The Uk Method Of Corporate Governance Accounting Essay


Corporate governance is the system in which companies are directed, controlled and held to account. There has been a development in the UK during the last one-and-a-half decades on a distinctive framework of corporate governance. The method adopted by the UK for corporate governance, as per Roger Barker's paper published on the Institute of Directors website in 2008, (A) is a good balance between self-regulation and law.

The UK method of corporate governance revolve around the Combined Code and the "comply or explain" principle and has attained with a passage of time a position in which it is broadly "fit for purpose".(A)

The assessment carried out by a 2003 International Monetary Fund (B) observed that the UK is among the leading countries internationally for setting standards in the field of corporate governance including public disclosure practices basing on its ability to promote high standards of governance without stifling the wealth creation process. It is observed that the UK method of corporate governance is less costly and more flexible emphasizing on board engagement with shareholders and their compliance with a voluntary combined code of best practice contrast to the legislatively based corporate governance model of the United States. (A)

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The UK method of corporate governance is primarily governd by the companies Act, the combined code issued by the Financial Reporting Council (FRC), and the Listing Rules issued by the Financial Services Authority (FSA) (B) The UK Companies Act 2006 was judged in 2009 by a U.S. Country Commercial Guide published by the Department of Commerce (DoC) as the law which simplifies and modernizes the present rules rather than make any dramatic shift in the company law regime.(B)

Alex Kay, in the International Financial Law Review says that the Companies Act 2006 provides for the codification of directors' duties that were, in the past, dictated by the principles established in case law. (B) As per Kay, the law has been made more consistent, certain and accessible with the incorporation of seven general duties which contribute in increasing the directors' understanding and knowledge of their duties.




The basis of the Combined Code about Corporate Governance on a "comply or explain" principle can trace its origin back to early 1990s when the UK witnessed the debackles of the Robert Maxwell pension fund and the Bank of Credit and Commerce International (BCCI) specially the controversy about directors' pay, which caused corporate governance to be in the

public eye. As a result, there were strong recommendations made in the "Cadbury Report" (C)for the separation of the role of the chief executive and chairman, for having a board with balanced composition of executive and non-executive directors, non-executive director's selection processes, stronger internal controls and transparency of financial reporting. The "Greenbury Report" (D )was made in 1995 providing directors' pay and share options. The Cadbury and Greenbury Reports were

merged in 1998 to form the Combined Code(L ) which could be applicable to all listed companies.

However, after the scandals of the Enron and WorldCom in the US, there was further updating in 2003 having the recommendations regarding the role of non-executive directors given in Higgs report and the audit companies role provided in the Smith report. In 2003, the FRC got the responsibility to maintain the Code, and minor changes were incorporated in subsequent years, however, with the latest being made in 2008. There were weaknesses observed in the implementation of the Code by the Barker and he pointed out that only10% of the FTSE 350 companies fully follow in all respect of the Combined Code and thus all those companies not fully compliant with all aspects of the Combined Code must explain non-compliance in their annual reports .(A) In the present economic crisis the FRC has made another review, during March 2009,

, as "the effectiveness of the Combined Code and the 'comply or explain' mechanism are being tested to a greater extent than under the previous, relatively benign conditions."

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The FSA in June 1998 satrted provisional operations and the Financial Services and Markets Act was passed in 2000, and became effective with effect from December 1, 2001.

At the very initial, the FSA started the activities of previous nine regulators/government departments. They were incorporating the Securities and Investment Board, the Securities and Futures Authority, and the Investment Management Regulatory Organization. The FSA, since then has assumed greater responsibility, including the UK Listing Authority (UKLA). There are eleven principles(M) that include corporate governance rules which apply to the firms regulated by the FSA.

Initially, the FSA assumed the activities of nine previous regulators and government departments, including the Securities and Investment Board, the Securities and Futures Authority, and the Investment Management Regulatory Organization. Since then, the FSA has accumulated greater responsibility, including incorporating the UK Listing Authority (UKLA). The FSA's eleven principles include corporate governance rules that apply to firms regulated by the FSA; but they are not applicable when the matter in question falls under the firm's Home State regulator under EC Directives. However, the assessment does not address the UK's compliance with this principle.

(C )

(D )



According to the Barker paper of 2008, the key component in the UK method of corporate governance is for having constructive dialogue between companies and shareholders. In this regard,

the Combined Code states that, "the board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place" (Main principle combined code - D.1).

In addition Myners (2001) and Higgs (2003) reports were initiated, addressing the weaknesses present in the institutional investors capabilities. As regords to corporate social responsibility, the 2008 Barker report (A) notes that the companies since 2005 are required for reporting in the annual

business review about non-financial issues. This was the requirement of the EU Modernization Directive(N) which is implemented through the Companies Act of 2006. This was noted by the Barker that there is a requirement for introducing corporate social responsibilities into the Combined Code.(A)

The Barker carried out the comparison of the UK and the US in his 2008 paper, regarding shareholders rights and says that as per the company law of the UK "shareholders have comparatively extensive voting rights as compared to US shareholders, including the right to appoint and dismiss individual directors and, in certain circumstances, to call an Extraordinary General Meeting" (p. 4)(A). The company law also provide various requirements as regards to the AGM,(O) containing the provision of information for shareholders and having arrangements for voting on resolutions.

In the UK, the Listing Rules (it must be followed by companies) provide reinforcement to the legislative framework which are supervised by the FSA. There is also a requirement under the Listing Rules to put all major transactions to a vote by the shareholders and also require some information to be disclosed to the market. In this regard there is a formal requirement for the provision of the corporate governance statement by the companies in the annual report and explaining the way the company has applied the Combined Code.

If the companies are incorporated abroad and listed in the UK are under obligation for disclosing how their domestic governance practices differ from those given in the Code. As regards to the governance of remuneration is concerned a significant reform were introduced with the directors report in 2002 which made a requirement by the legislation for shareholders advisory vote on the issue of remuneration. "It was believed at the time that this would engender significant engagement between boards and shareholders over remuneration" (p. 9)(A)

The UK method of corporate governance provide that in order to enhance economic growth, improve competitiveness, and increase the investor confidence, "Every company should be headed by an effective board, which is collectively responsible for the success of the company." (Main principle A.1 - Combined Code 2003) The Code adds: "the board's role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed" (Supporting Principles A.1 - Combined Code 2003)

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The Barker report provide that the UK companies having a unitary board which combines "a monitoring function - geared to the interests of shareholders -- with a strategy-setting and business advisory role within a single institutional structure" (p. 6) (A) In order to have proper command and control "The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board"(Code provision A.2.1 - Combined Code 2003)

The Barker report further added that the Combined code's recommendations in the area of independence are far-reaching: "the board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board's decision taking." (Main Principle A.3 - Combined Code 2003)