Accounting and Finance - Speech or Presentation Example

My dear audiences and fellowmen, The new era of globalise businesses and increased awareness in the stakeholders have given importance to the notion of Corporate Governance. The execution of the notion will have important consequences for investors, companies, and, critically, for the stock and other financial markets of UK. With the increasing globalisation when every country can be seen as an opportunity for the investors the lack of understanding of effective corporate governance can adversely effect the investment intentions of investors. Nowadays corporate governance is seen as the key of attracting investors. Capital flow seems directed towards the companies, which practice fair and transparent ways of governing their organisations. With the changing global business scenario the need of understanding and effective practise of fair and technologically advance corporate governance has also increased. In my speech I will first explain the notion of Corporate Governance then we will have a brief overview of the development of corporate governance codes in the UK and the adaptation of similar codes in the EU. ICAEW (2002) has explained corporate governance in a very effective and comprehensive manner as " Corporate governance is commonly referred to as a system by which organisations are directed and controlled. It is the process by which company objectives are established, achieved and monitored. Corporate governance is concerned with the relationships and responsibilities between the board, management, shareholders and other relevant stakeholders within a legal and regulatory framework." Sir Adrian Cadbury (1992) defined corporate governance as 'the whole system of controls, both financial and otherwise, by which a company is directed and controlled'. There are no hard and fast rules for corporate governance, which can be prescribed for all the countries. These rules can be different for different countries according to their needs and cultural settings. According to ICAEW (2002) with all the contrasts present in the rules and regulations of different countries emphasis is given to generic corporate governance principles of responsibility, accountability, transparency and fairness. Responsibility of directors who approve the strategic direction of the organisation within a framework of prudent controls and who employ, monitor and reward management. Accountability of the board to shareholders who have the right to receive information on the financial stewardship of their investment and exercise power to reward or remove the directors entrusted to run the company. Transparency of clear information with which meaningful analysis of a company and its actions can be made. The disclosure of financial and operational information and internal processes of management oversight and control enable outsiders to understand the organisation. Fairness that all shareholders are treated equally and have the opportunity for redress for violation of their rights. According to Meigs et al. (1999) this information meets the needs of users of the information-investors. Creditors, managers, and so on-and support many kinds of financial decision performance evaluation and capital allocation, among others. (P.07) Owen (2001) traces the history of the structure of the British financial system that was shaped by the form which industrialisation took in the 18th and 19th centuries. Following legislative changes in mid-century - principally the Joint Stock Companies Act of 1844 and the Limited Liability Act of 1855 - a growing number of Industrial firms converted themselves from partnerships into limited companies. Some of them remained private, while others chose to have their shares listed, either on one of the provincial stock exchanges or in London. Since than till the decade of decade of 1980s, there was no specific development in the field of Corporate Governance in UK. Tricker (1984) mentioned the same fact as, "In the past there seemed a, no demand for independent supervision or disclosure, no intervention in matters of accountability, no questioning of corporate power and legitimacy, little interest in involvement or participation in management decisions."(P.280) In the UK the lessons learned in the early 1990s when we had a series of major corporate collapses. The most famous one you might have heard of was Robert Maxwell who misappropriated hundreds of millions of pounds from his public companies and their pension plans to finance his private corporate expansion. That and other collapses at the time helped to cause a revolution in the UK in how companies and the accountancy profession were governed. The Corporate governance in UK constitutes the three important pillars. 1) Institutional investors. 2) The codes suggested by the Cadbury Committee. (Although these have been revised and amended according to the changing needs of Modern business. 3) The London Stock Exchange as the regulatory body for implementing these codes. ICAEW (2002) reports the step by step development of Corporate Governance in UK. In this lieu the first step taken towards the process of financial irregularities investigation resulted in shape of Cadbury Report which was published in 1992. The report proposed recommendations such as separation of Chair man and chief executives role and selection of board members. Transparency and fairness in reporting information was also found as an important factor. The report recommended a code of best practise, which were included in the rules recommended by London Stock Exchange. The Rutteman Report presented in 1994 was the extension of the same effort by working group on Internal Control. Greenbury Report, 1995 addressed the important matters as director's pay and the share options. The report also recommended a step forward in the disclosure of remuneration in the annual reports. The recommendations proposed by the report were also added in the listing rules of London Stock Exchange. The process was enhanced in 1996 by establishing Hampel Committee, which undertook the inquiry about the implementation of Cadbury and Greenbury Reports. The Committee published a combined code of Governance in 1998. The publication covered the areas concerning the structure and operations of board, director's remuneration and broadened the area of regulations by addressing the accountability and the relations and responsibility of shareholders. In 2001, the relationship between institutional investors and companies was addressed with the Government commissioned Myners Review. In 2002 the Directors' Remuneration Report Regulations were introduced to further strengthen the powers of shareholders in relation to directors' pay. Mallin et al. (2004) states that the bankruptcy laws are a key component of any corporate governance system. The recent UK Enterprise Bill aims to encourage entrepreneur-ship by improving the rights of 'good' as opposed to 'recalcitrant' business debtors, relative to creditors; as a means of encouraging entrepreneur-ship and reducing the fear and stigma attached to business failure in the UK. In order to improve and strengthen the Corporate Governance efforts by and within the EU member states a report was presented by the High Level Group of Company Law Experts. The Report was aimed at improvement in shareholders protection and increase in the confidence level of investors with regards to the system. The recommendations presented in the report were highly inspired by the development in UK. The report also pointed out towards the fact that the company law in all the EU member states has high degree of diversity, which can further increase, with the enlargement of EU. The report by Mallin et al. (2004) further states that the EU's 'Modernising Company Law and Enhancing Corporate Governance in the EU' published in November 2003 largely incorporates the recommendations of the High Level Group of Company Law Experts discussed earlier. In addition the OECD has recently issued revised principles of corporate governance in the spring of 2004. The Swedish Commission on Business Confidence issued a report in May 2004 emphasising improved corporate governance, increased confidence in the financial sector, and a more effective competition policy. Although in most respects inspired by the UK and EU principles discussed above, the Swedish Commission deviates or goes further in some areas. The Company act should require those decisions with respect to remuneration principles and incentive programmes are taken at shareholder meetings. Companies covered by a "Code of Corporate Governance" (CCC) can deviate from the code under the principle "comply or explain". In the continuation of improving the corporate governance processes in UK, the ICAEW presented a report in 2003, which included the 11 models dealing with the issues related to the corporate governance and financial reporting. In the next part of my speech I will explain the 11 models presented in the ICAEW Report (2003) and their contribution to the solution of the related problems. Value Dynamics: The model discussed in ICAEW report, (2002) emphasises the need of changing the concept of assets. It presents a whole new concept of assets as compare to those used in the traditional accounting. Hermes Principle: The second model presented in the ICAEW report (2002), addresses the problems of long time value delivering process by the companies and the return maximisation on capital. The Hermes principal find the open communication with shareholders a key issue in order to help them assess the present situation of business and the future performance. Balance scorecard: It is considered as the strongest ideas in the last 15 years covers all the aspects from customer to business process and learning and growth. The model is a response to the dissatisfaction with the external reporting models. Jenkins Report: The model emphasis the importance of the relevance of the information provided to the shareholders financial statements in order to effect their decisions. With changing and innovative business environment the information provided should also be changed in order to effectively fulfil the needs of the users. The model put greater emphasis on the needs of those who value equity securities. Tomorrow's Company: The model puts more emphasis on stakeholders' relationship rather than on financial measures. Heavy reliance on financial measures has damaged most of the company's reputation. The financial performance does not represent the overall performance of the business. The position of the company in the market and the performance cannot be judge by only addressing the financial measures. The model recommends that the role of the intangible assets is growing in determining the future performance of a company. The 21st Century Annual Report: The model emphasises the need of disclosing a wider range of financial information. The model takes into consideration how the business report can effectively address the needs of the changing information demands of the users. The model is a step forward from the above proposed models it assets that a successful business report should not only address the leading financial indicator and stake holder value but should also make use of IT and Internet to provide the information on easy to reach and cheap basis. The Inevitable Change: The inevitable change also requires the business reporting to be done by using technology in order to cater the need of versatile, fast and frequent provision of information for today's broad business environment and increasing kinds of the stakeholders. It is found that the business reporting is more effected by the will of producer's rather than users. Inside Out: The model demands an increase in disclosure about the strategic indicators and performance of the business. Most of the companies often report only about the past performance. In order to attract the attention of the shareholders it is important provide information about the potential of the company in order to gain the strategic goals and achievements. In order to create customer value it is important answer all the suspicions of the shareholders regarding the strategic direction, implementation and achievement of the goals. Companies often cannot keep up the pace with the information requirements of the users. GRI: It is a reporting template for the businesses, which takes into consideration social, economic and environmental performance of a company. The GRI model suggests that the following elements should be included in the business reports. Vision and strategy. Profile. Governance of the company. Performance indicator. Guidelines related to economic, social and environmental performance indicators. Unseen Wealth: The model offers importance to the value chain of intangibles, and suggests that the assets should be disclosed to a certain level. The Companies should keep on discovering, developing and commercialising the stages of the value chain for intangibles. It is also suggested that the reporting of the intangibles should be done with great care since poor reporting of intangibles leads to under valuation of, and increased cost of capital for knowledge intense companies. ValueReporting: 1. The model put forward the suggestion that the proper reporting can lead to cost reduction and the value improvement of a company. Dallas (2006) states that in order to make the organisation work effectively the Investors and stakeholders should: Recognise that governance is a risk. Governance-related risks need to be better understood by shareholders, creditors, D&O (directors and officers) insurers and non-financial stakeholders; Understand that there are limits to governance-related laws, regulations and codes: governance risks will not be eliminated by compliance, and even with compliance there is scope for differentiation at the company level; Institute case-by-case company analysis as standard practice. One size does not fit all. Governance assessment should be guided by principles, not rules. Be alert for both underachievers and overachievers. Companies and directors should: View governance as a dimension of enterprise risk management and as a source of sustainable competitive advantage; Regularly assess governance structures and practices - especially listed companies wishing to maintain access to public capital markets; Continually improve transparency and disclosure standards, particularly with regard to non-financial risks and how these are communicated to different stakeholder groups. Companies can use disclosure to signal their commitment to corporate governance specifically and to the management of non-financial risks more generally. Today, there are many number of codes of governance around the world but they are all based on the three principles I have already mentioned - those of transparency, integrity and accountability. In order to avoid scandals like Enron the Government should introduce the codes of financial ethics in order to improve sense of responsibility in the corporate employees and Management. A fair accountability should be undertaken so that the main responsible should pay the price of the fraud. With the changing business environment and increased awareness of the shareholders and investors the information needs for assessing risk has also been changed. Risk assessment plays an important role in the decision making of the investors. Researchers and business bodies have increased their concentration on the area of risk disclosure in order to respond to the needs of the shareholders and investors. Risk plays an important role in the investment decisions by the shareholders. The improvement in public scrutiny and controlled market discipline is largely dependent upon the meaningful and accurate disclosure of information. This not only helps the shareholders but also helps the organisation to conduct business in a safe and efficient manner by achieving their targets through improving their risk management processes. I will end my speech with the concluding remarks that Business reporting effect people from every work of life an effective allocation of resources strengthens an economy by promoting productivity, innovations and an efficient and liquid market. Adequate information plays an important role in reporting the risks and opportunities of investing in business venture. To make effective decisions people need accurate information. The completeness and timeliness of information enhances the probability of taking the most appropriate decisions by the investors. References Cadbury Sir Adrian, (1992). Report of the Committee on the Financial Aspects of Corporate Governance, Gee & Co Ltd, UK Chris Mallin, Andy Mullineux & Clas Wihlborg, (2004). The Financial Sector and Corporate Governance - Lessons from the UK, available from Dallas, G., (2006). Ensuring companies walk the walk, Global Agenda, Available from: ICAEW, (2003). New Reporting Models for Business: Information for Better Markets, An initiative from the Institute of Chartered Accountants in England and Wales, Available from ICAEW, (2002). What is Corporate Governance Institute of Chartered Accountants in England and Wales, Available from ICAEW, (2002). Corporate governance developments in the UK, Institute of Chartered Accountants in England and Wales, Available from Meigs, Robert F., Williams, Jan, R., Haka, Susan F. & Bettner, Mark S., (1999). Accounting: The Basis for Business Decisions, Eleventh Edition, Irwin Mc Graw-Hill, p. 07 Owen, Geoffrey, (2001). Corporate governance in Britain: is incremental reform enough" Paper prepared for European Commission project on "Corporate governance, innovation and economic performance", January 2001, available at Tricker, Robert Ian, (1984). Corporate Governance, Gower Press, Aldershot, England, p.280 Edition is not available for this book. Read More