Corporate Governance: Accountability and Responsibility
Introduction
In “Corporate Governance Essay” the concept of corporate governance will be considered as widely and accessible as possible. For all intents and purposes, the term ‘Corporate Governance’ was formally defined in 1992 by the Cadbury Report in the first version of the UK Corporate Governance Code. It was defined as ‘the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. ’ While the definition holds true even today, the key factors (i.e. companies, board of directors, shareholders, etc.) that form a part of this definition have been in a state of constant change, as they should be. It is because of this very reason that the corporate governance structure in the UK has seen regular changes in a way to keep up with the demands of the market.
Another noteworthy point about these key factors is that their very being is global in nature and because they deal with similar if not the same issues, corporate governance codes across the world tend to contain largely similar provisions which are much higher as compared to company laws of each jurisdiction due to the variety of reasons that affect each of these jurisdictions differently. This distinction between company law and corporate governance because even more imperative with the ever-changing dynamics of the corporate governance with the advent of time.
This “Corporate Governance Essay” will discuss the current scenario of governance in UK which is heavily based on requirements of the market and industry based solutions and how this is not ideal in a corporate world because essentially what this is doing is making corporations a watchdog of their own activities. The essay will go on to explain how this increasing reliance on self-regulating governance will have an ill-effect on the sustainable growth of a company as well as the general public. It is respectfully submitted that while the measures to ensure good corporate governance practices fit well in today’s time, all these measures are rendered useless due to lack of enforcement, impositions and penalties to ensure transparent and smooth running of the current corporate industry.
Corporate Governance in UK
To begin a discussion on corporate governance in the United Kingdom, it is pertinent to note that the UK Corporate Governance Code, The Stewardship Code as well as the Strategic Report - all form a major part of the UK Company Law specifically targeting good corporate governance in the region, as of today. The UK Corporate Governance Code with its most recent changes was released in July 2018 by the Financial Reporting Council . The CG code is one of the most important means of achieving good corporate governance in the UK as it has been created by way of the Listing Rules which have statutory authority under the Financial Services and Markets Act, 2000. The CG Code does not set out a rigid set of rules; instead it requires public listed companies to disclose whether they have complied with the code and if they have not, then explain with reasons through the ‘comply or explain’ provisions as referred to in the code.
The Stewardship Code also forms a part of the UK Company Law and focusses on the principles that are expected to be followed by various institutional investor companies. The Stewardship code applies to ‘firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles.’ It ensures corporate governance by asset managers holding voting rights in companies and are responsible for money belonging to people other than themselves by applying the ‘comply or explain’ approach. After a public consultation, the FRC published a substantial revision to the UK Stewardship Code in October 2019 (in effect from January 2020). According to the FRC, the new Stewardship code sets high expectations of those investing money on behalf of UK savers and pensioners.
In addition to the above-mentioned codes, which can largely be understood as industry-based solutions to achieve a better and all-encompassing corporate governance structure in the UK, a great amount of additional structure to the governance is brought about by requirements of disclosure of the activities of companies in the UK. The Strategic report is a disclosure requirement which must form a part of the annual reports of companies. For better understanding of the disclosure requirement as a whole and to make sure that the strategic report does not exist in isolation from other aspects of corporate reporting, the FRC published an updated version of its Guidance on the Strategic Report in 2018 which essentially includes principles to improve communication of important information.
Change in the Corporate Governance Landscape
Under the globally followed company law regime, one of the most basic understanding is that while it doesn’t matter what a corporation aims to achieve, it is of utmost importance that effective governance measures are instilled so as to ensure that boards and managers are accountable and can give reasons for pursuing the said aim.
The goal of a corporate governance regime is to minimise if not completely solve the problem of conflicts of interests within a firm, in a cost-effective way. In its fundamental essence, corporate governance structures across the world and in the UK address agency problems between companies and their investors, especially between managers and shareholders with a view to protecting weak owners from strong managers and balance the rights and obligations of various stakeholders. Because these needs and demands are global in nature and address similar issues, corporate governance codes tend to contain similar provisions which is much higher as compared to company laws that are still largely policy decision centric for each jurisdiction.
However, it would be unfair to not notice how quickly, the traditional corporate governance landscape is changing. Born and raised without legal constraints because of its very nature of being, the world of corporate governance today seems to be the victim of its own success mainly due to the domination of economic and managerial perspectives and lack of much legal perspective. A series of scandals and failures not just in UK but all over the world, over the past few years have propelled corporate governance to the forefront of the political, media and public agenda.
Confidence in businesses, investments and corporates has been seeing a continuous downfall thereby creating an atmosphere of public outcry calling for intrusive, transparent and fair regulations. With a rather drastic shift from the earlier perspective of corporate governance based on principles of moral and ethical behaviour of companies with the investor’s money, the general public today is of the view that corporate governance norms govern investor’s hard-earned money and are thus norms that govern too serious an issue to be entirely left to businessmen. This change can be corresponded to the popular public opinion that these corporations and the businessmen who run it are after all only after profit maximisation and the good governance will in fact take a back seat when it comes to choosing between profits or good governance. One cannot completely refute the reasoning behind this opinion formation considering the several examples of corporate governance scandals like Steinhoff International , Carillion , Patisserie Valerie and BHS. This is why and where the trend of corporate governance in the UK needs to shift to a more legal perspective with a strong enforcement mechanisms. It therefore becomes surprising that even though corporate governance forms an important part of the corporate industry, the government as well as the general public, there is a near-total absence of legal certainty in the enforcement of corporate governance provisions. It is respectfully submitted that the UK Company law, Codes and reports mentioned above are mere solutions that have been made when a visible problem arises or has arisen in the past.
The laws that govern corporate governance in the UK take the route of soft law measures rather than hard law measures which is precisely where the problem starts. ‘The Code, being soft law, does not provide adequately for the accountability and governance mechanisms that would check and balance shareholders’ enhanced engagement roles and powers’ . The corporate governance framework in the UK lack serious legal binding force and while one may argue that the FRC overlooks most of the corporate governance measures, in practise the part that FRC plays only attracts the slightest legal significance which is hardly enough considering the problem at hand.
The Absence of Legal Enforcement
It is common knowledge that much of the research around corporate governance is based on universal problem and solution approach due to the global access and engagement that the market enjoys. Simply put, the premise it is centrally based out of is that of a Principal-Agent theory wherein fund managers (agents) can play a part such that it only serves their interests which may cause huge losses or prevent maximisation of wealth of the shareholders (principals).
Even so, the absence of legal enforcement renders useless, even the good effect that the corporate governance codes bring to the forefront which is more disturbing considering the role of enforcement in promoting legal credibility and economic efficiency. It risks overlooking the divide, as Roscoe Pound put it, between ‘law in books’ and ‘law in action’. The way in which rules are enforced will clearly affect agents’ incentives to comply. The effectiveness of a regulatory regime, therefore, is a function of both substantive rules and enforcement mechanisms. This holds especially true when the very purpose behind having corporate governance regulations in place is that a well-governed company is likely to behave more efficiently, in a less risky manner, and ultimately be more profitable.
Looking at the current scenario of the corporate governance in the UK, one cannot deny that while the constant amendments, clarifications and versions of its codes and requirements that are made are keeping in mind the constant and rapid changes brought in the market and in fact, rightly so. The utter inadequacy of the model however lies in the lack of reliance it places on making sure that these codes and requirements reach to their rightful end i.e. address the need, means and ways to ensure good governance in the UK. Since the time it was introduced with the Cadbury Code in 1992, almost all of the UK corporate governance framework embodies some form or variation of the Comply-or-Explain principle. i.e. companies should either comply with the rules or explain why they do not and is visibly framed in such a way to enable a one-size-fits-all approach. But how can we settle for a one-size-fits-all framework in something so rapidly dynamic and so specific to actors that are affected by the framework in different capacities? The comply or explain principle only creates more confusion by essentially making the corporations monitor their own self in what can mostly always be misused if one wishes to. It is pertinent to note that both choices: comply and explain, are actually very much compliant i.e. the choice not to comply is also equally acceptable under the code. This is perhaps because there is an assumption that such a decision is likely to be consistent with good corporate governance intentions and in line with the best practices.
The Inadequacy Faced by the System
It is respectfully submitted that the most obvious reason for this not being the most ideal way of working is that, very simply put, the world is evil. A code which only considers moral and ethical high ground is therefore not very apt for the world we live, work and invest in. Corporations, directors and other such actors in this situation can all have vested interests. It is therefore concern-inducing, that a corporation’s decision to ‘not comply’ can come from a place of self-interest, self-serving reasons that are in direct conflict with the very principle that perhaps gave birth to the said discretionary rule. Under the current regime, in a case like this for example, all that the self-serving corporation will have to do is give an ‘adequate explanation’. It therefore becomes very important that such decisions be monitored and a determination made on whether ‘the said decision on action is indeed consistent with the regulatory objective’. It is after all corporate governance that can effectively keep a check on the power that few odd individuals in a corporation hold and with this power, control large amount of money that belongs to others. The state of affairs indeed begs the question as to why then do we still rely so much on the principles and framework and trust that the system is working. It is perhaps because so much of the code is industry-based and a large portion of the requirements and solutions come out of the industry itself because of the nature of corporate governance. It may have also stemmed out from the belief that corporate governance framework techniques like code reports and disclosure requirements and will see large level enthusiastic participation from all actors involved. This is not entirely true when one looks at ground realities, explanations that hold important meaning from the purview of governance have been taken rather lightly: In 2005, Camelot PLC in the UK, did not comply with four incidents as per the compliance statement in its annual report and a mere one sentence explanation was provided, ‘the exceptions are not viewed by the board to impact the quality of corporate governance, and arise from the unique nature of the company’.
In addition to the far-reaching effect corporate governance monitoring (or lack thereof) has on the relation between corporations and the general public including the present and future shareholders of these corporations, successful corporate governance models also help in the growth and sustainability of a corporation irrespective of its size. Corporate sustainability and growth of a corporation can be very well understood as their ability to positively influence environmental, social and economic development through their governance practices and market presence. It is therefore significant that the legal philosophical view about the statement and objective of a corporation be taken into account when working on the scope of corporate governance and the legalities involved therein.
It thus becomes compelling to conclude that the lack of enforcement, increasing reliance on industry led reports and solutions is proving to be a threat to the object of UK’s corporate governance framework in particular to its goal to serve sustainable growth of corporations and the relation of these corporations with the public.
Proposals and Solutions to Mitigate Issues - Conclusion
Close monitoring, penalties and imposition of mandatory disclosure requirements on institutional investors are some ways that the existing corporate framework can work better and enforce its existing model in a more planned manner and ensure engagement of all actors in the corporate governance model. Furthermore, the industry based solutions and ground work can also be done by taking into account the suggestions and action plans of multiple interest groups so as to essentially mark out each of their engagement intentions, plans and outcomes to the public as well as regulators such as the FRC. This would thereby ensure that the regulatory standards of conduct focus on the long-term well-being of corporations while also taking into account of other shareholders’ and stakeholders’ interest.
This would rightfully ensure that the important role played by corporate governance gets its due for promoting the use of resources of all that are impacted by the industry in the most efficient and responsible way possible allowing the growth of each such impact growth along with the economy as a whole.
