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1.

Background/Introduction of the subject area/Definitions/correct analysis of corporate


governance and the effectiveness of the system of corporate governance in the UK. The
answer should demonstrate an excellent grasp of corporate governance. Key concepts and
principles must be clearly defined, main themes identified, well explained and well structured.
The answer must be focused and coherent with supporting explanation.
2. Critical review of corporate governance and the effectiveness of the system of
corporate governance in the UK demonstrating analytical skills. The answer should
demonstrate critical review of the relevant techniques, theories/principles associated with
corporate governance and to apply rational arguments in analyzing them.
3. Findings/Conclusions/assignment length/overall structure and
Referencing/Bibliography
The answer should demonstrate authoritative understanding of how to analyze these
methods/tools with worked examples where relevant. The analysis of this work must be well
structured with good conclusive remarks and presented effectively and appropriately.
References in the most part must be properly formatted and cited. The assignment length must
be strictly adhered to.
Main Question

1.1 Background of the Study


Corporate finance can be defined as the set of structure or the processes that are aimed to
direct and control the operations of the companies. In addition to it, corporate governance
embraces crucial relationships among the board of directors and the management of the
company. In the same way, corporate governance caters the issues of all the stakeholders of the
company including small shareholders with the intention to enhance the sustainability of the
business as well as to ensure the economic development by attempting to burnish the
performance of the companies. Though, it should be taken into account that the intention of the
corporate governance is to improve the bonding between the board of directors, management as
well as stakeholder with the intention to increase the outside capital for the business in order to
bring prosperity in terms of financial incentives or increased capital. Though, it is crucial to
understand that the concept of corporate governance is notorious in nature and can be defined in
a broader sense by extricating the internal relationship of the company with its shareholders
including the conflicts between the investors as the shareholders (Ferrarini & Wymeersch, 2006).
The urgency of corporate governance has been increased with the increase in
globalization in the context of contemporary business environment. Though, It should be noticed
that the urgency of corporate governance in even more sharp in the context of European business
due to the fact that most of the companies in European countries do not only concerned about
their investors, employees and board of directors but they are also show concern for their social
responsibilities (Becht, Jenkinson & Mayer, 2005, p.157). It is crucial to highlight that the
corporate governance and the corporate social responsibility is the rigger that helps in inducing

positive image of the company in the market. Eventually, it induces the competitiveness of the
business as well as in helps in enhancing the economic development of European countries.
Though, in order to ensure the good governance practice, it is crucial for the businesses to adopt
efficient social as well as environmental reporting system along with the pre defined code of
conduct as well as guidelines of conducting business within European countries. Companies can
gain and sustain competitive position as well as they can achieve long term profitability by
following the code of conduct of EU approach to corporate governance. Though, it should be
taken into account that some alterations are required in the EU guidelines of corporate
governance in order to increase the profitability of the companies as well as to achieve the targets
of the high economic growth in order to compensate the damages of the crises faced by European
countries during last decade.
1.2 Rationale of the Study
Increased globalization in contemporary business environment is inducing the countries
to make alterations in the legal framework of their corporate governance in order to outperform
in the market as well as to attract the more beneficial investments. Existing conditions of the
financial markets are exerting pressure on the companies to get more concern about their
corporate governance in order to increase their capital as well as to increase their profitability by
attaining a reputable position in the market. Though, it should be taken into account that the
intention of the corporate governance is to provide efficient and effective frame work of policies
and guidelines with the intention to make the operations of the company more focused and in
accord with the aim of increasing capital for the business by sustaining growth as well as by
achieving the long term goals of the company. Though, it should be taken into account that the
current policy of European Union is not efficient enough to efficaciously provide the best
possible guidelines regarding the company law. There are some loop holes in the corporate
governance framework of EU. It has been observed that the corporate governance practices of
European Union do not cover all the crucial aspects of the company that need to be catered
effeciently in order to make improvement in the overall performance of the business as well as to
enhance the positive reputation of the company in the market.
According to the directive of European Works Councils, an efficient and effective
corporate governance is one that caters the issues as well as sensitivities of labour relations and
their contribution in decision making in order to enhance the motivation of the employees as well
as to comply with the social responsibilities of the business. In addition to it, alterations are
required in the current guideline of corporate governance regarding the reality as well s
legitimacy of the model in the context of the social partnership of the multinational. Moreover,
changes are requires to ensure the harmony in the interest of the board of directors as well as
shareholders of the company in the perspective of their financial interest as well as regarding
their social responsibility. It is crucial to for the EU to provide adequate framework to the
member states regarding the equal treatment of the directors and management as well as to
ensure the safety of the rights of the shareholders of the companies.
1.3 Literature Review
1.3.1
Corporate governance
Corporate governance can be defined as the system that directs and controls the activities
of the companies with the intention to establish and maintain strong binding between the
directors, management of the company as well as its stakeholders including investors,

employees, customers as well as minority share holders (Aglietta & Reberioux, 2005). In
addition to it, corporate governance is aimed to improve the performance of the company by
creating and sustaining positive image in the market as well as by increasing the profitability of
the business. Though, it should be noticed that the corporate governance framework for the
member states of European Union encompasses a combination of legal and regulatory guideline
as well as soft laws including code of the corporate governance as well as recommendations for
the companies of the member states to integrate the best code in their activities as well as
recommendations to improve their performance with the intention to enhance the profitability of
the business. Though, it should be taken into account that the EC exerts pressure on the
companies to follow the code of conducts of EU corporate governance on the basis of comply or
explain approach.
Comply or explain approach is basically the regulatory framework that is used in the
states members of EU regarding the integration of the corporate governance (Wieland, 2005, p,
84). According to this approach, it is beneficial to set out a code of conduct in which the listed
companies have to either comply with the EU corporate governance practices or they need to
explain why they are not following those practices rather than creating government regulations.
Though, it should be noticed that most of the European countries use comply or explain approach
with the intention to set the minimum standard that are mandatory for the companies to follow
regarding the most crucial and most sensitive issues (Collier & Zaman, 2005. P. 757).This
approach has implications in audit as well as remuneration committees. Moreover, comply or
explain approach of corporate governance is usually used to make recommendations for the
company regarding the distribution of the authority in order to meet the expectations of all the
stakeholders of the companies.
However, it should be noticed that the intention of this approach is to set the adequate
standards for individual companies in order to provide explicitly defined guideline for the
organization in order to meet the expectations of directors, management, employees as well as
shareholders of the companies. Though, the basis for this approach is the let the market decide
approach. According to which some of the companies may deviate from the standards of
corporate governance with the rationale of one size does not fit all. This reflects the fact that
all the companies cannot follow the principles of EU approach to corporate governance due to
the difference in the circumstances of the individual companies. It should be taken into account
that all the investors in the market have their preferences and they do not necessarily accept all
the explanations and practices of the company. Under such circumstances, investors are more
likely to sell their share. Therefore, it is prudent to set the market sanction rather than creating a
legal framework.
1.3.2
Urgency of Corporate Governance
In contemporary business approach of European countries, corporate governance today is
considered as an integral aspect of the corporate governance guideline of the European Union
(Wieland, 2005, p. 81). Corporate governance plays exceptionally crucial role in the perspective
of European Union in order to attract the capital investments as well as to enhance the
competitiveness of the companies. In addition to it, corporate governance is crucial to create and
maintain the rust within the directors, management employees as well as shareholders of the
company. In a nut shell, corporate governance plays exceptionally crucial role in boosting the
economic growth by inducing the companies to outperform as well as by attracting more

investment within a single market. Though, it should be taken into account that the different
member states of EU have different circumstances, company laws as well as set of corporate
governance practices. In addition to it, there is a difference in legislation, business code of
conduct as well as ownership structure (Kusyk & Lozano, 2007, p,. 513). Therefore, all of the
member states have to create and maintain their distinctive and balanced set of practices
regarding the corporate governance. This fact supports the view that one size does not fit all.
1.3.3
Basic Principles of Corporate Governance
In 1999, the ministers of OEDC endorsed the basic principles of corporate governance
that are now considered as benchmark of basic rules and guidelines of corporate governance at
international level (Lannoo & Khachaturyan, 2004). These principles are used as the basis of
making policies, investment decisions, setting guideline for corporations activities as well as to
resolve the issues of the stakeholders. In addition to it, OEDC principles play crucial role in
providing guidance for the legal and regulatory framework even for non OEDC countries. In
order to make sound financial systems, the financial stability forum has established principles
regarding the decisions related to capital investment as well as ensure the effective
implementation of the corporate governance rules and regulations in the companies (Telo, 2002.
251). The intention of the OEDC priniciples is to bring the economic growth by enhancing the
performance of the companies in both public and private sector.
Though, the basic principles of OEDC are defined as follow:
1. Providing base line for efficient and effective framework for corporate governance:
according to this principal, the corporate governance is aimed to promote the transparency as
well as efficiency of markets while being in accord with the rules and as regulations.
Additionally, it is aimed to ensure the distribution of the authorities as well as responsibilities
among different authorities.
2. Shareholders rights and Key Ownership Functions: this reflects the fact that the primary
intention of the corporate governance is the protection of the rights of the shareholders with
the intention boost the financial investment.
3. Facilitating shareholders with equitable treatment: According to this, all the shareholders
including foreign and minority shareholders should be treated with equal rights in order to
discourage the violation of shareholders rights.
4. Stakeholders contribution in corporate governance: according to this, effective corporate
governance is the one that facilitates the establishment of law with mutual agreement in
providing jobs and financial opportunities for the stakeholders.
5. Transparency: it is the most crucial aspect of the corporate governance as it ensures the
disclosure in a timely manner that is crucial in the context of financial position, performance
as well as company ownership.
6. Board responsibilities: it is crucial for the corporate governance to provide basic guideline
for all the activities of the company including monitoring of managerial activities as well as
checking accountability of the shareholders of the company.

1.4 Summary of Key Debates


Corporate governance today is considered as an integral aspect of the corporate
governance guideline of the European Union in contemporary business approach. Corporate
governance plays exceptionally crucial role in the perspective of European Union in order to
attract the capital investments as well as to enhance the competitiveness of the companies. In
1999, the ministers of OEDC endorsed the basic principles of corporate governance that are now
considered as benchmark of basic rules and guidelines of corporate governance at international
level. Moreover, increased globalization in contemporary business environment is inducing the
countries to make alterations in the legal framework of their corporate governance in order to
outperform in the market as well as to attract the more beneficial investments. Alterations are
required in the current guideline of corporate governance regarding the reality as well s
legitimacy of the model in the context of the social partnership of the multinational.
In addition to the above mentioned issues, the literature review of the research will
explore the facts about the limitations of the principles regarding Corporate Governance as well
as European Commissions sanctions for non-compliance in order to highlight the lope holes of
the EU approach to corporate governance as well as to discuss the consequences of the non
compliance of the companies with the rules and practices of corporate governance. In addition to
it, the literature review will embraces the crux of the minimum standards for the SMEs regarding
the integration of corporate governance in SMEs with the intention to boost the economic
growth.
Examples of Corporate Governance Fails
A practical example of the implementation of the European model of corporate
governance and the American model of corporate governance can be observed in the case of the
US and Europe respectively. In Europe, a small number of investors are capable of making
pivotal investment decisions and these decisions are generally aligned with the interests of the
selected investors responsible for the decisions. In comparison, the system generally followed
and proffered in the US calls for the inclusion of multiple opinions and perspectives .The
corporate strategy that is developed and eventually implemented is not finalized until all the
investors are and shareholders are in unanimous agreement.
Enron scandal is a leading example illustrating corporate governance, regulations,
financial reports and ethics. Enron was a company that rapidly increased its share value by
presenting false reports and statements to the public. Such actions caused an immediate

bankruptcy on December 2001 and consequently one of the biggest scandals of the human
economy. Enron was born from the merge of Houston Natural Gas and Inter-North, which was
a pipeline company in 1985. The company took a huge amount of debts from its first days.
George Bush, President of USA from January 2001 to January 2009, stated in his speech in 2002
that; At this moment America's greatest economic need is higher ethical standards, standards
enforced by strict laws and upheld by responsible business leaders. (Bundred, 2012)
As a result of the Enron collapse, the auditing profession was subject to firm scrutiny.
The legislators responded rapidly to the events with the SarbanesOxley (SOX) Act of 2002.
This piece of legislation involved a strict rules-based system broadly considered as the most
inclusive economic regulation since the New Deal. (Shell,Pp.7, 2012)
Enron and some executives from the Arthur Andersen Firm managed to increase their
personal wealth and gain as much money as they could possibly obtain. In order to achieve their
goal they were determined to do whatever it takes, which was in fact what they did. Their greed
led those two companies to bankruptcy. Having regulations always forces companies to follow
them and through this they would not try to mislead any reports. From the Enron scandal and
their accountants culpable behaviour, different types of measures emerged in order to help in the
protection of the public and the investors as a whole. Some of the safety measures adopted
included the Generally Accepted Accounting Principles (GAAP), the Generally Accepted
Auditing Standards (GAAS), the Statements on Auditing Standards (SAS), and all professional
ethics. As previously mentioned, the United Kingdom is one of the best organized countries
when it comes to standards since they adopted really good ones for the corporate governance.

This is one of the reasons why United Kingdoms market is truly attractive to new investors.
(Grimaud, Pp.8, 2005)

Weakness of Corporate Governance structure UK business


BP addressed the management teams responsibilities in their corporate governance
program. It is this same program that is being rated by Management & Excellence and ranked
accordingly. BP ranked number three on the list and surprising to many as BP ethics are based
solely on board structure and policies. If the rating were based on management actions then we
would have a new ranking, as ethics should be based on the verbs that management take in the
day-to-day operations of the company; not the policies.
Dempsey (2012) points to BP having more fatalities than compared to other company and
also the recent 11 death in the April 20, 2010 explosion of the Deepwater Horizon . Considering
death toll of BP and disaster like the Texas Refinery explosion, pipeline leaks, illegal doming,
and the Gulf Coast oil leak, we feel some things out of place and the rating system has it wrong,
as environmental issues cannot be measured by policy and Procedure but the actual action and
their day-to-day activities to gauge the ethical behaviour.
As per Thornton (2012) review in Financial times British Petroleum has a stubborn
nature of corporate culture which is difficult to change and also has defective safety culture. If
we go through BP annual report which shows its top priorities are safety but it has not adhered to
this statement as seen from Texas refinery explosion and Gulf of Mexico oil spill. Independent
safety expert has given advise about BP US refinery safety up to scratch and from we can assume
there specific problem of corporate governance, several investment professionals have said

recently that the BP affair underlines the duty of owners to examine companies on safety. The
recently refurbished UK Corporate Governance Code lays out the official position. The board,
it says, is responsible for determining the nature and extent of the significant risks it is willing
to take in achieving its strategic objectives. The board should maintain sound risk management
and internal control systems.
In other words, top level management policy is not carried in execution below and this
will make us believe the hypothesis of weak corporate governance in BP. Several institutional
investors didnt buy BP share because of before the disaster because of safety worries.

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