Corporate Governance in Public Limited Companies in the UK - Coursework Example

Corporate Governance in Public Limited Companies in the UK Introduction Corporate governance is a system of pre-defined rules, practices and processes by through which a company is run, controlled and directed. It mainly entails the art of balancing stakeholders’ interests in a given company. The stakeholders may be the management, customers, the shareholders, financiers, the government, its suppliers and even the community. It provides a framework for achieving the objectives of a given company. In other words, corporate governance specifically identifies tasks for each participant or stakeholder in a corporation. It aids in specifying the decision-making procedures in corporate affairs. Corporate governance in public limited companies In the past years, increment in freedom has become eminent, in all aspects of business activities thereby creating more opportunities for entrepreneurs. There has been international market development especially for UK based companies. Cross-borders business relationships have increased dramatically. The UK has also generated a lot of developments. The businesses have clearly indicated that they have the knowledge and the strength to explore new ventures abroad and also in the UK, and have thus helped increase the affluence. The business community wants to show that their enterprises are ready to shoulder this increased responsibly. Many business ventures have realized that by creating good relationships with the stakeholders, there would be more business opportunities that will come up. There should be mutual trust between a company and the public in order to have improved competitiveness and ultimately higher and better living standards of the people Ensuring that the business community is trustworthy can be done and achieved by improving relationships between the stakeholders, from the top management to the lowest shareholder. The corporate governance system in the UK has been very effective. Regulations that have been established have assisted enterprises in conducting relations between the stakeholders in companies. It was a firm belief among the UK business community that in order to obtain acceptable results, internal governance and supervision within the enterprises should be increased immensely. There was a lot at stake, and it was important that the initiative came from the business community itself and that it pointed out methods to alleviate the confidence of the stakeholders involved and that the public had the right to demand from enterprises. The corporate governance system has been very effective in the UK. By looking at the various stakeholders in a company, we will be able to identify how each has benefited through this system. The Board of Directors The board of directors has the greatest responsibility in a company. It is also the highest authority in any given company. During meetings between shareholders’ meetings in a company, the board of directors also stands out as the highest authority. The functions of any given board can be summed up in the following listed roles: • The Board of Director's responsibility is to promote the prosperity and success of the company. This is achieved through supervision of its managers and the affairs of the company. • The board and the managers have the duty to set up the company’s standards, values and the objectives. The objectives can be either long term or short term. The duties, roles and obligations of the board of directors have been improved and made more effective through corporate governance now than before. This has been done by: • The Company´s Board of Directors have had to undertake the company’s affairs and seen to it that the organization’s activities are in correct and in good order every time. It is also responsible for ensuring that proper book-keeping and handling of the company’s funds is sufficiently supervised. • The Board of Directors now has to deal with between one and three managers of the company. This has to be, unless the company’s Article of Association states otherwise • The manager and the Company´s Board have the responsibility of administration in the company. • The Board of Directors now lay down the policies and instructions which have to be followed and undertaken by the company’s manager. • It is also responsible in ensuring that the daily operations of the company do not extend past the usual arrangements and thereby cutting costs and increasing efficiency. Duties An individual that has been chosen to be a director should be able to carry ot the stipulated duties. He/she should have the required knowledge and skills that are required for that specific directorship post. The individual should also be able to show his/her commitment to the company and should be a dedicated individual. Before beginning his/her duties, he/she should be aware of the job’s requirements and what his/her duties are. For a board to be successful, it is important that the members are aware and have the knowledge on how the company runs and operates. It is also advisable that the members of the board be from different fields of specification in order to be able to complement each other’s knowledge. The members of the board should able to attend to the duties assigned to him/her in the company. Since the implementation of corporate governance, each director now: • Should be conversant with the regulations, laws and stipulations that relate to the company • Familiarize themselves with the values, strategies and goals of the company. He/she should be in a position to carry out the duties required to help achieve the company’s goals. • Be able to have a full understanding of the functions of the board and hence be able to make sound judgments and have a good intuition. • Be able to make informed, independent and reliable decisions. • Ensure that functions of the internal control are satisfactory. They should also ensure that the information received by the board is satisfactory, timely, accurate and reliable. This will enable the board to perform its duties properly and make correctly informed decisions. •Ensure that all the regulations that foresee the company are adhered to and followed • Strive to positively inspire and motivate the staff of the company. Working rules As at now, the board of directors is mandated to prepare, introduce and ensure that there are written rules that govern the working of the company. The rules should clearly stipulate the methods of working, the roles, the procedures to be followed. The rules have to clearly defined the roles of the directors, the chairperson and the managing director. The information in the board´s working rules has enabled shareholders to evaluate operations of the board. The working rules of the board have included the following: • Proper responsibility division between the members of the board. • Proper responsibility division between the chairperson and the board. • Responsibilities division between the chairperson and the managing director. • The board’s sub-committees. • Attendance, frequency of meetings and calling of meetings. • Information that is submitted to the board. • Minutes of meetings held by the board. • Decisions and voting. • Non-disclosure and confidentiality. • Disqualification. • Connections to other rules of the company. Evaluation of performance The board now has to evaluate its performance, practices and procedures regularly. The board should also be able to evaluate the development of the company. This is done with the assistance of outside specialists. Such evaluation requires that the board take a realistic evaluation of its strengths and weaknesses in carrying out its duties. It should also be able to suggest how it can improve its ways of discharging its duties. Independent directors It is now desirable that the majority of directors be independent of the company. This means that a minimum of two directors should be independent of the major stakeholders of the organization. The directors have a duty to oversee those who are part and parcel of the everyday running of the company. This means that most of the members of the board of directors be independent of the employees of the company. A significant or major shareholder is one that owns or controls a minimum of 10% of the total shares of the company. Evaluation of the independence of directors The board now has to look at the directors and evaluate their independence. The board has a responsibility to state its conclusions and findings in the company’s annual report. A director is said not to be independent of the company if he/ she: • In the past three years been an employed by the company or been the conglomerate of the company. • In any way receives compensation, apart from that compensation to him as a director of the company, from a member of the operative management or from the company itself. • Is a close family member of the operative management, a consultant or director of the company • Has significant business ties or interests with the company, or if he/she does considerable business with the company. • The board is completely satisfied with the individual’s character, past performances and his/her background. • It is important that information on directors given out in the annual report should include: • Name of the individual and the birth date and year. • Education status and background. • Occupation. • Initial work experience. • When the individual was first elected into the board • Positions of trust in other companies and institutions. • Shares held in the company. Sub-committees of the board For efficient functioning of a company, there should be well organized working methods of the board. It is now important to establish sub-committees with some of the directors in them to carry out special tasks delegated to them by the board. These sub-committees are required to regularly report to the board about their work. Audit committee It is now very important to have and audit committee in a company. This is based on the size and the scope of the company. This is also, subject to whether the financial matters of the company and other reports need further scrutiny and analysis. A selected small group can do this from the board of directors. The audit committee selected from the board of directors is mandated with monitoring and analyzing the integrity of reports on finance of the company submitted to the board. From this, it is able to ensure that the board is able to get a clear picture of the company based on the reports it gets from the auditors. Companies that have not yet formed such sub-committees now have to yearly evaluate whether such a committee should be established. Should have substantial and up-to-date knowledge of accounting practices and the understanding of annual financial statements. Tasks of the audit committee The board now has the sole authority to stipulate the roles and duties of the audit committee. This is based on the needs and requirements of the company. Duties of the audit committee include: • Supervising and analyzing the position of the company financially • Evaluate the internal financial control system. It also should carry out risk management. • Evaluate financial reports and also management reports. • Ensure that all rules, laws and regulations are complied with. • Prepare the decisions and actions to be taken in appointing an external auditor. • Has contact with the externally chartered accountant. • Evaluate the reports submitted by the external auditor. • Evaluate other services provided by the external auditor. Remuneration committee The board has a mandate to form a special remuneration committee. This committee is to set the standards and levels of remunerating the employees of the company.The MD of the company must be a member of the remuneration committee. Members of the remuneration committee The constituents of the remuneration committee shall be three majority party members must be independent of the company. No employee of the company should be a member of the remuneration committee except the managing director. Tasks of the remuneration committee The tasks of the remuneration committee shall be defined by the board. The remuneration committee has the following tasks: • Analyze the wages of the managing director and negotiate the terms of compensation. • Analyze the wages of the other employees of the company. These other employees include the directors of the company. • Structure the policies of the company relating to performance and wages. The policies may also include purchase options. Share purchase options It is now mandatory for the share purchase option plans of the company be submitted for acceptance by the members of the general meeting In this context, the main provisions refer to the number of shares in the plan, maximum length of re-purchase rights, time of purchasing rights, the time frame in which employees can purchase exercise their purchasing rights and the frame of reference in regards to the decision on the price. (European Corporate Governance Institute, 2004). Conclusion From what we have observed above, we can conclude that corporate governance in the UK has been very effective. It has supported correct decision-making. This has been based on a clear framework of accountability. There has also been clear communication and understanding across the stakeholders of any given company. It is also evident that organizations with consistent corporate governance have been able to maintain services of high quality and improved their performances. In a nutshell, we can comfortably say that corporate governance has been very effective in the UK. References Colley, J. L. 2003. Corporate governance. New York: McGraw-Hill. Davies, M., & Aston, J. 2011. Auditing fundamentals. Harlow, England: Financial Times/Prentice Hall. Homewood, L. 2001. Auditing fundamentals. Croydon, Vic.: Tertiary Press. Monks, R. A., & Minow, N. 2004.Corporate governance (3rd ed.). Malden, Mass.: Blackwell Pub.. Dignam, A. J., & Galanis, M. 2009. The globalization of corporate governance. Farnham, England: Ashgate. Calder, A. 2008. Corporate governance a practical guide to the legal frameworks and international codes of practice. London: Kogan Page. Mitchell, L. E. 2009. Corporate governance. Farnham, Surrey, England: Ashgate. Solomon, J., & Solomon, A. 2004.Corporate governance and accountability. New York: John Wiley. European Corporate Governance Institute 2004, Corporate Governance. Available from: . [28th July, 2004] Crowther, D. 2002. A social critique of corporate reporting: a semiotic analysis of corporate financial and environmental reporting.. Aldershot: Ashgate Pub. Group. Nash, T. 1999. Reputation management: strategies for protecting companies, their brands and their directors. London: Published for the Institute of Directors and AIG Europe (UK) Limited by Director Publications. Zinkin, J. 2010. Challenges in implementing corporate governance: whose business is it anyway?. Singapore: Wiley. 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