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I of opinion the two key concerns that the UK Corporate Governance aims to solve are:
i. Enhanced disclosure and
ii. The scrutiny by the non-executive directors (NEDs).
However, prior to divulge into the said concerns, preferable to explain what does the term corporate governance means?
As well as giving a background about the process which have had conducted by the committees and their recommendations.
What is Corporate Governance?
Over the past decade corporate governance has become a subject in its own. Thus recently universities began to teach courses on corporate governance as abound. This might give the impression that it is a new topic but this would be misleading. Corporate governance issues are as old as the companies themselves. (see : Dignam &Lowry page400: Company Law , (Oxford: University Press,7th edition ,) . Despite this longevity the phrase "Corporate Governance "is somewhat malleable; as every article or book on the subject offers us a different view as to what the phrase means.
However, the phrase "Corporate Governance” at its broadest, concerns the question of who should own and control the company and at its narrowest, it purely concerns the relationship between the shareholders and the directors. ( same reference as mentioned above).
We noticed that different committees have conducted studies about Corporate governance and offered their recommendations.. Below are the committees along with brief of their recommendations:
1. TheCadburyCommittee (1992) wasestablished bytheFinancial ReportingCouncil,theLondonStockExchange andthecombined accountingbodies.
ThekeyrecommendationsoftheCadbury Committeewere:
theintroductionofnon-executivedirectors tothemain board
thecreation ofsubboardsdominatedbynon-executives.
2. TheGreenburyCommittee (1995)
It has been noticed that Accountability issuesrumbledonafterCadbury,particularlyregarding directors’pay. By1995the committee submitted its report on DirectorsRemuneration, recommending the followings:
identified that there isaninherentconflictofinterestin directors deciding ontheirownpay.
Recommended:
· anenhanced disclosure regimefordirectors’pay
· anon-executive-onlyremunerationcommittee.
3. Athird committee, theHampelCommittee (1998). This Committee provided anopportunity tocombine theCadbury andGreenbury recommendations intooneCombined Code.
4. The fourth attempt was conducted by TheCLRSGandthegovernmentwhite paper(2002)
TheCLRSGrecommended that directors’duties beexpandedto include stakeholderconstitutiencies,anditsrecommendationswere adoptedbythe UK CompaniesAct2006. Section172 which states:
“172 Duty topromotethesuccessofthecompany
(1)Adirector ofacompany mustactinthewayheconsiders, in goodfaith,would bemostlikelytopromotethesuccessofthe company forthebenefit ofitsmembers asawhole,andindoingso haveregard (amongstother matters)to—
…………………………………………………………………………………………………………………….. etc ”
5. TheHiggsReview(2003)
One year after the CLRSG report , a new committee was formed (Higgs Committee). This resulted from thecollapseoftheUS company Enron.Thegovernment was pushed intoannouncingareviewoftheroleofnon-executivedirectors in UKcompanies.Governmentconcern relateddirectlytothefactthat manynon-executiveswereseenasbeingtoocloselyconnectedto thecompany tobeindependentinjudgment.
Thekey recommendation oftheHiggsReviewwastoprovide agood definitionofindependence fornon-executives. Accordingly, anon-executivedirectorshouldonlybeconsidered independent whentheboard determines that certain requirements are satisfied. For example:
thedirector isindependentincharacter andjudgmentand
there arenorelationships orcircumstanceswhichcouldaffect, orappeartoaffect,thedirector’sjudgment.
………………. ect.
However, The UK Companies Act 2006as reformedhave introducedstakeholder concerns intothereformprocess.
From the above-mentioned, I conclude that the two key concerns and recommendations focus on:
i. enhanced disclosure and
ii. the scrutiny by the non-executive directors (NEDs).
The function of the NEDs are they monitor management. Its note worthy that in the past NEDs have lacked
independence which was changed in the Higgs Report and adopted by2006Act.
Regarding the question to what extent these committees have succeeded or failed about solving these concerns?
I would conclude that overall the committees’ results are mixed. The non-executive directors seem to be carrying out a good level of monitoring, as there have been no major collapses of UK-listed companies during this period but they have not restricted pay.
However, its note worthy that the NEDs failed to protect shareholders in the large financial institutions at the centre of the recent financial crisis due to various factors which could be discussed in a later article.
to build investor confidence and promote economic stability
The concerns of the UK Corporate Governance Regime is to ensure effectice, entrepreneurial and prudent management that can deliver long term success of the company. The second concern is to ensure incidents of corporate failures does not occur.
According to my view it's high time the term corporate governance should be changed to corporate social responsibility. Main concerns should be not to follow procedures according to the letter of the law but to do things with social and environmental concerns in consideration
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