GFC, Directors Duties, Corporate Governance At Masters level Essay Example
Director’s duties in corporate governance
After the global financial crisis that was felt globally, there arose a perception that directors were not performing their duties and this made the management to abuse their powers. Currently, there has been pressure for the shareholder engagement to address this perception. This paper will be looking at the actions, duties, roles and responsibilities of directors and the GFC. In addition, it will be looking at the shareholders role in the effective management of the corporate. Corporate governance refers to the framework within which companies are directed, controlled and held to account. This is different from the corporate management of an entity on a day-to-day basis as corporate management is a task delegated by the executive management. The functions of corporate governance are more strategic and overarching as they are concerned with moving a company towards a direction that is consistent with its long-term values and objectives. For the individual companies, an appropriate framework of corporate governance which is well coordinated by a properly functioning board of directors, serves to increase confidence in the firm’s long-term viability. Good corporate governance helps in building trust and credibility with investors, company creditors, its employees and all the other stakeholders. At the national level, corporate governance is a determinant of national competitiveness, which helps in the establishment of the legitimacy of corporate activity in accordance with the rest of society governance.
Ard and Berg (2010), argue that many problems of the GFC can be traced to flawed implementation of good governance principles and excessive short term remuneration. These were notably apparent in some of the largest and most sophisticated financial institutions globally. Ard and Berg (2010), suggests four areas that have been identified contributing to GFC namely, risk governance, remuneration, board professionalism and shareholder engagement.
There is diversity in the corporate governance globally. Differences arise due to the varying sizes, different sectors and the general lifecycle stages of corporations. However, the nation remains the main driver of corporate governance variation. For example, prominent multinational corporations engage in similar economic tasks, i.e. the manufacture and distribution of same goods but their activities are subjected to entirely differing frameworks of monitoring, oversight and control due to their unique governance environments of their respective countries of incorporation. However, global market forces have an impact on governance practices. Large publicly-quoted firms around the world increasingly conform to international standards of corporate governance or best practice as its known organizations such as the OECD (Organization for Economic Co-operation and Development, the EU, and the International Accounting Standards Board. Such conformity behavior helps the organizations in winning the favor of capital market investors. Consequently organizations, gain access to external finance at the lowest possible cost. Such globally operating practices are yet to override the importance of national level factors in determining governance choices though its significance is felt by the smaller, non-listed enterprises in the corporate sectors of most economies. The SME (Small Medium Enterprises) segment is less exposed to the capital market influences that affect larger companies. In addition, ‘best practices ‘reflects the continued importance of domestic politics and regulation on the national business environments. Relatively, other factors of relevance to corporate governance behavior such as the intensity of competition in local product markets, norms of business behavior, and corporate ownership structures, will vary significantly globally.
Good corporate governance system is very essential to the effective for the operation of every financial service industry. It enables wealth creation and encourages freedom from poverty. UK has a long history of encouraging free trade and good corporate governance. This is based on the application of simple principles to the individual corporation and the distinct circumstances of each entity. Streamlined system of corporate governance in any business community ensures less need for detailed regulation to ensure effective compliance with good standards of business behavior. The UK’s system of corporate regulation reduces the cost to global businesses of introducing procedures to comply with detailed regulations. Without corporate regulation, there would be unnecessarily constrain business practice and innovation. This paper will be looking at Financial Services Industry and other industries if necessary, on the actions, duties, roles and responsibilities of directors and the GFC and with an overall theme of how to reform the corporate governance system nationally, regionally, or globally.
What are/were the weaknesses of the current UK corporate governance system?
and in particular the Financial Services Industry. This has proved to be a serious weakness in the UK’s system of corporate governance. The magnitude of these problems has been illustrated by the lack of investor oversight at the banks in the run up to the crisis. Shareholder engagement is an important role in the UK’s system of corporate governance. Several issues ranging from director’s pay through to the election of directors and the performance of the board are left to the shareholders. They should be left to the regulators, to monitor them and address them accordingly. Successive corporate governance has placed considerable emphasis on shareholder monitoring and engagement as a discipline upon companies and as a substitute for regulation. If this approach is emphasized, it is clearly essential that shareholders have the ability and the right incentives to act responsibly in relation to the companies whose shares they hold. There is a high degree of public interest which rides on this given that shareholder oversight has been preferred to regulate requirements in many key areas of corporate governance. However, the financial crisis has illustrated the significant problems in terms of both the quality and quantity of shareholder engagement that currently takes place.effective shareholder engagement representationOne of the weaknesses of the current UK corporate governance system lies in its financial crisis. This is particularly on the importance of effective engagement between investors and the companies in which they invest. Consequently, there has been concern for the lack of
What are the strengths of the UK corporate governance?
According to fco , UK hosts Europe’s largest financial and professional services industry. This industry has employed over one million people and makes a contribution of over 12% of UK Gross Domestic Product. This is one of the strengths of the UKs financial sector. It’s believed that there is no other country that can match the City of London’s international expertise. More overseas financial institutions and investors choose to do business in UK and this makes London, to be the home of offices, branches or headquarters of almost every major international bank and financial institution in the world (fco). Despite the international financial crisis, the strengths of London’s financial markets have enabled the country to continue to function efficiently and effectively meeting the international clients’ requirements.
UK based companies have a strong presence in countries like china. These include Barclays, Standard Life, Lloyd’s of London and PwC which are all very active. Relatively, Chinese financial sector has a long-standing presence in the UK. More recently there have been an increase in the number of other countries financial and professional services businesses choosing the UK as a location.
The city of London which is at the heart of UK handles 34% of the world’s foreign exchange trade, 22% of global foreign equity trading, 43% of the world’s over the counter derivatives trade, 70% of all Eurobonds are traded in the City and 95% of the world trade in non-ferrous metals.
According to frc, (2006) also known as (Financial Reporting Council), the U.K approach to corporate governance combines high standards of corporate governance with relatively low associated cost. ‘Several studies demonstrate that UK outperforms other countries in terms of corporate governance standards….. (frc, 2006 ). Due to various scandals emaciating from poor corporate governance, U.K, the European Union, United States, the World Bank and several other world bodies adopted various recommendations for the company boards and company accounting systems to mitigate corporate governance risks and failures.
According to frc, (2006), the strength of the UK model lies in its high standards with low costs. The model is often placed in a similar category to that of the United States. This is because it reflects the dispersed pattern of ownership in both countries with a common emphasis on capital market financing. Some scholars argue that this might be misleading as it since the Depression years of the 1930s; U.S government regulation has played a central role in US corporate governance. This was initially as a means of protecting small private investors. Small investors have historically formed a major component of US corporate ownership. This is contrasted by the U.K placing greater reliance on institutional shareholders to enforce high standards of corporate behavior. This divergence of key approaches to corporate governance has intensified over the last 10-15 years.
The measures that are outlined by the U.K government have been successful in driving significant changes in governance behavior. A good example is that prior to the year 1992, few companies split the role of Chairman and CEO. Today there is a division of roles in 94% of FTSE 350 companies. In addition, the non-executive directors and board committees have grown in numbers and influence. They now play a very major governance role. This has made U.K outperforms the US and most other countries in terms of governance standards.
The compliance costs in the UK are considerable lower than in the United States. This is particularly in the advent of the Sarbanes-Oxley Act in 2002. The onerous requirements of Sarbanes-Oxley, and in particular those relating to internal control structures, have given rise to massive implementation costs for US corporations. The Financial Reporting Council (FRC) undertook its latest review of UK corporate governance and made a conclusion that the current UK framework was working reasonably well and that it required no major changes.
However it relied on two major changes that were made to the Combined Code in 2008. One is the restrictions on chairing more than one FTSE 100 company were removed and the chairman of a listed company outside the FTSE 350 was permitted to be a member of the audit committee. This was if the chairman was regarded as independent on appointment. Although the UK model is in good shape, it is important not to become complacent. There are a number of areas which are worthy to have a renewed attention from policy makers and market participants. Strength of the UK corporate governance lies in creating a special committee to examine the financial aspects of corporate governance.
By allowing greater role for non-executive directors, changes in board operations, and a more active role for auditors in a company in order to reduce the power of executive directors in the boardroom the committee, this gives U.K corporate governance more strength.
Consider the various rights and remedies that shareholders have against directors and the role that shareholders play in corporate governance.
The term shareholder refers to an individual who has invested financially in a publicly traded company. This implies that shareholders own a particular potion of the company depending on the amount of money they have injected in the company. Most companies with shareholders are listed in the various regional or international stock markets. In light of this, most companies’ are managed according to the wishes of the shareholders. However, decision making in a company derives from shareholders with majority shares (Willocks, P. (1991, p. 95).
Corporate governance refers to the laid out rules, processes or laws under which businesses are run, synchronized or controlled (Mallin, 2011, p.58). In light of this, shareholders are obliged to create conciliation of interests. This involves the articulation of the various viewpoints from other shareholders to arrive at a unanimous conclusion. This helps in the reduction of internal wrangles in the company. Shareholders are the reasons behind a company’s success and failures. In this regard, their consideration should be well calculated. Shareholders are very important in any corporate entity. The various rights and remedies that shareholders have against directors in a corporate give the shareholders a role to play in the corporate governance. According to one of the most important rights that the shareholders have lies in dialogue between the company and the shareholder. This is a key component of the UK model of corporate governance. According to Rushton , in accordance with the combed code “The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place…” (this is in Section 1, D.1). In addition, the code also states that “institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives” (Section 2, E.1).
Corporate investors have made some progress in increasing their active ownership capabilities. Relatively, UK shareholder relations are generally less confrontational than those in the United States. In United States, hostile activist campaigners try to impose their will on CEOs.
In most companies, there is lack of prescription as to how the company’s board organizes itself and exercises its responsibilities. The Combined Code on Corporate Governance identifies good governance practices. However companies can choose to adopt a different approach if that is more appropriate to their circumstances. The key relationship should be between the company and its shareholders, but not between the company and the regulators. The board of directors and shareholders are encouraged to engage in dialogue on corporate governance matters. In an established company, shareholders have voting rights and rights to information. These rights are set out in company laws which enable them to hold the board to account.
Foss v Harbottle and s994 in the Companies Act 2006
In the judgment on the Foss v. Harbottle, several minority shareholders’ remedies were taken into consideration. In his judgment, Wigram VC followed the older cases on unincorporated companies by insisting that the minority shareholders must show that they had exhausted all possibility of redress within the internal forum(Cambridge). Although some notion of majority rule had been implicit in the earlier cases, Wigram VC was the first to state plainly that the court will not intervene where a majority of the shareholders may lawfully ratify irregular conduct. This was somehow a circular argument. His judgment implied that where it is futile to hope for action by the general meeting, a suit may nevertheless be brought by the minority even for matters which might in law be ratified by the majority. However, on the last point, the rule was to become even more unfavorable to the minority shareholders. This was because it was later established that the Foss v. Harbottle rule barred a minority action whenever the alleged misconduct was in law capable of ratification, whether or not an independent majority would ever be given a real opportunity to consider the matter. Wigram VC’s judgment was important for his discovery of an entirely new principle to support that of majority rule. This is because in the corporate character of the company, he found a second ground for restricting minority actions. Since an incorporated company was the ‘plaintiff’ in any action concerning its rights, it would only be exceptionally in the case of grave abuse that a minority might be allowed to sue in their own name by joining the company as defendant. This principle that the company itself was the proper plaintiff in proceedings concerning its rights, was linked with the discretion exercised by the courts of equity over the use of the representative form of action. Relatively, it was to have a considerable influence upon the later Victorian judges in adopting an increasingly restrictive attitude to minority actions for breach of the articles or breach duty by company directors.
Before the Foss v. Harbottle, the scope of the exceptions to the rule was only vaguely indicated. The task of defining the extent of the exceptions to the rule was to be the work of later generations of judges. Relatively, more mplications of WigramVC’s judgment were soon to be drawn. In Mozeley v. Alston, the majority were alleged to be of the same opinion as the complaining minority. There was nothing to prevent the company from filing a bill in its corporate character.
Discuss The UK Corporate Governance Code of June 2010 UK Stewardship Code 2010
The main aim of the U.K Stewardship Code is to enhance the quality of engagement between institutional investors and companies. This is in order to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities. This engagement includes pursuing dialogue on strategy, performance and the management of risk, as well as on issues that are the immediate subject of votes at general meetings (frc, 2006).
The Code sets out good practice on engagement with companies to which the FRC believes institutional investors should follow. The code provides an opportunity to build a critical mass of UK and overseas investors committed to the high quality dialogue with companies needed to underpin good governance.
By creating the basis of engagement, it should create a much needed stronger link between governance and the investment process. This should eventually lead to greater substance to the concept of ‘‘comply or explain’’ as applied by listed companies. This is therefore sees it as complementary to the UK Corporate Governance Code for listed companies, as revised in June 2010.
Institutional shareholders are free to choose whether or not to engage though their choice should be considered based on their investment approach. Their managers are responsible for ensuring that they comply with the terms of the mandate as agreed.
Relatively, disclosures made by institutions under the Code should assist companies understand the expectations of their major shareholders. In addition, they should assist those issuing mandates to institutional fund managers to make a better and informed choice. In the end they will improve the function of the market and the facilitation of the exercise of responsibility to the investors. The Code does not constitute an invitation to manage the affairs of investee companies or preclude a decision to sell a holding. Relatively, the code is addressed in the first instance to firms who manage assets on behalf of institutional shareholders. These can be the pension funds, insurance companies, investment trusts and other investment vehicles. As expected, firms should disclose on their websites how they have applied the Code. Institutions that manage several types of fund need to make one statement. The full responsibility for monitoring the company performance is not mandated to the fund managers alone rather pension fund trustees and other owners can do so. This can be either directly or indirectly through the mandates given to fund managers. Fund managers actions can have a significant impact on the quality and quantity of engagement with UK companies. Therefore all institutional investors should report if and how they have complied with the Code. Principle 1 of the Code explains that institutional investors that make use of advisory services should disclose how they are used. The FRC therefore encourages those service providers to disclose how they carry out the wishes of their clients by applying the principles of the Code that are relevant to their activities. However it recognizes that not all parts of the Code will be relevant to all institutional investors as the smaller institutions may judge that some of its principles and guidance are disproportionate in their case. In the given circumstances, they should take advantage of the complying or explaining ’approach and set out why this is the case. The explain option means that overseas investors who follow other national or international standards that have similar objectives. They should not feel application of the Code duplicates or confuses their responsibilities.
Did the UK corporate governance structure in any way contribute to the credit crisis?
Corporate governance refers to the composition of rules, policies and laws that serve as guidelines and regulations in the effective running of a business entity. The guidelines are both internally and externally constructed. Internally constructed guidelines comprise of those policies that only apply to the company or business and are decided by the company’s management. On the other hand, externally constructed guidelines are universal policies directed to the company’s by the government, consumer groups or clients. For example, government policies include tax remittance and price controls among others. In light of this, corporate governance system1 represents the various individuals and departments responsible for the articulation and critical observance of the corporate governance policies. Besides, the directors act as a link between the shareholders, government and the clientele of a company. In this regard, they are bestowed on them a number of duties, roles, and responsibilities in the corporate governance system to help in the positive progression of the company.
UK Treasury published a report that stated that banks have failed because their leaders and mangers failed. The treasury quoted PIRC which is a leading UK corporate governance consultancy, by stating that boards are responsible for the failure of banks. They continued explaining that they approved the business strategies and products that caused such damage. In addition, there was failure of non-executives. They failed in effectively overseeing and act as a check on executive directors. Some boards operated as members of an exclusive club. The areas that The UK Treasury suggested for reforms were; limiting the number of non-executive directorships can be held by an individual, ensuring that a non-executives posses a relevant professional qualification to sit on the board, expanding the talent pool from which the banks can draw upon in appointing non-executives, finally examining ways to strengthen the relationship between institutional shareholders and non-executive members of the board .
What role did directors of financial institutions contribute?
The directors of the financial institutions contributed greatly in the global financial crisis. This was due to their exhibited crisis that revealed that there were significant failings several key areas in the corporate management. This included pay and bonuses, risk management, board performance and the involvement of shareholders.
According to bbc, (2010) the former Northern Rock directors, David Baker and Richard Barclay misreported mortgage arrears data and failed to ensure accurate financial information respectively. According to FSA the two had admitted their misconduct and received reduced fines as a result of their co-operation. FSA fined them and relatively banned them from for any regulated financial firm again.
Mr Baker, the former Northern Rock’s deputy chief executive, was responsible for the bank’s reporting of financial information. Though he argued that his actions did not affect customers nor had anything to do with Northern Rock’s collapse later that year when it had to be rescued by the government, he regretted his misconduct. In the market perception, the figures were important to analysts and outside investors as they were used to judge performance of the company.
According to FSA, Richard Barclay failed to prevent the inaccurate reporting of the financial information. Consequently, his failings were abused by some members of staff and this lead to the under-porting of arrears figures. His conduct showed lack of skill, care and diligence in overseeing effective systems and controls. The FSA said Mr. Barclay took no action to ascertain the extent to which the arrears figures were being adjusted even though he aware that Northern Rock’s arrears position was being misrepresented.
Another case that demonstrated the contributions of the directors in the GFC, was the case for the Royal Bank of Scotland’s (RBS.L) takeover of ABN Amro. According to (Reuters, 2009) the bank led a European consortium to buy Dutch bank ABN AMRO for 70 billion euros in October 2007. They outgunned Barclays (BARC.L) and landed the deal by paying a higher price mostly in cash. RBS paid about 10 billion pounds for its portion, mainly investment banking business (Reuters, 2009). After the deal, the consortium was heavily criticized for not cutting its offer as the financial crisis began before the deal was sealed. RBS became financially stretched by the deal leading to the surrender of its majority stake to the government in return for a 20 billion pound taxpayer-funded bailout. This was after it was hit by escalating losses on risky credit-backed assets. This again demonstrated the director’s contribution in the failing of the financial institutions. This was a show of port risk management.
In the recent years, the CEO’s pay has been growing fast. Some mangers have been awarding themselves hundreds of millions of dollars a year. This has been revealed in the business press soaring the public outrage. According to Wharton a professor of legal studies and business ethics, he asks if the hefty executive compensation figures reflect an efficient market or a failed one (Wharton, 2007).
For the most part of these payments, there is very little transparency in the company as more transparency exists at publicly traded firms. This has lead to controversy in the recent years as critics saw executives getting richer while pay for lower level workers remained relatively low. Several studies have concluded that compensation for big company CEOs was more than 400 times the pay for average workers (Wharton, 2007). Cases of the executive greed, such as the one for Enron and many other scandals involving more than 12 companies involving 13 or 14 companies, can lead to the collapse of the company.
It has been suggested that the directors should adopt strategies on their own such as a rule that prohibits compensation consultants from doing other business with the firm. In addition to that boards should get pay advice from more than one consultant and should change their consultants after every five years (Wharton, 2007). Relatively, they should set pay limits before searching for new executives and they should compare the payment data showing pay at similar companies. If all these measures to curb overpayments are not followed, then more and more financial institutions will collapse leading to core global financial crisis.
Duties, roles and responsibilities of directors in the corporate governance system
It’s of great importance to understand the role of independent directors and their relationship with shareholders. The new UK Corporate Governance Code requires that the board appoint one of the independent non-executive directors to act as the senior independent director. In his position, the senior independent director is expected to provide a sounding board for the chairman together with playing the role of a liaison for the other directors when need arises. In addition, the director is expected to be available for shareholders in case they have concerns about which the chief executive, the chairman or other directors are unable to resolve or for which it is inappropriate to contact the mentioned authorities (frc, 2010).
Challenge and develop proposals on strategy
Challenge and develop proposals on strategy is another new main principle that non-executive directors should constructively challenge and develop proposals on strategy. The new Code emphasizes the role of non-executive directors in that they should scrutinize the performance of management in meeting the set goals and objectives of the company. In addition, they should scrutinize the reporting of performance. Independence of decisions made by the board is encouraged by Provision A.4.2 of the new Code which requires the chairman to hold meetings with the non-executive directors in the absence of executives. Non-executive directors led by the senior independent directors are also required to meet in the absence of the chairman at least annually to appraise the performance of the chairman. This provision is the same as Provision A.1.3 of the UK Combined Code (Hicks & Goo, 2008)
Accountability is the effective running of a company ensuring that every undertaking is of high integrity. This implies that the directors are answerable to the company’s shareholders on the day to day running of the company. The directors should serve as the eye of the shareholders in the company ensuring that every activity in the company is decisive. In realizing this, the directors hold annual general meetings to inform the shareholders on the company’s activities, future prospects and at times seek their suggestions on the best possible way to run the company.
Layout of company’s policies
Directors in the corporate governance system are responsible for the establishment of the company’s goals, objectives, mission and vision and also laying down company’s policies. This implies that the directors create policies that should govern the company. Besides, it includes the creation of a company constitution. However, they incorporate the views and suggestions of the shareholders in making the policies and also follow government policies to avoid legal repercussions. For example, they establish the vision such as centre of academic excellence in a school setting. In light of this, they also foresee the implementation of the same policies in the company and provide guidance where need arises. Moreover, they deal with issues arising from non-compliance with the said policies within the company structure. For instance, they might fire or sack a non performing employee through a resolution by the board of directors2
The directors in the corporate governance system are responsible for the effective management of the company’s assets, employees and other activities pertinent to the company. This implies that they oversee the successful running of the company on behalf of the shareholders. For example, they make certain that employees are paid on time to avert sideshows and inconveniences in running of company matters such as employees go slows. Moreover, they ascertain the overall management of the company by ensuring that the shareholders receive their dividends on time and also see to it that the company policies are followed to the latter without fail.
Moreover, the directors are the overall managers of the corporate governance system. This implies that they oversee the effective running of the business and also attend to issues of concerns for the benefit of the company.
Company image and representation
Directors are responsible for the maintenance of the corporate image of the company to the clients, government and other stakeholders. This implies that the directors portray the company’s image to the outside world. Failure by the directors is seen as failure by the overall company. Moreover, the directors act as representatives of the company in any event or situation such as legal cases, award ceremonies and also in government among other places. For example, in case of a legal suit in court the directors are responsible for ensuring representation of the company n seeking of a lawyer. In light of this they adequately play their role of representation3
According to the OECD, although rating agencies and accounting standards played a role in causing various credit crises, the boards used their own powers to overcome weaknesses and associated risks in these areas. The Effective boards implemented systems leading to the sharing of information and open dialogue across management and the board. The OECD head of Corporate Affairs, made recommendations that ensured that risk management systems are continuously adjusted to corporate strategy. Particularly, boards need to be more exposed to risk issues and have all the necessary information to make informed decisions. This could be achieved by appointing a «special risk officer» to report directly to the board rather than via the CEO.
Is the UK similar to other corporate governance systems i.e Australia, US, Europe? If not why not? What was the impact of these different systems in responding to the GFC? Were they better, worse or no different?
Corporate governance differs across countries. In some countries, bank have dual board structure involving a supervisory board and executive board. According to FRC, (2010), the importance of independence directors increased in the years prior to the GFC. There is similarity between corporate governance in the UK and in Australia.
Aronson v. Lewis (US)
In the US for example there was short of gross negligence in various cases. This made it hard to prove that the directors did not show reasonable business judgement in cases such as Aronson. This shows that shareholders in the US are more able to bring derivative actions. In 1984 the Aronson v. Lewis,
was one of the cases related to stockholder derivative suits and the authority of boards of directors. First the court of chancery had developed its own rule that demand was excused if the plaintiff’s allegations raised inference and that the action of the directors was not protected by the business judgment rule. Delaware Supreme Court on its part rejected the court of chancery’s test and adopted a standard of reasonable doubt for the guidance of trial judges.James Hardie Industries Limited (JHIL) Australia
In Australia, it seems almost the opposite in that it is much easier to show non good business judgment under cases such as James Hardie Industries Limited (JHIL).
In 2009, former non-executive directors and Mr Macdonald and James Hardie Industries Limited were found to have breached the Corporations Act. This was by making statements in 2001 about the adequacy of asbestos compensation funding. In August 2009, the New South Wales Supreme Court imposed pecuniary penalties and disqualification orders on the non-executive officers and executives and pecuniary penalties. The defendants appealed the decisions as to liability and penalty. The penalties for both were reduced. Earlier this year ASIC filed applications in the High Court for special leave to appeal the decision of the New South Wales Court of Appeal. Mr Shafron and Mr Morley also filed special leave applications in respect of the said decision of the New South Wales Court of Appeal.
UK and Australia
In the UK, there is no statutory business judgment rule. This may be maybe because of rulings such City Equitable Fire Insurance and the defining of duties of care and skill but also because of the different situation in bringing derivative actions in the UK (ie more complex in the UK then in the US for shareholders).The two countries have adopted a principles-based approach of reforming corporate governance. This is different from the approach taken by the United States through the Sarbanes-Oxley Act of 2002.4 In Australia, there is a market-based response as opposed to a regulatory regime to deal with corporate governance concerns.
Comply and explain rule
Similar to the UK system, the Australian system of corporate governance is based on the comply or explain principle. This means that the adoption of the guidelines by issuers has been voluntary, however, disclosures of non-conformance and explanations were obligatory under the ASX listing rules beginning in the 2004 annual reports to shareholders. The rules are not principles, not mandatory and do not avert corporate failure or mistakes in decision-making. However, they can be used as a reference point for improved structures to minimize problems and optimize accountability and performance as part of the overall Corporate
Election of board members
One of the features of corporate governance in the UK and Australia is in election of members to boards. According to the new UK Corporate Governance Code, elections should be conducted annually to select directors of FTSE 350 companies (FRC, 2010). This decision highlights the preference of institutional shareholders and can be seen as a key to enhancing shareholder engagement. In Australia, potential company directors are required to disclose a variety of information including the term of office currently served by any given director prior to re-election. These measures are meant to reduce redundancy within the board as there is a likelihood of having new board members with new ideas periodically, and re-appointment of directors is not automatic. The ASX Principles of Good Corporate Governance and Best Practice Recommendations highlight the significance of each organization structuring its board so that it can effectively discharge its responsibilities.
According to FRC (2010), the main principle under board effectiveness states that, the board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company. This is in order to enable them discharge their respective duties and responsibilities effectivelly (FRC, 2010)
are being planned to be introduced. company lawOver some time now, US and UK approaches on corporate governance have been quite different. However, of late the emphasis has been on building up a voluntary code. In the UK, Corporate governance came to be with the publication of the Cadbury report in 1992. However, in response to the increasingly severe scandals in Europe, the UK is now tending to follow the US lead of introducing mandatory and punitive measures. According to Jill Treanor, stated that UK company directors risked criminal charges in the future if they attempt to hide information from their auditors. She commented that comprehensive changes to
Globally, there has also been pressure for change in the corporate governance. Accounting directives collectively known as Modernization Directive have recently been issued. These became mandatory in all member states and focuses on harmonizing accounting practices (Directive). In UK, the Combined Code is widely regarded as the definitive corporate governance reference as it contains most key governance aspects that have developed over the years. It has included the role of and contribution of non-executive directors and the activities of audit committees.
Various sector-specific examples of self-regulation have emerged recently. As an example, following recent friction between the individual voluntary arrangement sector and the major banks, 27 companies have founded the debt resolution forum to establish best practice in their industry in an attempt to placate both the banks and the financial sector regulator.
A FRC report indicated that 33% of UK companies were fully complying with their corporate governance responsibilities (FRC, 2007). However, the collapses of several leading financial institutions which were not limited to the UK only but globally clearly demonstrated that there were serious problems in the corporate governance. This was particularly the methods employed to try to keep companies from making risky decisions.
In the UK’s corporate governance, policies are based on the belief that it is shareholders who should hold the deciding vote when it comes to determining whether or not a company’s governance policies are adequate (Mallin, 2009). This holds a similarity in the US model which is different to the EU model. The EU focuses on a broader range of stakeholders including unions, employees and the public.
The UK corporate governance is not similar to other corporate governance systems globally. The differences in financial institutions globally have implications for corporate governance. Equity markets provide a market for the corporate control. However, the monitoring by the banks could perform the same external oversight role as takeovers. The Spanish corporate system is bank oriented, making the financial intermediaries play a prominent role in it.
What measures are being adopted in the UK and Europe and internationally to address failings in the corporate governance systems within the UK and Internationally? Specifically define any new legislation or regulations that may be planned.
UK — Walker Report
different banks operating in the same financial and market environment generated different outcomes. Regulation responses were proposed in each four areas of risk governance, board professionalism, remuneration and shareholder engagement. The walker’s recommendation falls under these four categories.walker report, rc, (2011), the on theAccording to f Walkers report was published in 2009. It contained recommendations that were addressed to the FRC. FRC on its part agreed to implement those recommendations that it considered should apply to all listed companies. Some of these recommendations have been implemented through revisions to the Code.
US Volcker rule
This rule was introduced after the recession of 2008. Its main aim was to control the risk associated with the financial sector. The rule was given the name after the former Federal Reserve Chairman Paul Volcker; the Volcker rule basically stops banks from some activities such as trading on their own behalf.
US — Financial Reform Bill
In the US, the Financial Reform Bill was introduced and signed into law by President Obama (thefreelibrary, 2010). It was also known as The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act’s purpose was to promote financial stability. The Dodd-Frank financial Act included the regulation that stipulated that all public companies must now give shareholders a say on executive pay.
Australia- Corporation Amendment Bill 2011
In Australia, there is a new llegislation which is being introduced. The Corporation Amendment Bill 2011 improves accountability and the executive remuneration. This bill is covering the two strikes test and a no vacancy rule. This rule has been seen as responding to shareholders concerns relating to directors, boards and the operation of companies.
New Zealand — Financial Markets Authority
In New Zealand, there has been an announcement of a new capital markets’ super regulator which has come into announcement after 21 years since it was first recommended by the Russell Committee in 1989. The regulator will help restore confidence in New Zealand’s capital markets relatively going along way in helping restore the confidence of the investors in the New Zealand financial markets.
The recent US corporate scandals which involved Enron and WorldCom have resulted in changes to corporate law as a result. SOX law is today mandatory in all US organizations and the non-US organizations listed in the US. The recent corporate fraud cases such as Enron’s and Parmalat which wiped out billions of shareholders’ wealth had shaken down confidence of investors in financial market. In addition, the cases damaged external business relationships, the firm reputation and its branding. In countries like U.S.A, e Sabena Oxley Act (SOX) was set as a company law in 30 July 2002 its aim being to protect investors by improving the accuracy and reliability of corporate disclosure.
provides a last chance for a corporate governance system that relies so heavily on shareholder engagement as an essential part of the monitoring system of corporate Britain. If implementation of the stewardship code does not lead investors to show that they are willing and able to play the role in corporate governance that has been ascribed to them, it will be a clear and irrefutable sign that the system itself needs to change.proposed stewardship codeIn UK, there has been planned rules and regulation that will be governing the corporate governance. Regulations have been planned to be use by the corporate governance as the best practice in gaining the lost confidence in public. The
According to frc, (2006) it has issued updated corporate governance code for UK companies. Though formerly referred to as the Combined Code, the newly issued UK Corporate Governance Code is a response to the financial crisis.
These good governance measures will ensure that directors will fully consider the stakeholders’ interest. Relatively, In order to meet the expected a long-term success of an organization, the organization must comply with the entire external environmental factors. These are laws and regulations as well as social responsibility. However, some employers may seek profit from their employees and even refuse to provide basic facilities to its workers as a way of reducing their expenses (Mohamad, 2004).
Non-executive directors are given the responsibility of monitoring the board of executive directors. Their work is to expose fraud cases to the public and the shareholder if any is detected. The audit committee re-evaluates the program that management establishes to monitor fulfillment with company’s code of ethics. Therefore, the corporate governance prevents fraud from occurring thus reducing the white-collar crime and helps in discovering fraud at the early stage.
The corporate governance is mandated to ensure the independence of non-executive directors. This is in especially the audit committee. The executive compensation and director nominees should have the majority independent directors. However, officers and employees must perform their responsibility honesty besides the directors. In addition, there must be no bias and fraud in the process of transaction of business.The Shareholders Directors have the fiduciary principals and duties of care to manage the company under the law. However, this can only happen depending largely upon shareholders’ action to protect the other stakeholders and the money they invested.
In any corporate entity, shareholders are the owners of the organization. However, not all the shareholders actively contribute in the day to day operations of the company. The majority shareholders owners of the corporate make decisions on behalf of the minority shareholders though managers of some firms will also control the company and make all level decisions (Bhasa, 2004)
On the other hand, all the directors should be given a test base on morality before and after they are employed. The test may not be in a written form but practically. For example, a few directors play in an act to show that there is a fraud case going on in the organization. Then, they will monitor on how the candidate take action towards those them. Thus, such test is able to ensure that all the employees are trustworthy and alert. Thus, they are able to trace if there is any fraud happening in the organization too.
The committee reports such as Cadbury, Greenbury and Turnbull are very informative for the shareholders to monitor and control the directors. For example, The Cadbury Code stated that the Board of Directors should not be control by any single party, such as chief executive officer, chairperson or by a small group of executive directors. The shareholder should pick the important factor that are most relevant from all the codes and enforce the company. However, the company should not use that information, which the organization cope with, such as all the organization should be audited despite its size and costs which was set by SOX. The shareholder will face problem because the burden of auditing fees will use up a high portion of its turnover.
The shareholders must understand the background of all directors especially the independent directors before employing them. If any of them had involved themselves in the white-collar crime, the company will be in danger in their hands. Besides, the shareholder must provide more authority to non-executive director. These directors must have the right to view the all information of the organization so they have enough evidence to proof the right doing of wrongdoing of the managers.
The shareholder must be responsible to provide authority to the directors’ duty and play a role within corporate governance so that the directors are able to perform their function effectively. (Kirkbride, Letza and Smallman).
What measures are being taken in relation to the duties of directors? Are these likely to be effective? Are they necessary?
Fines are being imposed on directors who are found to have aided in the collapse of any financial institution. Two former Northern Rock directors were fined by the FSA and banned from working for a regulated financial firm again due to their misconduct in the Northern rock financial institution. David Baker was fined a total of £504,000 for misreporting mortgage arrears data. Richard Barclay, a former credit director was fined £140,000 for failing to ensure accurate financial information.
This shows that measures are being taken in relation to the duties of the directors. The fines that were imposed on the directors showed that action was being taken against directors who failed to perform their roles to a high standard or lacked integrity in their work. These measures are being effective as they demonstrate the standards to which it requires all individually approved managers to operate.
In the case of the introduction of the SOX law which dramatically increased regulatory costs for many companies have made the directors to be very conscious in all their operations.
Document any cases involving directors etc that have taken place either in the UK or Internationally that have been brought because of the results of the GFC.
As a leader of the organisation, the executive directors should set a very good example to their employees. This is in terms of morality and efficiency in the process of serving the company. They should be ethical and not abuse their authority in the company. Abuse of authority includes using the company’s asset privately, accepting bribes in form of commissions from the contractors and many others.
In a corporate setting, there are two types of directors in an organization. These are the executive directors and non-executive directors. The executive director’s are usually selected by the majority vote of shareholders. In the corporate governance, the executive directors function senior managers of a business. Their work is to design, develop and implement strategic plan in order to achieve the objective of the organization. These directors are involved in the day to day operation of the company. In addition to that, they have the authority to control all staff and they are the link between the employees and shareholders. A financial report is produced by the board of directors at least once a year for the shareholders to review.
In the UK, the Northern Rock case was one of cases that involved the directors. The case was brought to fore as a result of the global financial crisis. The company case which involved two directors who misreported the actual financial information made the UK government to bail the company out in 2007. The directors were fined heavily by the FSA and were banned from working for a regulated financial firm again.
According to bbc, (2010 ) the misreported financial report was very important to the analysts and investors in the analysis of the company’s health. Positive market perception was crucial to the Northern Rock as it was assisting in its funding of the rapid expansion during a time in which it became the UK’s fifth largest lender.
The staff in its debt management unit was under pressure to maintain a lower-than-average level of mortgages in arrears and properties they had lent money against that had been repossessed. This resulted in improper reduction of the reported numbers of what were known as impaired loans. Richard Barclay was the director in this unit. Richard Barclay failed to prevent a number of the improper practices and this lead to under-reporting of arrears figures.
Though the company was later bailed out by the government, it was documented as one of the cases that were brought because of the results of the GFC.
Another recent case of director’s malpractice is the fraud case of Enron Another fraud case that involved its directors was that of
. It started in early 1991. Enron as a company borrowed a large amount of loan without disclose in their financial report. This enabled them to continue its business as usual. Many years later, the company accumulated a debt of more than $350 million dollars. However, these amounts of loans were recorded in the accounts of their assets or liabilities from an affiliate entity (Doost, 2003). The case was later exposed in the late 2001 sending all the managers (Azul, 2004).Parmalat, These fraud cases can happen when shareholders depend on the directors only. The non-executive directors or external auditors were not involved in the auditing of daily operation of the executive directors. This made the directors lose control as the system allowed the directors to abuse their authorities. As much as the shareholders might think that the auditing job is a waste of resources, its very important for the practice to be carried out. The directors should however work in an ethical manner. Investors are the only ones who can control the company operations, monitor and give directions to the directors. In the case where the company collapses, many stakeholders especially those that are jobless remain at a loss. However it’s their duty together with the directors to oversee that this doesn’t happen.
which is a dairy foods producer. The company created a fraud account in Bank of America where the branch is in Cayman Island in 1998. Its report on the financial status stated that it had 38% of assets, which is $4.9 billion in this bank. This was untrue as it was revealed after 15 years later as the falsified account was disclosed. Parmalat, organizations liability was $16.2 billion. This lead to its forced winding up 2003 (Celani, 2004).
In its green paper, the European Commission (2010) argues that it is clear that boards of directors rarely comprehend the nature or the scale of the risks that they face. The financial crisis can be to an extent attributed to failures and weaknesses in corporate governance. This is in particular the failures in risk management systems and remuneration structures. In addition, insufficient board and oversight of senior management, inadequate risk management an unduly complex or opaque bank organizational structure and activities can also be attributed in the GFC.
The European commission argues that the role of corporate governance within financial institutions must be adapted to take account of the specific nature of these companies. This is specifically the role played by the supervisory authorities as implicit representatives of stakeholders such as depositors and taxpayers.
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The Sarbanes-Oxley Act was signed into law in July 2002 which illustrated that the US had adopted a more rigid legislative and prescriptive approach to Corporate Governance. The Conference Board Commission formed in June 2002 to address US corporate scandals and declining public trust and to issue best practice guidelines (Minter Ellison, 2003)
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