Corporate Governance in the UK - Case Study Example

Corporate Governance in UK Name Institution’s Name Course Name and Code Date Introduction Corporate governance is referred as the system of rules, practices and process through which a corporate organization is directed and controlled; a system by which firms are directed and controlled. In each and every corporation, a governance structure specifies the allocation and distribution of rights together with responsibilities as applied to different stakeholders in the corporation including board of directors, shareholders, managers, regulators, creditors and other stakeholders. Corporate governance is tasked with the responsibility of specifying the rules and procedures for decision making in corporate affairs. Important to note, corporate governance provides a framework through which the company’s objectives are achieved and obtained, it encompasses the entire management sphere including action plans together with internal controls, performance management as well as corporate disclosure. Corporate governance came into play after various scandals and fraud that had perverted different corporate organizations was discovered. For instance, the introduction and enactment of the Sarbanes-Oxley Act in the US, was particularly formulated in 2002 to restore public confidence in corporate societies and markets specifically after some high profile companies such as WorldCom and Enron were involved in fraud, which rendered them bankrupt. Companies across the globe strive to have levels of corporate governance to acquire and retain a good public image, which on the other hand enhances the company’s performance and overall profitability. Companies usually achieve good corporate citizenship by not only being environmentally aware but also demonstrating high ethical standards together with sound corporate governance practices. This paper critically evaluates the effectiveness of the systems of corporate governance in UK. In essence, the paper using Barclays Bank Corporate Governance provides a critical review of corporate governance in UK together with effectiveness of systems of corporate governance in the UK. Critical Review of Corporate Governance in UK The above introduction extensively established that corporate governance is fundamentally about separation of ownership and control; for example, a company is owned by shareholders but it is run by directors (Wright et al., 2013). According to the agency theory, there is separation between those who direct and manage the company and those who actually own the company. In regard to this, there is need for corporate governance to have codes of practices to determine whether directors are maximising shareholder returns as well as making sure that the business risk is kept at reasonable levels (Davis and Aston, 2011). Consequently, directors and managers should ensure that they do not become too dominant but also receive reasonable remuneration for their services (Wright et al., 2013). Best practice is all that is about corporate governance; how the company is controlled and administered (Frederikslust, Ang and Sudarsanam, 2007). It is strongly eluded that corporate governance should and must contribute extensively to the superb performance of the company through aiding the board in discharging its duties, which should always remain in the best interest of shareholders. In the event that this is not adhered to, the company risks the vulnerability of poor performance (Wright et al., 2013). Similarly, good corporate citizenry should facilitate the effective, efficient and entrepreneurial management, which deliver long-term shareholder value (Gospel and Pendleton, 2006). The corporate governance codes are focused on dealing with: Proper constitution of the board, Proper arrangements for the remuneration of directors, Proper mechanism shareholder relations, and The role of accountability and audit (Cheah and Lee, 2009) Corporate governance in UK The UK corporate governance has undergone an extensive revolutionary process; it was initiated to respond to various external events coupled with increased demands for company’s accountability from various sectors of the society (Davis and Aston, 2011). For this reason, since 1992 various reports have been written with regard to this subject matter giving wide recommendations regarding codes of corporate best codes of practice in the UK which eventually culminated into the Financial Reporting Council’s (FRC) Combined Code on Corporate Governance 2003 which were later amended in 2006 and 2008 and which were subject review in 2009. UK experienced collapses of high profile companies including the Bank of Credit and Commerce International (BCCI), Maxwell Communication Corporation, and Ferranti International plc (Kogut, 2012). These collapses caused tension and discontent in the UK’s business community as well as throughout the accounting and auditing profession (Davis and Aston, 2011). The above mentioned corporate failures were largely linked to the existence of weak corporate governance systems, poor director’s oversight systems of the board together with extended concentration on control that was mainly in the hands of a few top executives (Wright et al., 2013). Corporate governance in the UK is a voluntary or principle-based approach where UK’s system of business regulations is focused on decreasing the cost of global businesses introducing procedures. The causes of UK corporate failures in the late 1980s were strongly attributed to: Accounting standards were loose that allowed misinterpretation of accounting information thus leading to lack of consistency (Bruner, 2013) The lack of a clear framework to ensure directors are kept under review to ensure internal control as well as management within their business The existence of competitive pressures that made extremely difficult for auditors to make board of directors accountable particularly when there were issues of concern The UK utilities denationalisation that led to controversy over levels of pay together bonuses paid to directors. As already noted, the financial scandals in the late 20th century resulted into the publication of various reports that have vastly helped in the development of the UK’s corporate governance. Each report identified and helped address various views. Accordingly, these reports increased the levels of accountability among the top directors, positively impacted on the auditor’s role, and hence were significantly seen as the response from regulators (Davis and Aston, 2011). Corporate governance focus specifically on relationship between the company and shareholders; for instance, there is extended efforts to encourage and enhance communication and dialogue between the board and shareholders regarding corporate governance issues (Wright et al., 2013). Significantly important to understand, shareholders are entitled to voting rights, which empowers them to have the right to information; this renders the board of directors accountable to shareholders. The Corporate Governance Timeline 1992: The Financial Agents of Corporate Governance (Cadbury Report) This report was authored by Sir Adrian Cadbury and Cadbury Shweppes in response to the continued corporate failures in the UK in the late 1980s and early 1990s. This report mainly focused on the potential abuse and misuse of powers together with the need of openness, accountability and integrity especially in the business decision making process of the company (Wright et al., 2013). Accordingly, this report was published with a singular objective of improving information flow to shareholders, solidify auditor’s independence and reinforce self regulation (Cadbury, 2002). In this regard, the report recommended that there should be the implementation of effective internal financial controls for the companies listed on the FTSE; the creation of an audit committee composed of non-executive directors. 1995: Study Group on Director’s Remuneration (Greenbury Report) This report was written by Richard Greenbury, Marks, and Spencer to laud the concerns against exponential salaries in previously nationalised industries such as the utility industry. A committee was set up in 1995 to review the remunerations of directors; the main concern was to examine directors’ salaries in response to the public outcry over the perceived pay excesses (Davis and Aston, 2011). This report gave the following recommendations; there should be improved reporting of directors’ remuneration in published accounts and that remuneration committees should be established (Wright et al., 2013). 1998: The Committee of Corporate Governance (Hampel Report) This report was authored by Sir Ronald Hampel, ICI plc and it was aimed at reviewing the impact of the Cadbury Code. After an extensive review of available materials, the following recommendation were made: there should be separation of chairman’s role and the chief executive’s role; non-executive directors should be included in the board; directors should review all internal controls rather than only being concerned with the company financials; and above all, review the need for internal audit. Combined Codes These were the findings of the Financial Reporting Council (FRC), which combined the requirements established in the Greenbury, Cadbury, and Hampel reports. In this regard, FRC recommended that all companies incorporated in the UK and listed on the London Stock Exchange must comply with the Listing Rules in order to report on how they have applied the combined code in their annual report and accounts. 1999: Internal Controls: Guidance for Directors on the Combined Code (Turnbull Guidance) This report was written by Nigel Turnbull, Rank plc to give the ICAEW provisions of advice on complementing the combined codes (Davis and Aston, 2011). This report encouraged the adoption of a risk-based approach to establishing internal control system together with reviewing its effectiveness; additionally, it recommended for the annual review of the effectiveness of the internal control system. Accordingly, the use of internal Audit function was recommended. 2003: Review of the Role and Effectiveness of Non-Executive Directors (Higgs Report) This was the work of Derek Higgs, Partnerships UK plc; this was the UK’s response to the corporate failures in the US (Wright et al., 2013). It was an independent review of the role and effectiveness of non-executive directors. The report gave guidance with regard to the composition, performance evaluation as well as the role of the board, particularly the chairperson and the non-executive directors. Consequently, the report gave guidance on the operation of remuneration and nomination committees. Audit Committees – Combined Code Guidance (Smith Report) This report was authored by Sir Robert Smith, the Weir Group plc; this was also UK’s response to corporate failures in the US (Wright et al., 2013). An independent review was aimed at clarifying the role and responsibilities of Audit Committees and to develop the existing Combined Code guidance. In regard to this, it was recommended that audit committees should include at least three members who are mainly independent non-executive directors: the chairperson and non-executive directors (Davis and Aston, 2011). The committee should also monitor and review the integrity of the financial statements of the firm, the company’s internal financial control system and, unless addressed by a separate risk committee or by the board itself, risk management system. Similarly, they should review the effectiveness of the company’s internal audit functions and make recommendations to the board with regard to the external auditor’s appointment (Clarke, 2007). Furthermore, they should review external auditor’s independence, objectivity, and effectiveness in order to develop and implement policy on the engagement of the external auditor to supply non-audit services. Revised Combined Code This is the work of FRC; this was tasked with incorporating the principles from Higgs and Smith review; for instance, it was recommended that all company disclosures must comply and cover all main and supporting principles. 2005: Flint Review This is a review of Turnbull’s guidance done by Douglas Flint, HSBC (Gugler, 2008). This review re-emphasized that the establishment of an effective system of internal control is not a one-off exercise. Accordingly, Flint endorsed flexible principle-based approach instead of the mandatory changes on the Sarbanes-Oxley report. 2006: Update of 2003 Combined Code This was modifications to the 2003 0riginal combined codes and it was done by the FRC. For instance, it was recommended that company chairs should be allowed to sit on the Remuneration Committee particularly if they were deemed to be independent. Shareholders should vote by proxy and thus have the power to withhold vote on resolution. Above all, companies should publish details of proxies lodged on resolutions where votes are based on a show of hands. Effectiveness of the system of Corporate Governance in UK Corporate Governance in UK is highly effective: from the above discussion, it virtually clear that UK’s corporate governance has tremendously evolved towards increasing transparency and accountability in corporate organizations. Different reports and reviews have extensively tackled various issues of corporate governance (Davis and Aston, 2011). In the same line of discussion, the Walker report of 2009 widely reviewed the effectiveness of risk management in the banking sector that further led to the amendments of the Code in 2010 (Davis and Aston, 2011). For instance, the Combined Code extremely identifies good corporate governance practices specifically those related to the board composition together with its committees as well as the development of effective and sound internal control system. In order to extensively comprehend the effectiveness of the UK corporate governance, Barclays Bank corporate governance will be used. Barclays Bank is listed on the London Stock Exchange thus it meets all the requirements under London Stock Exchange in that the composition of its board has: Barclays Bank has a single board that comprise of members collectively responsible for leading the company and establishing its standards and values. Barclays has clear division of responsibilities with regard to running the board as well as running the company with a separate chairperson and chief executive (Dine and Koutsias, 2013). There is a balance of executives and independent non-executive directors; for instance, 50% Barclays Bank board is made up of independent non-executive directors something that is largely recommended by the London Stock Exchange (Wright et al., 2013). Barclays Bank embraces formal and transparent procedures for appointing directors and all appointments and reappointments are ratified by shareholders. The bank has excellent procedures for regularly evaluating the effectiveness of the board of directors and its committees. In accordance with the remuneration for executives in the UK which must be in line with remuneration regulations, Barclays Bank has the Board of Remuneration Committee that consists of independent non-executive directors who are chaired by an independent non-executive Director who is usually appointed by the Board. This board of remuneration committee has formal and transparent procedures which are largely essential in guiding in the setting of executive remunerations. Similarly, the company’s remuneration for executives is also linked to performance as required by the UK’s corporate governance regulations. Barclays Bank corporate governance also fosters audit and accountability, which emphasizes that the company’s board be responsible for presenting a balanced assessment with regard to the company’s position together with maintaining a comprehensive and sound system of internal control (Davis and Aston, 2011). Similarly, Barclays bank has a formal and transparent procedure for carrying out auditing and accountability responsibilities. In this regard the company has an Audit committee that is made up of independent directors with relevant and necessary qualifications and experience. Barclays Bank has an excellent information flow system; for instance the company’s chairman is responsible for ensuring that the board receives accurate, high-quality and timely information with regard to the company’s performance at appropriate intervals and in an appropriate manner. This helps the board to make sound decisions, effectively monitor and provide advice to enhance the success of the company. It is the responsibility of the chairman, chief executive, and the company secretary to work together to ensure that directors receive all the necessary and relevant information. Similarly, the company embraces good relationship with shareholders; the board of directors have an obligation of maintaining contact with shareholders in order to understand their concerns and opinions. In addition to this, there should be separate resolutions in relation to all substantial issues at general meetings (Wright et al., 2013). In the same line of argument, Barclays Bank has the board of financial risk committee that is comprised of independent non-executive directors. This committee meets at least four times in a year. During these meetings the finance director and the chief risk officer must be present. Similarly, the company’s chief internal auditor, the group general counsel and Barclays’ external auditor together with other senior executives also attend the meetings where appropriate. Given this extensive analysis of Barclays Bank corporate governance, UK has an excellent and effective Corporate Governance. Conclusion Corporate governance is basically a system of rules, practices and process that governs the way a corporate organization is directed and controlled; a system by which firms are directed and controlled. It is particularly based on the best practices and tasked with the responsibility of specifying the rules and procedures for decision making in a corporate organization. Furthermore, corporate governance provides a framework through which the company’s objectives are achieved and obtained; it encompasses the entire management sphere including action plans together with internal controls, performance management as well as corporate disclosure. The UK corporate governance has undergone a tremendous revolution, which has resulted into a system the embraces effectiveness, transparency and accountability. When the country experienced corporate failures in the late 1980s and early 1990s, various experts rose to their feet to ensure that corporate governance within the country is streamlined and made more accountable. From the above Barclays bank corporate governance; it is essential to note that the system of corporate governance in the UK is very effective as it covers all areas that would otherwise compromise corporate governance. 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