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In a business context, corporate governance is defined as ' the set of processes, ethics, cultural, policies, such laws and institutions which effects the operations of the organisations, and the way it is controlled. It focuses on the relationship between stakeholders and the goals which are mean to be achieved. This includes the two different types of internal and external stakeholders. Internal stakeholders include board of directors, executives, and employees. Their action has a direct effect on the operations of the organisation and the way it is run. The stakeholders are the one which exists in the external environment of the organisation. This includes shareholders, debtors, creditors, suppliers and external customers. It also focuses on the nature and responsibility of stakeholders within the organisation, and mechanisms in place that reduces the principal-agent problem.
Another related issue to corporate governance is that it also focuses on the impact it has on the economic efficiency with a great emphasize on welfare of the stakeholders.
Since the economic crash in 2001, when many big giant corporations collapsed due to accounting fraud, many corporations have transformed their corporate practices.
Regulatory requirements that shape the Corporate Governance
A committee was formed back in May1991 by Financial Reporting Council, The London Stock Exchange and the accountancy profession. It was known as Cadbury Committee. A report was later in 1992 published by committee popularly known as Cadbury Report., however its actual title was Financial Aspects of Corporate Governance. The reason this report was published because of the lack of trust and confidence by the investors in the listed companies in LSE. This was due to the financial collapse of two major companies, one a wallpaper group Coloroll and Asil Nadir's Polly Peck consortium. The Cadbury Report sets out the recommendations on the arrangements of company boards and accounting systems to eliminate the risks and failures related to corporate governance. Some of the points or recommendations covered under Cadbury Report are:
Shareholders will have the right to directly question the sitting Chairs of Audit and Remuneration committees
Shareholders will get a representation from a senior non-executive director in cases CEO and Chairman are combined.
There will be a clear division of responsibilities at the top, so that position of Chairman of the Board will be CEO
The board will have the external directors unlike internal
An Audit Committee including three senior non executive directors will be appointed by the board
The Report was given the legislative position, and LSE was required to check the listed companies to comply with the report and explain their corporate governance and accounting system.
Later in 1995 another report following the Cadbury Report was published by Confederation of Business and Industry- UK. It carried on the points laid by Cadbury Report and addressed the growing concern about the level of director remuneration.
To make things more regulatory and legislative, in 1998 a revised corporate governance system was introduced. The aim of the committee was to address the codes found in Cadbury Report and revise it. It raised the whether the code has achieved its purpose. Hampel noticed that the present governance system was still effective enough. The report further harmonized and clarified the codes mentioned in Cadbury and Greenbury Report. It states that:
'The single overriding objective shared by all listed companies, whatever their size or type of business is the preservation and the greatest practical enhancement over time of their shareholders' investment'.
In 1999 another code was published to revise the old corporate governance system. The committee chaired by Nigel Turnbull from The Rang Group plc, published the new guidance policy titled as ' Internal Control: Guidance for Directors on the Combined Code'. It is also commonly known as Trunbull Report.
This report requires directors to keep good internal controls within the organisations and have auditing committees to ensure the quality of financial reporting, which makes them easy to identify any fraud before it becomes a problem.
In 2003 Derek Higgis chaired a committee commissioned by the UK government. On 3rd January 2003 Higgis Report was published under the title of 'Review of the role and effectiveness of non-executive directors. As the titled of the report says, it reviews the role and effectiveness of the non-executive directors and that of auditing committees with in organisations, and aims to improve the existing system, which is known as Combined Code.
Later the same year, another report following the Higgis report was published in UK. It focuses on the independence auditors had in the current code, which led to the collapse of Arthur Andersen and Enron in US back in 2002.It adds a point to the existing Combine Code, which addresses the auditors in organisations to place in an automatic robust or safeguard system in the corporate governance structure to preserve his own independence.
Impact of Regulatory requirements on corporate stakeholder's interest in an organisation
After the collapse of major giant corporations in US in 1992, shareholders lost their trust in the industry. To keep things on the move, Cadbury Report was published. It required organisations to have auditing systems in place which will identify any kind of fraud of problem before it happens. This was in direct favour of the shareholders, who are also the stakeholders of the organisations. However this report followed an approach 'comply or explain'. Hence companies were under no obligation to enforce the code in their organisation.
Since the report was accepted by the majority of the corporations, which includes, 90% of UK listed companies and 50% of US listed companies. The implementation of Combine Code eliminated the culture of personality surrounding and discouraged the domination of boards and companies by those whose agenda went unchecked very easily. In one of the recent cases, Sir Stuart Rose at Marks and Spencers, who combined the two codes, and despite his stellar performance M&S shareholders voted against him continuing in both jobs by margin of almost 38%.
Another impact it had on stakeholders was that, it focused on the power of senior-non executive directors, who very often sits the board meetings, and they were going to represent the shareholders. They were not responsive to shareholders in a limited time scale.