Key Principles of Corporate Governance - Coursework Example

1. Introduction In the rapidly changing environment of globalization, the dynamics of the business across the globe is undergoing tremendous transformation. The organizations need to implement necessary changes to not only survive but compete with their rival with confidence and effectively meet the challenges of the constantly evolving business environment. Indeed, the highly competitive nature of emerging new models of global business has increased the risks and responsibilities of the organizations. Ticker (2009) asserts that in the contemporary environment, corporate governance needs to reflect the interests of all the main stakeholders and ‘be more participative, less secretive and fare more transparent’. The role of corporate governance has, therefore, become increasingly vital to the strategic management of the organization and projection of its aims and objectives in the eyes of the public and other stakeholders. 2. Key principles of corporate governance Corporate governance can be broadly defined as the creation of business environment within and outside the organization that would effectively meet the challenges of the time and improve and improvise the productivity of the performance outcome. The lack of effective controls vis-à-vis malpractices in accounts and auditing, security of confidential information, corrupt practices in the higher hierarchy of management, disparity in rules and regulation etc. have become crucial risks factors that have resulted in huge economic loss for its shareholders as well adversely affecting its credibility in the market. Hence, in the fast changing environment of globalization, business compulsions have become more stringent in their nature and factors like accountability, responsibility and reliability have become important pre-requisites for business to create a credible environment for their trade and investment. ‘Corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreement..’ (Du Plessis, 2005, p.36). The key principles of corporate governance are described and ranked in order of importance as under: 2.1 Transparency through disclosure ‘Corporate disclosure to stakeholders is the principal means by which companies can become transparent’ (Solomon, 2007, p143). Thus, Corporate Governance promotes effective control measures to safeguard the interest of all its stakeholders, investors and business partners. Under the codes of corporate governance, the disclosure mainly relates to the policy of the company to disclose relevant information about its budgets, annual financial statements and short term and long term management forecasts and other mandatory information that gives indication of the company’s positioning in the market. In the recent past, the world has witnessed great slide in the standard of corporate governance that has considerably damaged the goodwill of the public. The lack of strategic control mechanisms and effective regulation has been responsible for the decline of the overall performance of the company, making them an easy target for the unscrupulous elements, both within and outside the organization. The number of financial scandals resulted in various reports and guideline. The transparency in the system helps build credibility in the market and significantly impacts capital market. Turnbull report and later revised guidelines for corporate governance became the guiding principles for the United Kingdom companies to reinforce internal controls to reduce risks and through transparency in the corporate governance. BP in its annual states that ‘..the board continued its ongoing evaluation processes to assess its performance and identified areas in which its effectiveness, policies or processes might be enhanced…’ (BP, 2005: p161). While UK has introduced some radical reforms in its company laws but they have not been made mandatory. But in US, strict laws prohibit the misuse of public money and make transparency as mandatory practice in the corporate governance. The study shows that ‘demands from the institutional investors for disclosure of internal control information… was considered to be useful to external decision makers’ (Hermanson, 2000). Hence, transparency greatly promotes fair practice by the management and helps improve its market position. 2.2 Effective financial accounting system and accountability Financial accounting information is one of the most important aspects of corporate governance that has significant element of risks that can effectively damage the investors’ trust. The financial system along with effective auditing provides an easy means for the stakeholders to monitor the performance of the company or organization. Owen Report explains that ‘..the point of an audit is to provide independent assurance of the integrity of the way in which the company has reported’ (Owen Report, 2003, vol.1 6.1.1). The various financial statements and the role of auditors, help to give credibility to the company’s projected forecasts and at the same time, facilitate better decision making tools to realistically gauge the disparities between the productivity and financial outcome, projected or otherwise. 2.3 Internal control Internal control is another key factor that has the power to put the stakeholders’ interests at risk. The Turnbull report says that the aim of framework of internal controls is to ‘reflect sound business practice whereby internal control is embedded in the business process’ (Turnbull Report, 1999, para. 8). The internal controls of the company are various inter-related processes within its different departments which facilitate smooth operation, conforming to the prescribed parameters of managerial and policy controls. Internal controls are intrinsic part of strategic management which streamline various operational, productive and administrative processes that are designed to produce improved productive performance leading to better financial outcome. The Enron scandal followed by Worldcom scam are important events in the US capital market and business arena that have forced the government to reform its company laws and incorporate extensive and tough acts to deter malpractices by the corporations. The recent financial scams have corroded the trust of the shareholders and various stakeholders. Sarbanes-Oxley Act 2002 of US, came into force by 2004 which make it compulsory for the US companies to submit annual assessment of effectiveness of the internal control system to ‘Security Exchange Council (SEC)’. It also makes it mandatory for the companies to have independent auditors to evaluate their internal control system while their financial account are separately evaluated, making two of its senior executive personally responsible for its correctness! The incorporation of such modules in the Company Acts promote transparency and protects the stakeholders interests in the capital market. 2.4 Risk disclosure All the factors and element of governance, that adversely affect and dilute the rights of the shareholders and other stakeholders of the organization, are risks that need to be addressed urgently. The changing paradigms of the global business environment have greatly influenced the wider implications of effective managerial imperatives producing considerable impact on the confidence building processes of the capital market. ICAEW1 has advocated the ‘need for companies to prioritized risks’ (ICAEW, 1998). Risk management strategy of the organization is yet another important factor that determines the extent of risk to the stakeholders. The business faces challenges from hordes of issues, both within and outside the precincts of the organization that may pose considerable risk to its overall performance impacting its long term missions and vision. Issues like pollution control, environment conservation, long term measurement for protection against damages due to various factors like natural calamities, fire etc. are issues that need to be incorporated in the risk management strategy. Abraham and Cox have asserted that ‘corporate risk disclosures appears to be related to institutional ownership… companies with more fluid investors tended to disclose more risk information’ (Abraham & Cox, 2007). Development and implementation of such strategies allow the corporate governance to effectively manage the risks. 3. Conclusion Indeed, one can conclude that the codes of corporate governance have been developed to ensure effective and transparent functioning of the business processes of the corporation. Mallin states that ‘the introduction of corporate governance codes has generally been motivated by a desire for more transparency and accountability’ (Mallin, 2007, p.21). The implicit and explicit corporate ideologies that are distinct to a corporation are reinforced and emphasized through governance reporting that gives a written confirmation to their commitment to the codes of good corporate governance. It is for this reason that government, through various regulations and parliamentary acts have incorporated the necessity of reporting the details of the practices followed to ensure transparency in governance. Reference Abraham, S., Cox, P. (2007). Analysing the determinants of narrative risk information in UK FTSE 100 annual reports. British Accounting Review. Forthcoming September 2007. BP Annual Reports and Accounts. (2005). Available from: [Accessed 10 May, 2010]. Du Plessis, McConvill & Bagaric. (2005). Principles of Contemporary Corporate Governance. Cambridge. Hermanson, H. M.  (2000). An Analysis of the Demand for Reporting on Internal Control.  Accounting Horizons (September):  325-341. ICEAW. (1998). Internal Control – Guidance for Directors on the Combined Code [Turnbull Report], London: Institute of Chartered Accountants in England and Wales. Mallin, Christine A. (2007). Corporate Governance. Second Edition. Oxford. Owen Report. (2003). Report of HIH Royal Commission. Vol. 1[6.1.1]. Available from: [Accessed 10 May, 2010]. Sarbanes – Oxley Act 2002. Available from: [Accessed 10 May, 2010]. Solomon, Jill.( 2007). Corporate Governance and Accountability. Second Edition. John Wiley & Sons, Ltd. Ticker, Bob. (2009). Corporate Governance: Principle, Policies and Practices. Oxford University Press. The Turnbull Report. (1999). Internal Control: Guidance for Directors on the Combined Code. ICAEW; London. Read More