The Term Corporate Governance - Coursework Example

?Corporate Governance Introduction The term corporate governance reflects a set of rules and processes based on which business operation is normally controlled and regulated. Corporate governance can be defined as “the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled” (Solms & Solms, 2008, p.2). An attractive theme of corporate governance is its mechanisms that try to avoid the principal-agent problem. In recent years, especially after the collapse of American corporate giants like Enron, WorldCom, and Parmalat, organisations have been vehemently working to improve their corporate governance. In addition, the 2007 global economic crisis can be attributed to the corporate governance failure to a great extent. This paper will explore the practical strategies which would improve current corporate governance system in UK. Corporate governance The concept of corporate governance underwent tremendous changes from period to period since its origin. Managements always pay attention to update their corporate governance strategy in accordance with the needs of time. The corporate governance policy also maintains the relationship among the stakeholders and the objectives of the organisation (OECD). In case of contemporary business concerns, the external stakeholder groups mainly include shareholders, creditors, suppliers, and customers while board of directors, executives, and employees. Top level mangers always focus on the impact of their corporate governance strategy on economic efficiency in addition to a strong emphasis on shareholder values. Since a series of corporate failures in 2001 were attributed to accounting fraud, today organisations give focus on internal check policies while formulating their corporate governance strategy. Likewise, corporate scandals of various forms during the last decade attainted public and political interest, which greatly contributed to strict regulation of corporate governance. However, it seems that corporate governance principles always give major emphasis on the rights and privileges of shareholders. In addition, the principles of corporate governance clearly point out the role and responsibilities of the board, firm’s integrity and ethical behaviour, and concerns of disclosure and transparency. The corporate governance practices are largely different across the globe. The Continental Europe’s multi-stakeholder model gives first priority to the interests of workers, customers, managers, and suppliers whereas the Anglo-American corporate governance model mainly recognises the interests of shareholders (Vasilescu, 2008). Continental European countries like Germany and Holland possess two-tiered Board of Directors with intent to improve their corporate governance practices. The main point of difference in corporate difference between United Kingdom and United States is that in UK, the CEO generally does not hold the chairmanship of the board whereas in US, the CEO also serves as the Chairman of Board. Corporate governance in UK In the opinion of Roberts (2011), the balance of power between the board of directors and the general meeting primarily constitutes corporate governance of a UK company. Generally, the term “governance” is used to refer to principles mentioned in the UK Corporate Governance Code. The UK Corporate Governance Code 2010 is a set of corporate governance principles which aim the improved performance of the listed companies on the London Stock Exchange (Harbottle and Lewis). Financial Service Authority’s Listing Rules demand the public listed companies to disclose how they have abided by the proposed code and explain where and why they have ignored the rule. Private companies are also encouraged to follow these corporate governance guidelines even though it is not a compulsory requirement in private firm accounts. This Code contains a principles-based approach and a rules-based approach; the former provides strategies for best practice while the latter rigidly defines exact practices that have to be adhered to. The collapse of a major UK company named Polly led to the formation of a committee in 1991 to ensure the accuracy of financial accounts. According to the committee recommendations, a company must have separate chairman and CEO. Every board has to possess a minimum of three non-executive directors, and each board must maintain an audit committee. In 1994, these recommendations were added to Listing Rules of London Stock Exchange. However, these principles were acceptable or ignorable at the option of companies if they had adequate reasons to justify their choice. In order to overcome the issues associated with executive compensation and to improve the transparency of company operations, a committee chaired by Marks & Spencer Sir Greenbury framed a set of recommendations. Subsequently, the Hampel report suggested the consolidation of both Cadbury and Greenbury principles. A number of other reports were issued followed by the release of Hampel report, mainly including Higgs review. The recently issued UK Corporate Governance Code 2010 provides specific guidelines regarding appointment and remuneration of directors. The Code stipulates that NEDs should oversee appointments committee and recommends a ‘performance related pay’ as director remuneration instead of a ‘say on pay’ by the general meeting (Keasey, Thompson & Wright, pp.274-275). Under accountability and audit section, the Code gives more emphasis on the context of recent corporate scandals and directs that the audit committee must be composed of independent non-executive directors only. As per the provisions of this Code, the current UK corporate strategy maintains good relationship with shareholders and keeps them well informed on organisational affairs. Finally, the recently formed guidelines set out specific practices for treating institutional shareholders who constitute a unique part of the UK financial market structure. Improvement strategies Although UK corporate governance policies are being amended timely, they cannot ensure perfect corporate performance. As per the 2007 report of Pensions & Investment Research Consultants Ltd (PIRC), only 33% of listed companies adhere to the Code provisions (PIRC). PIRC appraises that poor compliance directly relates to poor business performance. The UK corporate governance system has to maintain flexibility simultaneously with consistency to prevent corporate failures and improve organisational sustainability. Referring to recent turmoil in the banking sector, Legal & General Investment Management (LGIM) opines that UK needs to promote quality and efficacy of shareholder and company board engagement (Legal& General). It is obvious that disclosure of frauds and errors would be a cumbersome task for auditors if they are committed by persons at the helm of affairs including board of directors. When such top level personnel get an opportunity to continue for a long period in an organisation, they may fraudulently manipulate company accounts in order to take unfair financial advantages over shareholders. Therefore, annual re-election of board of directors may be a fruitful strategy to strengthen organisational accountability and stability. It is also recommendable for non-executive directors to conduct a deeper probing into company affairs at regular intervals. This practice would put a moral check on board of directors so that they may act more sincerely. In addition, it is advisable for non-executive directors to receive support from the company secretary for information and other document requirements. A detailed audit programme is very useful to conduct an external performance evaluation that may disclose almost all material facts regarding the state of affairs of the company. Generally, shareholders do not get platforms to express their opinions and ideas. Hence, LGIM suggests that it is necessary to set up an ‘investment forum’ where key shareholder get together to voice their views and provide information on any issue that may be expected in the near future (Legal& General). During the last few years, remuneration issues have become a topic for debate. Many recent bank failures showed that management allowed high rate of compensation to its executives regardless the firm’s performance. Hence, while formulating decisions regarding remuneration arrangements, board of directors have to give specific focus on risk management. The current UK Corporate Governance Code seems to be an excellent framework for corporate governance practices as its ‘comply or explain’ approach may maintain flexibility and pragmatism. Therefore, the board of directors and concerned officials must ensure that the framed corporate governance standards are adequately met. Moreover, recent major corporate failures emphasise the fact that shareholders need to take the corporate governance issue seriously. At the same time, company boards must be willing to pay attention to the feedbacks and interests of their shareholders. Although the corporate governance guidelines are not compulsory in case of private limited companies, such firms may also practice these principles in order to ensure sustainable organisational growth. UK government can play a significant role in promoting effective corporate governance practices. Evidently, an integrated effort of government, board of directors, top executives, shareholder, and other external parties is extremely vital to ensure effective corporate governance. Conclusion Although, UK corporate governance principles are being timely amended, they are not perfect enough to ensure transparent organisational performance. Recently, UK Corporate Governance Code 2010 has been ratified. In order to improve the corporate governance system in UK, annul re-election of board of directors would be an effective policy. Similarly, shareholders must get a common platform to come together and voice their views. Finally, shareholders and governmental bodies must ensure proper enforcement of corporate governance principles. References ‘Corporate governance in the UK needs improvement says legal & general investment management’, 2009, Legal & General, Viewed 18 Aug 2011, ‘Corporate governance for smaller AIM companies’, 2010, Harbottle & Lewis, Viewed 18 Aug 2011, Keasey, K, Thompson, S & Wright, M 1997, Corporate Governance: Economic, Management, and Financial Issues, Oxford University Press, New York. “OECD principles of corporate governance’, 2004, OECD: Organisation for Economic Co-operation and Development, OECD Publications, Viewed 18 Aug 2011, Roberts, J 2011, ‘The theories behind corporate governance’, Havingtheircake.com, Viewed 18 Aug 2011, ‘Review of the impact of the combined code’, 2007, Corporate Governance Annual Review, Pensions & Investment Research Consultants Ltd, pp.1-6, Viewed 18 Aug 2011, Solms, SHV & Solms, RV 2009, Information Security Governance, Springer, New York. Vasilescu, LG 2008, ‘Corporate governance in developing and emerging countries. The case of Romania’, MPRA: Munich Personal RePEc Archive, University of Craiova, Viewed 18 Aug 2011, Read More