An increasingly high demand of improvement has been noticed in corporate governance over the recent years, due to the criticism of executive directors as a result of certain corporate failures which have occurred over the past twenty years. Such financial scandals just to mention a few are the Enron, Worldcom, Parmalat, Nothern Rock, Barings Bank, Bank of Credit and Commerce International (BCCI). The series of such scandals has forced the requirement for constant reform in how a firm is managed and controlled by the directors and the shareholders. It is thus clear that the need for effective and efficient corporate governance framework is high in demand of companies and other organisations especially in today's ever increasing rate of innovation and the developing complexity and sophistication of business plans and financial transactions. The requirement for appropriate governance structure generated the preparation of numerous conventions such as the Cadbury (1992), Greenbury (1995), and the Combined Code appointed by the Hampel committe (1998). Firstly this report will indicate the core fundamentals of corporate governance and agency theory. Moreover an analysis of the degree to which and if at all the combined code of best practice has supported the improvement of corporate governance and agency concerns in the last two decades amoung UK listed companies is undertaken.
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"Corporate governance quotes on the way in which a company is directed, and the laws influencing the certain control. Moreover it involves by the laws relating to the configuration of firms, the regulations established by the firm itself, and the structure of the firm. The corporate governance construction designates the association, and the distribution of rights and authority, among the board of directors, managers, workers, and shareholders. Thus its basic concern is to ensure the policy and measures that are undertaken for corporate transactions. Corporate governance grants the configuration of how the firm's aims are appointed as well as the procedures of supervising and achieving them. According to this the directors and managers of the firm should operate in the interests of the business and its shareholders and employees. Corporate governance also confirms the means by which managers are held accountable to capital providers and workers for the use of assets. The current progress in the economic sector indicates that a significant part of the governance framework of substantial business organisations is the board of directors. Therefore the board of directors which is able to hire, fire and compensate senior management teams is responsible working out and resolving disagreements of interest between the decision makers and risk bearers of a certain corporation."
"The agency theorists Jansen and Meckling (1976) quote that a principle (the employer) and agent (the employee) relationship can be classified as an agreement under which one or more persons (principles) appoint another person (the agent) to execute a certain task or service on their behalf which involves assigning various decision making and action taking authority to the agent. These may include organisational and capital structure, remuneration policies, accounting techniques and attitudes toward risk taking of a firm. A common example is when a client (principle) might hire a lawyer (agent) to defend his case. In many cases such associations might endure a conflict of interest between the principle and the agent and that the agent will be motivated to pursue his own goals, which means that the goals of the principle are rarely achieved. Such a conflict is referred to as an agency problem."
THE EVOLUTION OF CORPORATE GOVERNANCE OVER THE LAST TWO DECADES:
The Cadbury Report (1992):
"This report was declared in December 1992 by the Financial Reporting Council lead by Sir Adrian Cadbury. It focused on the performance and benefits of boards and had as an outcome the simplicity and responsibility in boardroom arrangements. Moreover this report proposed that the board should consist of three non executive directors and that the position of the chairman and chief executive held by different individuals. Finally the Cadbury report provided a code of best practice including instructions for behaviour and disclosure. The assignment of non executive directors and an audit committee to supervise the control of financial reporting and the separation of the position of the chair and chief executive were the key suggestions."
The Greenbury Report (1995):
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"In July 1995 a study group directed by Sir Richard Greenbury was reported going further than the Cadbury report previously mentioned in some significant respects, such as improving the section regarding executive income. The propositions of this report were the establishment of a remuneration committee to decide the director's remuneration and a nominations committee to supervise recent appointments to the board."
The Hampel Report (1998)/The Combined Code:
"In 1998 a British corporate governance report was composed with the title 'Final Report: The Committee of Corporate Governance' which was named after Sir Ronald Hampel who lead the certain committee. The Hampel report is widely known as the combined code as it combined and reassessed the guidance given in the Cabury and Greenbury reports that were described above and was therefore added to the Listing Rules. The certain report proposed the enhancement of communication with shareholders and restoring the balance amongst implementing controls and permitting firms to come up with their own ways of implementing corporate governance principles. The combined code was revised in 2003 to include aspects of the Higgs and Smith report. Moreover the certain report was replaced by the improved code in November 2004."
iv. Corporate governance noticed remarkable progress following the release of the combined code in 1998 by the Hampel committee by undergoing a number of reviews, reports and legislation, these include just to name a few:
Turnbull Report (1999):
"A working party led by Nigel Turnbull was established to provide assistance for companies in reporting how they had applied the combined code and its principles. The report covers operational and financial controls based on high level principles of good governance rather than rules or detailed checklists."
Myners Report (2001):
"Paul Myners was commissioned by the Treasury to review institutional investment in the UK. The certain report identified a series of distortions to effective decision making by the institutions and made a number of proposals to tackle them."
Sarbanes-Oxley Act (2002):
"The act requires the CEO and the CFO registrants to confirm that the financial statements fairly represent the financial decisions. They also need to test and document the effectiveness of controls against financial reporting fraud and to make a public statement on the effectiveness of internal controls."
Higgs Report (2003):
"The review was led by Derek Higgs and the main points were to amend the combined code, following the Hampel report for NEDs to take on a more demanding and important role on company boards."
Smith Review (2003):
"Sir Robin Smith chaired an independent group, which reviewed the clarification of the role and responsibilities of audit committees."
Combined Code of Corporate Governance (2004):
"The code aims to achieve more open and rigorous procedures for the appointment of directors and imporoved induction and development of NEDs. The code also calls for formal evaluation, of boards, committees and individual directors. It takes a 'comply and explain' approach to encourage best practice in corporate governance."
THE INFLUENCE THE COMBINED CODE OF BEST PRACTICE HAS HAD ON IMPROVING CORPORATE GOVERNANCE AND AGENCY CONCERNS IN RECENT YEARS :
"Modern corporate governance in the UK was established in the early 1990's in the turnout of corporate scandals such Enron, Worldcom, parmalat, ect. Therefore due to these scandals the UK government supported the market to develop a solution to moderate the risk of more scandals taking place and to improve market confidence. This led to the advancement of the combined code, the foundation of the 'comply and explain' concept of corporate governance."
"The effectiveness of the combined code of best practice was put to use after the rise of major corporation scandals such as the:
The Enron scandal in (2002) which turned out to be the largest corporation bankruptcy in the history of American business. The US government thus
initiated the Sarbanes-Oxley Act to enhance the accountability of auditing firms. The certain act proposed the implementation of internal controls, the strengthening of the responsibility of the audit committee, the autonomy of the non executive directors and the obligation to which the directors clearly identify the blame for the company's financial reports.
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Major UK firms of the London Stock Exchange are obligated under Listing Rules to state how and if they have practiced the core principles of the Combined Code in their annual, reports."
Through the research and analysis of the current report it is clear that the combined code of best practice has assisted to improve corporate governance and agency concerns in the last two decades amidst the recent scandals. With the combined code put to its full potential over the last twenty years it seems that there is almost a belief that obeying the Code in itself forms good governance. The code however is of necessity limited to being a guide only in general terms to principles, structure and processes. It is practically impossible to develop a system of governance and control which will completely please the diverse obligations commonly insisted of it. The effectiveness of the code is attained if boards think deeply, thoroughly and on a continuing basis about their overall responsibilities and the implication of these for the roles of their individual associates. Finally corporate governance and the combined code of best practice should be means to aid long term company achievements. Therefore the devotion to correct procedure should be avoided due to the fact that the main purpose of the company is lost in the long run.