What are the two key concerns that the UK Corporate Governance Regime aims to solve? Explain the success and the failure in this regard?

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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