsible and answerable for not the disaster and for not justifying their roles. In result of the known mortgage disaster and the asset’s value adjustments, RBS was adversely affected. The government of the United Kingdom has been supporting the bank and now possesses the greater part of its shares in the Stock Exchange of London. Through focus leadership, competent and reliable board, and the investment, RBS can provide the strongest possible future. The important thing to understand is to prepare strategies according to the needs of corporate governance in order to provide better results. RBS failed because of the managerial failure. The lack of responsibility and the risk management are the main factors of the RBS failure. As per Stephen Hester, the chief executive of RBS, takeover of ABN AMRO was the turn point for RBS. The board of the Royal Bank of Scotland is mainly of topical period following the walk out of nearly seven directors by the mean of resigning from services in the aftermath of the bank. The RBS, once fine bank, now 70% owned by the taxpayers, thus both the private shareholders and taxpayers lose out. Considering the inconvenience and disaster, the board should accept the faults and the managerial failures. On the other hand, the well-known bank, HSBC sustained the high standards of the corporate governance. Moreover, it was ranked among the top 50 safest banks of the world. The ranking has become a recognized standard of credit worthiness for the entire financial world and also for the corporate governance. Except for the North America, HSBC remained profitable and financially strong in all of its regions. Management also plans to return to its roots and capitalize on its traditional strengths. REFERENCES Prophet. (2009). UK Customer Experience Report: Retail Banks. Available: http://www.prophet.com/downloads/articles/ukcustexp-retail-banks.pdf. Last accessed 14 May 2010. Read More