Analysis of Corporate Governance in the UK - Case Study Example

Financial resources management: Analysis of corporate governance in the UK BY YOU YOUR SCHOOL INFO HERE HERE Analysis of corporate governance inthe UK Introduction and background Corporate governance can best be defined as the various policies, systems and processes, at the highest levels of the corporate hierarchy, which determine business direction and strategic decision-making. Corporate governance is inclusive of monitoring financial performance and capital expenditures whilst establishing a system of controls to ensure corporate objectives for financial management are met sufficiently. Governance includes a variety of different regulatory frameworks which direct the activities of executives and managers, inclusive of performing external market analyses and internal structure evaluations that are inter-dependent for ensuring corporate successes. Corporate governance ensures that Board members consider how to effectively align management activities and financial management with Board member directives serving as the underpinning for these considerations (Tricker 2009). Corporate governance can also be classified as a variety of policies and processes by which the corporation is able to make strategic decisions toward establishment of a relevant and effective corporate structure that outlines responsibilities for recognising shareholder and broader stakeholder groups’ needs, managing auditing practices, and outlining internal management responsibilities toward this end. Board members serve as the foundation for the establishment of policies, regulations and internal procedures that are most appropriate for ensuring corporate objectives are met effectively (Clarke 2007). The UK corporate governance systems that guide contemporary corporations are aligned with the Western model of governance known as the Anglo-American model. It is a one-tiered system whereby corporations maintain just a singular Board that consists of insider executives and some level of non-executive presence. This system is designed to guarantee that there is a balanced system of governance. By having non-executives represent some positions on the Board of Directors, it removes the potential biases that could occur as a result of familiarity and intimacy with the corporation whilst also providing governance systems with the expertise and knowledge of insider operations that is necessary for effective and productive guidance. Having internal executives on the Board is justified as their understanding of strategy, operational systems, financial management and accounting is fundamental for guiding strategic decision-making that is relevant to the organisation and in relation to external market conditions. Concurrently, it is necessary to have external Board members in the governance system as they provide more impartial solutions and no predisposition toward favouritism of the corporation to make more effective decisions. UK corporate governance, regulations, policies and codes of conduct, has been established under the foundation of protectionism for constituencies inclusive of stakeholders and shareholders, but with emphasis on shareholders as a primary governance objective. Why is this relevant in UK corporations? The UK economy is a free market economy that maintains many of the ideologies of capitalism that is prevalent in other Western nations. Free market doctrines have been established under the premise of guaranteeing that factors of trade, industry and manufacturing are controlled through private entities with very limited government regulation and authority toward directing business activities. This allows for the attainment of profits to be the most appropriate and significant objective of strategy development and corporate activity (Durlauf and Blume 2008). Free market economic systems have supply determined by corporate actors and not a centralised government authority and where government is restricted in establishing legalities to control corporate pricing on product and service outputs (Hacker and Pierson 2010). Government in free market economies cannot determine what businesses can enter a market and is unable to institute pricing controls in a market (Hacker and Pierson). This is the main groundwork for the UK’s Anglo-American governance model which provides corporations with considerable autonomy and ensures insulation from government imposition. Free market ideologies have been established under the foundation offered by respected theorists such as Adam Smith and Milton Friedman suggesting that the only genuine obligation of businesses is for guaranteeing corporate profitability to provide for corporate longevity and sustainability (Fleischaker 2011; Dunn 2010). Smith proposed that once a corporation is able to attain profitable success, the supplementary benefits of corporate income improvements are better outcomes for stakeholders in society (i.e. job creation, government revenues, etc.). As such, the Anglo-American model of UK corporate governance provides the reinforcement for ensuring that regulations and policies are primarily designed to protect shareholders. Shareholders have the most relevancy and influence on corporate activity over that of broader stakeholder groups. Many corporations issue securities (stock and bonds) that ensure capital procurement that is utilised for business improvements and growth. Shareholders, hence, become owners of the corporation. Without having their capital provided through securities purchases, corporations would be forced to find alternative funding opportunities, such as in the banking environment, which is not always a consistent and dependable method of capital procurement today. Therefore, any corporation guided by corporate governance codes of conduct that attempted to deceive shareholder investors could have substantially-negative consequences for the competitive and financial positions of the companies. Volatility and speculation in the securities market can have substantial impact on share value and any effort to provide inaccurate financial reporting or other defrauding activities produces this lack of investor confidence which can quickly erode share values. This is why corporate governance systems in the UK are founded on shareholder protectionism which generally guides the majority of strategic decision that are made at the Board level. The Anglo-American system is effective as it not only protects the financial position of the corporation, but also establishes a rapport, trust and security for shareholders that have long-term implications for corporate success. By protecting the owners of the company, the corporation is better positioned for financial growth and the ability to procure necessary capital to attain market and competitive successes. Failure to protect shareholders as a primary objective of UK corporate governance would impose significant risks and consequences within a free market economy and where established legalities ensure that executives and Board members act in a responsible manner when guiding the corporation. Critical review of governance effectiveness in UK corporations The main participants in corporate governance in the United Kingdom are management team members, Board members and the different shareholders that serve as owners of the organisation. From a financial perspective, which serves as the foundation for corporate governance strategy and regulation, legislation has established the criteria of critical obligations for Board members and executives at the corporation. Board members and internal executives have absolute accountability for being proper economic stewards for shareholders, known legally as the duty of care as fiduciary agents. Fiduciary responsibilities are established under a legitimate legal relationship in which internal governance members maintain control and governorship over financial matters of one or more parties (Conaglen 2005). The UK House of Lords established several legal mandates that regulate corporate activities as it pertains to being fiduciary agents to shareholders. Referred to as the neighbour principle, laws have been established that demand compliance related to negligence of duty of care and have established the criteria by which compliance is to occur (Elliott and Quinn 2013). British Tort Law maintains legal language that makes sure that CFOs and CEOS, as well as Board members, sign off on the integrity and accuracy of financial data that is reported to shareholders and stakeholders. Financial data, inclusive of balance sheets and income statements (to name only a few methods of reporting) is the measure by which shareholders understand the accurate financial position of the corporation. English law further defines the duty of care to make sure that investing agents in the corporation are free of undue harm or unwarranted financial losses pertaining to shareholder status (Bagshaw and McBride 2008). Breach of duty of care under Tort Law guarantees a set of penalties and punishments that occur for non-compliance to the neighbour principles established by the House of Lords (Steele 2007). The notion of duty of care as fiduciary agents is also supported by the UK Companies Act of 2006, which offers the criteria for governance responsibilities in relation to shareholders and the potential consequences for non-compliance. Schedule 15 of the Act offers the following: “(Persons with) the power to suspend or prohibit trading of securities in case of infringement of applicable transparency obligation, has contravened that requirement, it may impose on the person a penalty of such amount as it considers appropriate.” (UK Parliament 2006, p.693). The Companies Act identifies that relevant authorities have the right to ensure compliance and to provide chastisement for those in the governance system that fail to adhere to shareholder protection obligations. Hence, the legal structure that guides corporate governance practices and ideologies is highly effective as it ensures that the rights of owners (shareholders) are considered and establishes the incentive for conformity to obligations for responsible financial reporting and corporate strategy developments aligned with shareholder protectionism. Compliance to Tort Law and the Companies Act maintain mutual benefits, long-term, for both ownership and the corporation. From a different perspective, corporations that must comply with fiduciary duty of care as established by British law must ensure that financial accounting practices and reporting practices are extremely accurate. This entails, in most instances of corporate governance, to establish internal and external auditing teams and systems to achieve this end. Auditing is a type of quality assurance which improves a corporation’s operational capacity by assisting the organisation in establishing accounting disciplines and executive disciplines as it pertains to finance. Internal and external auditing processes are a method of risk management, ensuring perceptions of integrity with shareholders that rely on accurate financial reporting data, and guaranteeing competencies and compliance with Board members and executives (Davies and Aston 2011; Sawyer 2003). Auditing examines various cost accounting systems and consists of records management to verify that the details of costs of products have been achieved in compliance with cost accounting best practices. Auditors have the obligation and authority to express opinion regarding the accuracy of financial statements and other relevant accounting data by which to report on corporate integrity and conformity to accepted standards. Auditing provides a balance of qualitative and quantitative assessment of corporate accounting and reporting standards which provides a richer and more in-depth understanding of what is driving corporate financial activity. Auditing is highly effective as a risk avoidance tool and also protecting shareholders as mandated by British law. Companies that have utilised long-standing relationships with a variety of external auditing teams have come, however, to recognise that problems exist when a corporation fails to rotate auditors. Auditors that have considerable tenure with a corporation become cosy with corporate Board members and executives which can erode some of the non-biased activity required of auditing team members (Boxer 2008; Carey and Simnett 2006). Auditors that maintain long-standing presence as auditors of the corporation are more apt to offer favourable opinions in relation to the Board and executives which represent a type of prejudice that is a considerable risk for ensuring fair and accurate financial reporting of accounting activities. Auditors tend to be more careless in their investigations and have more willingness to simply accept a variety of executive-written statements about accounting and financial data reporting rather than launching an investigation to ensure that corporation is actually complying with accepted codes of conduct in this area (IFA 2010). However, not all UK corporations want to rotate auditors as governance team members believe that new auditors lack a familiarity and knowledge of the business that can create ineffective auditing practices by the auditor. Jackson, Moldrich and Roebuck (2008) support this assertion, believing that long-standing relationships with auditing companies creates better judgment and capacity for making auditing decisions that are consistent with best practice. It takes time for auditing teams to learn the unique and intricate complexities of accounting practices and reporting activities relevant to each disparate UK organisation (Carcello and Nagy 2004; Maletta and Wright 1996). Auditing firm tenure at the corporation creates incentive by the auditing team to quantify and justify their auditing practices and opinions which assists in improving the reputational integrity of the auditing firm in the industry (Vanstraelen 2000). This is not necessarily astonishing, as Fiolleu, et al. (2010) identify the competing environment of auditing firms in certain industries to be a beauty contest where auditing firms are consistently seeking opportunities to gain reputational exposure and find new business opportunities as external auditors. Therefore, long-standing relationships between corporation and auditing firm, based on auditing team behaviours, ensures more diligence in investigation practices and oversight of accounting activities that better serve shareholders and the corporation concurrently. Based on the evidence, rotation of auditors might actually better serve the organisation, though this is often a point of contention in the accounting and auditing domains. Conclusion As illustrated by the research, corporate governance codes of conduct, compliance methodologies, British Tort Law, and ensuring shareholder rights and interests are protected are effective methods of aiding the corporation and also the ownership. Financial resources management is critical to ensuring that the organisation is able to properly procure important capital, especially through the capital markets, and provide a perception of integrity and truthfulness with important shareholders. The free market ideology, serving as the underpinning rationale for UK corporate governance policy formations and best practices, justifies effective and proper UK corporate governorship aligned with values of capitalistic ideologies and also the relevancy of corporate profitability for sustaining communities and the needs of supplemental stakeholders. Keeping long-standing relationships with auditing firms, rather than rotating regularly, seems to be a more effective method of compliance with accepted accounting and reporting standards which is likely why corporations in the UK, today, continue to utilise these external auditing agents. Furthermore, identifying and accepting the legally-mandated role as fiduciary agents drives corporate governance activities and policy developments that are not only aligned with free market doctrines in society, but to ensure financial longevity of a corporation in an environment where capital procurement through the securities market is absolutely vital for business expansion and improvement. This, in turn, leads to a better competitive position in an established market. If corporations were to utilise a governance policy not aligned with the Anglo-American model and put corporate interests ahead of shareholders, the consequences of diminished securities valuations and the reputation of the corporation are rather obvious. Hence, internal policies that ensure compliance with established British laws and maintaining a focus on auditing is both effective and profitable for the corporation. Recognising the needs and rights of shareholders and understanding the obligations of being fiduciary agents for these owners sets the tone for cultural development within the governance team that underpins governance activities. Financial resource management, therefore, becomes the foundation for corporate governance policy developments and strategic decision-making that is inclusive of auditing services, market analyses, establishment of control systems for managers and Board members, and similar control systems for accounting agents within the corporation. The Anglo-American, single-tiered system of corporate governance that is utilised by the majority of UK corporations today is productive, effective, and ensures that all stakeholders with a vested interest in the profit capabilities of the corporation are satisfied and recognised. References Bagshaw, R. and McBride, N. (2008). Tort law. United Kingdom: Longman. Boxer, A.M. (2008). 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