in the uk, corporate governance regulation is based around a voluntary code on the principle of comply and explain.dicuss the possibile reasons why this approach has been preferred to legislation in th UK and contrast this approach with that adopted in the US.
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Introduction:
Mathiesen (2002) said "Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return". It deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer &Vishny, 1997). In the UK, the markets largely follow the disclosure-based approach to regulation but have nevertheless adopted codes of corporate governance that include fairly extensive specification of corporate governance practices that companies should adopt. However, the flexibility to companies is preserved in most areas through the voluntary nature of these codes. Subject to appropriate descriptions of corporate governance practices and disclosure of non-compliance with specific provisions, companies can depart from specific provisions in the code under the Listing Rules (Corporate Governance Committee; 2001:16). Simply to say, the corporate governance regulation of United Kingdom is based around a voluntary code on the principle of comply and explain. In this paper, I will exam why the UK use this approach. In the US, the Securities and Exchange Commission ("SEC") and the various stock exchanges generally don’t prescribe corporate governance practices that companies should adopt, although some private sector bodies and major institutional investors have developed codes that embody what they consider to be good corporate governance. Instead, the SEC and the stock exchanges emphasise high disclosure standards, including disclosure of corporate governance practices that companies have adopted, so that investors can assess the corporate governance of companies they invest in (Corporate Governance Committee; 2001:16). Furthermore, I will exam how this approach adopted in the United States by contrast the UK. And also I will show the cases of corporate governance regulation in the banking sector both in the U.K. and U.S.
Main body:
Traditionally, the boards of directors of companies have had two functions in UK: (1) to lead and (2) to control the company. Shareholders, directors and auditors have played an important role in ensuring good corporate governance (Alexander K, 2004). In May 1991, a committee chaired by Sir Adrian Cadbury was established to make recommendations to improve corporate control mechanisms for all UK companies. The Cadbury Committee’s main focus was on financial control mechanisms and the responsibilities of the Board of Directors, the auditor, and shareholders (1). In 1992, the Committee published a final report concluded the cause of problems were not the need for improved auditing and accounting standards, but widespread defects in the internal control systems of large UK companies. Moreover, the Committee recommended that the boards of all listed companies registered in the UK should comply with the Code immediately or explain why they have not complied (Alexander K, 2004).
Recently, the UK corporate governance has been greatly influenced by the corporate and financial scandals in the United States (Alexander K, 2004). As a result, a revised Combined Code came into effect on 1 November 2003, based on proposals of the Financial Reporting Council. (3) The Code was amended to reflect proposals in the Higgs review (2003) that a change in board structure should be based on enhancing the role of non-executive directors, and splitting the role of the CEO and board chairman. The chairman should be an independent, non-executive director who can take a detached view of the company’s affairs. Another important proposal of the Higgs Review (2003) was that independent, non-executive directors should be used more to transmit the views of shareholders to the Board. Thus, non-executives would have more responsibility to monitor the performance of the company’s executive directors. The Financial Service Act ( FSA) now considers compliance with the Code to be an important issue for investor consideration.(4) Although the Combined Code is technically voluntary in a legal sense, public companies listed on the London Stock Exchange and other regulated exchanges are required to state in their annual reports whether they comply with the Code and must provide an explanation if they do not comply.69 This is known as the ‘Comply or explain principle’.(5) The requirement to comply or explain does not apply to non-listed companies. (5)
The new political theory of the British corporation is de-regulate in order to lower the costs of coordination among shareholders.Relaxing various legal restrictions and barriers would significantly enhance the ability and incentives of institutional investors to monitor corporate managers.
By contrast the U.S., both the New York Stock Exchange and NASDAQ submitted proposals designed to strengthen the corporate governance of their listed firms in 2002. They require the (1) Shareholder approval of most equity compensation plans;
(2) A majority of independent directors with no material relationships with the company; (3) A larger role for independent directors in the compensation and nominating committees; (4) Regular meetings of only non-management directors.
These proposals address U.S. corporate governance deficiencies more directly and with lower costs. The closest historical parallel to these proposals is the Code of Best Practices (based upon the recommendations of the Cadbury Committee) that was adopted by the London Stock Exchange (LSE) in 1992. The Code included recommendations that boards have at least three outside directors and a non-executive chairmen. Although the Code is voluntary, the LSE requires companies to state whether they are in compliance. There is evidence that the Code can make a difference. A recent study of all LSE companies reported that both CEO turnover and the sensitivity of CEO turnover to performance increased following the adoption of the Code. Moreover, the changes in turnover appear to have been driven by the increase in the fraction of outsiders on the board rather than the separation of the chairmen and CEO (J. Dahya, J. McConnell, and Nickolaos Travlos, 2002)
The legal culture of U.S. is similarly as the U.K. which is that the most largest corporations are public and not family-controlled. Even the financial institutions in the United Kingdom are significantly less regulated than the U.S., but less regulated does not mean unregulated.
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