A statutory response to Corporate Governance: A Critique - Compare and contrast UK and USA responses to Corporate Governance
My dissertation will focus on the examination and the comparison of the corporate governance practices followed in UK and USA. The extensive reforms that have taken place in the particular sector have led to the development of many doubts regarding the effectiveness and the credibility of the corporate governance systems applied on these two countries. For this reason, the examination of the particular issue is considered to be really valuable offering to researchers and managers around the world the chance to understand the various aspects of corporate governance and align (where possible) their business strategies with the relevant corporate governance principles applied on each specific market (referring to the cases of UK and USA). Moreover, this study could help to the identification of any potential weaknesses of the corporate governance policies applied on UK and USA suggesting appropriate reforms on the relevant rules.
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Business activities around the world have often caused the interest of governments within the particular states. The reason is that all parts of these activities need to be appropriately regulated in order to offer adequate and effective protection to the stakeholders and the public in general (referring mostly to protection from severe financial losses that can threat the viability of the company but even the level of the development of the local economy – when the firm under examination is a well established one, eg Enron). However, because there are many differences in corporate structure internationally, it is necessary for legislators to each specific state to try to adapt the legal principles that are related with business activity with the social and cultural characteristics of each particular state; the size of the firm and its culture should be also taken into consideration. The particular issue was examined by Douglas et al. (1989, 440) who noticed that ‘differences in environmental conditions in different country markets, in terms, for example, of market size and growth, rate of technological change, or barriers to entry, may also lead to differences in strategy’. In other words, corporate activity is a complex network of actions and initiatives that need a careful review and close monitoring by the governmental authorities in order to ensure the safety of the transactions without influencing the development of the various corporate projects.
As noticed above, the dissertation will focus on the examination of a specific aspect of corporate activity: the corporate governance. The latter can refer to a series of elements within a particular organisation starting from the principles that should be applied to the governance of a firm up to the relationships between the employer (board of directors) and the employees. On the other hand, globally two major corporate governance systems are recognised: the liberal form of corporate governance (UK and USA) in which the interests of shareholders are considered to be the major priority for legislators when developing laws related with business activities. In accordance with the coordinative model (accepted mostly by Europe and Japan) the interests of other participants (in the corporate activities) like employees, customers and suppliers are considered to have a crucial role in the formulation of the laws regulating business activities. This study will refer primarily to the corporate governance schemes applied in UK and USA. For this reason, the corporate governance system of these two countries will be analytically presented highlighting the potential differences and also the advantages of each one of them within the modern market.
From another point of view, the examination of the various aspects of corporate governance cannot be achieved without the analytical presentation of the characteristics of corporate governance through an appropriately customised definition. In this context, it is stated by Buck et al. (2005, 42) that ‘corporate governance and governance institutions in general terms are concerned with the means by which a firm's stakeholders control the decisions of senior managers; these stakeholders can include shareholders, executive directors, employees who are not executives, customers, creditors, suppliers (including banks as suppliers of credit), competitors, and the State’. From another point of view, Pedersen (1999, 45) supported that ‘corporate governance - the mechanisms by which companies are controlled and directed - is a complex subject that consists of owner-manager relations, stakeholder relations, board structures and practices, management compensation, capital structure, company law, and other variables’. Both the above definitions present the particular aspects of corporate governance within the modern market; no differentiation in corporate structure seems to be made in accordance with the principles of the state of activity (or the state of origin). On the other hand, the study of Fort (2000, 829) led to the conclusion that ‘corporate governance can be described as the top management process that manages and mediates value creation for, and value transference among, various corporate claimants in a context that ensures accountability to these claimants’. In accordance with the above definition the development of the various aspects of corporate activities is decided by the firm’s managers; the intervention of the state is rather limited. Indeed, the increase of the power of top management in modern businesses around the world is also highlighted by the literature and the empirical research. In a relevant report it is noticed that ‘the principal weakness of corporate governance today is the excessive concentration of power in the hands of top management; rebalancing or equalising this power is a prerequisite for controlling management fraud and promoting accurate financial reporting’ (CPA Journal, 2008). The above described concentration of power can have severe consequences for both the stakeholders and the public in general. In the case of Enron the concentration of power in the firm’s top managers led to the unexpected collapse of the firm and the development of severe turbulences in American economy.
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Corporate governance – general aspects
Firms that operate within the modern market have to face a series of challenges related with both their internal and external environment. In this context, it is supported by Wooldridge et al. (2001, 17) that ‘the main challenge for companies in a global economy is to situate themselves in various centers of excellence and weave together different centers of excellence into a global production network’. From a different point of view, Gooderham et al. (1999, 507) noticed that ‘despite their very different assumptions, both rational and institutional explanations of organizational structure and management practices predict similarity among firms that operate in the same industry within the context of a simple country’. In other words, the regulation of business activities today can be effective only if it takes into consideration the various aspects of these activities as they are formulated within the modern market – taking always into consideration the changes in the needs of the firm’s shareholders but also in the needs of the stakeholders. On the other hand, it is clear that extensive differentiations can be observed in the methods of corporate governance applied to modern firms in accordance with the social and cultural characteristics of these firms but also the social and cultural context of the country in which the firms’ operations are based.
The theoretical and empirical research has proved that significant differences can be observed in all aspects of business activities in accordance with the social and cultural characteristics of a specific region – where business activities are mainly developed. The differences mentioned above can refer to specific management issues or they can refer to all business context. In the case of British firms, Scullion (1994, 86) noticed that ‘very few British companies can claim to have a truly international top management team’. Other issues of corporate activity may be differentiated under the influence of the social and cultural trends applied on a specific country/ region.
In order to understand the importance of corporate governance for the development of the business activities, we should refer primarily to a clear description of the interests existed within any corporation: the stakeholders from one side and the shareholders from the other. Regarding this issue, it is noticed that ‘stakeholders, broadly defined as society as a whole, are interested in the collateral benefits derived from the success of the enterprise, such as the abundance of a product or a service, a clean environment, or a general rise in the standard of living; stockholders have a dual interest in the success of the enterprise: direct interest as a reward for their investment, and collateral benefit as stakeholders’ (CPA Journal, 2008). The conflict of interests of these two sides can lead to the development of severe turbulences within the organization. On the other hand, in firms that the interests of both these sides are protected it is very likely that there will be no severe problems in the communication and the cooperation between these parties towards the increase of the firm’s performance.
It should be noticed that the principles of corporate governance are primarily stated by the governmental authorities (referring to the firms of a particular country). Apart from these orders, the international community can intervene in the business activities presenting a series of standards that should be met in the corporate activities worldwide. OECD is a well known international organization that provides appropriate solutions to a series of issues related with international business activities. The specific organization has set several rules regarding the various aspects of corporate governance. In accordance with these rules: ‘’all shareholders should be treated equally; insider trading and abusive-self dealing should be prohibited; capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed’ (OECD, 2004, 18-19). It is clear from the above rules that international organizations can set rules regarding business activities around the world; however these rules can be characterized rather as ‘principles’ of commerce being similar with the ethics held in corporate activities worldwide.
Corporate governance in Britain
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In the case of Britain, the regulation of business activities is realized through the application of a series of legislative texts and orders. The history of business activity in the particular country was examined by Pedersen (1999, 45) who noticed that ‘the industrial revolution took its beginning in the United Kingdom more than 250 years ago; therefore, the hypothesis of greater differentiation in the early industrialized nations than in later industrialized nations can be tested by examining the extent to which the corporate governance structures of U.K. firms are more or less similar to the governance structures of firms in other nations’. In other words, Britain is a country with a significant history in business activities. The importance of the latter in the economy should be considered as extremely high. For this reason the legislator pays a significant attention to the development of the appropriate legal framework for the regulation of the various aspects of corporate governance. The above assumption is in accordance with the view of Kay (1995, 84) who supported that ‘British statute law is virtually silent on how corporations are to be organised; since the corporation is regarded as a creation of private contract, obligations on companies are mainly there to prevent abuse of the privilege of limited liability, and concern formal matters such as registration and audit’. Because of the above phenomenon, additional legislative texts (as described below) have been introduced and applied in order to support the effective regulation of all corporate governance in British firms (foreign firms that operate in Britain may have the right to claim the application of the laws of their country of origin – it depends on the law applicable on each case taking into account the firm’s articles of association but also the legislation of the country of origin and the country of operations). However, it could be noticed that the British statute law recognizes to the firm’s leaders (board of directors) the right to decide on the firm’s corporate governance.
The legal framework applied in UK regarding the corporate governance includes a variety of legislative texts:
- ‘Common law rules (e.g. directors' fiduciary duties).
- Statute (notably the Companies Act 1985).
- A company's constitutional documents (the memorandum and articles of association).
- The Listing Rules, which apply to all companies that are listed on the Official List (or AIM Rules, as appropriate).
- The Combined Code on Corporate Governance; the Code is supplemented by: the Turnbull Guidance (relating to the internal control requirements of the Code), the Smith Guidance (on audit committees and auditors) and suggestions of good practice from the Higgs Review.
- Non-legal guidelines issued by bodies that represent institutional investors (such as the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF) and the Pensions & Investment Research Consultants (PIRC).
- In the context of takeovers of public companies, the City Code on Takeovers and Mergers and the rules of the Takeover Panel apply.
- The Financial Services Authority's Code of Market Conduct (relating to the disclosure and use of confidential and price sensitive information and the creation of a false market)’ (Metropolitan Corporate Cousel, 2008)
In other words, corporate governance in Britain is regulated by a series of legal texts the most important of which is the Combined Code on Corporate Governance as described above. The specific Code includes provisions that refer to all particular aspects of corporate governance of firms operating in Britain; however because in some cases additional provisions may be required (like in the case of a merger) it is possible that other legislative texts are used in order for the relevant issues to be appropriately addressed. In any case the common law rules and the Companies Act of 1985 are applied (the former are rules that can be applied in any dispute – whenever necessary – whether the latter can be applied in any issue related with the business activity – i.e. not only to the corporate governance).
Corporate governance in USA
On the other hand, in USA there is no Code for the regulation specifically of the corporate governance issues; instead a series of laws and courts’ decisions can be used in order to resolve problems that are related with the corporate governance of firms operating across the country. There are certain issues that are regulated directly by the law but these are limited; in the high majority of the disputes appeared in the area of firms’ corporate governance various statutes and other legislative texts can be applied. In accordance with a report published recently in USA ‘corporate governance practices in the United States are not regulated by any one particular statute but instead are affected by the governing instruments, the corporate law and the court decisions of each issuer’s state of incorporation, and, in the case of many publicly-owned issuers, by the U.S. federal securities laws and requirements of the national securities markets (Security and Exchange Commission of Brazil, 2008). On the other hand, it should be noticed that corporate governance issues are likely to be regulated differently by each one of the 50 states of USA. In this context, the Sarbanes-Oxley law which was introduced in 2002 has been formulated in order to offer a valuable legislative base for the regulation of various issues referring to the corporate governance of firms across USA. The above is considered to have influenced also the UK legislation related with the corporate governance. Regarding the specific legislative text it is noticed by Tran (2004) that ‘Sarbanes-Oxley, which called for tighter internal company controls, caused a rethink of corporate governance laws in the UK as well, with the publication of the Higgs report, written by Derek Higgs, the former investment banker’. The effectiveness of Sarbanes-Oxley Act 2002 has been extensively criticized. In accordance with Atkins (commissioner in United States Securities and Exchange Commission, 2003) the specific legislative text ‘contains many advances for corporate governance and attempts to provide best practices to prevent the misdeeds that have led to the investor losses. Many of these ideas are not new, but have been floating around in one form or another for quite a number of years’ (Atkins, 2003). In other words, Sarbanes-Oxley Act has been introduced in order to resolve specific problems in corporate governance for firms operating in USA; in the long term the achievement of this target can be doubted and only the examination of the consequences of application of this Act in practice could lead to a ‘safe’ assumption regarding the particular issue. It is for this reason that the incorporation of the empirical research (questionnaire) in current study has been considered as necessary.
Research question and objectives
In accordance with the issues developed above, current study will focus on the regulation of corporate governance in two specific countries: UK and USA. Because the particular issues can include a variety of aspects, it is necessary for the relevant research to be expanded to the following questions: a) which is the current trends in corporate governance around the world, b) which are the major differences between the corporate governance practices followed by the Anglo-American countries and the countries of continental Europe/ Japan, c) which are the benefits and the pitfalls of the statutes and the other legislative texts applied on UK and USA regarding the corporate governance d) which are the most common problems related with the corporate governance in these two countries.
Atkins, P. (2003) Recent Experience With Corporate Governance in the USA, online, available at
Buck, T., Shahrim, A. (2005) The Translation of Corporate Governance Changes across National Cultures: The Case of Germany. Journal of International Business Studies, 36(1): 42-69
CPA Journal (2008) A Comprehensive Structure of Corporate Governance in Post-Enron Corporate America
Fort, T., Schipani, C. (2000) Corporate Governance in a Global Environment: The Search for the Best of All Worlds. Vanderbilt Journal of Transnational Law, 33(4): 829-859
Kim, H. (1995) Markets, Financial Institutions, and Corporate Governance: Perspectives from Germany. Law and Policy in International Business, 26(2): 371-405
OECD Principles of Corporate Governance (2004), available at
Pedersen, T., Thomsen, S. (1999) Business Systems and Corporate Governance. International Studies of Management & Organization, 29(2): 43-54
Scullion, H., (1994) ‘Staffing policies and strategic control in British multinationals’, International Studies of Management and Organization, 24(3): 86-97
Security and Exchange Commission of Brazil (2008) available at
Tran, M. (2004) USA: Corporate Governance Law 'Too Strict' available at
Metropolitan Corporate Counsel (2008) Corporate Governance In The UK And U.S. Comparison