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Corporate governance is a set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. It includes the relation between a company's management, its board, its shareholders and other stakeholders. Corporate governance provides structures through which the objectives of the company are set and monitoring performance are determined. Good corporate governance would provide proper incentives for the board and management to achieve objectives of maximize the interests of the company and its shareholders. Good corporate governance also would facilitate effective monitoring the management of the company. The presence of an effective corporate governance system helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.
UK's Corporate Governance
The UK has pioneered corporate governance reforms for over a decade by create a framework for corporate governance to the listed companies. Spurred by the Maxwell pension scandal in the 1990s, the government commissioned researchers started to study UK corporate governance standards and tries to improve the system. Foundations laid by the 1992 Cadbury report, the 1995 Greenbury report, and the 1998 Hampel report resulted in the Combined Code Principles of Good Governance and Code of Best Practice (Combined Code). The Code, which applies to UK listed companies, sets out a framework of corporate governance which widely accepted "comply-or-explain" principle that promotes transparency, accountability, fairness, and responsibility. This Code is apply to all the companies listed on the London Stock Exchange's Alternative Investment Market (AIM) but not required all companies to comply with, yet adherence is encouraged.
Combined Code on Corporate Governance which operates on the basis of 'comply or explain' makes UK has developed a market-based approach that enables the board to retain flexibility in the way of organizes itself and exercises its responsibilities, while ensure that it is properly accountable to its shareholders. The UK Corporate Governance Code sets out principles of good governance under the headings of Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders.
Every company must be leaded by a single effective board with members collectively responsible for leading the company and setting its values and standards to achieve the long-term success of the company. It should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company's business. There is no one individual should have unfettered powers of decision. The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role while non-executive directors should constructively challenge and help develop proposals on strategy.
The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. All directors should receive induction on joining the board and should regularly update and improve their skills and knowledge. In the procedures for appointing directors, should be formal, rigorous and transparent procedures. All the appointments and re-appointments have to be ratified by shareholders. The board should undertake a formal and rigorous annual evaluation of its own performance including all its committees and individual directors. All directors should be submitted for re-election at regular intervals, in order to continued satisfactory performance.
Accountability and Audit
The board is required to present a balanced and understandable assessment of the company's position and prospects. The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. In managing risk, the board should maintain sound risk management and internal control systems. The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles to maintain an appropriate relationship with the company's auditor.
Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors' remuneration should be structured as a reward for corporate and individual performance. Performance-related elements of executive director's remuneration are designed to promote the long-term success of the company. It should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. There is no director should be involved in deciding his or her own remuneration.
Relations with Shareholders
It is needed to have a dialogue with shareholders based on the mutual understanding of objectives between board and shareholders. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders is taking place. The board must maintain contact with shareholders to understand their opinions and concerns. The board can use the AGM to communicate with investors and to encourage their participation. All the separate resolutions on all substantial issues can be discuss at general meetings.
The Combined Code on corporate governance is aims to facilitate an effective, entrepreneurial and prudent management in order to deliver the long-term success of company. It cannot make a company which bad management to be good, but it can make a company's management become better than before.
Marks and Spencer's Corporate Governance
Marks and Spencer's objective is to sustained business through consistent, profitable growth and to make sure that their customers and wider stakeholders can always trust them to do the right thing the right way. The governance rules which apply to UK companies listed on the London Stock Exchange are found in the Combined Code on Corporate Governance. (the 'Code'). The Code provides a detailed framework to Marks and Spencer (M&S) in term of how they apply the Code's principles and comply with its provisions.
M&S's Board agrees with the role for boards given in the Code, which has been adopted in their governance framework. The Code provides entrepreneurial leadership to M&S within a framework of prudent and effective controls which enables their company's risk to be assessed and managed. Besides that, the Code helps M&S set their company's strategic aims and ensure the necessary financial and human resources are in place for their company to meet their objectives and review management performance. In addition, the Code also helps them to set their company's values and standards and ensure that its obligations to its shareholders and others are understood and met.
M&S had complied with all Code provisions with the exception that from 1 June 2008 the role of Chairman and Chief Executive has been exercised by the same individual, Sir Stuart Rose. It is noted that this has been out of line with best practice in corporate governance. It was resulted M&S's shareholders concern on it but it is prove that M&S have maintained robust governance while at the same time benefiting to company from having Stuart at the helm. The Board has reviewed and agreed a clear division of responsibilities under the Board structure to ensure a proper division of responsibilities and balance of power. The Deputy Chairman, Sir David Michels, takes joint responsibility with the Executive Chairman for the agenda and the overall Board structure and composition of the Board. He takes the lead on all governance matters, engaging shareholders on their views, chairing the Nomination & Governance Committee and conducting the review of Board performance. To avoid the interest conflict of Stuart's dual role and maximize protection for investors, M&S has appointed Marc Bolland as Chief Executive on 1 May 2010.
M&S also has a balance of executive and non-executive directors to avoid individual or small group of individuals can dominate the board's decision taking. On 3 April 2010 the Board comprised 11 directors: the Chairman, Deputy Chairman, four executive directors and five non-executive directors.
To make sure that all directors receive induction on joining the board and regularly update and refresh their skills and knowledge, M&S's Chairman ensures that the directors receive accurate, timely and clear information to enable them to discharge their duties. Besides that, all the directors have receive regular updates on business performance against the annual operating plan and investment decisions, together with business reports and presentations from senior management at Board meetings. Directors are encouraged to update their skills, knowledge and familiarity with the Group through their initial induction, on-going participation at Board and committee meetings, meeting employees at store locations and elsewhere and are kept up-to-date on the views of customers and shareholders.
M&S's long term philosophy is to attract and retain leaders who are focused and encouraged to deliver business priorities within a framework that is aligned with the interests of the company's shareholders. They are implement performance-related elements of remuneration to form a significant proportion of the total remuneration package of executive directors in order to attract, retain, and motivate them sufficiently. Non-executive directors are paid a basic fee with additional fees payable for acting as Committee Chairman or Committee member. These fees are neither performance related nor pensionable. Non-executive directors do not participate in any of the Company's share schemes nor the Annual Bonus Scheme.
Accountability and Audit
M&S's aim is to build a sustainable business through consistent, profitable growth and to make sure that their customers and wider stakeholders can always trust them to do the right thing. They recognize that creating shareholder value is the reward for taking acceptable risks. The Board has overall accountability for running the business effectively by making sure risks are managed and it's all under control. Internal controls and risk management was designed to limit the chance of failure to achieve corporate objectives. Independent assurance is provided by the external auditors and internal audit, who present their findings regularly to the Audit Committee. The Audit Committee is responsible for monitoring the risk process to ensure the risk of the company is under control.
Relations with Shareholders
To ensure that a satisfactory dialogue with shareholders takes place, M&S had more contact with a wider group of investors and shareholder representative bodies in AGM. This active dialogue has enabled them to feedback a wide range of views to the Board and develops a better understanding of mutual objectives. This ongoing dialogue will continue to be a key focus going forward for M&S.
The Code gives shareholders confidence that a company is well run because there is transparency in the way the board makes its decisions. Besides that, it establishes what is known as the "comply or explain" attitude. Companies that come under its rule must comply with, or explain why they have not complied with, its principles and requirements. By this rules, companies have even greater flexibility in taking decisions whether comply with the Code or explain the reasons why they out line from the requirements.
However, companies which have compliance with the Code complain that they are spending a disproportionate amount of time on corporate governance are probably suffering from poor chairmanship. To comply with the Code, companies need to comply with numerous corporate governance requirements, this will results an expensive expenses and can deflect directors from their main priority due to run the business in the best interests of the shareholders. Moreover, too much supervision could bring a lack of independence to the way a company runs its business.
US's Corporate Governance
Although the OECD's first Principle of Corporate Governance (published in 1999, revised in 2004) were very much in the spirit of Cadbury, but US went down a rather different route from the UK's 'comply or explain' principle. While the UK had been taking steps to boost the strength and independence of the executive and non-executive directors and had been forcing listed companies follow the route of separating the roles of chairman and CEO, the US still continued to place almost full power in the hands of the CEO. In the vast majority of US listed corporations, the company continued to be led by a single person who was both chairman and CEO, and who picked his or her own board members on whatever criteria seemed individually appropriate. CEOs tended therefore to appoint outside directors who were likely to contribute to the success of the company and not likely to disagree with or challenge their leader. The spectacular financial collapses like Global Crossing, Tyco, WorldCom and Enron were given warn to US that their corporate governance system was not efficient. The Sarbanes-Oxley Act of 2002, which radically overhauled the US system of corporate governance which particularly focusing on the financial aspects.
The Sarbanes-Oxley Act was a set of regulations that more far-reaching, draconian and its detailed application is a significant step forward for corporate governance. It instituted what might be called the 'comply or die' principle, by which those corporations that fail to comply with its requirements face significant corporate financial sanctions as well, potentially, as criminal sanctions for their directors and officers. SOX increased the level of scrutiny of public companies especially it makes CEOs and CFOs personally accountable for any financial misstatements. SOX compliance is a state, not an event. It requires continuous monitoring and reassessment of financial risks and controls to prevent any loopholes that could potentially lead to misstated financial statements.
The key provisions of SOX corporate governance are stated under few sections.
Section 301- public company audit committees' regulations.
Under this section, all listed companies are requires to have an audit committee, which is entirely composed of independent directors and is supposed to work as a watchdog for the actions taken by the Board. Furthermore the audit committee is directly responsible for the appointment compensation and oversight of any outside auditor.
Section 302 -a set of internal procedures designed to ensure accurate financial disclosure.
The signing officers must certify that they are responsible for establishing and maintaining internal controls and have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared. The officers must have evaluated the effectiveness of the company's internal controls as of a date within 90 days prior to the report and have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date. External auditors are required to issue an opinion on whether effective internal control over financial reporting was maintained in all material respects by management. This is in addition to the financial statement opinion regarding the accuracy of the financial statements.
Section 401 - the regulations about disclosures in periodic reports.
All the listed companies are required to disclosure all their material off-balance sheet items.
Section 404- Management Assessment of Internal Controls
All the listed companies' management and external auditor are requires to reports on the adequacy of the company's internal control over financial reporting (ICFR). This is the most costly aspect of the legislation for companies to implement, as documenting and testing important financial manual and automated controls requires enormous effort. Under this section, management is required to produce an internal control report as part of each annual Exchange Act report. The report must affirm the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. The report must also contain an assessment, as of the end of the most recent fiscal year of the Company, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Both management and the external auditor are responsible for performing their assessment in the context of a top-down risk assessment, which requires management to base both the scope of its assessment and evidence gathered on risk.
The SOX Act certainly enhances accountability levels for directors, officers, auditors, security analysts and legal counsel who involved in the financial markets. It would have far reaching implications worldwide particularly in areas of audit. It applies to all companies with are listing in the US. The key aspect of the SOX Act is that it makes it clear that a company's senior officers are responsible for the corporate culture they create, and must be faithful to the same rules they set out for other employees.
Enron's corporate governance
On 2 December 2001, Enron Corporation, the seventh largest publicly traded corporation in the United States declared bankruptcy. The stock waves caused by this catastrophic corporate collapse transformed the corporate governance environment not simply in America, but throughout the rest of the world. The US Senate investigations found that Enron's collapse is due to their bad corporate governance especially the role of the Enron Board of Directors in Enron. The Enron Board of directors failed to safeguard Enron shareholders. He allowed Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off the book activities, and excessive executive compensation.
High risk accounting
The Board of Directors knowingly allowed Enron to engage in high risk accounting practice.
Inappropriate conflicts of interest
Despite clear conflicts of interest, the Enron board of directors approved an unprecedented arrangement allowing Enron's chief financial officer to establish and operate the private equity funds which transacted business with Enron and profited at Enron's expense.
Extensive undisclosed off-the-books activity
The Enron board of directors knowingly allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to Enron's collapse.
The Enron board approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enron's 2000 annual bonus and performance unit pans, and failed to monitor or halt abuse by board chair and chief executive officer Kenneth Lay of a company-financed, multi-million dollar, personal credit line.
Lack of independence
The independence of the Enron board was compromised by financial ties between the company and certain board members. The board also failed to ensure the independence of the company's auditor, allowing Arthur Anderson to provide internal audit and consulting services while serving as Enron's outside auditor.
As a conclusion, the failure of any Enron Board member to accept any degree of personal responsibility for Enron's collapse is a telling indicator of the Board's failure to recognize its fiduciary obligations to set the company's overall strategic direction, oversee management, and ensure responsible financial reporting. The Enron Board failed to provide the prudent oversight and checks and balances that its fiduciary obligation required and a company like Enron needed. By failing to provide sufficient oversight and restraint to stop management excess, the Enron Board contributed to the company's collapse and bears a share of the responsibility for it.
The U.S. system of corporate governance had an overwhelmingly positive, albeit burdensome, impact on the accounting profession. The industry is expanding and more jobs are being created. Furthermore, accounting firms are producing more credible, accurate and reliable financial statements to meet the reporting requirements. The appropriate measures are being taken to prevent future debacles and scandals thus fulfilling the accountant's superpower of protecting the investing public and restoring faith in the profession.
However, stepping in line with Sarbanes Oxley requirements, training is necessary in order to effectively carry out the long list of must-do's involved. In addition, numerous software providers have rolled out advanced programs that specialize in the automation routine compliance measures. Indeed, training and compliance software are the most cost-effective way of becoming Sarbanes Oxley compliant, and, as mentioned earlier, lack of compliance with Sarbanes Oxley requirements can pose a dangerous risk to corporate managers.
A Global View of Corporate Governance: One Size Doesn't Fit All
There are still substantial practical differences between corporate governance frameworks in different jurisdictions. For example, the US corporate governance framework has a far higher degree of compulsion about it than the UK's 'comply or explain' doctrine, so "one size fit all" is not possible. Corporate governance evolves and improves over time. Globally, organizations in different sectors are operated in diverse environments. Culture, regulation, legislation and enforcement are all different. Therefore, for corporate governance, what is appropriate for one type of organization will not be appropriate for other organizations from different countries.
A number of common themes are emerging from the empirical work. The first is the wide diversity of approaches to corporate governance which are to found at national level poses to the transnational convergence of corporate governance practices. This is the barrier of the concept "one size fit all" to be success. A 'one size fits all' approach to governance imposes disproportionate costs and times on the companies which lack of resources. To apply one size of corporate governance to the whole world, flexibility and an intelligent approach to compliance is essential. As a conclusion, corporate governance and risk management will never be fully evolved and may always be improved. It is vital that requirements do not create a straightjacket that prevents innovation and improvements in the way organizations conduct themselves in the future.