Corporate Governance Is The Way a Public Limited Company Is Governed - Coursework Example

Corporate Governance is The Way a Public Limited Company Is Governed and the Way Its Directors Report to Shareholders, Reading Chapter 5 of Auditing Fundamentals by Davies and Aston, 2011, Critically Evaluate the Effectiveness of the System of Corporate Table of Contents Table of Contents 2 Introduction 3 Critical Review of Corporate Governance 4 Fundamental Tenets of the Corporate Governance Concept 4 Types of Committees 7 Audit Committee 8 Nomination Committee 8 Remuneration Committee 9 Analytical Frameworks 9 The Shareholder Model 10 The Stakeholder Model 11 Conclusion 12 References 14 Bibliography 21 Introduction Corporate governance is a system principally used to control corporate sectors as well as direct them with the aim of ensuring ethical and appropriate conduct of business operations (Rayton & Cheng, 2004). Notably, the functioning of the Board of Directors (BOD) is an important consideration to ensure successful implementation of corporate governance provisions. It fundamentally comprises of specific rules as well as regulations based on which the BOD should make decisions. Notably, the codes as well as principles of corporate governance assist in maintaining a strong relationship between stakeholders and managers of companies (Calder, 2008). Corporate sectors are therefore required to operate according to the rules and policies of the corporate governance for better growth of business functions. Additionally, it also helps in assuring a transparent and responsible manner of the business operations. It also facilitates companies to conduct its business operations in accordance with the rules and the regulations prescribed under the Companies Act of the host/home country. Corporate governance offers specific guidelines for policymakers and regulators to ascertain that the formulated policies and rules comply with legal provisions (Fernando, 2009). Emphasising a similar notion, the discussion henceforth will aim to address the effectiveness of corporate governance system as practiced currently in the UK. Accordingly, theoretical underpinnings with reference to various books and peer-reviewed sources will provide guidance to the critical arguments presented through this discussion. Critical Review of Corporate Governance Fundamental Tenets of the Corporate Governance Concept Corporate governance is as an important and non-negligible framework to ensure long-run sustainability, which is mandatory to have a strong foothold in today’s highly competitive business environment. Based on effective corporate governance policies, companies set effective management principles with a futuristic intention to conduct their operations in accordance with their long-term objectives and defined values (Mallin, 2013; Keasey & et. al., 2005). Conceptually, corporate governance provides the principles to regulate and govern business operations by way of following the specified legal, organisational and societal norms affecting the company’s stance as a corporate entity. Principles and the regulations of corporate governance aid in managing the activities conducted by boards, developing a suitable relationship with shareholders (Tricker & Tricker, 2012; Clarke & Rama, 2008). In public traded corporation, the developed corporate governance mechanisms aim to minimise agency conflicts that often arise among managers as well as owners. Conflicts, in relation to practicing corporate governance frameworks may also develop due to the increasing gaps between control operations and ownership. It is worth mentioning that the applied corporate governance mechanism might be internal or external to a company’s business environment. The internal mechanism comprises directors, management and charter provisions. On the other hand, the external mechanism consist labour markets, legal as well as regulatory rules and investor monitoring among others (Gillan & et. al., 2007; Witherell, 2002). The corporate governance codes became a part of the UK Company Act legislation during the year 1992, following the submission of Cadbury Committee Report. The incorporation of the codes in the UK was following several corporate scandals. Among these, majors lead to the collapse of Polly Peck, Robert Maxwell pension funds and BCCI bank in the UK. In this regard, the business community of the UK focused on developing effective policies and regulations with the aim of ensuring that business operations are ethically sound and legitimate as per the relevant company laws (IOD, 2008; Naidoo, 2002). In the UK, corporate governance grounds on the vision of developing an effective accountability of the company board towards stakeholders. Additionally, governance should reflect the ability of the board in managing the operations of a company successfully. As apparent, the BOD mainly regulates corporate governance in the UK, which implies a centralised management process followed in the corporate sector of the nation to ensure complete ethical soundness and legitimacy of the business operations conducted. Respectively, the BOD acts as accountable for ensuring the effectiveness of a company’s business functions (Solomon, 2011; IOD, 2008). It is important to note certain features when formulating an effective corporate governance framework based on applicable Company Laws, Listing Rules and Combined Codes. In this respect, developing a unitary board is crucial, which should be accountable for developing appropriate strategies in order to lead a company successfully. Moreover, segregation of the roles along with the powers of the directors is also important for conducting business operations in a systematic manner. Additionally, obtaining formal as well as transparent procedures are also important in relation to appoint directors and formulate remuneration policies. In the UK, the combined codes act as the base to formulate effective corporate governance principles. Arguably, the best practice of corporate governance in the UK emphasises developing a strong relationship between the stakeholder group and the company. Development of corporate governance principles based on Combined Code provides certain flexibility to the board members to determine processes in the most beneficial way to ensure both profitability and sustainability of the company. Consequently, flexibility in determining certain principles of corporate governance might have positive impacts on the performance of a company owing to the fact that requirements of governance are different amid companies based on their size, business activities and ownership structure. Hence, with the intention to maintain uniformity in the principles of corporate governance, the ‘Financial Reporting Council’ (FRC) undertakes the formulation as well as implementation of code or standards in the UK. The FRC is responsible for developing codes along with standards for accounting, investors and auditing communities. The FRC is also responsible for ascertaining the eligibility of professionals involved with the communities with sufficient understanding of their responsibilities to ensure that they conduct their operations in accordance with the specified standards. Accordingly, the FRC develops corporate governance codes in the UK based on certain objectives, which include enhanced quality of corporate reporting, auditing, corporate governance and actuarial practice (FRC, 2014; Plessis & et. al., 2012; IOD, 2008). Undoubtedly, after the scandals witnessed in the UK, constituting some large corporate sectors, the importance of corporate governance has increased. The codes of corporate governance in the UK are based on the principle of ‘comply or explain’ in order to ensure that corporate sectors are able to conduct their operations ethically and in compliance with the determined regulatory laws and standards. The principle fundamentally aims at ascertaining that the conducts of business operations are in accordance with law by the BOD following effective corporate governance practices. This code is quite flexible as it allows the board to take actions against practices conducted by corporate entities, which do not comply with the predestined codes or principles; thus, making the complex corporate governance framework much comprehendible. In this respect, at times, when board performs in non-compliance with the laid procedures, they are required to explain the reasons for such actions to the company stakeholders to ensure the legitimacy of their decision(s) concerning the notions of corporate governance (Keay, 2012; MacNeil & Li, 2006; Pass, 2006; Webb & et. al., 2003). Similarly, it is necessary that the shareholders are adequately aware of the activities of the board members with the intention of ascertaining that whether business operations are in compliance or in non-compliance with the enacted corporate governance standards. The disclosure of company operations should abide by the relevant company laws besides complying with governmental rules along with regulations (Cronin & Murphy, 2012; MacNeil & Li, 2006; Arcot & et. al., 2005). Accordingly, guidelines as well as standards must be well organized in order to safeguard the interests of the shareholders, to meet the present ‘Corporate Social Responsibilities’ (CSR) of the company and to protect the environment as a whole (Davies, 2012). Types of Committees Arguably, in order to develop effective governance system in corporate sectors, the responsibilities of analysing the company’s operational adherence of determined principles bestows on particular committees. In this regard, there are three types of committees, which include audit committee, nomination committee and remuneration committee. These committees function as important pillars in the development of an effective governance structure (Davies & Aston, 2011; Plessis & et. al., 2011; Balling & et. al., 1997). Audit Committee The audit committee is an important element to ensure an all-inclusive development of effective corporate governance. The committee principally performs the responsibility of ensuring the effect conduct of audit operations, which forms the fundamental base of a successful corporate governance framework. Additionally, the committee is responsible for managing and ascertaining that the internal along with the external audit operations essentially comply with determined codes of corporate governance (NEST Corporation, 2012). Moreover, by policy the auditors perform the tasks of scrutinising that the audit reports developed abide by the enacted accounting and corporate governance principles. The committee is also responsible for reviewing internal control processes, financial statements and risk management techniques adopted by a company (Deloitte, 2014; KPMG LLP, 2012; Smith, 2003). In the UK, there are several corporations including 2ergo Group Plc and Wolseley Plc among others who have developed audit committee internally in order to gain better efficiency in abiding by the corporate governance policies (Wolseley plc, 2014; 2ergo Group Plc, 2012). Nomination Committee The nomination committee holds the responsibility of seeking that the nomination procedure of board members is transparent and legitimate to the highest possible extent. The committee is majorly accountable for identifying the skills along with the experiences held by its members, vital for constituting board members. Accordingly, the members of the committee should perform independently in their approach, with the intention of minimising biasness and malpractices so that board members constitute of competent directors. This will further enrich organisational decision-making in abidance with corporate governance norms (FRC, 2012; Nationwide Building Society, n.d.). UK corporations such as AB Dynamics Plc and Wolseley Plc have their Nomination Committee with a similar purpose (Bloomberg Businessweek, 2014; Wolseley plc, 2014). Remuneration Committee The remuneration committee is accountable for scrutinising and subsequently, implementing the remuneration policies entitled for the executive directors in a company. The committee is therefore accountable for making overall recommendations in order to devise and incorporate remuneration policies accordingly. In this regard, the committee should determine the bonus scheme and remuneration packages offered to individual executive directors (OECD, 2011). Additionally, the committee should ensure the formulation of effective policies in accordance with service contracts along with pension plans. This shall in turn facilitate the committee with the opportunity to offer remunerations and other monetary packages based on their performances and competencies (BIS, 2012; Das, 2010; Jones & Pollitt, 2001). Examples of remuneration committees can be identified in AB Dynamics Plc and Wolseley Plc, two large-sized UK corporations (AB Dynamics Plc and Wolseley Plc). Analytical Frameworks There are certain procedures for decoding the effects of corporate governance in relation to economic performances along with the behavioural attributes of firms. In this regard, incorporation of different analytical frameworks shall be important with the aim of recognising the impact of corporate governance. The discussion henceforth gives an elaborated understanding of analytical frameworks. The Shareholder Model Incorporation of the shareholder model, when formulating effective corporate governance, fundamentally aims at ensuring minimum gap between business operations conducted and the requirements of shareholders as well as other stakeholders of the company. In accordance with the model, the aim of a company is to or should be to maximise the wealth of shareholders and respectively, enhance profitability. The performance of corporate governance can be analysed with the application of this framework by recognising shareholder value. In this regard, the managers along with the directors are required to ensure that business operations aim at satisfying shareholders’ interests to the highest possible extent. The model apparently assists in having an effective analysis of the performances of a company by enhancing principal-agent relationship. However, the differences in the interests of the managers or decision makers and the shareholders of a company impose strong influences on the effectiveness of this framework. In this respect, the alignment of the managers’ interests and the shareholders’ concerns is essential in order to mitigate issues related to management entrenchment along with monitoring. Contextually, strengthening the rights of shareholders is essential to improve the monitoring techniques, so that they have a better control on business activities and develop effective management system. In this context, the model aids in developing an effective framework for governing the management in order to ensure that business operations work in accordance with the objectives and values of the organisation. Subsequently, the shareholders can track the performance of the company and examine whether the management is conducting the business operations in alignment with their interests obtaining transparent and accurate information through company reports (UNM, 2013; Maher & Anderson, 1999). The Stakeholder Model The stakeholder model attempts to analyse the performance of corporate sectors from a wide perspective. In this regard, the model encompasses stakeholders’ interests, including suppliers, employees, creditors, customers and environment. Accordingly, the model also aids in managing the operations of corporate sectors in relation to market share fluctuations, employment generation capacities, trade relations and financial performances. Contextually, businesses must ensure that the requirements of stakeholders obtain priority when conducting organisational operations. Moreover, the opportunity of making decisions also facilitates the involvement of stakeholders in the corporate governance functioning of the company. Emphasising a similar notion, debates have centred in judging the efficiency of modern organisations in building effective corporate governance to ensure complete ethical soundness of business operations (Heath & Norman, 2004). As the inferences drawn from this study reveal, adherence to certain principles is essential in order to develop an effective corporate governance structure, which are included in the above-mentioned frameworks as their basic tenets. These principles commonly include transparency, fairness, accountability and responsibility. Transparency principles signify that disclosure of financial and other corporate reports aims at building trust. Likewise, principles of fairness ensure that the management decision-makers treat investors in an equitable manner. Subsequently, accountability principles imply the importance of managing business operations in an independent along with competent manner while the principles emphasising responsibility ascertains prioritising the needs of the stakeholders when conducting business operations (Fremond, 2000). Conclusion From the above presented critical review of corporate governance, it becomes easily comprehensible that corporate governance plays an important role in providing measures and codes based on which, managing and directing effective business operations is possible in abidance with formulated transparency principles. Notably, BODs are vital considerations for the development of a good corporate structure as they are accountable for managing and making decisions. However, effectiveness and successful implementation of corporate governance is by no means restricted to the efficiency of the BOD. For instance, Combined Codes are the ground for formulating the codes and principles of corporate governance in the UK, besides ensuring legitimate and balanced nomination of the members in BOD. According to these Codes, the intention of safeguarding the interests of shareholders holds a priority concern when developing the corporate governance principles. Conclusively, the understanding developed through this study revealed that the UK based business mail focus on incorporating the shareholder model of corporate governance in order to ensure that shareholder needs are adequately justified through the business operations. 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