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Renewed Focus on Corporate Governance

Info: 1302 words (5 pages) Essay
Published: 6th Aug 2019

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Jurisdiction / Tag(s): UK Law

Corporate governance refers to the system by which companies are directed and controlled. It provides the structures via which the company’s objectives are set, means of attaining and monitoring the objectives are determined, all of which is meant to ensure that companies are run in the interests of the company itself and its shareholders Klaus and Teubner (I985 p. 14) A god system should provide appropriate incentives for the management and the board to pursue the said objectives. The primary stakeholders are the shareholders, board of directors and the management. Secondary stakeholders include the employees, consumers, suppliers, creditors and the wider community. The current system of corporate in England endeavors to ensure transparency and accountability of particular individuals in companies via mechanism that reduce or eradicate the principal-agent dilemma Solomon (2007p.9).

Great Britain shares with the United States of America an arm’s length/outsider system of control and ownership, with the ownership in large companies basically being spread over a huge number of institutional intermediaries and individuals as opposed to being placed solely on ‘core investors’ (for example a family) and with the shareholders hardly being poised to intervene and participate in managing the business schon (2008 pg114)

It is expected that listed companies will abide by the codes provision. however it is recognized the provision of the code may be justified in particular circumstances and all the company is required to is review each provision and offer a considered explanation if it happens to depart from the its provision.

Smaller companies especially those new to listing may judge that the code provisions are uneven or less applicable to them. Some of the code provisions are not applicable to companies that are below FTSE 350. Nevertheless, such companies may consider adopting the code for their own sake and this is highly encouraged. The code provides that company directors be appointed by the shareholders. Equally important is the fact that the concerned evaluators of governance ought to make use of common sense in their evaluation task so as to promote trust and partnership. They should consider companies’ individual conditions and keep in mind, the complexity, size and the kind of challenges and risks it faces.

While the owners/shareholders have the right to dispute a company’s explanations if unpersuasive, they need not be evaluated mechanically and any departure from the code ought to not automatically be treated as a breach.

Both institutional shareholder and their respective agents should respond to companies’ statements in a way that supports the ‘explain or comply’ principle. As Section’s two principles dictates, institutional shareholders should review explanations given for not complying with the code before making any judgment. They should then present their analysis and be ready to dialogue if they disagree with the position of the company. Institutional shareholders should put their views in written form where applicable (Solomon, p.315)

Being part of the United Kingdom, the current system of corporate governance in England conforms to the respective provision of UK’s combined code of corporate governance. The earliest developments in corporate governance commenced just before the final leg of the 1980s the early 1990s following the emergence corporate scandals, for example, Maxwell and Poly Peck, which dealt a big blow to their images. The scandals were due to irregularities in financial reporting and consequently a committee led by Sir Adrian Cadbury was set up to look into the matter and make recommendation. The resultant Cadbury report which was published in 1992, contained recommendations that centered around: the need to separate the role of a company’s chief executive and its chairman, the need to have transparent financial reporting and proper internal control. It also set out the process and rules for vetting of non executive directors. It also had a code of best practice adopted among the rules of the UK’s stock exchange Morck (2005.p.111-115).

Borrowing heavily from Cadbury, Rutteman Report: Internal control & Financial Reporting was published in 1994 and sought to provide companies some guidance on how to act in accordance with Cadbury code that concerned reporting on the Company own system and process of internal control and its effectiveness.

In 1995, following complaint about directors’ share option and pay, the Green Bury report made recommendation that entailed detailing remuneration of companies’ directors in the annual reports. As in Cadbury’s case, majority of Green Burry recommendations were endorsed as part of the Listing Rules.

In early 1996, Hampel Committee was set up to look into the performance of

both Greenbury and Cadbury provisions. It was to examine the extent to which the two reports had been applied and whether the intended objective had been realized. The committee came up with the Hempel Report leading to the publication of the code, in 1998. It covered areas relating to, directors’ remuneration, audit and accountability, relations with individual and institutional shareholders and their responsibilities. It also laid down the code governing the operations and structures of the board Solomon (2007 p.300).

In 2002, remuneration report were introduced which were intended to further solidify the shareholders’ powers with regard to the directors pay. In addition to directors pay, the regulations resulted in shareholders obtaining other important information such as performance graphs. The shareholders were allowed to vote in an advisory capacity in approving directors, remuneration report.

The code was revised again in 2003, and added to Listing Rules 12.43A obliging companies to avail in their yearly reports a statement in the form of a narrative of the way they have applied the principles contained in the code, indicating that they have indeed complied and if not, the reason for not complying.

A 2007, a shareholder representative group reporting on compliance to the code indicated that only about 33% of companies listed on the stock exchange were fully compliant with the codes provision. This however is not essentially a poor response given that the provisions are enormous and companies internal structures and processes are different. It has been found that poor compliance to the code correlates to dismal performance in business and a key provision; for instance, separating the chief executive officer from the chair had an 88.4 % adherence rate.

The 2007-2009 financial crises renewed the focus on corporate governance. Deficiencies and failure in corporate governance led to the collapse of many UK banking group including Lehman brothers. The events did confirm that soaring remuneration packages for the top management were driven by risk taking as opposed to real sustainable profit. Walker review recommended more transparent pay and bonus structure for top official, just as the code provided for.

Wolfgang Schon, 2008. Tax and Corporate governance. Springer.

Jill Solomon, 2007. Governance and accountability. John Wiley and Sons.

Oliver Marnet, 2008. Behavior and Rationality incorporate Governance. Rout ledge

Randoll Morck, 2005. A history of corporate governance around the world: family business groups. University of Chicago Press.

Klaus J. Hopt, Gunther Teubner, I985.Corporate governance and directors’ liabilities: legal, economic, and sociological analyses on corporate social responsibility. Walter de Gruyter.

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