Corporate Governance: A Critical Analysis - Coursework Example

Corporate Governance: A Critical Analysis April 27, Introduction It has become increasingly important for a nation’s legal system to play a significant place in influencing the failure or otherwise of its corporate governance system. The journey towards the combined code in 2012 took a tumultuous journey from 1992, when the Cadbury committee initiated the growth towards it. According to Baker & Anderson (2010), good corporate governance reflects the strength of a country’s legal system. In most industrial nations, there exists good legal systems that are backed by effective institutions and the United Kingdom is not an exception. In the last ten years, the United States and the United Kingdom have been the two leading countries in the fore front towards more effective corporate governance globally. The capital markets and the company law regimes in the United Kingdom are perhaps some of the most developed in the world, similar to the same situations in the United States. Certainly, these two features of the British business climate merge to ensure a sound corporate governance tradition. This paper critically analyses corporate governance, with a particular emphasis on the UK. The development of Code of Corporate Governance The three contributors of the corporate governance package therefore are; statutes, case laws and the non-statutory codes of conduct developed as has been explained earlier. The Cadbury committee laid the foundations for the present effective system of corporate governance in the UK and influenced codes for so many other countries. Committee on the Financial Aspects of Corporate Governance, & Cadbury (1992) report provided revolutionary first formal code of corporate governance practice in the UK. This report was a response to key financial and corporate scandals that beleaguered the corporate environment. Polly Peck and Maxwell1 in 1991 awakened the authorities to inefficiencies of the then corporate governance codes that were in play. Therefore the committee was formed to create Codes to spur investor confidence which was waning as a result of the lack of honesty and accountability in the listed companies, particular when suddenly, wallpaper group of companies Coloroll and Polly Peck Consortium went under. These two companies prior to their collapse had all along shown healthy published financial accounts. Maxwell’s death in 1991 revealed major financial improprieties among the companies that he had a stake in and these included the Mirror group, a major publishing company. Jones & Pollitt (2003) opine that issues in corporate cannot arise in a vacuum, rather from processes that are identifiable. Similar to the process above in tackling corporate governance issues, the UK authorities instituted a similar pattern, which are committees. The next committee instituted to address the limitations that accrued from the Cadbury report which did not comprehensively address the sector wide issues. On the hind of the Cadbury report, the Study Group on Directors Remuneration & Greenbury (1995) report addressed an important component of the corporate governance, the director’s remuneration. Chairmen and chief executives of listed companies in the UK were receiving were deciding their own salary much to the ire of the public. This was a perfect move to stem the growing discontent in public accountability system, especially with regard to the pay packages. The Hampel Report (1998) was instituted to revise the corporate governance Code laid down by the Cadbury committee of 1992 and seek to determine if the codes were being adhered to by the listed companies. The report sought of combined and harmonized both the Cadbury report and the Greenbury report. The report in its institution was not premised on issues of corruptions and scandals that contributed to the other two reports; rather it was developed to compliment. The report though a clarifications of the other reports did not propose stringent revolutions in the UK corporate governance system. The Turnbull Report (1999) which premised on internal control and it provided directions to the directors of listed companies on the guidelines of the UK’s Combined Code. The report was acting on the theory that corporate frauds are the direct result of inside jobs which are caused by insufficient prevention program. Therefore, the report emphasized financial, operational, compliance and risk management. The Higgs (2003) review was created to review the role and effectiveness of non-executive directors and of the audit committee, aiming at improving and solidifying the then present Combined Code. There were certain scandals that occurred in the US that informed the authorities to institute the committee so that such scandal does no befall the UK system. The Enron Scandal2 as well as the WorldCom and Tyco scandals rocked the international corruption scene prompting the reactions from the UK authorities. In addition to being the largest bankruptcy realignment in American history at that time, Enron was surely the largest audit failure (Lysandrou & Stoyanova, 2007). In an unfamiliar move, the committee sturdily pushed for the retention of the then present non-prescriptive manner to corporate governance. Academic experts often simply refer to the Higgs committee recommendations as ‘comply’ or ‘explain’. In an unprecedented move, the committee pushed for inclusions of the rigorous criteria for board composition and vetting of independent directors. Higgs was of the opinion that the then present discretion allowed by the Hampel Combined Code be removed. Smith (2003) report instituted by the UK government later on 2003 focused on the independence of auditors. In the wake of the fall of the Enron and Arthur Andersen all in the year 2002, the review became necessary. The recommendations from these reports have been included into the Combined Code of the UK, and they are applicable through the Listing Rules for the London Stock Exchange. Further the report has been heavily influenced by the EU commission views taken during time which a meeting of the commission was held. In corporate governance structure, internal auditors had failed substantially to provide the true financial picture of companies such as the Enron and Arthur Andersen, the then massive auditing firm in the US. Auditors must as a key role look into the corporate governance structure and as such must provide safeguards to conserve their own independence from that of their client companies. UK incorporated companies listed on the London Stock Exchange must adhere to the Combined Code on corporate governance. This came in the year 2006 and it has been consistent with the reports that have been built from the Cadbury report to the 2003 Smith report. The UK companies Act of 2006 which came into effect in 2008 replaced previous UK corporate legislation providing another key directive on corporate governance. According to Mullerat & Brennan (2005) just as the of rights and duties of the US directors and shareholders are contained in the US state corporations statutes and correlated decisions in the state courts in the courts, the rights and duties of the directors and shareholders in the UK system are contained in the Companies Act, presently contained in the Companies Act of the year 2006. The European Commission has had a significant influence on corporate governance in the United Kingdom, particularly with regard to the Commission’s 2003 Corporate Governance and Company Law Action Plan. A mix of legislative and regulatory measures were contained in the in the plan and the effect would include; disclosure requirements, voting rights, cross border voting, institutional investors and responsibilities of board members. Global financial crisis that crippled the world could have its roots deeply in the failure of the corporate governance and it prompted governments particularly in countries such as the UK, where it lasted longer to reevaluate their financial regulatory framework. Re-evaluation was an attempt to tackle the causes and the resulting fallout from the economic crisis that beleaguered the whole world. Deficiencies and failures in corporate governance in the early 2000s led to the collapse of the Lehman Brothers and other Banking Groups in continental Europe and the United Kingdom. Actions that are unprecedented have been adopted by the UK Government to not only contain but also to prevent financial crisis in markets, specifically within the financial institutions and shoulder the wider economy that are intent on steadying the banking system to cushion people’s saving and the wider economy. Safeguards against excessive risk taking in a wide range of financial institutions have often been cited to be the leader factor that causes the weak connection in corporate governance. In October 2008, Lord Turner was commissioned by the UK government to review the causes of the financial crisis that hit the world. In the year 2009, the UK regulatory framework was a response to the world financial crisis and as such the recommendations was on redesign and supervisory that would have led to a more robust financial system for the future. Additionally, internal improvements recommendations were contained in the report, and additionally the importance of internal risk management and the effectiveness of corporate governance. The Financial Reporting Council reviewed and revised the Combined Code in 2009 and 2010 to undertake certain fundamental changes. These reconstructions in the nature of corporate governance in the UK have been the leading factors in the development of the code of corporate governance. The 2012 Combined Code is firmly based on this changes and it addressed far reaching issues in corporate governance. Conclusion Effective and efficient capital market induces companies to develop sound governance norms through rewarding of properly governed institutions and penalizing those institutions with ineffective practices through the adjustment of the cost of capital. On the other hand, company law develops the foundational policy and rules that creates the relationship among a number factions within the corporate structure, which include; shareholders, employees, customers, management and creditors. The development of the Code of corporate governance framework was necessitated by the number of corporate scandals that bedeviled the corporate environment over the years. In all these questions the corporate governance frame emerged to provide companies and institutions with the clear line to provide their shareholders and other stakeholders with clear and transparent financial reports Reference List Baker, H. K., & Anderson, R. (2010). Corporate governance a synthesis of theory, research, and practice. Hoboken, N.J., John Wiley & Sons. http://lib.myilibrary.com/detail.asp?ID=278280. Committee on Corporate Governance. (2003). The combined code principles of good governance and code of best practice. London?, Stationery Office?]. http://www.fsa.gov.uk/pubs/ukla/lr%5Fcomcode3.pdf. Committee on the Financial Aspects of Corporate Governance, & Cadbury, A. (1992). Report of the Committee on the Financial Aspects of Corporate Governance. London, Gee. Jones, I., & Pollitt, M. G. (2003). Understanding how issues in corporate governance develop: Cadbury Report to Higgs Review. Cambridge, Centre for Business Research, University of Cambridge. Lysandrou, P., & Stoyanova, D. (2007). The Anachronism of the Voice-Exit Paradigm: institutional investors and corporate governance in the UK. Corporate Governance. 15, 1070-1078. Mullerat, R., & Brennan, D. (2005). Corporate social responsibility: the corporate governance of the 21st century. The Hague, Kluwer Law International. Study Group on Directors Remuneration, & Greenbury, R. (1995).Directors remuneration: report of a study group chaired by Sir Richard Greenbury. London, Gee Pub. Read More