Corporate Governance Law
Corporate Governance Law
Corporate governance refers to procedures, traditions, principles, institutions and laws that may affect the way a firm may be controlled . The most important element in the corporate governance regards the nature and degree of obligation of people in the business and their efforts to cut down on the principal-agent predicaments. This is inclusive of the connections among the different people involved and the objectives for which the company is controlled. In the modern business world, the major external groups of stakeholders include; debt holders, trade creditors, suppliers, communities and customers who are directly or indirectly affected by the corporations . On the other hand, the internal stakeholders consist of executives, board of directors and employees within the corporation. The following discussion will put more light on the corporate governance laws their origin under the combined code, theories of corporate governance and the role of shareholders in an organization . Besides, the role of directors will be analyzed and the rationality as to whether the corporate governance should be statute based or code based discussed.
The Combined Code
The Unite Kingdom governance code 2010 refers to situate of principles of proper corporate governance which targets firms that are quoted on the London stock Exchange. The rules of being quoted are provided by the statutory weight in the financial services and Market Act 2000. The rules provide that all firms quoted must disclose all the information about the conformity to the code in their statements of accounts. There are principles adopted by the code to give guidelines for best practice .These principles must be adhered to unconditionally to enhance best practice.
This code’s origin can be traced back in 1992 when Cadbury issued a report in response to various major scams which were linked to United Kingdom’s governance failure. A committee was formed in 1991 on the eve of Polly Peck a major UK firm that went insolvent due to many incidences of making false financial reports . The report brought to light financial matters, auditing methods and general corporate governance issues hence the recommendations that; there should a separation of CEO and Chairmen of firms. Besides, the board of directors must at least have non executives with no interests in the firm. The report also recommended that the board must consist of non-executive audit committee. Though they were alot of controversies regarding the recommendations, in 1994 they came to be incorporated in the listing rules at the London Stock Exchange. The requirements were meant to be strictly adhered to by all. In case there was no compliance to the principles, the firms were to give reasons for the non-compliance to the principles .
In 1995, another committee was set up which produced Greenbury report that was to probe into the executive pay or compensation.The report later made recommendations that a remuneration committee was to be part of every board without the directors but the chairman inclusive. And that, long term performance related pay to directors was to be disclosed in the accounts of the company for which the contracts were to be renewed every year .
Another committee that was recommended by Greenbury report was set up to review the reports earlier issued. This resulted into Hampel report in 1998 which recommended that Cadbury report and Greenbury report be merged into one to form Combined code. The report made further recommendations that the non-executive leader was to remain the chairman of the board. Besides, shares held by institutional investors were to be considered in voting though compulsory voting was rejected. Similarly, the disclosure of all kinds of remuneration was to be adhered to, inclusive of pensions .
Furthermore, Turnbull committee issued a mini report which made recommendation that internal financial and audit controls were to remain under the jurisdiction of the directors. Following the collapse of Enron in the U.S, other mini reports like Higgs Review and Derek Higgs were issued which placed their attention on what the non-executive directors were to do in case they encountered problems within the reports from the company. Financial Reporting Council later issued a stewardship code in 2010 with a new version of UK corporate governance code which then distinguished issues from another .
The compliance of the code is one issue to determine as to whether the firms adhered to while the reasons for non-compliance is another. A report issued by Pensions & investment Research Consultants ltd revealed that 33% of the quoted firms were in full compliance of the codes provisions. This was in reaction to the Financial Reporting Council paper that was released in 2007 . The report further revealed that poor compliance to the code contributed largely to poor business performance. In particular the major provision of separating the CEO from the chair contributed to 88.4% rate of compliance. Recently, the Financial service authorities made a proposal that requirement to comply with the principles was to be abandoned but rather compliance to rules was to be followed. This was after many recommendations that accountability was to be implemented via the market and not the law. The main reasoning was that if the shareholders conceded to noncompliance because it worked for them, they were not to be punished as a result exit of investors .
The Berle-Means thesis
Berle and Means thesis revolves around the theory of governance in public limited firms in which there is separation of ownership and control from shareholders. In this case the boards of directors are trusted to represent their interest in the firm. The theory stipulates that with time, there is so much absorption and dominance of the boards of directors that their responsibilities become less effective in which case the executives have to give an ultimatum say. The Berle and means thesis places its attention on revolution by managers in which control of corporations changed hands from owners to managers . Though currently policy of corporate control has now shifted back to owners in investor capitalism. Owners who are currently acting as stock market manipulators have recently risen to stress high level of control over the independence of the CEO (Brinkman and Brinkman, 2002; p. 403). This has practically gone into vicious circle to culminate into surplus profits by CEOs.
The effect that ownership and control severance as determined by the sense of ownership of equity stake firms and the sense of having the power to dictate the corporate policy, has had on the corporate governance analysis can be easily described . According to the views of Monks and Minow managers in public corporations have interests and objectives that are unique from those of the owners. Alternatively, when there is lack of sizeable share by the shareholders to have an impact or influence on the directors and executives, the board may at this point apply agency cost which is initiated by managers who serve their interests to develop into a major concern.
There are different market-oriented mechanisms like external directors’ monitoring, compensation based on performance and corporate control by the market to assist in aligning the management’s interest with those of shareholders . Nevertheless, just like the shareholder value whole destruction in major financial corporations that were publicly traded in U.S in the recent markets, there can be persistence of major gaps in the accountability. Therefore according to  the American corporate governance intellectual mission takes the form of seeking for Holy Grail in the organization which is a technique that connects ownership and control separation via putting in line the interests of the manager with those of the owners.
According to diffusing ownership and control in the United Kingdom, depends highly on a pattern of companies that are publicly traded to make an argument that, high number of corporations in U.K have a bigger percentage of shareholders and the concentration of ownership in UK firms same as concentration of ownership of firms in other country’s corporations.
Berle and Means predisposes that there is a thinning out in ownership and control; such that a significant portion of individual’s wealth has the interests in huge enterprises with which no one person has a major share. The proof on the ownership and control separation was nonetheless not made out. It is clear that apart from a majority of firms falling out of the Berle and Mean’s theory, there was also others that qualified by attaining the bright line standard which was to describe the control by management. The rest of the management controlled roll comprises of firms where the control locus are uncertain.
The supposition that distinguishing control and ownership, is a turning point of corporate governance in the United States which has been put to too much criticism of late. The paradox is whether conventional wisdom was to be ignored but it seemed it could not be. While there is an argument that by 1900 there was too much dominance of unending capitalism in the U.S to a level that did not match with that of the European countries that were industrialized, there existed various publicly trade US firms. This is because by that time ownership was starting to split from the corporations control especially in the largest firms. Through the trust divisions, banks have currently equity portfolios that are sizeable and representation on boards of different public organizations. Hence therefore it is difficult to observe the pattern changing.
Parkinson’s theory of Corporate Social Responsibility
It is a form of corporate self-governing which is integrated into business model. Corporate social responsibility (CSR) policy operates as an in built in which a firm monitors and ascertains its active conformity with the law spirit, standards of ethics and international wide norms. The main objectives of CSR are to embrace company’s responsibility, actions and promote a beneficial impact through its activities on the surrounding, customers, employees, general society and all other stakeholders. According to Parkinson the theory of social responsibility came into common phenomenon in the late 1960’s and early 1970’s. This was on the formation of the term stakeholders by multinational implying those whom a firm’s activities may have an effect.
Supporters of the theory argued that businesses get a long term gains by transacting their business with a point of view while those who oppose argue that CSR defrays from the fiscal role of business. The rest make arguments that CSR is a way of window dressing, in an effort to perform the role of the State as watchdog of multinational firms. Nevertheless, CSR is entitled to help companies mission as well as to provide guidance to what firms may stands for while promoting the interests of its consumers 
Developing business ethics is one way of applied ethics that establishes ethical norms and morals that can emanate in a business setting. There are different approaches that were observed by Parkinson as principles for responsible investment. These are described below;
Philanthropy approach; which comprise of donations of money and aid to local groups and communities that are impoverished. Some companies do not prefer this approach because of its inability to build and develop skills among the local people. This is opposed to community development which sustains development in the community.
Another approach consists of CSR to integrate CSR strategy straightaway into business plan of a company. For example establishment of fair trade which has been adapted by various organizations as it enhances commitment to the community. The other approach is heightening the corporate responsibility interest which is commonly referred to as creation of shared value . This is based on the fact that social welfare and success of organizations depend upon each other.
The potential benefits to business
The benefits accrued to CSR for a firm usually vary depending on the characteristics of the enterprise. The nature maybe difficult to quantify and as such there are high advocacy for measures to be adopted beyond financial benefits. Parkinson found a correlation between the environmental performance and financial performance. Sometimes business may not look at the short run returns when formulating and establishing their CSR strategy The following are some of the postulates that determine the arguments why businesses engage in CSR;
Human Resources: Through the CSR program firms can be in a position to recruit and retain employees especially in a competitive graduate student market. During interviews, potential recruits normally inquire about the CSR policy which can give an advantage if a firm has a comprehensive policy. This can help develop on the perception of a firm among the staff particularly when the staffs are highly active in the community development and volunteering.
Management of risk: This is a major concern for corporate strategies in which the reputation takes years to develop. Nevertheless, this can be ruined in a few minutes or hours through cases such as scandals in corruption or accidents related to environment. In addition, unwanted attention can be drawn from courts, regulators, media and the government. In building an authentic culture, corporations need to do the right thing to offset the risks associated.
Differentiation of brand: In a competitive market place firms require to have an exceptional selling offer that can distinguish them from their rivals among the consumers. CSR can play a big part in developing customer loyalty which is based on the unique ethical values. Hence a business can benefit more from integrity and best code of practice.
License to operate: At most times, it is argued that corporations are normally keen to avert interference in their transactions through the regulations and taxations. Therefore they would take substantive voluntary steps in convincing the government and the general public that they are concerned with the health, safety, environment and the diversity of the community as good and dependable corporate citizens in respect to the labor standards and environmental impacts.
The role and importance of directors
The directors are appointedon behalf of shareholders to carry out the daily running of the business affairs. They are mediators in the principal agency costs between the shareholders and the managers. In this respect they are directly accountable to the shareholders every year during the annual general meeting where they’re to give an account of the full business report in conformity to the principles of corporate governance . Their role is to ascertain the prosperity of the firm by meeting the appropriate interests. The board of directors must also deal with various challenges and financial issues relating to corporate governance, social responsibility and ethics of corporation.
Periodic meetings must be held by the director board in order to discharge their duties effectively. Their roles include the following:
- Formulating the vision, mission and core values of the firm. The vision is meant to set the momentum for the operations and development of the company. The values are meant to be adhered to throughout the life of the corporation. Organizational goals are to be determined and company policies are also to be set to guide employees and management in effective running of the business.
- The board sets strategies and structure where the SWOT analysis of the firm is considered. This is in relation to external environment. The board prepares the options strategic to the objectives and in line with the vision and mission of the firm. Hence the firms structure from the top management to the subordinate, defines the way the strategies will be implemented.
- The board of directors delegate duties to the management and supervises and monitors the implementation of the strategies and the policies inclusive of the business plan. In this respect they ascertain that internal controls are effective.
- They also command accountability to shareholders and obligations to the stakeholders. This are perfected through constant communication with the owners and the relevant parties of interests. The board on the other hand takes into account the stakeholders interests and tries to balance them to suite other parties. This ensures high support of goodwill amongst the relevant stakeholders. The director’s work for the good of everyone; the company and all the stake holders.
Principles of corporate governance with which the director’s work
The principles that were recommended in the Cadbury and OECD reports revealed the following in good governance
- Rights and shareholders equal treatment where the firms must respect the shareholders rights and help the shareholders in exercising the rights through open communication of information and encouragement in general meetings attendance
- The board and responsibility and roles; where the board requires relevant appropriate skills in understanding and challenging the performance of the management. It also needs substantial size and relevant autonomy and dedication to fully fulfill its obligations and duties.
- Interests of other stakeholders; firms must realize their legal, social, contractual and market driven duties to other stakeholders which consists of; creditors, investors, customers, policy makers, suppliers, employees and the community .
- Ethical behavior and integrity which must be a fundamental necessity in making a choice of corporate and board members. This ensures efficiency and proper code of conduct in promoting healthy decision making .
- Transparency and disclosure; where the firms must always clarify and make all information relevant known to the public and the stakeholders with some level of accountability. The firm must also execute procedures to ensure and protect the integrity of the firm’s financial reporting. Clear and factual information must be accessible to investors on timely basis to enable them make relevant decisions that may be beneficial to the firm.
Mary Stokes argument
Mary Stokes’s argues that a good company reporting is vital as it gives information to owners as well as other outside stakeholders such as creditors, employees and customers. This concerns all the people who may have interests in the company and its transactions and activities. The requirement for information is can be equally balanced against the company’s costs of gathering and publishing it. This also constitutes the costs to the users of the information in searching for what they desire to get. Sharing and disclosing of information comprise of a substantial section of company law. The legislation and legal texts normally underscores to the user of the information, the meaning of the disclosure requirement.
Therefore this is illustrated in the codes of practice and books of rules of different institutions for which the firm may be related to in one or another like the Financial Services Authority. Many people are engaged or involved in the information disclosure which may be released in newspapers, reports, on internet or promotional strategies. The effectiveness of disclosure systems in UK has come into different uncertainty despite the prominence on disclosure requirement. The uncertainty and criticism focuses majorly on the burden of costs complexities and absence of clear dimensions of evaluating performance at the same time poor modes of verifying the process and refusing to give the users of the information with the real information they need.
In determining or pondering the over the disclosure issue, there should be assessment of the objectives of company law and role of disclosure. In understanding this concept, one requires to have full knowledge of the jurisdiction of companies and the company law in communication process. In particular the UK’s disclosure era is part and parcel of a legal system that makes assumption that owner have a centered model of the firm. Mary Stokes provides a description of the different stages of a legal model by stressing on the traditional model which initially took directors of a firm as agents of the firm. Their power of control could at any time be retracted by the owners. At the same time, directors as agents were entitled to accept implementing specification s issued by the principals of the firm who were the owners.
At later times the traditional model was abandoned where the directors were viewed as organs of the firm. The owners no longer issued directives to the directors on what to be done. Nonetheless the model issued power to shareholders to supervise the director’s actions and power to dismiss and appoint directors on the basis of merit. This implied that directors were under the official duty of meeting the interest of the owners. Under no time could they place their interests before the owner’s interests. Mary continues to stress that legal model adopts two mechanisms of ascertaining that directors of a firm adhere to the controls of the shareholders. By use of internal division power in the firm the shareholders are able to appoint and dismiss directors at the same time supervise them while they are in office. Second; is by use of fiduciary duties that expects of them to perform in the best interests of the owners. She makes an addition the collective purpose of legal mechanism is to impel managers and directors to maximize profits for their firm and bar them from maximizing their own interests.
Corporate Governance Law
Moreover, there also exist more beneficial reasons for system of disclosure than the mere avoidance of regulatory intervention. For instance, it could enable investors make more productive decisions concerning proper investment decisions and disclosure could shield them from fraud caused by the managers and directors. In addition, some experts propose that disclosure of information could subject the corporation to democracy hence allowing participants to make decisions that may be influential and more effective to the firm. That more interaction with the disclosure requirements can bring more benefit to the firm due to shared perspectives and perceptions that can build the firm to higher levels of development and expansion. Besides, the participants are able to make judgments and hence connecting accountability and participation.
Corporate governance should be code- based or statute-based
Statute based corporate governance was adopted from the US corporate governance regulation –on responsibilities of the corporation. This was enacted by the United States of America House of Representatives and the Senate. SOA has had great influence on the development and is currently accelerating European Union regulation of governance . There are serious concerns expressed by EU over the United States’ steps they have laid down specifically the unprecedented outreach impact of the SOA for EU firms and EU auditors . EU based firms with US parent firms or subsidiaries that are quoted on the US stock exchange as controlled and monitored by Security Exchange Commission are required to conform to the Sarbanes Oxley Act 2002. In this respect therefore, there was reconsideration of the main concerns by the commission on initiatives on the upgrading of corporate governance .
In response to the recent financial reporting scams, the obligation has been put forth to put into practice for capital markets of EU standards to promote public confidence in the function of audit and the necessity to act in response to SOA. The new contemporary regulatory framework for audit will be in use to non-EU audit firms which carry out the function of audit in connection to companies listed on the capital markets of European Union. In achieving this identity of the EU regulatory advance to the defense of investors and other stakeholders, discussions have been put forth by the commission with the SEC to be precise but also with the major policy maker in the US congress and EU ministers for finance.
Corporate Governance Law
In view of whether to adopt the statute based corporate governance or the code based corporate governance, one must consider the constituents parts of the two Acts; together with the governing bodies and the state of compliance for the corporate governance. Sarbanes Oxley Act is far too complex to be adopted by UK . For instance, section 404 on internal control assessment stipulates that a report to be submitted by the external auditor and management on the efficiency of the company’s financial report internal control. On the other hand, in the combined code it only requires that disclosure of the financial statements according to the principles of corporate governance. This is normally hard to for UK based firms to adopt especially those operating in US. Besides, this must be approved by public company accounting oversight board (PCAOB). This has continued to create conflicts among different industries as to the role of the PCAOB in ensuring internal controls are followed up to date.
The case can be illustrated with a legal challenge (Free enterprise fund V. public company accounting oversight board). This process of legal challenge was filed in 2006 which contested the relevance and constitutionality of PCAOB. The complainant forwarded arguments that due to the fact that PCAOB has regulatory authority over the industry of accounting the officers must be appointed by the president himself and not the security exchange committee. Besides the law did not have the element of severability. Therefore the firm argued that the other part of the law was liable to lack an aspect of unconstitutionality based on judgment considering that one part of the law had judged unconstitutionally. Nevertheless the law allowed to go be discharged from the district court but the decision was held by the court of appeal in 2008.
What’s more, statute based corporate governance criminalizes any violation of corporate governance principles while the combined code does allow to a certain extent that firms issuing the financial reports could adopt to certain accounting procedures so long as the shareholders agreed to it and that any scary of investors was upon the directors and shareholders . Nevertheless, the disclosure requirements were to be adhered to under the code to enhance accountability and responsibilities to the external stakeholders. In regard to disclosure controls the statute based corporate governance has two sections civil and criminal provisions which lack in the code based corporate governance. Though the UK government and the general European Union are considering adopting this, the statute based corporate governance must be revised to suit the European Union based firms. This is due to the fact that the statute based corporate governance is far much complicated or complex to be easily simulated by UK based firms in overnight. Therefore the best governance to adopt is the code based corporate governance.
In view of the discussion above, it is evident that the principal agency cost between the shareholders and the management inclusive of the directors is a broad area that requires careful understanding to mitigate on the negative effects. Managers and directors as discussed, normally pursue interests that align their desires failing to recognize the owners of the business. On the hand, owing to the constant mixture of owners with the business management, several reports were released proposing the separation of the two to avoid exploitation of the consumer or employees. These reports have so far served their purpose in mitigating the principal agency costs only to bring about other concerns relating to which codes to adapt. There is the statute based corporate governance and the code based corporate governance which brings about the conflict between the US based parent firms and UK based subsidiaries. The conflict created is in relation to the mode of corporate governance principles to apply. Nevertheless, as noted in the discussion plans are under way to adopt the best methods of practice that will suit all the stakeholders involved in the US and European Union. Last but not least the role and importance of directors has been described in the process of mediating in between the principal agency costs between the shareholders and the managers. Therefore public corporations cannot be run to serve their own interests in consideration of other stakeholders mentioned in the discussion above.
Corporate Governance Law
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 Khalid Abu Masdoor, Ethical Theories of Corporate Governance. International Journal of Governance, (2011)1 (2): 484-492.
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 Cadbury, Sir Adrian, “Corporate Governance: Brussels“, Institute voor Bestuurders, Brussels, (1996)
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 Clarke, Thomas “International Corporate Governance” London and New York: Rutledge, (2007)
 Moebert, Jochen and Tydecks, Patrick, Power and Ownership Structures among German Companies, A Network Analysis of Financial Linkages,(2007)
 Clarke, Thomas & dela Rama, Marie (eds.) “Fundamentals of Corporate Governance (4 Volume Series)” London and Thousand Oaks, CA: SAGE (2008)
 Clarke, Thomas & Chanlat, Jean-Francois (eds.) “European Corporate Governance”London and New York: Rutledge, (2009)
 Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. the Separation of Ownershipand
Control in East Asian Corporations, Journal of Financial Economics, (2000) 58: 81-112
 Brickley, James A., William S. Klug and Jerold L. Zimmerman, Managerial Economic& Organizational Architecture, (2004)
 Clarke, Thomas (ed.) “Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance,” London and New York: Rutledge, (2004)
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 Monks, Robert A.G. and Minow, Nell, Corporate Governance Blackwell (2004)Monks, Robert A.G. and Minow, Nell, Power and Accountability Harper Business, (2003)
 Low, Albert, “conflict and creativity at work: Human Roots of Corporate Life, SussexAcademic Press, (2008)
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 Feltus, Christophe; Petit, Michael; Vernadat, François, , Refining the Notion ofResponsibility in Enterprise Engineering to Support Corporate Governance of IT, Proceedings of the 13th IFAC Symposium on Information Control Problems in Manufacturing (INCOM’09), Moscow, Russia (2009)
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 Murray, Alan, Revolt in the Boardroom Harper Business (2007)
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 Sapovadia, Vrajlal K., “Critical Analysis of Accounting Standards Vis-À-Vis Corporate Governance Practice in India” (2007)
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Corporate Governance Law
 Tricker, Bob and the Economist Newspaper Ltd, Essentials for Board Directors: An A-Z Guide, Second Edition, New York, Bloomberg Press, (2003, 2009)
 Bowen William and, the Board Book: An Insider’s Guide for Directors and Trustees, New York and London, W.W. Norton & Company, (2004)
 Hovey, M. and T. Naughton, A Survey of Enterprise Reforms in China: The Way Forward. Economic Systems, (2007) 31 (2): 138-156.
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