Improving the Current Corporate Governance System in the UK - Essay Example

Improving the Current Corporate Governance System in the UK Corporate governance in a broad sense is a practice by corporations and companies involving pursuance of policies, processes in the system and the resources (capital and human) which the organization uses to serve the specific needs of all the stakeholders (FRC 2010, p1-2). This includes the management of such issues through direction and control with objectivity and accountability so as to draw the stakeholders’ attention to the company’s integrity. The attention that has drawn many companies to this area of business practice is the fact that Gabriel O’Donovan, an author in business is quoted saying “the perceived quality of a companys corporate governance can influence its share price as well as the cost of raising capital” (Yadav 2009, p50). According to Andreasson (n.d. P 2) corporate governance in emerging markets is a critical issue where companies are constantly struggling for investors to raise capital base. About the scope of governance, Abdulla and Valentine (2009, p89) point out that “corporate governance includes all types of firms and its definitions could extend to cover all of the economic and non-economic activities” p 89. This needs to be embraced by the UK in its bid to improve its corporate governance. One way by which the UK can improve its corporate governance as shall be discussed in diversity is by incorporation of corporate governance and the complexity theory which encompasses many approches integrated into the governance system. Because the perception that the stakeholders about a company is an elastic issue that depends on the corporate image created by the company there has been experienced varying business performances by corporations in the financial and stock markets. This has led to the new wave seeking to transform the way legislative and procedural policies are made and employed by companies to stay afloat in the internal and external market. Therefore board actions on corporate management need effective monitoring so as to avert the corporate failures resulting from traditional corporate strategies as experienced in the UK capital markets. Their short-term policies are feared to be the main reasons for the low efficiency and low return on invested capital yet the companies largely depend on public equity financing amidst their many financial access options (DoB 2010, p 10). A look at the Bitish policies on company opertations shows an emphasis on the accountability of the directors to the shareholders while they set the policies for the company (FRC 2010, p9-11). However the weakness in the Companies Act 2006 which allows for freedom by companies to adjust corporate rules using their constitutions remotely diminishes the corporate sense of the shareholders who are the main contributors of investment through public equity funds. This calls for real improvement that will address the weaknesses that have led to failure of many corporate organisations which lies in the role played by the company directorate (Kiarie 2007, p2). Kiarie identifies the non-specificity of the management roles in the companies especially the non-executive directors (NEDs) whom she says must play an important role in checking the power wielded by CEOs based on their independance and autonomy. This is possible if the companies willingly offer relevant and sufficient information other than the one the NEDs solicit for use in decision making and judgment. Therefore the NED should be part of the shareholder pressure on the corporate board that would enhance the value of the firm in form, of policies and strategies (Brenner, 2008 p 3-5). It is realised that most companies are reluctant to freely disclose their portfolio in the bid to cut on costs and keep competitors at bay a fact that has made the shareholdders and the NEDs in darkness on the exact positioning of the company in the corporate market in what Brenner calls “free rider problem” p 5. This in a way has been the reason for mixed responses from stakeholders ranging from activist involvement to literal withdrawal from the company. Therefore NEDs should be, as part of an improvement strategy have a clearly defined role in corporate management and duly given operational autonomy able to access information required for sound judgement on how and when to restructure the system to enhance the value of the shareholder without falling into the trap of defence mechanisms (Brenner 2008, p3). Incorporating corporate governance and the complexity theory (an intergrated approach) can be seen as a multidisciplinary approach to improving corporate governance in which organisations are treated as a complex terrain of strategies and operational structures in an adaptive system. Companies aiming at holistic identification of corporate components and their interactions must therefore from this approach create a link on the relationship the company has with the shareholders in the corporate governance without ignoring the contribution that each group among the stakeholders has in the success of the company (FRC 2010, p25-26). According to Miles (2009, p 56) corporate governance following such a multidisciplinary approach needs regimes that will complliment the operations of the company such including the legal regime and the codes of practice. These act as regulators in the effectual determination of the success of the company’s corporate governance. Such may include regulations on mergers, takeovers and accounting standards which seek to safeguard the interests of the shareholders. Miles (2009, p 58) further identifies the need for recognition of the social factors in governance is one strategy by which corporate governors can use to win the confidence of the shareholders as a social value of consensus, mutual co-existence and collectiveness. In the inclussive approach which is part of the complexity theory, governance ought to stretch beyond the company’s economic value to their social corporate responsibility where stakeholders are the main focus. And as in King III (Miles 2009, p 60) this creates corporate citizenship where the shareholders develop a strong sense of responsibility over the welfare of the company. The integrated approach will be an easy tool to facilitate proactivity and transparency with stakeholders where the directorate’s reports reflect the true issues the company is facing in its operation on the economic, social and environmental platforms. The UK case which Owen (2001, p 2-3) identifies as one in which corporate governance is controlled more externally than internally has faced the challenge of ensuring such sustainable long-term shareholder interest partly because lacking the expertise and incentives but mostly because of ignoring integration into the social system. In pursuance of best practices in UK the Cadbury Code was developed introducing the ‘comply or explain’ regulatory concept. This concept can be built upon to improve corporate governance as it recognises the need for companies to give feedback to shareholders on their operations. This in the opinion of this article will go well if the role of non-executive members of company boards can be revised to ensure sufficient autonomy as this is an important weakness identified in most reports on corporate governance in UK. This will give the Corporate Governance Code (Combined Code 2009) the weight it requires to impact mnot only the UK but the EU members as well. The pillars of the concept are appropriateness of governance arrangement, code of best practice and strict observance of accounting standards (FRC 2010, p18-21) are therefore necessary ingredients in effecting the integrated approach to corporate governance (Hogg, 2010 p 1). Conclusion The challenge faced by many concepts and plicies seeking to regulate corporate governance in UK have majorly been as a result lack of integration of company policies with the shareholders’ needs. It is therefore proposed that there be an integrated system in which governance will be transparent to the shareholders through mutual involvement and in the recognition of the role played by the non executive members of the boards as lauded in the complexity theory through an integratyed approach. References Abdulla, H. and Valentine, B. 2009. Fundamental and Ethics Theories of Corporate Governance. Middle Eastern Finance and Economics. Issue 4. EuroJournals Publishing, Inc. P 89 Andreasson, S. n.d. Understanding corporate governance reform in South Africa: Anglo-American divergence, the King reports and hybridization. Business & Society. Scool of Politics, International Studies & Philosophy. P 2 Brenner, K. March 2008. Shareholder Activism and Implications for Corporate Governance. Pp 3-10. Viewed on January 8, 2011 from http://ssm.com/abstract=1115474 Department of Business Innovation and Skills. October 2010. A Long-Term Focus for Corporate Britain. BIS. 10-15 Financial Reporting Council. June 2010. The UK corporate Governancec Code. P 9-26 Hogg, C. 2010. The “Comply or Explain” Approach to Improving Standards of Corporate Governance. Q Finance. P 1. www.qfinance.com Kiarie, S. 2007. Non-executive directors in UK Listed Companies: are they effective? International Company and Commercial Law Review. Issue 17. Sweet & Maxwel. Pp 2-6 Miles, L. and Jones, M. 2009. The Prospects of Corporate Governance Operating as a Vehicle For Social Change in South Africa. Deakin Law Review. 14(1). Pp 53- 70 Owen, G. January 2001. Corporate governance in Britain: is incremental reform enough? Corporate Governance, innovation and economic performance. Pp 2-3 Yadav, S. N. 2009. Good governance: issues, challenges and prospects. New Delhi: Global Vision Publishing Ho. P 50 Read More