Corporate Governance in the US and the UK - Essay Example

Running head: Corporate Governance Corporate Governance s There has historically been a considerable difference between U.S. and U.K. owned corporations in their management and organisation. U.S. corporations have typically been more centralised, more professionally managed and [have had] more formalised bureaucracy. They have generally been seen as more aggressive and results-oriented. U.K. corporations placed more emphasis on relationships rather than formal controls, and appeared "amateurish" compared to their U.S. counterparts. Recent years have seen a considerable convergence of U.K. management styles with those of the U.S. Many of the largest British multinationals, such as GlaxoSmithKline and BP, have merged with or acquired large U.S. firms, and almost all leading U.K. companies derive substantial proportions of their revenues from the U.S. The differences in management style and culture have become far more nuance. Large British multinationals probably remain more international and cosmopolitan in their outlooks than their U.S. counterparts, slower to act and less inclined to adopt the latest management fads, and less ruthless in dealing with failure and under-performance. However, there is vast industry and firm differences. Both UK and US GAAP require purchase consideration relating to a business combination to be allocated to the net assets acquired at their fair value on the date of acquisition. Intangible assets: Under UK GAAP fair values are assigned to identifiable intangible assets only if the identifiable intangibles are capable of being disposed of or settled separately, without disposing of a business of the entity. Under US GAAP, identifiable assets are separately valued and amortised over their useful lives. The separately identifiable intangible assets included in the US GAAP balance sheet are principally comprised of brand rights, which are being amortised over periods between 25 to 30 years. Derivative financial instruments: Under UK GAAP, derivative financial instruments that reduce exposures on anticipated future transactions might be accounted for using hedge accounting. US GAAP requires the Group to record all derivatives on the balance sheet at fair value. The Group has decided not to satisfy the SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) requirements to achieve hedge accounting for its derivatives, where permitted, and accordingly movements in the fair value of derivatives are recorded in the profit and loss account. (Annual Report and Accounting, 2005) The new era of globalise businesses and increased awareness in the stakeholders have given importance to the notion of Corporate Governance. The execution of the notion will have important consequences for investors, companies, and, critically, for the stock and other financial markets of UK. With the increasing globalisation when every country can be seen as an opportunity for the investors the lack of understanding of effective corporate governance can adversely effect the investment intentions of investors. Nowadays corporate governance is seen as the key of attracting investors. Capital flow seems directed towards the companies, which practice fair and transparent ways of governing their organisations. With the changing global business scenario the need of understanding and effective practise of fair and technologically advance corporate governance has also increased. In my speech I will first explain the notion of Corporate Governance. ICAEW (2002) has explained corporate governance in a very effective and comprehensive manner as " Corporate governance is commonly referred to as a system by which organisations are directed and controlled. It is the process by which company objectives are established, achieved and monitored. Corporate governance is concerned with the relationships and responsibilities between the board, management, shareholders and other relevant stakeholders within a legal and regulatory framework." Sir Adrian Cadbury (1992) defined corporate governance as 'the whole system of controls, both financial and otherwise, by which a company is directed and controlled'. There are no hard and fast rules for corporate governance, which can be prescribed for all the countries. These rules can be different for different countries according to their needs and cultural settings. According to ICAEW (2002) with all the contrasts present in the rules and regulations of different countries emphasis is given to generic corporate governance principles of responsibility, accountability, transparency and fairness. Responsibility of directors who approve the strategic direction of the organisation within a framework of prudent controls and who employ, monitor and reward management. Accountability of the board to shareholders who have the right to receive information on the financial stewardship of their investment and exercise power to reward or remove the directors entrusted to run the company. Transparency of clear information with which meaningful analysis of a company and its actions can be made. The disclosure of financial and operational information and internal processes of management oversight and control enable outsiders to understand the organisation. Fairness that all shareholders are treated equally and have the opportunity for redress for violation of their rights. According to Meigs et al. (1999) this information meets the needs of users of the information-investors. Creditors, managers, and so on-and support many kinds of financial decision performance evaluation and capital allocation, among others. (P.07) Corporations resolutely focus on maximising profits and a 'legal obligation to act in the best interests of their shareholders. By and large, this excludes acting ethically or socially responsibly'(Slapper and Tombs, 1999). (Shah, 2002) states that some Trans-national corporations make more in sales than the GDPs (Gross Domestic Product) of many countries. In fact, of the 100 hundred wealthiest bodies, 51 percent are owned by corporations. While this can be seen as a success story from some viewpoints, others suggest that these and other large corporations are largely unaccountable for the many social and environmental problems that they leave in their wake, and that their size means that their effects are considerable. It is not that every single corporation is inherently bad or greedy, but commonly, the very large, multinational corporations who naturally have vested interests in international development and trade policies (like any group) are able to deploy enormous financial resources in an attempt to get favourable outcomes. The political power that is therefore held by such a small number of people impacts the planet significantly. As a result a few of these corporations make up some of the most influential sources of political and economic power. Naturally, with such influence it is not clear 'who' the regulator is. And as Clarkson's (1999) earlier quote suggests money and power, in corporate activity, are paired. And where profit supersedes safety and power supersedes regulation there stands the conflict of interests, for the victims of corporate crime. These are for the most part neither wealthy nor powerful although, when they are liability is certainly applied copiously. For example in the case of Enron the former chief accounting officer, Richard Causey was indicted on charges of ' fraud, conspiracy, insider trading, lying to auditors and money laundering for allegedly knowing about or participating in a series of schemes to fool investors into believing Enron was financially healthy' (findlaw.com). The 'victims' in this case were the investors who were identifiable and influential. Violations, which impact on financial systems, are subject to more scrupulous legislative administration, compared with social infringements (snider 1991 cited in Slapper and Tombs 1999:89). Increased attention to corporate crime would mean relating to large companies as 'criminals' (Slapper and Tombs, 1999). An issue, (Sullivan, 1995 cited in Clarkson, 1998) renders impossible on the basis that 'crimes can only be committed by human, moral agents'. Media attention will focus on financial aspects of corporate crime due to its impact on a political scale and the sensational-factor that is the 'respectable' figures committing crime as well a the belief/knowledge that 'scandal sells'. Scandal, is common reference for this financial aspect but noting the influence of language Slapper and Tombs (1999) note that this sets a' scale' for perceptions, rendering it uncommon/unusual. Another scale, which has been set in the last few decades, is the increasing complains of the least risk disclosure by the companies in their annual reports and financial statements. This is also accompanied by the misuse of the accounting techniques by the executive officers and managers of the corporations. As in case of Enron the technique of off balance sheet reporting was used in negative manner. Investors are often aware of the risks they take and in itself, off-balance-sheet financing is no vice. Companies can use it in perfectly legitimate ways that carry little risk to shareholders. The trouble is that while more companies are relying on off-balance-sheet methods to finance their operations, investors are usually unaware that a company with a clean balance sheet may be loaded with debt - until it is too late. (Morgenson, 2001) A change is required in the regulations. The accounting firm should not perform the consulting and auditing services both. The Companies should be required by the Government to increase their degrees of disclosure. The top-level management should be held more responsible by tightening up the regulations. They should also be held responsible in case of any frauds and regulatory violations of their subordinates. This in turn will give rise to the sense of responsibility in the people related at all levels. (Hanson, 2002) In the UK the lessons learned in the early 1990s when we had a series of major corporate collapses. The most famous one you might have heard of was Robert Maxwell who misappropriated hundreds of millions of pounds from his public companies and their pension plans to finance his private corporate expansion. That and other collapses at the time helped to cause a revolution in the UK in how companies and the accountancy profession were governed. Today, there are any number of codes of governance around the world but they are all based on the three principles I have already mentioned - those of transparency, integrity and accountability. The corporation accountants should really understand what the risks and opportunities of the company are and what it does in respect of them to enhance performance, and second, They should inform the outside world about what the company has been doing in a transparent and trustworthy manner. In order to avoid scandals like Enron the Government should introduce the codes of financial ethics in order to improve sense of responsibility in the corporate employees and Management. A fair accountability should be undertaken so that the main responsible should pay the price of the fraud. One of the knock-on effects of Enron has been to finally persuade the US regulators to really look again at their own accounting standards - which they have always maintained are the best in the world - and look at the benefits of International Accounting Standards. (Dallas, 2006) states that companies and directors should view governance as a dimension of enterprise risk management and as a source of sustainable competitive advantage; Regularly assess governance structures and practices - especially listed companies wishing to maintain access to public capital markets; Continually improve transparency and disclosure standards, particularly with regard to non-financial risks and how these are communicated to different stakeholder groups. Companies can use disclosure to signal their commitment to corporate governance specifically and to the management of non-financial risks more generally. It is also found that the disclosure of information should be undertaken frequently rather than annually. Since in the fast moving and volatile business environment trend of information disclosure annually is not very timely. This job can be undertaken through web-based technology i.e. through e-news letters to the shareholders and stakeholders and also through providing up-date information on company's web site. A surge of information provision regarding the risk confronted to the company from internal and external factors is also felt. The scandals like Enron and world.com has also enhanced the importance of information regarding the risk management disclosure. The information should be as clear as possible in order to make it understandable for all the related groups. Especially in the case of financial companies since there are many professional terminologies, which are not understandable by common, lay person. Emphasising the need the UK Government States that it is determined to avoid a box-ticking approach where reports are compiled using a boilerplate language and contain no useful information. (Deportment of Trade and Industry, 2004) The Directors of the companies must understand that the transparency and clear disclosure of risk related information can positively effect the image of the company and attract more investors rather than traditional investors. Since most of the people find it difficult to make judgements about the financial companies risk portfolio due to the complex nature of the information provided and non understandable terminology. It is also concluded that despite the advantages attached to the voluntary information disclosure the directors of most of the companies are reluctant to follow the trend of fair and transparent disclosure. It is due to the traditional fear regarding the disclosure of risk information and lack of confidence in the directors to deal with the pressure resulting in shape of accountability from stakeholders and shareholders. The directors of most of the companies use under the carpet approach to keep information regarding the risk hidden till the last moment. This trend has given rise to the importance of the role of legislative authorities which should make it compulsory for the companies to disclosure all the risk related information with out any provision of exclusion of sensitive information. Although a large amount of research has been undertaken which has resulted in shape of valuable suggestions such as Jenkins report, value reporting, GRI, & Turnbull report But it is evident from the research that most of the financial companies are not applying these suggestions voluntarily in order to modify and enhance the risk disclosure and management practices. It is suggested that in order to make most of the previous research it is important to find out ways to implement previously suggested applicable methods of risk reporting rather than finding new methods. Another important area of research, which needs to be addressed, is to examine the role of legislation in order to make management of the companies to adopt more responsible behaviour towards reporting risk information and risk management activities. Undertaking research in different countries and having cross comparison of the differing reporting practices can do this. This will help to analyse the role of legislation in improving the condition of risk related activities by the companies. Annual Report and Accounting, (2005). Summary of Differences between UK and US generally accepted accounting principles (GAAP), Retrieved 03/01/06 from http://www.imperial-tobacco.com/files/financial/reports/ar2005/index.asppageid=46 Cadbury Sir Adrian, (1992). Report of the Committee on the Financial Aspects of Corporate Governance, Gee & Co Ltd, UK Clarkson, Max (Editor), The Corporation and Its Stakeholders: Classic and Contemporary Readings, University of Toronto Press, 1998. Department of Trade and Industry, (2004). Draft Regulations on the Operating and Financial Review and Director's Report, Department of Trade and Industry, DTI, London. Dallas, G., (2006). Ensuring companies walk the walk, Global Agenda, Available from: ICAEW, (2002). What is Corporate Governance Institute of Chartered Accountants in England and Wales, Available from Hanson, K., (2002). Lessons from the Enron Scandal, interview about Enron by Atsushi Nakayama, a reporter for the Japanese newspaper Nikkei, March 5, 2002, Retrieved 04/01/06 from http://www.scu.edu/ethics/publications/ethicalperspectives/enronlessons.html ICAEW, (2002). Corporate governance developments in the UK, Institute of Chartered Accountants in England and Wales, Available from Meigs, Robert F., Williams, Jan, R., Haka, Susan F. & Bettner, Mark S., (1999). Accounting: The Basis for Business Decisions, Eleventh Edition, Irwin Mc Graw-Hill, p. 07 Moregenson, G., (2001). Are New Woes Lurking in Financial Nether World The Associated Press, December 23, 2001, Retrieved 05/01/06 from http://pages.stern.nyu.edu/adamodar/New_Home_Page/articles/isthisdebt.htm Slapper, G., & Tombs, S., Longman, (1999). Getting Away with Murder, Corporate Crime, Reviewed by Chris Moore, Issue 47, May 2000 Shah, A., (2002). Corporations and the Environment, Page Last Updated Saturday, May 25, 2002, Retrieved 01/04/06 from Read More