Corporate governance can be defined as how companies and corporates are controlled and directed. Since corporates play an important role in the society of wealth creation, tax payment, and provision of employment, there is the need for them to be controlled, so that their operations ensure the maximum realization of returns, which in turn boosts the economies of countries (Ali, & Gregoriou, 2006, p.300). Different countries have different corporate governance systems or frameworks depending on their unique economic, legal, and cultural backgrounds. Some factors influence the efficiency and performance of capital markets. They include low transaction costs, liquidity, availability of transparent and high-quality information, which increases investor confidence, and good corporate governance which is well regulated and coordinated (Ali, & Gregoriou, 2006, p.300). The United States and the United Kingdom have different corporate governance frameworks. The US corporate governance framework is rule-based while the one for the UK is principle-based (Ali, & Gregoriou, 2006, p.300). Though they have different approaches to corporate governance, their overriding goal is the protection of their shareholders in the corporate world. In this assignment, I will discuss both the UK and US corporate governance frameworks, their rationale, and how the specific system adopted in each country reflects the respective authorities’ responses to the major corporate collapses during the period 1990-2002 (Calder, 2008, p.25).
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United Kingdom’s Corporate Governance Frame Work
The UK system of corporate governance is principle-based rather than rule or regulation-based (Financial Report Council, 2006). The rationale behind this kind of system is based on the need to increase Britain’s competitiveness in the global field of investor attraction. The philosophy behind this kind of framework is that regulations and rules only make investors shy away from investing in the country due to the high cost associated with compliance to rules and regulations, some of which may only serve to impose unnecessarily constraints on businesses and kill of innovations. Since different companies have different sizes, organizational ownership structures, and complexity in business operations, the guiding principle in the UK is therefore to leave the corporations to design their regulation mechanisms that comply with shareholders’ wishes (Plessis, 2010).
The UK corporate framework operates under the combined code of conduct which operates under the basis of “comply or explain”. The code outlines what may constitute good corporate governance in terms of organizational structure, board organization, and committee composition at various levels of the organization or corporate (Financial Report Council, 2006). The code of conduct leaves the organizations with the leeway to decide for themselves which approach is best depending on their prevailing internal organizational circumstances, but they are required to explain to their shareholders about their cooperate framework so that the shareholders may decide whether the approach is good for the company or not. This is a market-based approach to corporate governance, which gives the shareholders of a company a big say in the organization of the corporate administrative infrastructure and obliges the companies to be accountable to the shareholders on the effects and results of the nature of corporate governance (Mallin, 2011).
The Robert Maxwell funds scandal and the collapse of the BCCI bank in the 1990s triggered the need for the reorganization of the corporate governance framework in UK (Financial Report Council, 2006). This saw the business community come up with what was referred to as the “Cadbury report” which gave several recommendations regarding the way corporates should be organized. One of the recommendations which were outstanding and seen as a specific response to the corporate collapsing was the one touching on the relationship between chairpersons and the chief executives of corporates and the roles and responsibilities of non-executive directors of organizations (Financial Report Council, 2006).
The United States Corporate Governance Frame Work
As I mentioned in the introduction, the United States corporate governance framework is rule based. This is due to the federal nature of the constitution. The regulation for corporates is governed by the state law; the Securities and Exchange Commission (SEC) regulations and the stock exchange listing rule (Waring, 2006). The state law takes care of internal corporate governance issues while the SEC regulations and the stock exchange listing rules takes care of the governance of corporates at the national and international levels (Chew, 2009).
The SEC was primarily formed to protect shareholders by enforcing security laws, promoting market stability and consequently protecting the investor and shareholders from fraudulent or misleading financial statements by corporates. All listed companies are therefore required by SEC to file quarterly and annual reports, and the registration documents for initial public offerings (Thau, 2001, p.212). SEC also obliges the listed companies to make public information regarding tender offers, and disclose documents related to company merging, acquisition or taking over of a company’s leadership or management by another company (Thau, 2001, p.212).
In 1990s, the collapse of corporates in the US was mainly attributed to corruption in the corporates, which took the form of manipulation of the market prices for securities, the sale of securities without proper registration, omission or mispresentation of important information about securities and the stealing of customer securities or funds by corporates (Thau, 2001, p.212). Following these unfortunate events, SEC saw the need of stepping up its regulations regarding the governance of corporates by imposing the guidelines for corporates to disclose internal information especially the information touching on the welfare of shareholders and investors, to safeguard them from corrupt and unreliable management of corporates (Thau, 2001, p.212).
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Ali,P.A.U, & Gregoriou, G.N.(2006). International corporate governance after Sarbanes-Oxley. Hoboken, NJ: John Wiley and Sons.p.300.
Calder,A.(2008). Corporate governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. London N1 9JN: Kogan Page Publishers.p.25.
Chew, D.H.(2009). US Corporate Governance. New York: Columbia University Press.
Financial Report Council (2006).The UK Approach to Corporate Governance. Web.
Mallin, C.A.(2011). Handbook on International Corporate Governance: Country Analysis. Cambridge, MA: Edward Elgar Publishing.
Plessis, J.J.(2010). Principles of Contemporary Corporate Governance. New York: Cambridge University Press.
Thau,A.(2001). 2nd edn.The bond book: Everything Investors Need to Know about Treasuries, Municipals, Gnmas, Corporates, Zeros, Bond Funds, Money Market Funds, and More. New York: McGraw-Hill Professional.p.212.
Waring, K. (2006). Effective corporate governace frame works: Encouraging Enterprise and Market Confidence. Web.