Corporate Governance Laws of the United States and England - Assignment Example

of Topic: Contrasting Corporate Governance Laws of the United s and England and concluding/explaining why the differences exist. Introduction This paper maintains that there must be distinctions between corporate governance between the UK and US, as brought about by their differences in their systems of government, backgrounds and bases. It is posited also that distinctions have different effects in term of advantage or disadvantage one over the other. Corporation law is used as the basis of corporate governance. Before the proposition can be maintained on corporate governance, there is a need to talk about the law upon which governance is based. Said law is known as Corporation law in US while it is being called Company law in the UK. Pursuant to this, Wikipedia (2006) defines corporation law or corporate law as “the field of law concerning the creation and regulation of corporations and other business organizations.” It added that a corporation is a legal entity that is legally treated, in certain instances, as a person; the corporation can own property, execute contracts, sue, and be sued. When one is confronted with the any of the following questions, one could be sure, it is about corporation law. “May a director rent a property?” “Are the directors and officers of a corporation elected or appointed?” “What responsibilities does a director, an officer, or a majority shareholder owe to the corporation or to other shareholders?” “What actions may be undertaken by the officers of a corporation in their capacity as such, and what actions require the approval of the directors or of the shareholders?” “How May one Corporation merge, consolidate with, or otherwise acquire another?” “What are the procedures for calling and holding a meeting of the shareholders or of the directors of a corporation?” “How may a corporation be dissolved, and what are the consequences of dissolving it?” “How may a corporation issue stock, and what rights does a shareholder have with respect to the corporation?” (Wikipedia, 2006) (Some paraphrasing made) Securities laws, which govern the conditions under which corporations can issue shares and are aimed at preventing fraudulent offering schemes is part of corporation law. If the relationship is between the corporation and the third party, one gets commercial law, antitrust law, or environmental law but not corporation law (Wikipedia, 2006) (Paraphrasing made) Corporate law is to the United States while the Code of Corporate Governance is to UK. Wikipedia1 said: “In the United States, corporations are generally incorporated, or chartered, under the laws of a particular state. The corporate law of a corporations state of incorporation generally governs that corporation (even if the corporations operations take place outside of that state). The corporate laws of the various states differ- in some cases significantly- from state to state, as a result of which corporate lawyers are often consulted in an effort to determine the most appropriate or advantageous state in which to incorporate. The federal laws of the United States and local law may also be applicable sources of corporate law.” It is submitted that since UK is not a federal govern of government, its system of government may have caused to have a unified or combined company law for the entire UK called ‘The Code on Corporate Governance’. This existence of the law is confirmed by its preamble when it provided: “This Code supersedes and replaces the Combined Code issued by the Hampel Committee on Corporate Governance in June 1998.”2 What is corporate governance? Sir Adrian Cadbury, father of the core of the UK Combined Code on corporate governance which regulates corporate governance in UK companies, defined corporate governance as “the system by which business corporations are directed and controlled”3 For one to understand corporate governance there is a need to understand the different levels of controls in a corporation. Level of controls in a corporation There are three levels of control of the business. At the highest level, are the shareholders are the owners whose personal liabilities are limited to the amount of their financial investment in the corporation. “They may have become shareholders by providing the initial funding to start the company, or because they founded and built up the company themselves. More often, shareholders buy shares of the company on an organized market as a financial investment in order to receive dividends from the profits of the company or to benefit from the rise in the value of the company as the business grows.”4 (Some paraphrasing made) Shareholders could include juridical and natural person and hence they cannot meet every week, or even every month, so they must appoint or elect a second layer of control empowered to oversee the managers who run the day-to-day operations of the company, which is the Board of Directors (second level). The powers and responsibilities of the Board of Directors are also defined both in law and in the charter of the company. Board members must act always in the best interest of the company as a whole, rather than for the benefit of particular shareholders or outside influence. They must put the financial success of the company before their own interests, especially if they are shareholders themselves. The central role of the Board of Directors must therefore be to ensure that the company fulfills its responsibilities to shareholders, the government, the company’s business partners, lenders, suppliers and customers, and also to society at large. When in the judgment of the Board of Directors the management of the company is not fulfilling these obligations, it is the Boards obligation to intervene and ensure that the interests of shareholders and other stakeholders are served.5 (Paraphrasing made) Discussion in these meetings about the ideal composition of Boards of Directors, with an emphasis on independent directors playing an essential role by contributing an unbiased view of what is best for the company as a whole. Shareholders are interested on dividends while government officials are interested in increasing tax collection or employment, bankers may focus only on the repayment of loans, but it is the responsibility of each Director to reach a balance of all these influences which will allow for the growth of the company while protecting the interests of all parties with valid claims on the activity of the corporation. Boards of Directors their committees meet regularly at least monthly and throughout the year to provide guidance and oversight to the managers of the corporation. They select, evaluate and pay compensation to management.6 The third level is the management people who the day-to-day operators of the corporation. The Chief Executive Officer and President, the top executive of the company is given considerable freedom by the shareholders and the Board of Directors to run the business operations of the corporation. This freedom of operation is very important as it provides for a clear chain of command within the operations of the company and ensures that it is the top executives who can be held accountable for the performance of the business. It is the responsibility of the executives, whether or not they are shareholders, to manage the affairs of the company in the interest of the company as a whole. If they achieve success, they are rewarded by the Board and by shareholders. If they fail, they are held accountable as well.7 These three bodies, shareholders, the Board of Directors and management, account for the basic structure of a corporation. However, the success of several other functions of the corporation are also critical to the effective and legal operation of the business, and as such, we must also consider these functions when we discuss corporate governance. Additional corporate functions include internal and external audit to ensure quality accounting and transparency of the financial condition of the company and its transactions. The responsibility for accurate accounting lies with management. On the other hand, checks on management in the area of accounting are to be made by an external auditor under the supervision of the Board of Directors. The shareholders must also approve the financial statements of the company on an annual basis.8 (Paraphrasing made) Difference in Reporting exist between US and UK Having defined corporate governance and having discussed the three levels of controls, it is now proper to dwell on differences between the US and the UK. ICAEW9 cited that in reporting, saying: “A report highlighting the historical reasons for differences between US and UK financial reporting and auditing has been published on Tuesday 5 July 2005 by the Institute of Chartered Accountants in England & Wales.” It reported too that Divided by Common Language, an independent viewpoint written by Tim Bush of Hermes Pensions Management, highlights difficulties arising from the US 1933 Securities Act. Arguing that US 1933 act was created as a pragmatic federal solution to bring the US out of depression, ICAEW, said that the same Act focuses financial reporting and corporate oversight on stock market pricing. On the other hand, it said that by contrast, the British model developed both shareholder rights and financial reporting under a single system of company law. It said that in the US, company law is fragmented because it is set at a State level. It may be noted that what have use this kind of difference has a great influence from the political structure of each country. In the US, the federal form of government recognized the independent status of corporate law for each state, while under UK; the unified system might have been influence by its being a constitutional monarch, in which there is concentration of power at the centre. The difference in financial reporting between US and UK will necessarily result to difference in interpretation of the financial statements which may confuse the decision makers. But the most import thing is the effort to promote understanding between US and UK Systems. US corporate governance more strict than that UK Mark Tran10 reported that the head of Unisys has joined the backlash against the regulations introduced as part of the post-Enron crackdown. He said: Larry Weinbach, the chief executive of Unisys, accused Congress of overreacting yesterday when it introduced legislation following Enron and other financial scandals. Mr Weinbach, whose technology company boasts annual sales of $6bn (£3.3bn), joined other executives who have recently criticised the Sarbanes-Oxley law for imposing too many burdens on companies. Congress passed the Sarbanes-Oxley law in 2002 in reaction to a spate of financial scandals, notably Enron and WorldCom that shook public confidence in corporate America. Sarbanes-Oxley, which called for tighter internal company controls, caused a rethink of corporate governance laws in the UK as well, with the publication of the Higgs report, written by Derek Higgs, the former investment banker. Sarbanes-Oxley law in 2002 is being blamed for the tight controls and investors cannot do any thing to comply. The said law is applicable also to non-US companies which want to be listed in the US stock exchanges. The said law is being implemented by the US Securities and Exchange Commission. Stock exchanges in the US then would feel the brunt of such stricter rules. Mark Tran11 also confirmed this when it reported that in the US, a corporate backlash has been steadily building up against Sarbanes-Oxley. It mentioned that in the report that the head of the New York stock exchange, John Thain, asked in the Wall Street Journal whether regulation had gone so far that foreign companies had decided against listing in the US. It was in that instance that Mr Weinbach, who was speaking to reporters on the sidelines of a European press briefing in the French resort town of St-Paul-de-Vence, added his voice to the upsurge of criticism of Sarbanes-Oxley. Mr Weibach reportedly said the following: "Congress was shooting from the hip in response to mistakes some businesses made in not living up to financial transparency.” “Congress felt it had to do something and did not realise the full ramifications."12 More Independent directors and a compensation committee under Sarbanes-Oxley Mark Tran13 however quoted the Unisys boss to have said parts of the new corporate governance regime were appropriate, such as independent directors and a compensation committee, but others were onerous and very expensive. It mentioned the case Hank Greenberg, the chairman and chief executive of insurance giant AIG, recently complained that his company was spending almost $300m (£164m) - 1.5% of total operating expenses - on total regulatory and corporate governance expenses. More over, his report revealed that Mr Weinbach having said Unisyss audit fees had gone up and some of the documentation required was "over the top". There is a US finding that Most US companies have more CEO-Chairs than that from the UK, hence the greater independence created by new law might be a good might a positive development. Mr Weinbach in the Mark Trans report, admitted, however, that Sarbanes-Oxley was not going to go away but he ‘predicted that the pendulum would swing back in the other direction and that parts of the legislation would be modified in two or three years.’14 Some quarter however believes that Sarbanes-Oxley is not imposing ‘too high a financial and administrative burden on corporate America.’ The Teamsters union recently cited figures from Glass Lewis, the proxy advisory firm showing that total audit fees for 461 of the Fortune 500 companies rose 15% last year. Despite the increase, the union argued, companies still managed to report record profit margins.15 (Paraphrasing made) The presence of those agreeing and agreeing with the stricter requirements may pinpoint the biases of parties, hence to take a more objective view, let us ask the experts. Mark Tran16 said: Some experts believe that congressional reaction to the spate of scandals has been over-legalistic, pointing to the advantages of the UK approach, where a lighter touch is being applied. The UK has resisted taking a mandatory approach and relies on an essentially voluntary system. One change has made a significant difference in Britain. In requiring companies to put compensation packages to a non-binding vote at annual shareholder meetings, investors have had the chance to show their exasperation, notably in the case of GlaxoSmithKline, the pharmaceutical giant. Ask the experts, who should be more reliable point to the fact of ‘overkill’ on the requirements created by US Sarbanes-Oxley law while UK rules are voluntary. Almost full compliance of UK companies on requirements of board leadership, hence more independent UK companies over US companies TCL Analyst of the Corporate Library17 said that in a recent news article it is reported that the Association of British Insurers (ABI) was disappointed to discover that only 46% of large UK companies are fully compliant with the Combined Code governance requirements. However, TCL said that some notable achievements have been in the areas of performance evaluations and board leadership. A full 96% of FTSE 100 companies have a lead independent director. TCL then argued that without reading the full ABI report, it is safe to assume that, at least in some important respects; the US still lags the UK. Cited by TCL Analyst as example include in 2003 that 77.4% of large US boards were headed by combined CEO-Chairs, whereas in the UK 93.4% of boards had separated out these positions. It also said that in the UK 69.1% of boards had a lead director position, whereas only 28.6% of boards in the US had such a position. There is greater independence in UK than in the US. What could have caused this despite Sarbanes-Oxley law may be attributed to the willingness of UK companies to comply with existing law on board leadership, with their realization that the importance of independence of directors from the chief executive officer is paramount in the successful operation in the business. This might a be fair assessment after since a similar case as that of Enron has not yet happened in the UK. Perhaps the UK rules are just more than enough that that require d by Sarbanes-Oxley law in the US, which according to expert if really too burdensome for some companies. TCL18 further said that the hhigh percentage of CEO-Chair position in the US is really an indication of lack on independence under the US. The presence of outsiders, who are CEO’s elsewhere on a typical corporate board in the US, really indicates lack on independence among the CEOs with other US companies. This could be a negative factor considering the possibility of connivance. Greater interlocking directors in the US and UK TCL reported that another striking difference between large UK and US corporations is the degree of inter-connectedness amongst boards and the number of positions held by the busiest directors. It said: that this map shows the US and UK networks and the links between the networks for the largest 350 companies in each as at 2003. For 2003 data on the largest 350 US and UK corporations, the US sported 87 multiple interlocks among boards via shared directors, compared to only 29 for UK data. US directors hold more directorships on average. There were 88 UK directors with three or more directorships amongst the FTSE 350 and 174 such directors for large US corporations.19 The numbers speak for themselves and confirm the less independence of US directors than that of UK counterparts. Conclusion: The differences are as follows: reporting, the presence or absence of the position of CEO-Chair. It is clear from the start that the difference between the two countries pertains to financial reporting, independence of directors from the management of the presence or absence of CEO-chairs, and interdirectorship among two or more corporations. It is less strict in UK than in the US as far as the reporting is concerned. This means that as far as investors are concerned, more will be encouraged to invest in UK. But the reality is that considering the bigness of the US market, there seems to me more UK companies listed in the US than US companies operating in the UK. This is seems to be confirmed by ICAEW20 when it said that with the globalisation of capital, calls for a level playing field in corporate governance to instil market confidence have never been greater. It said that there is a presumption of a convergence towards an Anglo-American model of capital market behaviour. Further, it explained that subsequent confusion can arise among policy-makers world-wide because of the superficially common language of the UK and the US where legal and regulatory frameworks are different in both intent and effect. Major differences exist between the US and the UK regarding both the preparation of financial statements and the governance aspects thereof. The confirmation by ICAEW of the existence of difference in governance aspects could therefore result in different approaches in decision making of the investors. The fact that there is less independence in the US than UK, the possibility of conflict of interest is greater in US, than in UK. Bibliography: 1. The TCL Analyst, The Corporate Library, Tuesday, November 08, 2005 .British governance still better than US. Available on line: http://thecorporatelibrary.blogspot.com/2005/11/british-governance-still-better-than.html, accessed April 26,2006 2. OECD, International Corporate Governance Meeting – Hanoi, Vietnam – December 6 2004, Available on line, https://www.oecd.org/dataoecd/18/47/34080477.pdf , accessed April 26,2006 3. Wikipedia Corporation Law, 2006, Available on line: http://en.wikipedia.org/wiki/Corporate_law , accessed April 26,2006 4. FSA, The Combined Code On Corporate Governance, July 2003, Available on line, http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf, accessed April 26,2006 5. Tran, Mark, US corporate governance law too strict , Guardian Unlimited, Tuesday June 22, 2004, Available on line, http://business.guardian.co.uk/story/0,,1244616,00.html, accessed April 26,2006 6. International Chamber of Commerce (ICC), ICAEW report 2005, Available on line, http://www.iccwbo.org/corporate%2Dgovernance/, accessed April 26,2006 Read More