corporate governance

PART ONE – Corporate Governance

‘The ‘Comply or explain approach is a trade mark of corporate governance code in the UK’ (FRC 2010). The main objective of this approach to provides good corporate governance. It has been using since the corporate governance beginning. The corporate code is not an inelastic set of rules. It comprises of principles and rules based approach (FRC 2010).

‘Principle-based’ approach implemented in UK and commonwealth countries to the enforcement of the provisions of corporate governance codes^([i]). This is also important for stock market had to identify the importance of corporate governance codes provision for public limited companies and report to shareholders on how they done so (FRC 2010). This approach also provides a conceptual basis for professionals (accountants) to follow instead of a list of complete rules (Robert Hertz, Chairman of FASB, 2002). This approach provides a system with a accurate representation of the financial substance of transactions.

                                                 Rules-based approach is sometime unavoidable; this approach does not provide special rules/guidance for every possible situation. Therefore, if there is a doubt, the reader is directed back to the principles. On the other side principle based approach provides specific guidance with examples (Shortridge & Myring, 2009). However, professional judgement is not required under rule based approach. “Rules based approach create a roadmap for avoidance and divert the attention from the need of true and fair view” (ICAEW 2009). 

After all above discussion i can say that both approaches have their respective advantages and disadvantages. Principles based approach: Fortunately, Principle based accounting approach offers a system with a faithful representation of the financial substance of transactions ^([ii]). Basic principle approach has no least standards of training and increase over time. This approach also reassures companies to start right away at moving their current policies in-line with the policies, leaving reasonable space for continues changes over time. This approach dejects the financial engineering; but encourages professional judgement with a positioning ‘truth and fairness’ at the middle of consideration.

Unfortunately, this approach does not specifically require definite practices in order to retain one’s membership in a community ^([iii]). Under this approach this is also really hard to get everyone moving into new practices within a specific time period. This approach may lead to bias in demand or ignorant to comment on the complex reporting and organizational skills ^([iv]).

Rules based approach: Fortunately, Sarbanes-Oxley Act (2002) has significantly improved corporate governance codes and executive staff reporting to the Board ^([v]). This act ominously removed any suspected involvement between bankers, auditors, and corporate officers as that which is under investigation in the Enron case ^([vi]).

Unfortunately, ‘this approach allows and also tends to encourage them to play rule game, finding loopholes in the rules and find ways around the rules’. If we look in recent past few years especially in two countries USA and Canada political leaders issuing new rules for collecting funds for the their countries ^([vii]). Rules based approach is a subjective approach and this approach does not reflect underlying principles. This approach also encourages creative accounting.

In the early 1990s the first major development in corporate governance to be raised in the wake of Maxwell and BCCI scandals. The name of the major development was Cadbury report. Since 1990s there have been a different number of important reports on corporate governance in the UK.

‘Cadbury report came in 1-Dec-1992. Its report made general recommendations about corporate governance; directors of all UK plcs were encouraged to use the code for guidance. Importance of the Board of directors (BOD) meetings on a regular basis, monitoring executive management and retaining full control over the company matters. There should be a clear division of responsibilities between (BOD) and head of the company. And last important point of this report was; company’s accounts gives true and fair view of the company’s actual performance and apply going concern concept in preparing final accounts. The (BOD) should explain their responsibilities for preparing final accounts’ ^([viii]). ‘’Determines the efficiency with which boards release their responsibilities British competitiveness. They must be free to run their business forward, but that freedom within a framework of effective accountability exercise. ⁽[ix]⁾.

After this report a new report came in 1995 (Greenbury committee’s). This report stressed the importance of the role of the ‘remuneration committee’ and specify remuneration package for each director ^([x]).

In 1996 ‘Hampel report’ came. The main purpose of this committee to ensure the main purpose of ‘Cadbury report’ is being achieved. If not then proposing necessary amendments to and deletion unnecessary close from that report, finally this report came in 1998 with some more recommendations; ‘ to increase the value of shareholders’ investment over time and relationships with other stakeholders were also really important. The committee stated that the roles of chairman and chief executive should generally separate ^([xi]).

In 1998 the ‘combined code’ on corporate governance was published by London stock exchange, which was derived from the recommendation of all three above reports ^([xii]).

In 2003 new version of ‘combined code’ were issued by financial reporting council (FRC).this new version includes; ‘the Turnbull guidance on internal control, the Smith guidance on audit committees and good practice guidance from the Higgs Report’(ICSA 2003).

In 2010 FRC again issue new version of combined code of corporate governance identifies good governance, but corporations may select to use a different approach when it is suitable to their situation. The key point includes; to improve risk management, all directors of FTSE 350 organisations should be re-elected, to enhance shareholders accountability and performance related pay should be aligned.

An evaluation of the UK corporate requirements: The UK corporate governance approach is an instrument/tool that can help to the boards of the company to improve the ability of the organisation’s performance and also provide accountability to shareholders (FRC 2010). The main purpose of the regulatory frame work to improve corporate governance standards, try to avoid business failures and properly managed business risks (Chris A. Mallin, 2007). ‘’If we compare UK corporate governance codes with other countries then we can find two things;1- standards are high and 2-Cost ([xiii])‘’.The important relationship between the shareholders and the organisations, not between the company and the regulator (FRC 2006).According to LSE most of the companies give priority to UK corporate governance requirements when choosing between US and UK listing. According to company law (2006) have voting rights and rights to information about the company matters (FRC 2006).  The main difference between UK and US corporate governance are as follows; high standards use in UK corporate governance code and principle based approach used but in USA rule based approach applied (FRC, 2008).

CONCLUSION:

At the end of this assignment, we can say good/proper corporate governance code is the key success of the organisation. “The proper governance of companies will become as crucial to the world economy as the proper governing of countries”(James D. Wolfensohn, President of the World Bank, 1999).‘’Bad governance involves opportunity cost; there is a great possibility to increase the value of the company by changing bad governance with good governance. In short, good corporate governance code is a positive NPV of the project’’ ^([xiv]).

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[i] - david campbell . (2008). rules, principles and Sarbanes–Oxley.corporate governance codes. 1 (1), 39.

[ii] iasplus. (2008). PrinciPles-based accounting standards. Available: http://www.iasplus.com/resource/0801principlesbased.pdf. Last accessed 1-09-2011.

[iii] - Thomas Clarke (2007). International corporate governance: a comparative approach. UK: Routledge publisher. 249.

[iv]- Linda S. Spedding, Adam Rose (2007). Business Risk Management Handbook: A Sustainable Approach. USA: CIMA publishers. 548.

[v] - William Sun, Jim Stewart, David Pollard (2011). Corporate Governance and the Global Financial Crisis: International Perspectives. UK: Cambridge University Press. 4.

[vi]- Robert Cobbaut, Jacques Lenoble (2003). Corporate governance: an institutionalist approach. USA: Kluwer Law International. 142.

[vii]- Doug Macnamara & Banff Executive Leadership Inc.. (2-02-2004). Improving Governance Performance Rules-Based vs. Principles-Based Approaches. LEADERSHIP ACUMEN. 16 (1), 1-6.

[viii]- Ad r i a n C a d b u r y C h a i r m a n. (1-12-1992). T H E F I N A N C I A L A S P E C T S O F C O R P O R A T E G O V E R N A N C E. Available: http://www.icaew.com/~/media/Files/Library/subjects/corporate%20governance/financial%20aspects%20of%20corporate%20governance.ashx. Last accessed 20-08-2011.

[ix] )- cadburry commettie. (1992). T H E F I N A N C I A L A S P E C T S O F C O R P O R A T E G O V E R N A N C E. Available: http://www.ecgi.org/codes/documents/cadbury.pdf. Last accessed 15-08-2011.

[x] - sir Richard Greenbury . (17-07-1995). Directors' Remuneration.Available: http://www.ecgi.org/codes/documents/greenbury.pdf. Last accessed 29-08-11.

[xi]- RONNIE HAMPEL. (January 1998). Hampel Committee, Final Report.Available: http://www.ecgi.org/codes/documents/hampel22.pdf. Last accessed 3-09-11.

[xii] -

[xiii]) - Jill Solomon - 2007 (2007). Corporate governance and accountability. 2nd ed. UK: john and wiley sons ltd. p49.

[xiv]) - jonathan Berk,peter DeMarzo (2007). Corporate finance. 2nd ed. Boston, USA: Pearson Education. P920.