Role of Business in the Governance of the UK - Case Study Example

Business Governance Contents Introduction 3 Discussion 3 Role of business in the governance of the UK 4 Regulatory Framework of UK 5 Influence of Groups on Corporate Governance 6 Company Law 9 Effectiveness of business in delivering of public sector services 10 Conclusion 12 References 14 Introduction Corporate Governance refers to a set of principles by which companies are controlled and directed. Corporate governance structure identifies the responsibilities and rights of different members of the corporations like shareholders, directors, managers, regulators, creditors, board of directors for making decisions in corporate affairs. Corporate governance provides the structure though which companies’ sets and achieves their goals. It reflects the regulatory, social and market environment which a company faces. It is a process through which policies, decisions and actions of organisations are monitored. Thus governance involves aligning the interests of the company with the stakeholders. UK Corporate Governance Code governs companies which are listed on London Stock Exchange. The companies are overseen by Financial Reporting Council who oversees the function of business across United Kingdom. The Financial Reporting Council is given authority under Financial Services and Markets Act 2000, which makes it compulsory for the pubic listed companies to disclose what codes they have followed and what they have not applied in their business. Private companies are encouraged to conform to the codes but they don’t necessarily have to follow disclosure compliance. The Code adopts a principle based approach and gives general guidelines for best practices to be followed by the company. This is in contrast with rules based approach where exact provisions have to be followed by the company. This paper will discuss about the role of business in corporate governance and how effective is the business in delivering public sector services in UK. Discussion Corporate governance in UK originated following a series of corporate scandals and collapses during 1990s. The UK business community thus recognises the need to put its house in order. Slowly the corporate governance of UK started developing and it was monitored strictly. In the past decade there has been worldwide movement especially in United Kingdom for moving toward effective corporate governance. United Kingdom has one of the most developed capital markets which companies operate under and the laws that govern them are also established. The above two features of the businesses in UK creates a strong corporate governance environment. If the capital markets are efficient it creates strong corporate governance within them. Also efficient capital markets provide great incentives to the companies for developing strong corporate governance practices. It rewards companies which are well governed and punishes those that follow poor practices. Company law helps in creating baseline rules which define the relationship for various stakeholders like management, directors, creditors, directors and employees (Financial Reporting Council, 2010, p. 3). Role of business in the governance of the UK The corporate governance in UK has many key elements into it. First are the duties of the director to the various stakeholders in a company. Secondly it relates to various composition of the board of directors like number of non-executive directors as compared to executive directors. The non-executive directors are independent because they have no on-going or previous connection with the company. Thirdly governance in UK relates to composition and presence of various committees in the main board, like remuneration, nomination and audit committee. The Remuneration committee concerns with the various compensation packages which is offered to the executive directors. The Nomination committee is concerned with the appointment of new directors for the board. The audit committee is responsible for looking after the external and internal audits of a company. Corporate governance is also concerned with the appropriate degree of internal control in a company. The Separation of the roles of chief executive from that of chairman of board of the company also forms part of corporate governance. The degree of reporting to be followed by the board and the policy to be followed while preparing the annual report is part of the code. Regulatory Framework of UK The regulatory framework of UK has developed a market based approach which enables the board in retaining flexibility so as to organise and exercise its responsibilities so as to ensure that it is accountable to the shareholders of the company. The main body responsible for maintaining Corporate Governance Code is Financial Reporting Council. The code works on the basis of comply or explain. It gives the flexibility to the companies to choose different approach according to the circumstances in relation to good governance practices. But the company need to explain their actions to the shareholders who will decide whether they are satisfied with their approach. This type of comply and explain approach helps in making important decisions like composition of the board and how to measure their performance on a case by case basis. This structure has been supported by investors, regulators and companies in UK and has been gaining popularity as compared to other models in the market. But to make the system work effectively, the shareholders must have relevant and appropriate information so as to enable them to make decision on the corporate governance practices which the companies in which they are interested to invest practices. They need authority to enable them to have an influence on the behaviour of the board in case they are not content with their decisions. Thus it is important that Comply or Explain is kept under appropriate regulatory framework. Law in United Kingdom has given shareholders the rights to dismiss and appoint individual directors of a company and in certain cases call general meetings of the company. There are certain provisionsrelating to general meeting like arrangement for voting on resolution, information dissemination to the shareholders which are included into the law. There are provisions relating to disclosure of information in annual reports and accounts, periodic review of business and report on the remuneration of the directors. There are additional regulatory requirements on specific sectors like financial services. The above rules must be followed by companies which care listed on London Stock Exchange. There are further provisions which give more rights to the shareholders and thus need certain information which is to be disclosed to the market. Influence of Groups on Corporate Governance There are a number of significant groups which influence the corporate governance in UK. The influences are generally grouped into four sets like business, authorities, public opinion and exogenous factors. Corporates These include the companies which are affected by corporate governance and debates directly. These include companies which has interest in companies in UK like Institute of Directors and Confederation of British Industry. Particularly, the publiclyquotedorganisations along with small and medium enterprises form part of the group. Financial Stakeholders Financial stakeholders include companies like investment trusts and pension funds. These kinds of organisations are concerned with the impact it has on them due to poor governance. These include performance of the shares they hold either their own or managed on behalf of others. They are also influenced indirectly by consumers who want to invest in companies that are following good corporate governance. These include groups like Hermes, activist fund managers who have opposed boards of companies due to poor performance records. The group includes National Association of Pension Funds and Association pf British Insurers. Professionals These kinds of professionals have high degree of knowledge under their belt. Professionals particularly refer to law professions and accountancy. They may work for indirectly for business services firms or work directly as executives for corporates. They exercise their influence companies via professional bodies like Law Society, Institute of Chartered Accountants for England and Wales. These bodies claim that they have at least one member on board for all leading companies in UK. Regulators Companies are regulated by statute and by voluntary agreement. In United Kingdom there are key regulators which have a significant influence over companies. The Bank of England is a key financial regulator which is concerned about poor corporate governance in case of bankruptcy or fraud. It undertakes the role of supervisor for achieving financial integrity in the City of London. Bank of England is seen as overall City regulator. It has established Pro-Ned, an organisation which promotes the use of independent non-executive directors. In the same way, the Stock Exchange can significantly influence company behaviour through its control of listing rules, like rules about reporting in company accounts, listing rules, and other rules which companies have to comply if their shares are to be listed on London Stock Exchange. A significant player in corporate governance debates is The Financial Reporting Council (FRC). The FRC incorporated the Financial Reporting Review Panel and Accounting Standards Board (ASB). The FRC independently oversees financial reporting standards in United Kingdom and it is sponsored by the government, the accountancy profession and the City. The FRC was established in 1990 due to high profile business failures. Media Media is the main mass of communication for many corporates. In corporate governance field, media includes financial press and popular newspapers, which highlights many important issues like executive pay structure since it is related to highly-paid individuals. The main function of media is to pick up topics which are of public interest so that they can have a viewpoint in challenging the establishment. Non-government bodies These indicates NGOs which are a private organisations engaging in activities which relieves suffering, protects the environment, promotes the interest of the poor, undertakes community development services or provides other basic social services. In the context of corporate governance, NGOs include research groups concerned with ethics, governance and corporate social responsibility. NGOs are usually non-commercial in nature but may engage in activities which are commercial in nature. Pension and Investment Research Centre is a notable NGO which works in corporate governance field. It is associated with various issues it has to do with poor corporate governance. NGOs can help the community, society and the economy of the country by maintain effective corporate governance. Exogenous Factors These are factors which are outside the control of individual actors in the economic system. For instance any collapse of a high profile company may result in media or political reaction. Other factors are like general macroeconomic environment and stock market. These factors can have a direct impact on the issues of general public or an indirect impact via company failure rates and corporate performance. It is expected that failures will be low in economic boom and correspondingly concern over corporate governance will be low. It is also expected that public acceptance for normal business practices is high when stock market and economy is doing well and the society as a whole is benefitting from the business activity. In UK, a committee headed by Sir Adrian Cadbury came out with Corporate Governance on Financial Aspects report. It later came to be known as Cadbury Report. This report was first formal report on corporate governance in UK which included comments and recommendations on it. This repot was followed by Hampel Commission and Greenbury Commission report. London Stock exchange has compiled their own corporate governance principles discussing the best practices which need to be put in place by the company (London Stock Exchange, 2012, p. 7). Company Law Most of the British firms are contained in Companies Act 1985. Company law of UK pressurizes companies in disclosing informations on corporate governance. Such code strengthens the role of capital markets for providing investors with information to be able to judge the company practices and take informed decision. Such kind of market enforcement has advantages over legislative enforcement since it takes into consideration certain circumstances of individual companies. It results in generating appropriate responses from the market since it scores over the inflexible legal norms. According to Cadbury Report, the board of directors need to retain an effective and full control over a company and monitor the executive management simultaneously. The report included general duties to be followed by the directors. According to UK case law, directors need to comply with the constitutions and by-laws of the company. They need to maintain independency in judgement. They must run the company for the benefit of the company instead of other purposes. They must use skill and care to exercise all their functions. It is the responsibilities of the steering group who creates the statutory provision of defining the duties of a director (Rayton and Cheng, 2004, p. 11). The obligation of the directors to run the company for benefit of the company is reflected in the powers which the shareholders have to hold the directors accountable to them (CBI, 2013, p.1). Effectiveness of business in delivering of public sector services Since 1979, there has been huge reform in the public sector in UK. Companies have taken many initiatives affecting wide range of issues like health care, infrastructure etc. With global trends like rising consumer expectations, global competition in investment, budgetary constraints have created new opportunities for business to engage in public services. In UK there is rapidly rising public debt. The current Eurozone crisis has led to severe cash constraints on governments and it is inevitable that the society will be facing fiscal austerity. This requires private companies to deliver public sector services. According to Public Services Industry Review by DEAnne Julius, public sector companies tender larger contracts resulting in saving between 10% and 30%. This report added that this kind of action had to adverse effect on the public sector service quality. In UK there has been introduction of independent sector treatment centres across many cities, so as to provide elective surgery to NHS patients. This was a significant contribution since it reduced waiting times and research showed that satisfaction among patients in these centres was 23 % more than in NHS hospitals. In education sector, a new outsourced recruitment service was introduced across UK. This resulted in savings up to £30 million per annum (Financial Reporting Council, 2013, p. 1). Thus competition should become an important tool for delivering public sector services, which will eventually reduce the burden of public debt. The public sector organisations have not undertaken full spectrum services for many years. It is true that recent European financial crisis and economic recession affected the economic environment of Britain. This economic downturn affected the country’s economic growth rate as well as the business environment of the country. Now-a-days, people of Britain are trying to save money rather than spend it in the consumption activities to support their affected business environment. It is true that several organizations within different sectors faced huge difficulty to maintain constant business growth rate due to the unfavourable economic and social environment. Therefore, the several organizations are trying to develop and implement effective business operation strategies in the business operation processes in order to maximize business profit. Therefore, it is the responsibility of the government to ensure sustainable business environment by developing several business operation policies for the organization. However, the private sector organizations are trying to follow developed policies in the business operation processes in order to maintain sustainability in the business operation process. In addition to this, the organizations are ensuring effective corporate governance and appropriate business ethics in the strategy development and decision making process to maintain effective relationship with several important external and internal stakeholders. It is true that common people of Britain generally expect high quality products and customer services from the private sector organizations rather than public sector organizations. It is important for the government to ensure effective service spectrum in the public sector services as it is essential for these public sector organizations to maintain sustainability in the business performances as well as service delivery process in this period of economic slowdown. It is responsibility of the government to develop effective fiscal policies to overcome the effect of the recession. Effective customer service from the public sector organizations can increase the trust and faith of the consumers on these organizations. It can help the economy in several ways. First of all, it can help the consumers to source high quality products in low price level comparing to other private sector organizations. It is important for the public sector organizations to maintain corporate governance in the strategy development and decision making process in order to maintain sustainability in the country. There are several reasons behind the maintenance of effective corporate governance in the business operation process. Conclusion The nature, role and development of corporate governance system in UK have been a subject of great attention for authorities, practitioners, members, academics and general public. Lots of individuals like Cadbury, Hampel, Higgs, Greenbury and Smith committees have tightened the corporate governance system as early as 1990s. The recommendations of these committees had a far reaching effect on the managerial practices in organisations. Public listed companies in London have to adhere to Combined Code and have to publish reports according to company law. Recent changes in the framework of UK corporate governance have coincided with one that occurred between 1998 and 2002. Several key recommendations were made during that time. These include, increase in the proportion of non-executives on board of directors, suggestion regarding formation of nomination committee which has non-executive majority and suggestion of the roles of chairman and CEO getting combined. It has been seen that the recommendations have been followed. In UK Comply or explain approach of corporate governance is being followed and is getting accepted by majority of the companies. Recent economic downturn in UK affected the business as well as economic environment of the country. Limited purchasing power and low disposable income of people affected the consumer buying behaviour of people. This changed consumer behaviour of people in Britain affected the business activities in Britain. During this period of global economic recession and financial crisis affected the business environment. Several organizations tried to increase business profit by implementing several unethical strategies. However, it is important for the government of Britain to ensure effective corporate governance in public sector firms too as it will help the country to overcome several types of external business operation challenges and threats. References CBI. 2013. Corporate governance.Available at:http://www.cbi.org.uk/business-issues/corporate-governance/. [Accessed on: 15 Feb. 2014] Financial Reporting Council. 2010. The UK Approach To Corporate Governance. Available at: https://www.frc.org.uk/getattachment/1db9539d-9176-4546-91ee-828b7fd087a8/The-UK-Approach-to-Corporate-Governance.aspx. [Accessed on: 15 Feb. 2014] Financial Reporting Council. 2013. Corporate Governance.Available at:https://www.frc.org.uk/corporate/ukcgcode.cfm. [Accessed on: 15 Feb. 2014] London Stock Exchange. 2012. Corporate Governance.Available at:http://www.londonstockexchange.com/companies-and-advisors/aim/publications/documents/corpgov.pdf. [Accessed on: 15 Feb. 2014] Rayton, B.A. and Cheng, S. 2004. Corporate governance in the United Kingdom.Available at:http://www.bath.ac.uk/management/research/pdf/2004-13.pdf. [Accessed on: 15 Feb. 2014] Read More