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1. What is the purpose and objectives of corporate governance, and the principles on which it is based?
2. An explanation of what is meant by rules-based and principles-based approaches to corporate governance, identifying the arguments for each approach?
3. What advantages might the company gain through the appointment of non executive directors?
4. Explain the importance of board committees in corporate governance?
5. An Identification of three of the committees frequently established in organisations and explain their purpose?
Corporate governance is associated with the means, system and procedures as well as relation through which organization are controlled and directed. Corporate governance enables an organization to find out the basic allocation and responsibilities among the different members of the organization. With the help of the corporate governance, an organization is able to set up the basic aims and objectives of the organization in relation to the social, market and regulatory environment (Hirschey, John and Makhija, 2004).
Being an accountant, it is my duty to make my clients aware about the basic structure of corporate governance and its impact on UK business. This will help my clients who are new in the business world to acquire all the required knowledge and thereby carry out their business smoothly and efficiently and gain success in the long run. The basic knowledge which my client should acquire has been discussed in the current report.
There are several issues which have arrived due to the improper management of corporate governance. The fall of Enron is the biggest example which showed how the inefficiency of corporate governance can result in the total devastation of the organization. Tesco was also once accused for misrepresentation of the financial report. Thus, it is very significant for any organization- new or old, big or small, to follow the rules and regulation of corporate governance.
Corporate governance is a basic structure which is used by the companies for the purpose of specifying the particular operations as well as guidelines for their employees. Corporate governance is considered to be framework that will be developed to address the goals and objectives of the organization. The purpose of the corporate in the organization has been discussed broadly (Mallin, 2004):
Corporate governance deals with long term relationship of organization. This involves dealing with checks and balances, extra incentives for the managers and interaction between the managers and investors as well. Corporate governance enables the organization to manage this long term relationship efficiently and effectively so that the organization is able to meet their targeted goal.
Corporate governance also looks after the transactional relationship which is engaged in dealing with disclosure and authority. With proper control and management with the help corporate governance, the organization is able to carry out their business smoothly (Mallin, 2004).
The basic objectives of the corporate governance are:
The main objective of corporate governance is to provide a fair and transparent view of an organization by providing full disclosure of the accounts of the specific company. This implies that the organization should follow all the rules and regulation and provide the correct information to the shareholders and investors.
Corporate governance makes it compulsory for the management of the organization to remain accountable and responsible to the shareholders. The board of directors is responsible for approving the compensation of the independent directors in order to make sure that the structure of the compensation is fair and is able to satisfy the interest of the shareholders (Monks and Minow, 2004).
Another important objective of shareholders is to make sure that all the shareholders of the company are treated equally and they are provided with the chance to satisfy their needs.
Corporate governance enables the firms to assess and appraise their behavior before being examined by some regulatory body. Strong corporate governance helps an organization to reduce the chances of regulatory risks and fines (Jackson, 2001).
The principles of corporate governance which should be considered by a newly formed organization had been discussed here:
Rules based approach to corporate governance creates huge emphasis on achievements instead of considering the basic factors as well as guidelines. Generally, rule based approach to corporate governance is required to be found in legal jurisdiction as well as the culture which create huge emphasis on obeying the letter of the law instead of spirit. The most important fact is that rule based approach often undertake the form of the legislation themselves (Arjoon, 2006).
As against this, principle based approach to corporate governance concentrates on the objectives instead of mechanism. The principles based approach to corporate governance put stress on some elements which are not taken into account by the rules based approach.
It is important to note that principles based approach is used in UK. Principal based approach to corporate governance is applied in all the fields of legal jurisdiction. In UK, Principles-based approach is used as it enables the directors to report on the appropriate circumstances and is based on all the specific requirements. In this approach, the change procedure is quite easy. This implies that with the changing condition and the desires of the shareholders, the code of practice can be easily updated and improved (Samaduzzaman, 2012).
From the above analysis, it is clear that principle based approach and rule based approach to corporate governance is quite different from each others. There are several arguments associated with these two approaches. A large number of critics consider the principle based approach to be more effective that the rule based approach. Generally, principle based approach to corporate governance is followed in UK. This is because it is considered to provide the best report from the directors as well as it is changeable with the passing of generation. However, there are some disadvantages of the principle based approaches to corporate governance. The most significant arguments against the principle based approach in that it often creates very simple and meaningless statements and thus it becomes invalid in some cases. Another significant argument against the principle based approach is that it becomes quite difficult for the directors to make sure that they have achieved the necessary requirements or not (Sama and Shoaf, 2005). The subjective element of principle based approach to corporate governance give rise different kinds of interpretation and this leads to confusion. Some of the codes of corporate coherence are not able to be complied as they are based on discretion. Confusion can also arise regarding the compulsory and non-compulsory codes.
Rules based approach is generally used in EMAS environmental management system. However, some arguments also exist against the rule based approach to corporate governance. Although rule base based makes it easier to see that the rules are followed or not but it is based on whether the rules and the regulation are accurate or not. The most significant criticism against the rule based approach is that the regulators and the auditors find it quite problematic to deal with the significant questionable circumstances that are not included in the rule book (Skouloudis et al., 2013).
Corporate Governance ensures that an organization should appoint non-executive directors for carrying out the function more effectively and running the business smoothly. A non -executive director of the company is entrusted with different kinds of responsibilities that help an organization to achieve its objective and thereby become successful in the long run. The advantages of appointing non-executive directors had been illustrated here (Higgs, 2003):
1. The appointments of non-executive directors will help in undertaking constructive challenges and it also enable to develop proposals on different kinds of strategy.
2. Another significant advantage of appointing non-executive director is that it helps in the process of assessing and analyzing the performance of the management and identify whether the organization has been able to meet its desired goals or not.
3. Non-executive directors also enable an organization to satisfy all the aspects of financial information and thereby regulate the risk management system.
4. Appointment of no-executive directors in the organization also provides with the scope of assessing the proper level of remuneration for executive directors in an organization.
5. The most important advantage of appointing non-executive directors is that it enables an organization to appoint as well as to remove executive directors as well it also aids the organization in process of succession planning .
The business is organized under the supervision of board of directors. The board hand over to the executive officer and through them to other top management, the duties for organizing the business organization. The importance of the board is to look over the management of the business and to supervise the performance of top management (Spira and Bender, 2004).
The importance’s of the board are:
1. To choose individuals for the membership of board and assess the activities of the board, and individual directors so that the business can be carried out in an efficient and systematic way.
2. To choose the senior management of the business according to their abilities through recruitment process.
3. To observe the activities of the top management of the company so that he may able to know how the senior management of the company is working.
4. To compensate the senior management of the company so that they can be motivated to do their work more efficiently.
5. The importance of board to ensure that the planning of management succession is appropriate.
6. To review and support the important commercial activities is also the importance of board of the company (Use board committees properly, 2015).
7. To review and observe the achievement of management’s strategic plans as the business is carried out on the basis of strategic plans.
8. To review and support the annual operating plans and budget of the company so that the management of the company can work according to the operating plans of the company.
9. To observe the corporate activities and assess the outcome as compared to the strategic plans and other goals of the business.
10. To review the financial control of the company along with the reporting systems.
11. To observe the relationship between the shareholders, employees and the areas in which the business works.
12. To review company’s moral standards and legal observance programs and processes (Use board committees properly, 2015).
The chairman guides the board; it also sets its agenda and assures that it is an efficient working team at the top of the business. He also encourages a culture of openness and is liable for efficient interaction with the stakeholders. He must also assure that board of directors should receive adequate and appropriate details (Waluszewski and Snehota, 2015).
The importances of non-executive director are as follows:
1. Non-executive director can help in improving proposals on strategy
2. He also analyses the performance of management in achieving the aims and objectives and observing the performance reports.
3. He ascertains the adequate levels of payment to the executive directors.
4. He has the power to appoint and remove the executive directors of the company (Waluszewski and Snehota, 2015).
5. He has the authority of sequence planning.
The three committees in organizations are the Audit Committee, the Personnel committee and the Nomination committee. The members of these committees are independent directors who are elected among the board of directors of the company. The members of the committee are elected by the independent members of the board on the suggestion of the corporate governance according to the qualification of the members (Folayan et al., 2012).
The Audit Committee is created by the board for the purpose of managing the accounting and financial reporting procedures of the business and audits of the financial statement of the business. The committee is liable for supporting the Board’s error of the quality and integrity of the financial statement of the company. The committee is also liable for supporting the Board’s error of the statutory audit of the financial statement of the company.
The personnel committee involves at least three members of the board who satisfy all the related needs as fixed by Finnish Law and the rules of the stock exchanges where the company’s shares are listed. The purpose of this committee is to direct the personnel based policies and practices at company. It supports the board in releasing its duties based on all compensation which includes equity compensation of the firm’s executives and their terms of employment (Folayan et al., 2012).
Nomination committee includes three to five members of the board who satisfy all needs as instructed by Finnish Law and the rules of the stock market. The purpose of Nomination Committee is to make the proposals for the general meetings based on the work of the board and the director payment to be permitted by the stakeholders. Another purpose of this committee is to observe problems and practices based on corporate governance and to suggest essential actions. It also suggests the stakeholders the director nominees for selection at the Annual General Meeting along with the director payment (Folayan et al., 2012).
The complete details of the Corporate Governance of UK will surely help my client to understand all the facts related to it. This knowledge will be very helpful for him as it will help him to open his new business efficiently and effectively.
Arjoon, S. (2006). Striking a Balance Between Rules and Principles-based Approaches for Effective Governance: A Risks-based Approach. J Bus Ethics, 68(1), pp.53-82.
Folayan, M., Adaranijo, A., Durueke, F., Ajuwon, A., Adejumo, A., Ezechi, O., Oyedeji, K. and Akanni, O. (2012). Impact of Three Years Training on Operations Capacities of Research Ethics Committees in Nigeria. Developing World Bioethics, 14(1), pp.1-14.
Higgs, D. (2003). Review of the role and effectiveness of non-executive directors. London: The Stationery Office.
Hirschey, M., John, K. and Makhija, A. (2004). Corporate governance. Amsterdam: Elsevier JAI.
Jackson, A. (2001). Towards a "Mutual Understanding of Objectives"? Attitudes of institutional investors and listed companies to corporate governance reform. Corporate Governance, 9(3), pp.196-205.
Mallin, C. (2004). Corporate governance. Oxford: Oxford University Press.
Monks, R. and Minow, N. (2004). Corporate governance. Malden, Mass.: Blackwell Pub.
Sama, L. and Shoaf, V. (2005). Reconciling Rules and Principles: An Ethics-Based Approach to Corporate Governance. J Bus Ethics, 58(1-3), pp.177-185.
Samaduzzaman, M. (2012). The Importance of Both Rules Based Approach and Principles Based Approaches to Eradicate Threats from Accounting and Auditing Profession. AJBMR, 2(4), pp.1-8.
Skouloudis, A., Jones, K., Sfakianaki, E., Lazoudi, E. and Evangelinos, K. (2013). EMAS statement: Benign accountability or wishful thinking? Insights from the Greek EMAS registry. Journal of Environmental Management, 128, pp.1043-1049.
Spira, L. and Bender, R. (2004). Compare and Contrast: perspectives on board committees. Corporate Governance, 12(4), pp.489-499.
Use board committees properly. (2015). Board & Administrator for Administrators Only, 31(8), pp.3-3.
Waluszewski, A. and Snehota, I. (2015). Editorial. IMP Journal, 9(1).
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