History of Regulations on Corporate Governance in the UK and the USA - Thesis Proposal Example

Hassan Al Lawati ID: 09002464 Module ......................... Module : ....................... Professor: ............................ Ms SC House Module Code: ......................... 9th January 2010 Title: The History of Regulations on Corporate Governance (Comparison between UK and USA) Background and Rationale The concept of Corporate Governance basically includes within its ambit the systems and processes brought into existence by the corporate entities and the related and concerned agencies and bodies, to establish transparency, accountability and integrity into the way the corporate entities conduct their activities and business. Corporate governance also pertains to the task of governing the dynamics influencing relationships between multiple corporate stakeholders like shareholders, management, employees, creditors, customers, etc., associated with the functioning of any corporate entity and the setting of salient goals for which a corporation exists and performs. Apt corporate governance not only assures the welfare of shareholders, but also ushers in the much needed economic efficiency within a system. Since the advent of the 21st century, the issue of corporate governance regulations has attracted a newfound interest and concern, both within the US and the UK, courtesy the collapse of many reputed and esteemed firms like MCI Inc.and Enron. With the globalization of the world economies and the digitization of business operations, the market forces seem to be in a state of flux, giving way to a destabilization of the existing business structures. The corporations and regulatory bodies around the world are responding by aligning themselves with a kind of convergence inspired by the Anglo-American models of corporate governance and regulation. A whole range of academic and non-academic sources like renowned economists and business and law faculties are extending inputs to explain this global convergence of corporate governance regulations in tandem with the Anglo-American lines. However, much of the available research and literature related to this topic is primarily ahistorical in its nature and approach. This is really disheartening in the sense that from the perspective of business historians, an analysis and study of the history of regulations on corporate governance extend the much needed framework and vantage point from which to revisit the past and to possibly reassess it. Still, it is really propitious that this trend towards Anglo-American convergence is now being studied from a historical perspective. In that context, it will be really pragmatic and beneficial to attempt a comparative study of the history of regulations on corporate governance within the US and the UK. A cursory perusal of the regulations on corporate governance in the UK and the US points towards a discernable difference in the approach of the two nations towards corporate governance. The regulations on corporate governance in the UK have always been primarily based on manoeuvrable and adaptable principles, rather than being stifled by hard and fast rules. The British approach has been to always allow the boards a degree of flexibility, so as to enable them to effectively discharge their responsibilities, while functioning within the constraints of an effective accountability. The regulations on corporate governance in the UK have always been a realistic mix of a whole range of traditions, practices, regulations, rules and recommendations, which to a great extent include: Rules originating from the Common Law. Relevant statutory instruments like the Companies Act 1985. Memorandums, articles of association and other important constitutional documents of a corporation. The Combined Code on Corporate Governance supplemented and aided by Higgs Review, Smith Guidance and Turnbull Guidance. The provisions of the Code are lenient and allow the corporations to some extent bypass them by extending reasonable and satisfactory reasons. There also exists a range of non-legal guidelines extended by the representatives of institutional investors like the National Association of Pension Funds, the Association of British Insurers, etc. Though such guidelines tend to be informal in their expectations, the British corporations do pursue them with a degree of sanctity, going by the weight they command amongst the institutional investors. The rules of the Takeover Panel and the City Code on Takeovers and Mergers do apply in the context of the takeover of listed companies. Issues associated with the disclosure of confidential data and information and dubious market activities come within the ambit of the Financial Services Authority’s Code of Market. In a historical scenario, the crux of the UK regulations in particular and the British approach on Corporate Governance in general has been to make way for high standards of accountability, while restraining the costs associated with the onus of corporate governance. Comparative studies, time and again have established beyond doubt that UK has always surpassed the US and other industrialized nations in the realm of corporate governance and that too while cutting impressively on the compliance costs. The UK regulations are apt at tackling a whole range of corporate and market scenarios, considering their pliable approach that seldom burdens the corporations and investors with strictly statutory or conservative prescriptions. Though the primary purpose of the Combined Code on Corporate Governance has unexceptionally been to layout the good and desirable governance practices expected of the corporations, yet the British companies have always been given the freedom and space to pursue innovative and ingenious approaches to corporate governance, though only by extending understandable reasons for such divergences. In a more contemporary scenario, the noteworthy corporate debacles in the 80s and the 90s like the Robert Maxwell Pension Funds scandal and the fall of the BCCI Bank gave the necessary and much needed impetus to the appraisal of the entire system of corporate governance in the UK, culminating into the setting up of the Committee on the Financial Aspects of Corporate Governance, which further streamlined the regulations on corporate governance within the UK. The emergence of WorldCom and Enron Scandals led to the updating of the Combine Code in 2003, in the light of the recommendations of the Smith Report and Higgs Report. The Financial Reporting Council was assigned the responsibility of maintaining the Code. On the contrary, a study of the American approach towards corporate governance is an endeavour that can only be well accomplished exclusively in a historical perspective. The growth of the corporate entities within the US have been somewhat atypical and unlike that in the UK. The US approach differs from the UK in the sense that it always resorted to the laying out of staunch regulations and guidelines and has always exhibited a predilection towards being predominantly rule based, rather than being principles based. The period between 1880 and 1904 saw the emergence of large firms on the American landscape. This saw the rise of trusts like the Standard Oil Trust in 1882 that resorted to their so typical trust form of corporate governance. It was the New Jersey Incorporation Act of 1889 that for the first type envisaged the governance of corporations instead of trusts and allowed the corporations to purchase stocks of other corporations. This unleashed the first great merger wave in the period 1897-1904, which though reduced the number of corporations in the US by 2000, but left them more efficient and accountable. The advent of the 20th century created a situation in America, where corporations became more of a social problem as well as a challenge rather than being upholders of accountability and propriety. The influx of monopolies allowed for misallocation of resources and widespread corruption. Severing of ownership from control in corporations raised a crisis of accountability. The American reaction though effective but regulatory and centralized was in the form of a series of federal and state regulations like the Sherman Act of 1890. The recent trend towards managerially-controlled firms necessitated the promulgations of apt regulations to bring in accountability into a system defined and dominated by producer-citizens instead of consumer-citizens. The thrust of the ensuing regulations was to cut the managers to being custodians of corporate and social interests and to safeguard the interests of the most vulnerable stakeholders in the American corporate framework. The upcoming institutional investors in the 60s and the 70s conclusively consolidated and justified the need for effective corporate governance. In the new circumstances, the institutional investors commanded a discernable hegemony over other stakeholders and the CEOs instead of being visionary stewards, stopped to the role of being mercenary contractors hired to accomplish corporate takeovers. This unobstructed cycle of greed rampant in 1980-2000 finally led to the adoption of Sarbanes-Oxley Act 0f 2002. It goes without saying that the US and the UK economies are two of the most resilient economic systems. But, the surfacing of the corporate scandals in both the nations in the last 10 years and the chinks exposed by the current economic meltdown finally highlighted the fragilities in the regulations on corporate governance in both the countries, being intrinsically different in their approach and spirit. Thus, both the systems can learn a lot from the strengths and weaknesses of each other. Research Question There is no denying the fact that the regulations and approach towards corporate governance in the US and the UK were effective irrespective of being disparate in their spirit. While the UK regulations on corporate governance have been flexible and pliable, the US system was rule based and centralized. The contemporary economic and financial challenges have surfaced the deficiencies in both the approaches. Hence, it will be propitious to attempt a comparative analysis of the regulations in the UK and the US in a historical perspective, so as to analyze the past and the future in a more realistic and result oriented context. It is more imperative today, when the world is increasingly opting for convergence along the Anglo-American lines. Research Methodology Extensive research and investigation will be required to accomplish this dissertation. Care will be taken to make use of all the reliable sources. Thus, immense effort will be put in the research that will focus on appropriate technical and historical textbooks, academic online sources and suitable search engines. Information relevant to the subject matter will be culled out from these sources, which will extend insight into the history of regulations on corporate governance in the UK and the US in a comparative context. Due efforts will be made to look into the current and past regulations that govern or governed the issue of corporate governance in both the countries. Moreover, journal articles of relevance will be used to evaluate the research topic, with special stress on the significant cases dealing with each part of the dissertation. Content Introduction Corporate Governance Global Convergence towards Anglo-American Lines British Approach towards Corporate Governance A Historical Perspective Common Law Rules Companies Act 1985 The Listing Rules The Combined Code on Corporate Governance Turnbull Guidance Smith Guidance Cadbury Report Financial Reporting Council Institutional Investors and Non-Legal Guidelines City Code of Takeovers and Mergers The Financial Services Authority’s Code of Markets American approach towards Corporate Governance Rise of Trusts New Jersey Incorporation Act of 1889 20th Century and Corporations as a Social Problem Rise of Institutional Investors in 60s and 70s Enron WorldCom Sarbanes-Oxley Act of 2002 Similarities in the UK and US Approach’ Differences in the UK and US Approach Lessons for the Future Conclusion Bibliography Timetable The dissertation will be carried out in several stages over the year in the following manner: The first stage will be done in April: it is to collect primary sources, which need to encompass the academic pieces of writing and text books related to the main focus of the dissertation. In May the second stage will commence by searching for secondary data, which will help to evaluate and provide further understanding of the obtained information. The third stage will begin in June by starting the write up of chapter 1 and 2 of the content of the dissertation. In July steps will be taken to observe the related journal articles and relevant cases along with appropriate legislation that governs the subject of the research. The write up of chapters 3 and 4 of the dissertation will be done in August with support of the wide reading sources. The final stage will be completed in September by writing the conclusion of the research along with the bibliography of the entire dissertation. Furthermore, the dissertation will be submitted to Glamorgan University at the end of September. Key Literature Academic Textbooks 1. Calder. Allan 2008, Corporate Governance, Kogan Page, New York. 2. Graiq, Paul and Burca, Grainne de 2007, EU Law: Text, Cases and Materials, OUP Oxford, London. 3. Gourevitch, Peter A 2007, Political Power and Corporate Control, Princeton University Press, New York. 4. Keane, Ronan 2007, Company Law, Tottel Publishing, London. 5. Morck, Rundall 2007, A History of Corporate Governance around the World, University of Chicago Press, Chicago. 6. Tricker, Bob 2009, Corporate Governance: Principles, Policies and Practices, Oxford University Press, London. Legislation Companies Act 1985 The Combined Code on Corporate Governance City Code on Takeover and Mergers The Financial Services Authority’s Takeover Code on Market Conduct New Jersey Incorporation Act of 1889 Sarbanes-Oxley Act of 2002 Table of Articles 1. Coffee, JC 1999, ‘The Future as History: Prospects for Global Convergence in Corporate Governance and its Implications’, Northwestern University Law Review, Vol. 93, no. 15, pp. 641-707. 2. Famma, EF and Jensen, MC 1983, ‘Separation of Ownership and Control’, Journal of Law and Economics, Vol. 26, no. 17, pp. 299-309. 3. La Porta et al 1999, ‘Corporate Ownership around the World’, Journal of Finance, Vol. 54, no. 7, pp. 471-516. 4. Nyman, S and Silberston, A 1978, ‘The Ownership and Control of Industry’, Oxford Economic Papers, Vol. 93, no. 15, pp. 641-707. Table of Cases 1. Royal British Bank v Turquand (1856) 6 E & B 237 2. Hendson and Co v Williams (1895) 1 QB 521 3. Enron v People 4. WorldCom v People Read More