Five Principle of the UK Code of Corporate Governance and Comparing it to the Australian Code - Case Study Example

Corporate Governance Name Course Lecture Date Introduction The repercussions of poor corporate governance have affected the quality of life of most people in many instances. A glaring example is the recent Global Financial Crisis and the Greece debt crisis. Corporate governance codes are developed to deal with such problems as fraud and dishonest, poor knowledge of market, poor business decisions, stock option manipulation, money laundering and breach of director’s duties which were at the centre of the recent collapse of western companies. Corporate codes of conducts are attempts made by the corporate world to ensure such crises are avoided. This paper describes the five principle of the UK code of corporate governance and compares it to the Australian code. The essay finds that the UK and the Australian codes borrow heavily from each other. However, the Australian code is more detailed and prescriptive than its English equivalent. UK vs Australian code The first principle of UK corporate Governance is concerned with Leadership. According to Financial Reporting Council (2012), a company is under the collective responsibility of an effective board which should ensure the long-term success of the company. This principle emphasizes that no one person should control the board and that the board should more concerned about the long-term success of the company. Under the principle of leadership, the board’s responsibility and that of the executive director should be laid out clearly and this division should ensure no one person dominates decision making. The board leadership and questions of its effectiveness is the responsibility of the board chairman (Financial Reporting Council 2012). This principle emphasizes the important role of non-executive members of the board who are supposed to question decision making constructively and assist in the development of strategy. In contrast the first principle of the Australian corporate governance code states that companies should lay a solid foundation for Management and oversight (ASX 2010). This principle is very similar to the leadership principle of the UK corporate governance code. It asks companies to set out and disclose the functions of the board and those that are delegated to senior executives. In contrast, the UK principle asks companies to include certain information in the letter of appointment of company directors. In this letter, the process of evaluating the performance of senior executives and the question of performance based remuneration are set out (ASX 2010). Furthermore, companies are required to provide information pertaining to the function of the director in running the company. Therefore, the Australia, provisions are more detailed and set out practical steps to be followed in implementing the principle. The second pillar of corporate governance in the UK is referred to as effectiveness. This principle is concerned with the independence, skills, experience and knowledge of the board and its committees (Financial Reporting Council 2012). A right balance of the above mentioned skills is needed for the board and its members to collectively and respectively carry out their duties. According to Financial Reporting Council (2012), the process of appointing new directors should be formal, transparent and rigorous. Secondly, the principle asks directors to assign other employees enough time to carry out their responsibility (Walker 2009). Thirdly, the company should provide induction training to all new directors and should also train them regularly to ensure their skill and knowledge are up to date. Furthermore, the principle emphasizes on the need to provide timely and quality information in an appropriate form so that the board may be able to discharge its duties. It also calls for a rigorous annual evaluation of the boards performance alongside that of its directors and committees (Financial Reporting Council 2012). It also asks, directors to seek re-election at regular intervals if they continue performing satisfactory. In contrast, “Structure the board to add value” is Australia’s second principle of its corporate governance code (ASX 2010). First, the principle sets out that majority of its directors should be independent directors. It goes on to say that the chairman of the board of directors should be an independent director. This principle also asks companies not to give the role of CEO and chairman of the board to the same individual. It also requires boards to have a nomination committee. Similar to the UK code, sub-principle five require companies to have in place a process to evaluate the board’s performance, alongside that of its committees and individual directors (Financial Reporting Council 2012). Australian companies are required to make disclosure on the information that show that they have complied with principle 2. In comparison to UK’s corresponding principle, The Australian principle contains more detailed guidelines on ensuring board independence and its effectiveness in carrying out its tasks. The third principle of the UK corporate governance code is named Accountability (Financial Reporting Council 2012). This principle requires the board to present a true and understandable account of the company’s position and prospects (Financial Reporting Council 2012). The principle recognizes that the board is ultimately responsible for the risk taken by the company in its attempt to achieve its strategic objectives. It charges the board with the responsibility of managing risks and maintaining internal controls. It also asks the company board to apply corporate reporting, risk management and internal control principles to maintain an appropriate relationship with the Company’s auditor. The fourth principle of the Australian corporate governance code corresponds to the Accountability principle of the UK corporate governance code and is referred to as the “safeguard integrity in financial reporting” (ASX 2010). Similar to the UK code, Australian CEO or equivalent officer and the chief Financial officer CFO are required to present to the board reports that present a true and fair view of the company’s position and prospects which comply with relevant accounting standards. Secondly, the principle requires the board to establish an audit committee and lays out guidelines for the formation of the committee. It also requires the board to give the audit committee a formal charter. Principle four of the UK governance code is called Remuneration (Financial Reporting Council 2012). It requires companies to remunerate directors at levels that are sufficient to attract, retain and motivate quality directors. It however caution companies not to pay directors more than is necessary for their skills and performance (Financial Reporting Council 2012). It also asks companies to link corporate remuneration to the company and individual performance. Companies are required to put in place transparent and formal systems for determining the remuneration of directors (Walker 2009). It cautions companies against letting executives determine how they will be compensated. The remuneration principle in the UK code corresponds to the ninth principle in Australia which requires companies to remunerate fairly and responsibly (Financial Reporting Council 2012). Sub-principle one requires the company board to establish a remuneration committee. Sub-principle two requires the board to consist of majority independent directors, it also requires that the chair of the remuneration committee be an independent director. In contrast, the UK code prevents executive directors from being involved in a committee to determine executive remuneration. Under this principle, companies are also required to clearly distinguish the remuneration structure of non-executive and executive directors. Principle five of the UK corporate governance code is concerned with the relationship of shareholders to the management of the company (Financial Reporting Council 2012). It requires the management of companies to engage in dialogue with shareholders as they have a mutual interest in the company objectives. It is the responsibility of the board to ensure satisfactory dialogue between management and shareholders takes place (Walker 2009). The principle argues boards to use the opportunity of the AGM to cultivate this dialogue and encourage investors to participate. Principle five of the UK corporate governance code as discussed above correspond to principle six of the Australian code which proclaims company management should “Respect the rights of shareholders” (ASX, 2012). Australian companies are required to put in place a communication policy that ensures shareholders are aware of major decisions. The communication policy should be geared towards ensuring shareholders participate effectively in the AGM. It also requires companies to make effective use of electronic communication to ensure shareholders are effective participants in decision making. Compliance with the Code in Australia EFIC Australia EFIC is the short form for Australia Finance & Export Corporation. EFIC is governmental organization charged with ensuring Australia’s export trade flourish. EFIC reports compliance with principle 1 of the code as it has laid a solid foundation for management and oversight (EFIC 2012). The company’s board is appointed by the minister of trade, while the board later elects the managing director (ASX 2010). Upon, appointment directors are provided with an induction package as required by principle 1. The pack contains all the information necessary for compliance with principle 1. The board determines it powers and those of the managing directors and sets them out in a documents called the “Statement of the Powers of Managing Director” (EFIC 2012). The boards reserves itself the other powers. The board is in-charge of assessing the performance based remuneration of the managing director under guidance of the Government’s Remuneration Tribunal. On the other hand, the managing director asses the performance of other executives under the guidance of the EFIC’s Performance Management Program. Principle two in the Australian code is concerned with independence of the board so it can add value to the company. EFIC board is dominated by independent member with the chair being independent (EFIC 2012). No one individual is allowed to hold the seat of chair and EFICs managing Director. At each board meeting, board members are required to update their annual disclosure of external interests which are an assessment of their independence. Board members are also under statutory obligation to disclose material personal interest in the company affairs whenever they arise. EFIC evaluate board performance at least one in every two years. The evaluation addresses director’s skills, operation of meetings, quality of information received, roles and responsibilities, induction and education, exercise of powers and effectiveness, stakeholder obligations and risk management (EFIC 2012). The management provides the board with reports on operations a week before board meetings (EFIC 2012). This ensures that the board has timely and effective information to assist in corporate decision making. EFIC complies with ensures that integrity is safeguarded in its financial reports (EFIC 2012). Since its inception EFIC has had an audit committee in place whose mandate is set out in the audit charter. The committee oversees internal and external audits (EFIC 2012). Secondly, it oversees preparation of financial statements and reports to ensure they are comprehensive and accurate. Thirdly, it ensures reporting complies with statutory obligations. Finally, it ensures financial risks are effectively managed and controlled. The Managing Director and the Chief Financial Officer have to state in writing the financial reports present a true and fair view of EFIC’s position and prospects and are compliant with relevant accounting standards (Cooper 2006). External audits at EFIC are conducted in accordance with the CAC act. Currently, EFIC’s external auditor is Ernst & Young (EFIC 2012). EFIC complies with principle six of the Australian Code that requires companies to respect the rights of its shareholders. EFIC is solely owned by the Australian Government, and maintains a close working relationship with the Government (EFIC 2012). EFIC has set out a number of principles that seek to balance its responsibility to the Australian government and other stakeholders. EFIC has to respect the international agreements made by Australia while seeking export opportunities in other countries. EFIC also complies with principle 8 of the Australian code by remunerating its directors fairly and responsibly (EFIC 2012). The Government remuneration Board is responsible for determining the amount of remuneration the board members should receive. It also set out guidelines used by the board to determine the remuneration of the Managing Director. EFIC compliance with the remuneration principle closely mirrors the UK guidelines which require that executive directors to play no role in determining their own pay as Key remuneration decisions are outside EFIC. Only the managing Directors of EFIC receives performance based remuneration. Compliance with the Code in UK Case of Aviva UK Aviva UK is one of the leading insurance companies in the UK (Aviva Plc 2014). Listed on both the London Stock exchange and the New York Stock Exchange Aviva has to comply with corporate governance codes in both countries. The composition of the Aviva board reflects its compliance with the principle of leadership in the UK code (Financial Reporting Council 2012). At least half of Aviva board of directors are non-executive directors and are also independent directors (Aviva Plc 2014). Aviva also has a clear delegation of powers between the board of directors and the Chief executive officer. In compliance with the effectiveness principle Aviva board of directors comprises of highly qualified individuals whose profiles are provided on its website. Aviva also has a comprehensive induction program for its board members once they are appointed to join Aviva (Aviva Plc 2014). However, Aviva CEO also plays the role of chair of the board showing Aviva has not complied with provision 2.1 of the UK code (Financial Reporting Council 2012). As compliance with provision of the effectiveness principle Aviva rigorously evaluates its board, its committees, the directors and the chairman annually (Aviva Plc 2014). The company’s annual report which is issued to shareholders is designed to comply with the accountability principle of the UK code. It presents a balanced and understandable view of Aviva’s activities and prospects (Aviva Plc 2014). To engage the shareholders at the AGM, Aviva makes a presentation to support the chief executive's, business operating and financial reviews and the chairman’s statement which assess Aviva position and prospects. Aviva also shows a high level of compliance with the remuneration provisions set out by the UK code. Its remuneration policy seeks to align executive remuneration with Aviva strategy (Aviva Plc 2014). Aviva strives to pay its executive at competitive market basis. Performance based compensation is pegged on the business performance and is reduced or increased accordingly. Aviva complies with principle five of the UK code which relates to shareholder relations. According to Aviva Plc (2014), Aviva maintains constant dialogue between its major institutional shareholders and the board. Shareholders are consulted on such issues as performance, strategy and governance. Aviva sends out notices for AGM 20 business days before the meeting to give shareholder enough time to consider the agenda and enable them contribute effectively at the board meeting. Aviva executives were recently engaged in a series of meetings with major shareholders to collect their views on major issues affecting the company. Corporate Culture between UK and Australia Although both the UK and the Australian corporate governance frameworks are principle rather than rule based, they have significant differences. The Australian code seems to be more detailed and sets more prescriptive guidelines for its companies (Kemp 2011). These differences may be owed to the fact that the Australian business environment is highly regulated and the source of the rules is ASX, an organization that also acts as a market regulator (Zadkovich 2007). Both Australia and the UK continue to use the “Comply and explain” mechanism which is preferred by most common law countries (Tran 2004). The similarity between the two codes can be explained by the fact that most Australian corporate principles are developed from similar principles in English laws. In both, the UK and Australia dispersed shareholding is the dominant form of ownership for publically listed companies in contrast to Latin economies like Brazil where block ownership prompts rule based systems of corporate governance (Zadkovich 2007). Conclusion Both the Australian and the UK corporate governance code provide clear and relevant guidelines that can greatly improve corporate governance. However, the UK needs to make its corporate governance code more comprehensive and detailed using the Australian approach. This may help in easing the interpretation of these corporate governance codes and in avoiding ambiguity. However, companies continue to abide by these voluntary codes of conducts showing their effectiveness both in Australia and the UK. 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