Corporate Governance Financial Crime Ethics and Controls in the UK and the US - Essay Example

Corporate Governance, Financial Crime, Ethics and Controls in the UK and US Name: Tutor: Course: Date: Introduction Issues of corporate governance, ethics and controls as well as financial crime continue to gain significant interest in the corporate world especially in the United Kingdom (UK) and United States (US) especially after the collapse of WorldCom and Enron in 2002. Corporate governance involves processes and systems among corporate entities that are established to ensure openness, probity and proper accountability in the way they conduct business. The concept of corporate governance was passed in the UK after initial development and implementation in the US (Ping & Andy, 2011, p.8). These countries operate under rules and regulations founded on the disclosure concept and uphold responsibility, fairness, accountability and transparency to gain the necessary confidence and trust of shareholders (Mendez, 2014). While there is no universal corporate governance model, the UK corporate governance environment remains volatile with significant influence from the US and Europe. National laws and regulations as well as the expectations of shareholders and economic goals dictate how corporations work. However, some measure of corporate convergence has largely resulted from standards required by capital markets and international investors. This essay compares and contrasts corporate governance, financial crime reporting and ethics and controls among corporate companies in the US and UK. Corporate Governance, Financial Crime, and Ethics and Controls in the US and UK The UK and the US corporate governance systems have common goals of bringing profits to the shareholders, the primary beneficiaries of fiduciary duties (Dowdey, 2005). Both countries operate under active markets for corporate control, uncommitted shareholder’s dispersed share ownership and the importance of equity financing. The UK corporate governance regulations are drawn from common law rules such as director’s fiduciary duties, statutes like the Companies Act of 1985, Listing Rules and the company’s constitutional documents. Moreover, Financial Services Authority, Non-legal guidelines from institutional investors, the Combined Code on Corporate Governance (CC-2008) and the Combined Code on Corporate Governance also have an input on regulations, rules and recommendations of corporations. The Combined Code provisions are mandatory for listed companies to provide a statement for reasons of compliance or non-compliance (Dowdey, 2005). On the other hand, the US corporate governance regulations are largely determined by the Sabarnes-Oxley Act of 2002 drawn by NASDAQ, New York Stock Exchange and the Securities and Exchange Commission (Barnett & Balasundram, 2008, p.24). The reigning principles of good corporate governance practiced by the two countries include responsibility, fairness, accountability and transparency to gain the necessary confidence and trust of shareholders (Mendez, 2014, p.20). Corporate governance in the UK uses the ‘comply or explain’ approach while the Sabarnes-Oxley Act (SOX) uses the general approach (Ofori, 2011). Yet, SOX related regulations are derived from ‘comply or explain’ even though it relies on imprisonment penalties and fines for violations. For example, the US regulations are less robust as compared to the regulatory intervention in the UK and other European countries (Clarke, 2016, p.29). Furthermore, the UK corporate ownership and control is highly fragmented and dispersed which results in the weakening of ownership and reduced board’s influence on the direction of the company (Mallin, 2004). Conversely, the US ownership landscape is even more dispersed which has given rise to institutional investors and strong managerial influence on the direction of the company (Mendez, 2014, p.13). In the UK, voting power is concentrated among committees and has incentives to perform direct monitoring while in the US, voting power is dispersed and has led to more scandals and corporate excesses (Mendez, 2014, p.20). Nonetheless, both countries have strong managers and weak owners. Besides, the US economic model on corporate governance is market oriented and emphasizes on unbridled competition where market forces operate under a regulatory framework of ‘winner take all’ criteria (Mendez, 2014, p.7). On the other hand, the UK model is based on ‘comply or explain’ which draws on culture and traditions, flexibility and corporate ownership structures given the varying legal frameworks. Shareholders elect the board of directors in both US and UK corporations who in turn will carry out the duties of nominating committees, remuneration and audit functions (Mendez, 2014, p.21). Just like the US, UK has unitary board of directors such as non-executive directors and executive managers with an overriding mandate to take care of shareholder’s interests. In addition, it is not by law or regulation but custom and practice to balance the non-executive and executive directors. Unlike the UK, Clarke (2016, p.22) argues that US institutional investor ownership in the market-based systems is higher and all firms are required to meet the minimum standards on international corporate governance. The Chief Executive Officer (CEO) and the role of board chairman are separated in the UK as provided by the Cadbury Code that the boardroom should not be dominated by one individual. Although US institutional practice allows for the same person to dominate decision making in the boardroom and executive management of the company, they are oversighted by Securities Exchange Commission and the shareholders (Barnett & Balasundram, 2008, p.25). In the recent past, some calls have been made to pursue Combined Code on Corporate Governance, impeachment procedures and fixed term offices to ensure greater CEO accountability. In contrast to the SOX demand for the company to disclose the presence of an expert, the UK corporate governance requires one of the audit committee directors to have a relevant and recent financial experience (Barnett & Balasundram, 2008, p.24). The UK Combined Code defines the role and duties of directors. For example, the chairman is tasked with checking the autonomy of the board, ensuring that the board is aware shareholder’s opinions, actions and decisions of the firm. Under the Combined Code, there should be an annual meeting between the independent directors and another separate annual meeting between the board chairman and the independent directors. The US and UK approaches, with regard to regulation share a lot of similarities in the stakeholder-and shareholder centric corporation theories (Jackson, 2011, p.313). While the regulation approach of the UK is founded on voluntary codes of conduct and self-regulation, the US approach is prescriptive in law because it is a civil law country. Ordinarily, the UK regulation system is derived from rules established by self-regulatory organizations and parliamentary acts. While showing convergence in corporate governance, boards in the UK are universal with greater independence (Albert-Roulhac & Breen, 2010). In particular, the Securities Investment Board is one of the self-regulating organizations and on the other hand the US’s Securities Exchange Commission (SEC) is a government agency. Although critics claim that self-regulation is insufficient given the vagueness of disclosure and sharing of information among shareholders (Clarke, 2016, p. 25), the plight of corporations such as Enron, JP Morgan and Lehman Brothers were sealed during financial crisis (Norberg, 2011). The UK believes that procedures that constraint business innovation and practice should not be introduced for the sake of complying with detailed regulations. Yeoh (2016) observes that banking corporations and bankers at lower echelons during the financial crisis were held accountable to a lesser degree in the US than it did in the UK. Despite the recent policy shift, isolated number of bankers and few major banks were affected by the corporate financial reporting. In the UK, any evidence of improper conduct or fraud will lead to large penalties, fines or even imprisonment of directors (Dowdey, 2005). While US senior managers exercise power over corporate entities, investigative media and institutional investors are slowly challenging board-level decisions (Tricker, 2012). Just like the US, the UK Financial Reporting Council (FRC) Combined Code and the Cadbury report requires the board to maintain a sound internal control system that is able to safeguard company’s assets and shareholder’s investment (FRC, 2010, p.4). This is done through reports to shareholders and annual reviews of group system effectiveness of internal controls. This review covers compliance controls, operations, finances, and risk management systems with regard to financial reporting processes. In the two countries, external audit and public accounting has been stretched to a breaking point. SOX add disclosure requirements, strengthen audit committee and regulate companies through federal securities laws (Grossman, 2013, p.416). As a requirement, financial audit is meant to confirm the accuracy of financial statements and documents for the previous year. While it addresses the perceived risks of the time, it fails to identify all the frauds. In the UK, the audit represents a diminishing proportion of risk faced by organizations producing unqualified audit reports. Such was the case with BCCI, Pollypeck and Maxwell which are UK companies that brought corporate governance issue to the fore similar to the WorldCom and Enron in the United States (Aguilera et al., 2006). Conclusion The essay has explored the similarities and difference in the corporate governance regimes of the US and UK based on the UK Combined Code 2003 and the US Sabarnes-Oxley Act of 2002. While corporate governance is entangled with corporate ethics, both countries exhibit unitary board systems of nominated directors. Although corporate governance models are not perfect, the UK and the US models derive a lot of differences than similarities. In terms of ownership, the UK model of corporate governance is dispersed while the UK is convergent. The US regulatory market is more market oriented and gives more primacy to shareholders. However, both countries protect investor rights and are committed to open markets. Also, the UK regulations and rules are less punitive compared to the Sarbanes-Oxley Act because it is less reluctant to prove its capability of self-regulation. In both cases, employees are not represented in the boards and board committees are tasked with auditing and nomination of directors. The UK and US regulations demand disclosure obligations for transactions falling within the previous financial year and observe business ethics for the benefit of shareholders and the government. References Aguilera, R. V., Williams, C.A., Conley, J.M. & Rupp, D.E. (2006). Corporate Governance and Social Responsibility: a comparative analysis of the UK and the US. Corporate Governance: An International Review, 14(3): 147-158. 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