Accounting And Financing - Essay Example

INTRODUCTION Corporate governance is the way in which the affairs of a company are regulated and governed. It plays a very vital role in a span of activities from setting of corporate objectives to running day to day operations. It is very significant in increasing the value of the shareholders' investment and safeguarding the interests of the stakeholders. Corporate governance is crucial to align the activities and behavior of the company in the direction of appropriate law and regulations. Effective corporate governance helps a company to survive, grow, realize the expectations, create value for the stakeholders and strengthen the corporate image. In the late 1980s and early 1990s there were a series of scandalous collapse of several prominent UK companies. The reasons being weak control and governance over the working of the management board and the main reason was the power and authority vested in the hands of a single person. In December 1992, the Cadbury Committee published the Code of Best Practice(hereafter, the Code) which recommended that Boards of publicly-traded UK corporations include at least three outside directors and that the positions of the Chairman and Chief executive Officer not to be held by a single individual. The purpose of this kind of separation is to enhance corporate performance and to avoid misuse of power and authority. In this essay the author discusses the effects of the Cadbury Committee on Corporate Governance and whether the split in the roles of CEO and Chairman according the Committee recommendations has increased or decreased the efficiency of companies. EFFECTS OF CADBURY COMMITTEE ON THE CORPORATE GOVERNANCE The main idea behind recommendation of the Code is that companies become more transparent and decisions made by the board are more credible. The major effects of the Code is mentioned as follows: 1. It is mentioned in various research reports that the Code has definitely increased the general awareness of good corporate governance and it has caused several changes in the governance of companies. Mainly, the presence of independent directors on the Board has definitely increased the performance of a company. 2. It is reported by Nigel Finch in his study that the establishment of an internal audit and remuneration committee as mentioned in the Code is positively related to efficiency of companies. 3. Another effect is that it has induced the turnover of top level managers in companies after the recommendations were implemented. In a study by Jay Dahya and John J. McConnell, it is evident that the implementation of the recommendations of the committee has increased the turnover of top level executives in companies in UK. This turnover of top-level executives can be voluntary and forced. But the turnover of the executives and the performance of the company shows a direct correlation. This study is very significant to show how the composition of the Board of Directors can cause a change in the performance of a company. 4. Mostly the Code mentions only recommendations voluntary measures. It is upto the necessity and discretion of the companies to implement the recommendations. But the London Stock Exchange has made it mandatory for all the Companies to comply with the Code. This step by the London stock exchange is an evidence about the credibility of the recommendations in itself. These recommendations when implemented by all the listed companies will definitely have a change in corporate governance across UK. 5. Generally, the quality of corporate governance can be measured by the flow of information inside the company. When outsiders are more in the Board of management and the CEO and the Chairmen posts are held by two different people, then there are more chances that information will be available to the shareholders. This availability of information is a cyclic process in improving the efficiency of an organization. If information is available freely the shareholders will have better idea about what is happening inside the Board. This information can play a crucial role in determining the composition of the Board, as the shareholders decide who will be on the Board. Hence, availability of information and the composition of the Board are interrelated which can help in improving the efficiency in a corporation. 6. In a study by Omneya H. Abdelsalam and Donna L. Street, it is reported that the adherence to the Code has helped in increasing the flow of information. The study was conducted to find out the timeliness of corporate internet reporting and the determinants. It is evident from the study that there is a significant association between timeliness of internet reporting and corporate independence and corporate experience. When companies have block ownership and when both the roles of CEO and Chairman are held by the same person it is more likely that internet reporting is less timely. 7. In yet another study by Shyamal Majumdar, it is observed that across UK after the implementation of the Code, the split in power has created the checks and balances that is essential for efficient corporate governance. When the people playing the roles are different, it offers a chance for dispassionate appraisal of the performance of the Board. The Code has prevented corporate scandals like the Enron and Tyco in US. Another major advantage of the split in power is that most of the Chairmen are older than the CEOs atleast a decade. The experience of the Chairmen is very useful to act as mentors which is very helpful for the growth of the organization. ETHICS FOR CORPORATE GOVERNANCE By adopting the Code, there are numerous examples that not only UK companies but companies across the world have reaped the following benefits: 1. Market confidence: Differentiating the CEO and Chairman has helped in increasing the confidence of the investors in the stock market. It is perceived by the shareholders that with the flow of information and increased role of independent Board members, that the company is better prepared for shocks. 2. Consumer protection: Improved transparency can help in increasing the relationship between the investors and management and hence, there is an environment to protect the interests of the investor. Whether it is the institutional investor who invests money for other people in bulk or the individual investor who invests his personal savings, better transparency helps in protection of interests of both the groups. 3. Less of financial crimes: The split in roles causes the adequate balance in power and authority helps in reducing the number of financial crimes 4. Public awareness and confidence: Higher business ethics and individual standards, the Code in general has increased the awareness of the general public and this has resulted in increasing the confidence of the public on the corporate mechanism. CONCLUSION Though there are various changes in the corporate governance after the implementation of the Code, has it been effective in achieving the intention of good corporate governance is another question. There is also another argument among the researchers and observers that most of the companies just comply to the recommendations of the Committee without analyzing the background of the recommendation. It is true that the recommendations have become a yardstick to measure the quality of corporate governance. But, it is often treated as an item in the checklist and how one checks and box ticks an item. This kind of box ticking of the compliance of the recommendations will not make help the company to become effective which is the primary objective of the recommendation. Also the Code was made after the corporate scandals in UK and hence, it contains recommendations which are just preventive measures to avoid abuse of power. But it does not give recommendations for good corporate governance. In spite of these complaints, there is a universal opinion that the Code has played a vital role in responding to crises, monitoring boundaries of the management, developing ethics and competence, open relationships and facilitating the development of corporate culture. The Cadbury committee has paved the way for development of Corporate ethics, but it has to be kept in the mind that good corporate governance is not just the responsibility of the management, but it is a team effort . The culture of good corporate governance should be imbibed at each and every level of the organization. REFERENCES 1. Dahya Jay, McConnell J John., 2000, Cadbury report, Corporate performance and top management turnover, , ALBA(Athens Laboratory of Business Administration, available at http://www.mgmt.purdue.edu/centers/ciber/publications/pdf/99-004.pdf 2. Byrd, J. W., Hickman K. A., 1992, Do outside directors monitor managers Evidence from tender offers, Journal of Financial Economics, 32,195-221. 3. Thomas, S., 2002. Firm diversification and asymmetric information evidence from analysts' forecasts and earning announcements. Journal of Financial Economics 64, 373-396. 4. Finch Nigel, 2005, The Future of corporate governance in Australia: Will Australia Take the Right Track", Macquarie University, Graduate School of management, available at http://ssrn.com/abstract=669903 5. Abdelsalam. Omneya.H., Street L. Donna, 2007, Corporate Governance and the timeliness of corporate internet reporting by UK listed companies, Journal of International Accounting, Auditing and Taxation, Vol 16, Issue 2, 111-130 6. Carver, J. , 2003, What be wrong with corporate governance and now to fix it. British Journal of Industrial Relations, 41(2), 331-351 7. Hemraj, M. B. ,2002, Preventing corporate failure: The Cadbury Committee governance report. Journal of Financial crime, 10(2), 141-145 8. Short, H, 1996, Non-Executive Directors, Corporate Governance and the Cadbury Report: A Review of the Issues and Evidence. Corporate Governance: An International Review, Vol. 4:2, pp. 123-131. Read More