Accountability and Sustainability of Business in the UK due to Corporate Governance Practices - Case Study Example

Corporate governance Contents Introduction 3 Discussion 4 Conclusion 10 References 12 Introduction Corporate governance is the system and the processusing which the businesses across different industries are directed, monitored and controlled. Generally, corporate practitioners explain corporate governance with respect to the control maintained on a business. Corporate governance in different countries, including the United Kingdom operates in a framework to focus on the overall supervision of the management as well as the running of a business. The process also signifies an intricate relationship between the company, the management, employees, shareholders as well as the other stakeholders of the business. Corporate governance is based on the different rules and a regulation pertaining to a country, the private sector conducts and the legal framework in the country in which a business is operating. According to the definition provided by the Organization for Economic Co-operation and Development (OECD), corporate governance is the major underlying element used by the businesses to enhance the confidence of the investors and to improve the economic growth and efficiency of the business. In UK, the corporate governance practices have become of increased importance, especially after the global financial crisis of 2008. All the companies operating in the UK are focusing extensively in implementing efficient corporate governance practices in order to increase their efficiency, viability, sustainability and competitiveness in the changing global scenario of business. Therefore, it is important to understand and critically evaluate the changing principles of corporate governance practices in different companies operating in the UK with proper consideration given to the legislative aspects existing in the country. The major companies in United Kingdom have started implementing effective corporate governance practices encompassing a wide array of practices which include the remuneration of the management, Corporate Social Responsible (CSR) activities of the companies, maintaining effective internal controls and directing the businesses towards a sustainable future. Discussion The corporate governance practices in the United Kingdom can be traced from the company law established in the country. The legal framework of the businesses is based on the Companies Act 2006 which has revised and replaced the previous legislations related to the companies operating in the country. Thus, the corporate governance practices have been given much emphasis, irrespective of the structure and the functioning of the company. The country is also characterized by the widespread use of self-regulatory principles in the corporate governance practices. This has stemmed from the requirement of rules related to the outcomes, standards and processes in a business which are not specified in the company laws (Pontiff, Shleifer and Weisbach, 1990, pp.600-613). The self-regulatory framework of corporate governance has been developed in the country through various reports driven by the entities to which the board could be held accountable for their decisions and activities. The self-regulatory framework includes the mechanisms of preventing frauds, improving the accountability of the businesses, controlling the directors and the boards, improving transparency, information providing process of the businesses and the mechanisms of making the boards more accountable to the stakeholders of the business. The Cadbury report in 1992 and the Greenbury report in 1995 established the best practices and other reworking in the existing corporate governance mechanism in the country. Following these reworking, the corporate governance in UK has become much more robust, accountable and transparent. The establishment of the UK corporate governance code was major milestone in the corporate govern mace system in the country which brought about the companies from different industries to focus on the best practices in corporate governance systems related to the remunerations of the directors, Corporate Social Responsibility (CSR) and maintaining transparency, control and accountability in the businesses. The key issues that were faced by the country with respect to the corporate governance policies were dealt with effectively by the introduction of the UK corporate governance code. These key issues were the remuneration of the directors, the structures and membership terms of the boards, the management of the boards, internal and financial control mechanisms, and relation with the stakeholders and the audit perspectives. The corporate governance code enabled the creation of a sustainable corporate governance framework that has supported the companies in UK to create profitability and prosperity while recognizing and creating value for the shareholders. The corporate governance e system in the country gives much emphasis to the power of the shareholders on the company. The system has recognized that the shareholders can highly influence the prosperity and the survival of a business and may also cause the winding up of a business in a negative situation. Therefore, the corporate governance system focuses on creating value for the shareholders and engaging them in the working of the business to a recognizable extent. The key features of the corporate governance system existing in the United Kingdom are: the maintenance of a board which is collectively responsible for the success and sustainability of a business operating in the country, the maintenance of a check and balance system including a balance between the independent directors and the executive directors in a board, the maintenance of a separate Chief Executive and Chairman, conducting annual evaluations of the performances of the boards, maintaining independent remuneration and audit committees and ensuring that appointments and remunerations are done on a transparent basis (Aston and Davis, 2011, p.44). The corporate governance process followed by different companies in UK also focuses extensively on maintaining the rights of the shareholders and other stakeholders by encouraging them to be engaged in the activities of the companies in which they are investing (Pedamon, 2010, p.90). The corporate governance code in the country operates on a principle of comply or explain. This principle is periodically reviewed and monitored by consulting with the relevant companies and the shareholders. One of the major aims of corporate governance practices is to facilitate the creation of wealth and removing poverty from the specific country. United Kingdom has a history of focusing on free trade practices and highly effective corporate governance practices so that a proper framework is created in the country in which the application of the policies can be done easily and effectively (Prowse, 1994, p.178). The business regulation processes in the United Kingdom is more based on principles than on rules. This makes the corporate governance system more embedded into the business community existing in the country. This also ensures that proper compliance is followed with respect to the standards of business without the need for highly detailed regulatory policies. This also reduces the costs incurred in the multinational businesses to introduce different processed and activities to comply with the regulations in UK when setting up their businesses in the country. The effective corporate governance practices play a significant role in boosting innovation and business practices in the country. Excessive regulation is not considered to be useful for the economy as this may lead to the damage of the innovation required for the economic growth of UK business systems. The regulations in UK, like the other countries in the world such as the United States, Japan, and China etc. begin with an effective and highly functional corporate governance system (The Economist, 2010, p.1). The shareholders and the boards in the companies in UK play critical roles ion scrutinizing and ensuring that the activities of the company are led in the required direction in the short term as well as in the long term perspective. The companies operating in the different industries in the country are focused to encouraging the long term stability, the transparency and accountability of the respective businesses so that a long term sustainability of the businesses can be easily achieved (La Porta, Lopez-de-Silanes and Scheifer, 1999, p.471). There are many beneficial aspects of the corporate governance system as established in the United Kingdom. This approach ensures that a high standard of practices in corporate governance is combined with much lesser associated expenses (Roe, 1994, p.78). The corporate governance of the country is considered much efficient (Deakin and Kronzelman, 2006, p.156). The governance metric International report in 2010 also indicated that UK was one of the leading countries in terms of the corporate governance performance shown in different companies in countries across the globe. The corporate governance practices followed in UK are proportionate in nature and are sufficiently capable to face any unforeseen circumstances as well as adapt to the changing demands of the global business landscape (Mehran, 1995, pp.163-184). The corporate governance code of UK identifies a robust governance system and practices but at the same time allows for companies to take up different approaches according to the need of the situation. This flexibility in the corporate governance code implemented in the country is a unique feature which has brought about immense success for the corporate governance system followed in the country. The corporate governance system in UK considers the relationship between the business and the shareholders to be more crucial that the relation between the business and the stock exchange (Amour and MacCahery, 2006, p.76). Therefore, the shareholders and the boards are given most importance in deciding on the matters related to corporate governance. The shareholders are given the rights to information as well as appropriate voting rights which empowers them to have their say in the decision making process of the business (Ravenscraft and Scherer, 2007, pp.11-42). The companies Act 2006, establishes that the directors in the businesses in UK are required to focus on ensuring the creation and maintenance of high value for the shareholders. Therefore, the boards are expected to ensure that the companies are sustainable and be prepared for the long term implications of the strategies and business models use in the business (Arsalidou, 2010, pp.12-14). The companies should also focus on improving the corporate governance procedures and processes so that the ability of the board in managing the business, create a high level of accountability for the business as well as deliver success in the long term is improved (Talbot, 2008, pp.7-34). The Cadbury Report of 1992 set a milestone in the history of the corporate governance practices in the UK (Veng Mei Rook, 2009, p.289). The report indicated that the effectiveness of the boards of different businesses in discharging their responsibilities while meeting the objectives and goals of the individual businesses are critical in determining the competitive position of the country in the global business scenario (Mayer, 1996, pp.7-34). The boards must be efficient in driving the businesses forward but this should be done while maintaining an effective framework of accountability for the business. This was indicated to be the essence of a robust corporate governance system which is in line with the corporate governance system followed in the United Kingdom (Petersen and Rajan, 1995, pp.407-443). The regulatory framework in the United Kingdom aims to improve the processes and standards of corporate governance which has boosted the establishment of a sustainable corporate governance system in the country (Arora, 2011, pp.89-90). The legislative processes of the country are aimed at supporting and not constraining the activities of the businesses in the country. But they are also aimed at ensuring that the compliance with the rules and policies are done and a proper risk management method is followed. This process calls for a high level of flexibility on the approach of the companies towards the corporate governance practices which has been highly supported and emphasized upon in the UK economy (McConnel and Servaes, 1990, pp.595-596). In the United Kingdom, the corporate governance methods are seen as a way to boost the performance of the businesses and not just a regular necessary compliance activity (Wormser, 1999, p.154). Therefore, the businesses adopt and adapt to the corporate governance practices in their own ways to ensure increased profitability for then businesses. The corporate governance mechanisms of different companies vary according to the culture, organizational structure, mode of business, size, functionality and the complexity of their processes. This implies better management and higher efficiency of the corporate governance practices in the United Kingdom as compared to other countries in the world (Farrar, 2008, p.45). The investors and other shareholders in the businesses in UK deem the corporate governance mechanism as efficient and transparent which makes them more assured and confident of their investments. The board can retain flexibility whole designing the remuneration packages, deciding on the trading stocks and embarking on different corporate social responsibility activities while maintaining a high level of accountability with the shareholders. The comply or explain principle of the corporate governance helps the companies to perform better and is supported by the regulators, investors and the businesses in the country  (Berle and Gardiner, 2004, p.562). This model has been a successful corporate governance model which has been replicated in many other countries of the world. The features of UK corporate governance which has made the system an efficient one include an efficient board which focuses on guiding the business in the right direction and providing proper leadership, formal methods of selection of board members and including the representative of the shareholders in appointing and re-appointing the directors of the board, evaluation of the performance of the board, the directors and the committees, maintaining accountability, ensuring that the board presents a balanced and realistic assessment of the business, sound risk management processes, identification of potential risks, robust internal control systems, formal procedures to decide the remunerations for the executives and maintain transparency with the shareholders (Amour and MacCahery, 2006, pp.17-20). Conclusion The businesses operating in the United Kingdom have become successful to a great extent with respect to accountability and sustainability by employing modern corporate governance practices. The shareholders of the businesses in the United Kingdom are focusing on boosting the best practices in the companies. The active interest of the shareholders and the motivation of the management to employ suitable corporate governance practices have increased the efficiency of major companies in the country over the last 20 years. Some of the most regarded companies in this aspect being Cadbury’s, Tesco, Sainsbury’s, Marks and Spencer, UKRD Group, W L Gore & Associate, Lindum Group and so on. The corporate governance practices in the United Kingdom industries are considered as efficient but it can be recommended that the businesses concentrate on improving the risk management processes, the incentives related to remuneration policies, on balancing the various skills and experiences required on the management boards of the various companies, on the effectiveness of these corporate governance practices, the performances of the risk, audit, remuneration and nomination councils as well as on the critical role of the institutional shareholders in monitoring and influencing the activities of the various businesses. Also, the companies should consider employing corporate governance practices that are in adherence to the changing structure of the legislative processes and policies in the country. 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