Corporate governance is a phrase that is used for broad description of the processes, rules, or laws by which companies are regulated, operated and controlled. The term also refers to the internal elements of an organization that are normally defined by the stockholders, offices, consumer groups, government regulation or the constitution of a company, which regulate the operations of a company. The term is also used to describe fixed sets of systems, processes and principles that provide guidelines on how company operations are to be conducted so as to fulfill its objectives and goals, in a mode that is beneficial for the stakeholders. Furthermore, the term is used to describe the relationship that exists between all the company’s stakeholders, such as directors, management team and the bondholders as outlined by the corporate regulations, rule of law, official policy or the corporate agreement.
Well-established and prescribed corporate governance normally provides a legal framework that operates for the benefit of all key stakeholders who are essentially concerned by ensuring that the company upholds its virtuous principles, as well as official laws.
Listed company is the company that has a legal authorization to offer its shares for trade in the stock exchange. In United Kingdom, it refers to as a company whose securities are duly registered in the London stock exchange official lists thus making it qualify for the listing and trading of its shares.
Corporate governance in listed companies (Comparison between United States vs. Europa)
Corporate governance ranks extremely high on the policy agenda of many developed countries, especially after a series of corporate scandals in respected companies, in United States of America and European countries, after they became evident to the public. Regulation of listed company has become a concern for authorities since most companies have proved to be unable to regulate themselves in accordance to the established codes. Nevertheless, stringent regulation of the corporate governance has raised an essential question concerning the importance and the role played by the public policy in this field, as well as the practicability of solving these issues in a comprehensive regulation, and its effects on the performance of the companies.
In response to the most recent corporate governance ignominy, in United State of America, which essentially caused massive losses to the stockholders, the American policymakers enacted the Sarbanes-Oxley Act that is essentially designed to prevent and deter governance disappointments in order to protect the shareholders. The listed company regulatory reform wave in the United States of America that was as a result of collapsing of the Enron has essentially spread to European countries. The Sarbanes-Oxley Act was essentially aimed at all the non-US companies that are listed on the United States stock exchange. The Act forces the European Union financial audit companies to register with the public accounting oversight board of the United States.
The Sarbanes-Oxley Act was enacted in order to sustain the stockholders confidence and prevent the fraud in the market that normally emanates from failure of corporate governance. The introduction of the act essentially aimed at strengthening the independence and composition of the audit committees, enhancement of the listed company financial disclosure and eventual setting up of the public accounting oversight board that was given the mandate of overseeing the auditing profession hence protecting the interest of the stockholders.
While acknowledging the benefits that have been established by the Sarbanes-Oxley Act, it has also created a heavy burden to the companies, and in particular the foreign companies that are listed in America. Furthermore, the Act is considered to be disadvantageous to the attractiveness of the United States stock markets. However, European countries have eventually been forced to adopt regulations that are stringently similar to those in United States since they will still want to be listed in the American stock market.
The corporate governance failures events in United States of America and the listed companies supervisory developments has essentially motivated the same regulatory developments in the European Union, in order to prevent the corporate governance issues witnessed in United States from being replicated among the European Union’s nations.
The European Union commission has essentially implemented frameworks aimed at modernizing the corporate governance and company law, which essentially starts with the selection of high level experts on company law in order to provide guidance. The European Commission has recommended the consolidation of a compulsory disclosure requirement for all listed companies, while providing distinctive rights to the marginal stockholder to investigate the corporate governance trends of a company. The commission also recommends the introduction of a sanction aimed at disqualifying the directors and the entire corporate management team found to be connected to disclosures, which are misleading to the public.
Moreover, The European Union Commission has proposed the development of United Kingdom style of corporate governance that embraces the policy of best practice, which is essentially applied through market mechanisms, enhanced shareholders accessibility to corporate information through the use of electronic means of information dissemination, and solidification of the shareholders right to vote through the use of electronic means. These endorsements have to a significant extent inferred a critical influence in the defining the European Union Commission’s strategy of advancing corporate governance and company law modernization.
The commission has also mad proposals on the harmonization and consolidation of the collective obligation of the listed companies board members in the European countries. The proposals pertained to annual release of the crucial factors in the corporate governance practices and structures by all listed companies in the European Union through using the local codes, the release of the investment procedures by all investors, as well as the establishment of European Corporate Governance Assembly, which will be privileged with the coordination of the corporate governance determinations by all European Union member states. Other regulatory measures involve the harmonization of the statutory audits and listed company regulatory framework so as to enhance the quality and independence of these companies.
In United Kingdom, strong corporate governance is normally based on self-regulatory or principle based mechanism. It is essentially strengthened by the presence of strong systems of market regulation and company law. Stockholders in a listed company operating in the United Kingdom are essentially allowed to play an active role in the corporate governance. Furthermore, they are normally conferred a lot of influence and power by the company law to hold the listed company management board accountable.
In additional, The Company Act, which was enacted in 1989, normally confers the stockholders with strong rights, which essentially exceed the fundamental rights to transfer shares and receive dividends. These privileges include the right to commend dividends, convening of extraordinary meetings, ultimate impeachment of directors from the corporate board, and rights to implement preemptive action rights on the new share issues. These rights are normally enshrined in the combined code on corporate governance that enables the stockholders to assume the corporate governance oversight function.
In the year 2000, Financial Services and Market Act was enacted in United Kingdom, this was essentially in line with the recommendation from the European Union Commission. The Act provides the basis for the regulation of the listed companies in the financial services industry, in United Kingdom. The Act ensures that the public awareness, consumer protection, market confidence and reduction of financial fraud cases are kept on surveillance. The financial service Act is also responsible for the United Kingdom Listing Authority, a body that regulates the entrance of the listed companies’ securities to the major market through the provision of the listing rules. The FSA has a legal power of imposing civil forfeits on listed companies and directors in a situation where the listing rules are breached. Furthermore, with regard to the extent of breaching, the FSA has the power to authorize the removal of a company from the main market, and consequently order the prosecution through the courts.
All companies listed in the main market in United Kingdom are normally required to put up with the continuing requirements. These include the obligation to disclosure financial reports that are in accordance to the accepted accounting principles, incorporate the model code and make regulatory filings as required by the company listing rule and laws.
The United States of America methodology towards corporate governance is essentially characterized by a regulator system that principally enforced through the American stock exchange, SEC directive and the state law. The United States of American essentially lacks the codes of corporate governance like those that are common among the European countries such as United Kingdom. This is attributed to the federal nature of the American constitution. In United States, all facets of the corporate governance such as the duties and responsibilities of directors and the rights of the shareholders are normally governed by the SEC, state laws and the American stock exchange. All these three corporate governance regulators play an essential role in the corporate governances of all listed companies in United States of America.
Since there is no central body dealing with the company law, each state normally has autonomy to establish its own model to regulate the corporate governance of the listed companies. The state of Delaware is essentially the most influential in the formulation of the corporate governance regulation, because it is home to more than a half of all listed companies in the United States of America. It is also noteworthy to note that most of the states normally adopt the commendation of the Model Business Corporation Act.
The United States of America approach to the regulation of the corporate governance on the state level is normally less dependent on the engagement of the shareholders than the European countries, where the stockholders are essentially authorized to take an active role, by the company’s rights. Nevertheless, the usage of the stockholders law suits is essentially more common in United States, and it is normally considered to be more efficient and effective ration of bringing about change in corporate governance.
In United States of America, the security Act of 1933 is the most powerful set of legislation that governs the securities markets of the listed companies. This act was essentially enacted in order to ensure transparent and efficient securities markets, and also to moderate the duplicitously financial information that may be provided to the stockholders. In the year 1934, the securities exchange Act was enacted, this was essentially followed with the formation of the SEC as an agency for regulating and promoting of securities market stability, and enforcement of securities rules and regulation, hence protecting the stockholders from eminent losses that are normally incurred as a result of poor corporate governance.
All listed companies that are registered with SEC in United States of American are essentially required to adhere to the strict disclosure requirement. They are normally required to provide all the annual and quarterly financial reports, copies of the commission materials that are sent to the stockholders and initial purchase offering and registration documents before the annual corporate meeting are convened. The SEC also requires the companies, which are involved in the acquisition situation, to release all documents concerning the tender offers and all document related to mergers and acquisition, so as to ensure stockholders interests are not compromised during the process.
Advantages of implementing good corporate governance
Implementing robust corporate governance is normally essential for the company; this is because well governed companies essentially tend to have reduced cost with regard to capital accessibility. Furthermore, these companies with strong corporate governance, in most cases, outperform the poorly governed companies in the industry. Another advantage is that all those companies that promote sound quality governance normally decrease numerous risks that usually are inherent to an investment company.
Another advantage is that sound corporate governance normally allows the company to be assessed positively by the potential investors. It also ensures increased valuation to the company in the market. Furthermore, it ensures that the management team of the company implements strategies and policies that are stockholders oriented. Good corporate governance normally instigates a sense of transparency and accountability in all company’s operations, which conquers the trust of the stockholders.
Strong corporate governance essentially inspires a system of internal control in the company which leads to impressive profit margins. Therefore, a company that implements effective corporate governance strategies attracts the new investors to bring new equity in board. In addition, company that upholds bright governance ensures that the management team of the company acts on the objectives and goals that are of the interest of the stockholders. Corporate governance is also advantageous to the stockholders because their investments are usually more secure. Furthermore, stockholder increased accessibility to the investment details of the company ensures that they exert their influence on the governance of the company.
Disadvantages of Corporate governance
Corporation governance, being the technique through which the company’s business operations are controlled and directed, normally has some shortcomings despite its wide acceptance. The disadvantage of this governance normally arises due to the absence of the sentimental, oversight, and the decision making by embedded board directors, and the extremely high cost that is normally incurred when diverting the business direction the moment a business path proves to be unproductive.
Corporate governance normally is corruptible. This is because corporate governance normally requires a close government inspection in order to avoid the growing levels of corruptions. This is normally evident in the area of banking and corporate finances, where the lack of government regulation in the industry normally leads to predacious lending practices that essentially created a financial crisis to the millions of American citizens in the year 2004. Lack of governance oversight and inspection normally leads to the misappropriation of the dues that essentially worked against the competition. This situation normally makes banks stop competing with each other.
Another disadvantage is that a large cost is normally incurred when monitoring the corporate governance. This is because in order to govern a public company efficiently and effectively, all the stockholder are normally required to speak with one voice, since this order make their influence against the company gain more weight. In most instances, this essentially requires an individual to uphold a collective dream of the company; thus, use a lot of resources in order to obtain a controlling stake in the company. This course of gaining corporate control is normally extremely political, since regulating of stockholders may result in an acutely hostile acquisition as one party may essentially attempt buy a considerable portion of shares in order to stay in power and exert dominance on the minority party. The corporate governance, at this point, normally brings into standstill the driving share prices and essentially hinders the company’s ability to make crucial business decisions.
Corporate governance normally upholds the values only when the stockholder and the management board members can make objective and realistic decisions, which work for the interest of the company. In family run companies such as Ford, where the members of the family hold the majority shares in the company, they may end up losing the objectives of the business when making key decisions because of the family emotional ties that normally tend to conflict with the business operations’ objectives.
Measuring corporate governance
Stockholders in both developed and developing markets are willing to make premium payment for the appropriate corporate governance. The establishment of the firm and effective corporate governance in a company is truly essential. When measuring or assessing the outcomes of the effective corporate governance mechanism in a company, it is essentially beneficial to pay a distinct focus on assessing the outcomes of the corporate governance.
There are normally three main ways of measuring the performance of the corporate governance. The first one is the determination of the benefits level resulting from control, which is normally measured using the voting premium that is paid by the investors. The second measuring method is the determination of the entrepreneur’s willingness to make the initial offering of the share to the market, as well as analysis of the functioning of external and internal markets for the company control.
The premiums that are essentially paid by the stockholders for the voting stock are normally used as the sign of poor corporate governance, because it proves that the stockholders usually receive the private reimbursements of the control. In addition, the stockholders are usually willing to buy the shares of the company that goes public when its corporate governance is supposed to be strong. In an instance where the corporate control functions efficiently in the market, those corporate managers that are performing poorly are normally interchanged. Though, the above named measures need to be considered together so as to determine the performance of the corporate governance, in most assessment, the main focus is normally in the functioning of the external and internal market company control.