Effects of Corporate Scandal on Governance in the UK

Effects of bodily S reardal on arrangement in the UK1.1 IntroductionThe aim of this thesis is to examine the ontogenesis of bodily plaque in the linked Kingdom and the affects which in somatic s rout outdals had on it. This aim is achieved through and through the following objectivesThe reading of somatic regime in the unite Kingdom.The affect of unified shits on stakeh olders. corporal dirts and merged Goernance. corporeal validation has been a source of talk ofion among investors and entrepreneur and it has g cardinal through umpteen transposes in recent years. It is delimitate as the coordinates and processes for the direction and manoeuver of companies (World Bank, 2005). The immensity of integrated brass instrument came into enlightenment after the collapse of laid-back profile presidency such as Robert Maxwell (Parkinson Kelly, 1999). These in bodily failings subscribe to to UK corporal administration being improved (Iskander Chamlou, 2000). The Dramatise change in somatic government moved(p) umteen a(prenominal) big plaques with a tot up of challenges. But the key aspect of incarnate Governance is guess-taking is fundamental to championship activity (Spira Page, 2003), which means jeopardy taken by the organisation must be makeled properly and from here Risk worry comes in.To select merged Governance as a harangue topic large marrow of research activities with many sources of literature is being used. unrivalled of the major occupation realised with this topic was, at that place was ample amount of literature addressable and that to is very difficult to select the most appropriate unrivalled. But bother was solved by concentrating on academic literature, which is mentioned in brief in this dissertation.The structure of this dissertation is as follows, chapter one go forth direction on literature re bring in, which ordain erect n premature basis k instantaneouslyledge for this dissertation. The eventful(prenominal) aim of the literature review is to extravagantlylight the various factors associated with the evolution of corporal Governance. This portion will as well as include corporal Governance in the the States which will b atomic number 18ly give some idea how the formula is different in two countries. Secondly we will treat some s ignoredals (Arthur Andersen and Robert Maxwell). The endeavor of choosing these two case is to show by which collective Governance r severallyed the stage of maturity. Robert Maxwell scandal which occurred in the UK and Arthur Andersen scandal occurred in the United States, which will be the second chapter of this dissertation which actually gave the birth to integrated Governance. And the last divide of the dissertation which is third and final chapter will divulge some limitation and conclusion.Chapter 1Literature ReviewThe aim of this section is to provide an overview in order to analyse different aspect of integrated Governance and scandals which be linked with the aim and objective of this dissertation. This part of the dissertation will describe well-nigh, what incorporated Governance actually is, discussing descriptions. Further it will present back ground, development of corporate Governance in UK, demand for Corporate Governance and Corporate Scandals.What is Corporate Governance?Corporate authorities is a field in frugals that investigates how to secure/motivate efficacious steering of corporations by the use of inducing mechanisms, such as contracts, organizational designs and legislation. This is a lot limited to the question of improving fiscal process, for example, how the corporate receiveers can secure/motivate that the corporate managers will deliver a competitory rate of return, www.encycogov.com, Mathiesen 2002.Corporate presidential term deals with the modalitys in which suppliers of finance to corporations predict themselves of get a return on their investm ent, The Journal of Finance, Shleifer and Vishny 1997, page 737. well-nigh commentators take too narrow a view, and tell it (corporate brass section) is the fancy experimental power for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the expression as if it were synonymic with shareholder democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edge. Corporate governance as a discipline, as an objective, or as a regime to be followed for the goodly of shareholders, employees, customers, bankers and indeed for the reputation and standing of our nation and its economy gob et al. 1994, page 1.Corporate Governance is the structures and the process for the direction and control of companies (World Bank, 2005). This definition only justify the getment of Corporate Governance, even so it fails to inform in depth about Corporate Governance.The other definition says the system by which companies are directed and controlled (Cadbury, 1992, Coyle, p4). The Organisation for Economic Co-operation and Development (OECD, 1998) pardon Corporate Governance in to a majusculeer extent details it says A desexualize of relationships surrounded by a orders wag, its shareholders and other stakeholders. It withal provides the structure through which the objectives of the club are set, and the means of attaining those objectives and observe cognitive process are make up ones mindd (United Nations, 2003, p1).If we look at the definition provided by the OECD (1998) we can say Corporate Governance involve repress of parties such as stake holder, share holder and board, and the last of an organisation can be achieved by use Corporate Governance. And in conclusion we can say Corporate Governance measures the performance of the connection.Background many a nonher(prenominal) large organisations in UK suffered because of the Corporate Governance and this was the briny reason for the material body of changes in it throughout the years. One of the secondary reasons for this change was the economy and ordering as well. In this section we will focus on this area, the change occurred in this area and the impact of these changes on corporate world.Dubbed the Enron of England, the southeasterly ocean Bubble was one of historys worst financial bubbles (Stock Market Crash 2006). This was started in 1711, when a war felt Britain in arrears by 10 billion pounds. And this debt was financed by the South Sea Company at 6% interest. A part from the interest, Britain likewise gave the right to trade exclusively in the South Seas. The failure of the South Sea bubble was the expectation of the directors lying about the profits, as the South Sea Company issued inventory to finance its operation. implicated Investors quickly realised that company is having monopoly in the grocery, so the share expenditure growthd drastically from the scratc h. Speculation became rampant as the share terms kept skyrocketing (Stock Market Crash 2006). And after certain period the management realized that the company share was overvalued. Well we can say that this academic degree in term this happened because in that respect was none of the steering documents which are available today.Cadbury commission told this initiative and they produce the first focus document in the UK, which was chaired by Adrian Cadbury (Cadbury, Report, 1992). The Cadbury Committee Report included a number of financial aspects of corporate governance i.e. the role of the board, auditing and melodic themeing of financial information to shareholders (Cadbury Report, 1992).Cadbury Committee Report was structured in such a manner that the organisations can easily follow it. Here are some outlines of Cadbury Committee Report, piece 4 deals with the structure of board, and at that place should be executive directors and independent non-executive directors. constituent 4.11 explains the purpose of having non-executive directors. The responsibilities of directors which are mentioned in section 4.28. Internal control is discussed in section 4.31 of the Cadbury Report (1992) which provided guidance on keeping records of accounts and reducing the befall of fraud (Cadbury, 1992). component 4.33 which explain about Audit committee and there relationship with the board members and the appointment of external auditors. However Cadbury Committee root fails to unveil directors recompense, which leads to the introduction of the Greenbury Report.The chartered launch of vigilance Accountants (1999) explains the purposes of having Greenbury Report, to encourage more(prenominal) transparency with the organisation. It provides guidance on directors salaries, bonuses, and overly accountability (Chambers 2002).Section A of the Greenbury Report discusses about the directors remuneration and directors remuneration should be decided by a remunerati on committee. This committee should include non-executive directors who will decide upon the remuneration of the directors (Greenbury, 1995, section A1). The remuneration committee should provide report to shareholders which are discuss in Section B of the Greenbury Report disclosure and approval eatable (Greenbury, 1995, section B). Section C of the Greenbury Report discuss the performance of the company with there directors. The performance- related component of remuneration should be plan to organise the interest of Directors and shareholders and to give directors enthusiastic incentives to execute at the gritty upest trains (Greenbury, 1995, section C). Section D of the Greenbury Report discusses service contracts and compensation (Greenbury Report, 1995, Section D). This part focus on, how ofttimes compensation a director is entitled in the progeny of leaving the company before his/ her contract expires. This means that shareholders know accurately how much it would cos t them if they are firing any one of there director or directors.Hampel and the Broadening of ControlHampels Committee on Corporate Governance (1998) resulted in both a step fore and a step back from the earlier Cadbury report. Hampel elaborated the concept of inner control business matchk assessment and response, financial management, compliance with laws and regulations and the safeguarding of assets, including the minimising of fraud (Hampel, 1998, pp. 53-54). The authors intelligibly put forwardd that They are non concerned only with the financial aspects of governance (Hampel, 1998, p.53). Hampel took a broad view of internal control, stating that it is the responsibility of directors to establish a robust system of risk management, to recognize and appraise potential risks in every aspect of the business operation. The control concept of Hampels was welcome by many organisations, which also include the Association of British Insurers (ABI) which recognise it a realistic start out that motivated companies to deal with their compliance with the new corporate governance requirements (Fagan, 1999). Neil Cowan, Vice chairman of the European Confederation of Institutes of Internal Auditing, say that Hampels view of risk management represented a welcome restatement of that part of a Boards prime responsibility for devising a strategy that will ensure the companys continued existence (Cowan, 1997).The Turnbull ReportA committee chaired by Nigel Turnbull produce a new report titled, Internal Control Guidelines for Directors on the Combined Code, under the support of Institute of Chartered Accountants in England and Wales (ICAEW, 1999), it was produce less than two years after the Hampel Committee on Corporate Governance was published. The document issued by Turnbull committee filled may gaps left wing by Cadbury and Hampel. The report was drafting by the recommendations of the Combined Code and the central Hampel recommendations that directors review al l controls. The main aim of the report as agree by large organisation including ICAEW and the London Stock Exchange was to provide guidance to the listed companies and to implement the requirements in the Code relating to internal control. But the main purpose of the report was giving the relaxation to companies to explain their governance policies, the guidance obliged the board to report on the effectiveness of the companys system of internal control.This centre on internal control is attached to the idea of a dynamic company, which requires non- tour of duty monitoring and auditing. The Report states that A companys objectives, its internal organisation and the environs in which it exercises are frequently developing and, consequence, the risks it faces are frequently altering. So there should a sound internal control system which depends on a regular assessment of the nature and extent of the risks to which the company is exposed. As profits are, in part, the prizes for succes sful risk-taking in business. Internal Control purpose is to help manager and control risk appropriately rather than to forfend it. (ICAEW, 1999, p.5, para.13).Turnbull Committee involve two steps to interpret, firstly to identify the risk and how the risk is managed and evaluated. Secondly, assess the effectiveness of the internal control system, it role and effectiveness. rough other report which focuses on Corporate Governance in UK are Rutteman Report 1994 on Internal Control and Financial Reporting, Myners Report 2001 on Relationship between institutional investors and companies, Tyson Report 2003 on Recruitment and development of non executive directors (Chartered Institute of accountants for England and Wales, 2006).Why use Corporate Governance?The controversy that the company should be subject to ratified regulation at least some of their actions tends to be couched in term of Market failure. Companies are accepted to feature characteristics, particularly the scale and scope of their operations, which make the market governance of their actions imperfect. The purpose of the regulation is to iron out those imperfections and to restore market governance. direct in some cases this may mean very extensive legal regulation indeed, and in exceptional cases, particularly in respect of the questionable natural monopolies, an acceptance that market governance must be neglectful in favour of economy governance. This is a topic, which is growing in importance following a number of high profile failures. In UK product line market as per Financial Aspects of Corporate Governance,1992 all listed companies lack to semipublically state whether or not they comply with Corporate Governance. If the Investors they are not fulfilling this requirement, they may full loss as this is an incentive for the listed companies to use Corporate Governance otherwise investors may choose to invest elsewhere.According to throng Madison (Bavly, 1999) No man is allowed to be judge in his own case, because his interest would certainly bias his judgement and, not improbably deject his integrity described by James Madison (Bavly, 1999). Because of the Corporate Governance, companies are run in a fair and efficient manner to maximise the wealth of the organisation rather than maximise the profit and that no one person should brook too much control.The Institute of Chartered Accounts for England and Wales (ICAEW, 2002) discuss the importance of Corporate Governance in more details, ICAEW (2002) explain that because of the corporate scandals, Corporate Governance came into motion or it can also be said corporate scandals is the main driver for Corporate Governance as it highlights what can actually happen and also the devastating affects.The ICAEW (2002) also indicated that because of the sentience and the increased knowledge of shareholders have lead to companies to improve there unveiling in the market and also to improve the way in which they operate in order to seduce investment. Shareholder influence affect the structure of an organisation (Investments) so they having a positive impact on Corporate Governance as it is a key driver for the implementation of Corporate Governance to many companies.Iskander and Chamlou (2000) explain that, to increase the market value and the market share good corporate Governance is all-important(a). This is a key subject to run across because if the management is not performing efficiently and effectively, thusly cash is going to be spent on agency enigmas, which arise. However with good Corporate Governance the board is working more consistently.Coyle (2003/2004) explains that there is also a difference of interest between directors of a company and its shareholders. The directors need to earn more benefits and high remuneration whereas the shareholders want the company to be earn more profit or to maximise the profit of an organisation so that they can cover there cost of capital. Corpo rate Governance allows shareholders and Directors to set criteria to come to an friendly agreement. This allows to set out exact guidelines to each other thus reducing conflict.(PriceWaterHouseCooper, 2004) The above experience is taken from a raft conducted by PriceWaterHouseCooper in year 2004, undertaking 134 executives. The executive were ask, what was the main reason for the failure of Corporate Governance. 37% of the executives replied because of the compliance failures and 26% replied because of the pitiful management and also because of the scurvy leadership. The conduct of senior executives was also a major risk according to 15% of directors. The figure polish offly shows that Corporate Governance strongly focuses on activities such as leadership of executives.Corporate Governance in the USACorporate Governance in the United States of America (USA) is different in some way from United Kingdom, however there are some correspondingities. In America the first Corporate G overnance documents, was Treadway Report (Chartered Institute of counseling Accountants, CIMA, 1999). It emphasis on auditing, which it hard-pressed must be separate from directors (CIMA, 1999). thither are many forces that have led to the development of corporate governance in the U.S. as it appears now. The problem of the corporate governance in U.S is that there is not a set of laws or regulation to decide how organization matters are to be addressed. There are two side-by-side laws first is Federal law and Second is state laws, and traditionally corporate governance is a matter of state, so it is determine by the sate laws. This recommendation of corporate governance was aimed at reviewing the performance and profitability of companies through an independent organization in order for shareholders to have a true picture of how the company is performing. The Committee of Sponsoring Organisations of the Treadway Commission (COSO) then produced a further document on Corporate Gove rnance which was base on Internal Control (CIMA, 1999). This was designed to discuss how a company should be run and appropriate controls, which would ensure this.After the corporate scandal of Enron, the Sarbanes-Oxley statute is really a federalization of corporate law. Sovereign of written statutes and regulations, the U.S. is a common law system so a great deal of the law on corporate governance comes through legal decisions. The United States of America introduced corporate governance legislation in 2002, the Sarbanes Oxley be (SOX).High profile corporate collapses due to a number of muckle including financial reporting irregularities leading to a lack of investor confidence and public assertion. The Financial operate Authority (FSA) which is the regulating body of the Financial Services empyrean in the UK did a number of things in reaction to the Enron scandal (Rouston, 2003). Rouston explains that the FSA conducted a review of listing rules and looking further into th e matter of account statement and auditing (Rouston, K, 2003).However in the USA the response to the growing number of Corporate Scandals and most recently the Enron scandal the USA was different than the UK. The Sarbanes-Oxley Act was introduced in 2001 as a direct response to a number of corporate failures (Matyjewicz and Blackburn, 2003). The Sarbanes-Oxley Act (2002) was useful as it meant that Corporate Governance would have to be taken seriously and that there would be company on the stock exchange who did not comply with SOX (2002). Although the UK does not have legislation many companies do use corporate governance, the Combined Code, in order to attract investors (Financial Aspects of Corporate Governance, 1992).The three reasons for the development of Corporate Governance in USA-(The Continuing Evolution of Corporate Governance in the United States- doubting Thomas A. COLE Chairman, Executive Committee, Sidley Austin Brown Wood LLP)Capitalistic view has clearly prevailed with specific regulations imposed relating to the treatment of employees and such.The second factor in the development of U.S. corporate governance is that there are very wide held corporations.Another factor that has shaped corporate governance is the rise of the institutional investor.Paying for Good GovernanceOne of the survey done by Mckinsey Company in 2000 all the investors are willing to pay more for a company with good board governance. Nearly 83% in latin America, 81% in US and 89% in Asia they consider that there should be proper control upon the working of the organisation.Source Mckinsey company, Investor persuasion (2000)Corporate Governance A Mandate for Risk Management?Risk Management is described as identifying and managing a firms exposure to financial risk. Corporate Governance as describe above is a set of rules, procedure and structures by which investors, who invest in an organisation assure themselves that they are getting pre-determined return and they also ensure themselves that there investment is used and invested in efficient portfolio and the managers are not misusing there investment. It is at the top of the global development agenda as emphasised by James Wolfensohn, President of the World Bank The governance of companies is more important for world economic growth than the government of countries.This section will focus the connection between risk management and Corporate Governance. Corporate Governance and Risk Management are strongly linked and the two are used in conjunction with one another to help companies in the running of a smooth and well-organized business. One of the main reasons for the implementation of Corporate Governance is to stop Corporate Failings and Turnbull highlights that that drive the business forward, some risks should be taken (Chartered Institute Internal Auditors for UK and Ireland). And is said to calculate risks the use of risk management is essential because even the smallest risk can create b ig problem for companies.CIMA (1999) explain number of factors which link Corporate Governance with Risk Management, good corporate Governance reduces risks. The purpose of the risk management is to eliminate risk. Risk Management as described by Coyle (2003/04) identifying, assessing and controlling the risks facing a business, and with incorporating risk issues into decision making processes (Coyle, B, P2). And if we compare the definition provided by the (Cadbury, 1992, Coyle, p4) The system by which companies are directed and controlled both the definitions aim to protect the organisation and their investor (equity or debt) and also ensure the smooth running if the organisation.There have been many changes in issues Corporate Governance and Risk Management from the Cadbury Report of the early 1990s to the more recent Turnbull Report of 1999. Well it is now clear to all the boards of directors there responsibility to ensure that all possible threats to an organisation have been s ystematically identified, carefully evaluated and effectively controlled.Corporate ScandalsThe Corporate Scandals were occurring on a frequent basis in the 1980s 1990s (The outside(a) Corporate Governance Review 2003). This was considered as a worrying condition for investors and companies. Short et al (1998) suggested that corporate scandals can occur for a number of reasons one of the reason given by them was creative accounting, which can explain as not doing the accounts properly and concealment the problems or risk through which the company is exposed. And the investors believe that company is performing and working in a good condition and there investment is safe. They also explained that dishonest of directors also played a vital part in corporate scandals, this can be in many ways such as hiding the fact and telling shareholder that the company is doing well.Nathanson (2002) explain corporate scandals often have elements of political blame. Nathanson explain this by takin g the example of Heaths politics in 1972 as they made a drive for growth. Which mean high share prices which affected the economy which was growing at round 5%. And some companies such as Slater Walker went bankrupt (Nathanson 2002).One of the interesting question to analyse is How do (the suppliers of finance) make sure that managers do not steal the capital they supply or invest it in bad projects (Licht, 2003). To protect Investors is the overall main purpose of Corporate Governance and this statement shows the overall purpose for the Corporate Governance.The scandals not only affected the shareholders of the organisation only if it also harm the staff, usually financially. So the square organisation was effected by the Corporate Scandals. One of the article printed in Financial Times in year 2002, which explain the former employees grant which was previously worth $450, 000 is now worth $12,000, this is because of the collapse of the company, and financial time total blame c orporate governance (Financial Times, 2002). This shows how the collapse of a monolithic company such as Enron can have on one individual employee. However we should also understand that shareholder are not only one who are affected by this disaster but it also affected such as the financial services market, a decline in confidence in the market, and the government as it is poor publicity. (Market and opinion research International, 2003)The figure 3.2 highlights that confidence in UK organizations is in-fact fairly high when comparing the above data it is clear that in-fact confidence is rather high with 47% disagreeing that an Enron could occur and 35% strongly disagreeing. But the fact is that only 4% of the directors who were interviewed believe that it was likely or highly likely. To conclude this, now the directors are confident after the effective corporate governance that there wont be another Enron Scandal occurs in the UK.Maier (2005) suggested of the failure of the corpor ate governance is corporate scandal. And because of these corporate scandals investor loose there confidence over the market (Maier 2005). Because of these corporate scandal government introduce the Cadbury Report (1992) to increase the confidence of the investor (Cadbury Report 1992). The USA also acted in a similar way to the Enron scandal by introducing the Sarbanes-Oxley Act (2002). It appears that corporate scandals have many bad affects but they are a key driver for Corporate Governance.Can directors be bank to tell the truth? hold up 17%Disagree 65%Are directors paid too much?Agree 75%Disagree 11%Can firms pension promises be certain(p)?Agree 34%Disagree 43%Can accountants be trusted to check results?Agree 37%Disagree 39%(BBC Business, 2002)The above figure was taken from BBC business survey which was conducted in 2002 by surveying 2000 members of the UK public. The survey was conducted soon after the corporate scandals which were because of the failure of the Corporate Gove rnance. When analysing the figure the familiar public of UK totally lost confidence from the companies and only 17% of the citizen respondents that they trust Directors.So we can conclude by saying that corporate governance is a prime factor or this also be explain as a key element which not only recruit investors confidence but it also promote competitiveness and ultimately the undivided economy benefits. The governance of companies is more important for world economic growth than the government of countries (James Wolfensohn, President of the World Bank).Cultural, political and economic norms affect the way in which a society approaches corporate governance and its affects on board leadership, management mistake and accountability. The challenge in front of the policy shaping machine is to reach a balance of legislative and regulatory reform, taking into amity the best practice to promote enterprise, enhance competitiveness and stimulate investment.decisivenessThere are clear ly many factors which act to provide incentive for institutions not to involve themselves in Corporate Governance issues. Whilst the level of monitoring by institutions is greater than that commenly supposed, such monitoring tends to be carried out in private, and, as Black and Coffee (1994) note, for most British institutions, activism is crisis driven. Furthermore, it is unlikely that tooshie the scenes monitoring is satisfactory, particularly from the point of view of the public, as it enhances the belief that institutions and company management are all simply part of the same old boy network, a belief illustrated by the debate concerning the high level of directors remuneration. The increase in number of informations and guidance has increased the knowledge of the companies and has also made the corporate practices more sophisticated. If we go through Cadbury committee report there was lack of internal control however Turnbull report move the veil and this report emphasized on internal control as part from other controls. Other countries such as the USA are different from Great Britain, the USA introduce Corporate Governance edict called the Sarbanes-Oxley Act. Although the United Kingdom do not have Corporate Governance legislation as such companies feel obliged to follow guidance if wish to attract investment (ICAEW, 2005).Corporate Governance is very much important for these days for the companies who work either in public sector or private sector as it has been highlighted in previous high profile corporate scandals, such as Enron, that lacking of Corporate Governance companies are exposed to being involved in a Corporate Scandal (ICAEW, 2005). Corporate Governance is now becoming a gloss of companies in Britain and it is more often used than ever before.Large corporate scandals in the USA, such as Enron, have an affected other countries which also include the UK. Corporate Governance is closely linked to Risk Management so it is essential to go th rough the key component in the risk management regime.Chapter 2Case StudiesIn order to go to the poor performance of Corporate Governance and lack of Corporate Governance legislation it is useful to use the case study approach. It was very important for the dissertation as it highlights the real life example of the poor performance of Corporate Governance. A case study can be defined as a research study which focuses on understanding the kinetics present within a single setting (Eisenhardt 1989, p65). This technique (Case Study) was introduced in 1934 as per the Oxford English Dictionary (2006). According to Stake (1993) the purpose of using two case studies was to see how the failure of corporate governance and there affect on the companies in different ways. One of the key objectives of including these cases is to see the affect of corporate scandals and how they can happen and this aim can be assisted by the case study technique. There are a many limitations however the company scandals are in different sectors of the economy.The approach of case study is having number of advantage and number of disadvantages as well. By using case studies, comparisons can be drawn, comparing one corporate scandal with the other company scandal (Jankowicz, 2005). It must be note that when comparing the different corporate scandal they are often very different but the