Contemporary Corporate Governance - Essay Example

?Contemporary Corporate Governance Contents Contents Introduction 2 Corporate Governance 3 Historical Development of Corporate Governance in UK 4 Corporate Governance of USA 7 Comparison of the Two Approaches 7 Conclusion 8 Reference 9 Introduction During the last two decades the business world witnessed a number of corporate scandals like the bankruptcy of Allegheny, Enron, Tyco, Global Crossing, WorldCom etc. The bankruptcy of Lehman Brothers fuelled up the global financial crisis of 2008-09. All these corporate scandals, bankruptcies etc has raised the importance of corporate governance. The ultimate sufferer of all these scandals and crisis are the stakeholders who had lost a large sum of money which they have invested in the companies involved in these scandals. The investors take their investment decisions on the basis of the information disclosed by the companies. Therefore any type of wrong or incomplete disclosure can cost a lot to the investors. Thus with every financial crisis and corporate scandals the relevance of corporate has increased to a great extent. Different regulatory bodies and other government agencies have laid down various policies from time to time in order to increase the effectiveness of corporate governance. This paper is aimed at evaluating and analysing the effectiveness of the various corporate governance policies and approaches of USA and United Kingdom. The paper encompasses the historical background and development of corporate governance in United Kingdom. The meaning and importance of corporate governance have been discussed in order to assess the various theories and approaches of corporate governance followed by various countries. The various approaches of corporate governance followed by United Kingdom and USA have been compared in this paper. Corporate Governance Governance refers to governing someone with the help of some specified system, policies and principles. Thus corporate governance can be described as the principles, specified processes, policies and systems which are used to govern a company. The principles of corporate governance acts as the guidelines which are used to control the activates of the company so that it can it can achieve its objectives at the same time it can also add value to the organisation in such a way so that the stakeholders can be benefited in long run. Thus corporate governance helps the management to operate in such a way so that not only the shareholders but also the other investors, employees, customer and the society as a whole can be benefited from the actions of the company (Centre for International Private Enterprise, 2002, p. 3-4). The basic premise behind the principles of corporate governance is to enable the organisation to conduct its activities with fairness, maintain transparency in its operations and transactions, disclose all the relevant information, comply with all the rules, regulations and laws, being responsible accountable to all its stakeholders and to maintain the code of ethics while conducting its activities. Practice of ethical activities is an important part of the corporate governance. Good corporate governance enables the company to achieve investors’ confidence and achieve goodwill in the industry. Thus corporate governance is not only important for the stakeholders but also for the company too (Thomson, 2009). OECD has described corporate governance as a system through which companies and other business organisations can be controlled as well as directed. Corporate governance helps to setup a structure as per which the responsibilities and the rights of the various members of the companies like the board of directors, employees, shareholders etc can be specified. Corporate governance set the rules, regulations and the processes of decision making regarding the activities of the company. The corporate governance helps the company in setting up the companies objectives and goals and also enable the company assess its performance and helps in achieving them. Corporate governance not only aims at maintaining accuracy and fairness in the financial statements but also incorporating ethical standards in the activities of the business (The Economist Intelligence Unit Limited, 2002). The Sarbanes Oxley Act of USA was an extension of the purview of corporate governance in fact it has evolved the whole concept of corporate governance. The Sarbanes Oxley Act was formed in 2002 just after the US economy witnessed a number of corporate scams and scandals. Sarbanes Oxley Act was a response to correct the various gaps in the practices of corporate governance. It was found that the interests’ conflict occurred due to the activities of the management. It was also found that the financial reporting were not accurate, reliable and lacked transparency of information. On one hand the market and other regulators didn’t have many tools to control the activities of the business organisation on the other hand the transactions of the security markets were affected by the conflicting interests. Thus the Sarbanes Oxley Act laid down various rule and regulations in order to correct these actions and strengthen the corporate governance (Guerra, 2004). Historical Development of Corporate Governance in UK Corporate governance is the process by which a company assure that the board of directors are perform the responsibility assigned to them, the operations and the reports produced by them is transparent and the rights of the shareholders, ethics are properly maintained (Plessis et al, 2010, p.10). From the decade of 1980s and 1990s when the reform took place in United Kingdom, and the inter-organizational networks remain underdeveloped. The intra organizational control that is the management control ad their work process was not up to the mark. The British government tried to recognize the constraints and they found it necessary to maintain a strong corporate governance policy in the company (Rhodes, 1996, p.660-662). A country’s economy mostly depends upon the efficiency of the companies. The companies are free to take any step so they can move forward but they should ensure that they are doing no malpractices. In the year 1992 the Cadbury committee was set up for reporting on corporate governance’s financial aspects, by the financial reporting council. The committee headed by Sir Adrian Cadbury recommended some strategies that should be taken by the companies for internal control of the company, for going concern of the company and for decreasing the fraudulent practices. The committee also recommended making broaden the areas of audit and make clear the responsibilities that should be undertaken by the companies for enhancing the corporate governance (Cadbury, 1992, p.74-77). The next development of corporate governance in UK concerned on the payments to the executive. The Greenbury report was published in the year 1995 and the main recommendations made by the committee was to set up a remuneration committee for determining the director’s remuneration and a new committee which will decide about the new appointments in the board (Greenbury, 1995, p.21-26). In the year 1998 the Hampel committee recommended that the company should improve the communication with the shareholders and the company should find their own way for applying the corporate governance in the company (Hampel, 1998, p.32-40). Thereafter a report was published for assisting the companies for applying the combined code which was proposed by the Hampel report. The Turnbull report assisted the company by making some recommendations for improving the corporate governance process. The report recommended that the boards should be responsible for the internal control and risk management. The report assists the company for operating their business effectively by recommending many ways. The treasury of UK has commissioned Paul Myners for reviewing the institutional investment in United Kingdom. The report proposed the ways for facing the problems while an institution is making the decision. A proposal was made by the report that the pension fund trustees should adopt some principle based on comply or explain for making decision about investment. The report also proposed some change in tax rule and legislative change (Myner, p.21-25). After that the Sarbanes-Oxley act (2002) was stated by the US Securities and Exchange Commission which implies the law that the top executives of the company that is the CEO and the CFO have to confirm that the financial decisions are fairly supported by the financial statements. As the British companies are listed in the US stock exchange, they also have to maintain the rules; as a result in UK the corporate governance procedure changes a lot. In the year 2002 a report was produced which stated the requirement that the directors of the listed companies have to make a report which would disclose the remuneration of the directors also that should be approved by the shareholders at the annual general meeting (UK Legislation, 2002, p.10-12). The Higgs report which was published in the year 2002 recommended that the non executive directors should be half of the board of directors, they should be assessed annually, the relationship between the major shareholders and the non executive directors should be close and they should not be in the board for more than two three years. In 2003 the committee headed by Sir Robert Smith recommended about the structure and role that should be played by the audit committee for make the corporate governance more effective (Smith, 2003, p.2-9). The combined code on corporate governance was published in 2003 and it took the approach of ‘comply or explain’ for encouraging best practices of corporate governance in UK. The listed companies have to report that they have maintained the principles in the code or they have to provide an explanation for not maintaining any principles. The superseded combined code of corporate governance was published in the year 2006 which has specified the area of responsibilities more for the executives, the auditors and the shareholders (Financial Reporting Council, 2006, p.23-24). After that the Companies act was implemented from the year 2008 which stated the implications that should be maintained by the stakeholders of the company. These include the shareholders right to sue the directors for wrong doing and offence against the auditors for misleading information (UK Legislation, 2006, p.16-40). In the Combined Code 2008 restriction was made for an individual that he / she can’t chair more than one FTSE 100 companies (Financial Reporting Council, 2008, p.5-12). In the year 2009 the Walker report has recommended that should be undertaken by the UK banks. These recommended about the board size and compensation, risk management and remuneration structure. The corporate governance code which replaced the code of 2008 was published on 2008. It included the new features about the chairman and board’s extra responsibility (Financial reporting Council, 2010, p.9-17). The corporate governance code for the unlisted companies was published in the year 2010 which should be followed by the companies in a voluntary basis (Institute of Directors, p.7). Corporate Governance of USA As a result of the failures of Enron, WorldCom and some other companies the U.S. congress has brought the Sarbanes-Oxley act in the year 2002 which would protect the investors from the possibility of fraudulent done by any company. As per this act the top management are bound to ensure that the financial decisions are based on the financial reports produced by the company. As per the rule no company can done the fraudulent and if they are not maintaining the rules they are bound to provide the explanation to the government and the US Securities and Exchange Commission. They may face the legal activity from the SEC for not comply with the principles (U.S. Securities and Exchange Commission, 2002). Though the U.S. companies are criticized for not performing well in the 1990s, the research report showed that the firms were not performed so bad in the scenario exists then but certain acts were implemented that time for ensuring an improved corporate governance. Along with the SOX act the NASDAQ and NYSE provide some proposals for improving the corporate governance. From the case like Enron the companies should take knowledge and thereby make improvement of the existing corporate governance culture (Holmstrom and Kaplan, 2003, p. 23-27). As per the law of corporate governance the U.S. companies are bound to maintain efficiency through the antitrust laws, introduce the proxy voting mechanism, prevent the abuse of monopoly power and to increasing the transparency of financial statements and the legal enforcement (Palacio and Johnson, 2006, p.23-26). Organization for Economic Cooperation and Development has made clear the roles that should be adopted by the stakeholders of the company. That includes the equitable treatment of the shareholders, mentioned the role of the stakeholders and a transparent disclosure by the company management (U.S. department of state / bureau of international information program, 2005, p.42). Comparison of the Two Approaches There are certain differences between the U.S. and U.K. corporate governance system. The ownership of the U.K. listed companies is by the institutional investors and the pension funds where in U.S. is only by the institutional investors. The dual leadership is rare in U.S.A. but in U.K. it is mostly done by the companies. The ownership in the U.K. companies is less dispersed than the U.S. companies. In U.S. there are no legal requirements to disclose the CSR activities by the companies but in U.K. it is suggested as the best practice by the Operating and Financial review. The pension act of 2000 requires that in the investment strategies how the environmental, ethical and social issues are taken care of (Aguilera et al, 2006, p.149). Prior to the Enron case there was some major problems existed in the U.S. corporate governance system like less scrutiny by the independent boards and the less responsibility of the investors. After the Enron breakdown the SOX act came into existence and the companies are then bound to follow a strong corporate governance process (Jackson, 2010, p.39- 47). The U.K. firms listed in the stock exchanges of U.S. are also bound to maintain the laws. But there was no such strict rule exists in U.K. They have to maintain it voluntarily and so they have taken a ‘comply or explain’ approach. The research results show that in U.S. there is scope for reducing the cost associated with the corporate governance and there is a scope of improving the robustness of the securities market without filing the lawsuits against the directors of the companies which are publicly traded (Armour et al, 2007, p.24-27). Conclusion Corporate governance is a process that should be properly maintained by the companies for protect the interest of the stakeholders. The U.S. and U.K. markets are the two bigger markets of the world. Many reports were published in U.K. from the Cadbury report in 1992 to the UK corporate governance code which was published in UK. Each report recommends some extra implications that should be include in the report for improving the corporate governance. Some implications were made legal (The Companies Act, 2006, the directors’ remuneration report 2002) but maximum requirements were not legal. The companies have to comply with the regulations otherwise they have to provide the explanations to the stock exchanges. The company which are not listed they also have to maintain certain principles voluntarily. In U.S.A. the companies have to maintain the rules according to the SOX act otherwise they would face legal proceedings. Some rules should be implemented also in U.K. which would enhance the corporate governance effectiveness. Though the corporate governance rules increase the costs of the companies of U.S., the corporate governance structure is more robust there than U.K. So the U.K. government has to implement some laws for make the corporate governance more robust so that the chance of fraudulent becomes lower in the continuously changing scenario of the market of these days. Reference Aguilera, R. et al. (2006). Corporate Governance and Social Responsibility: A comparative Analysis of the U.K. and the U.S. [Pdf]. 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