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Professional Accountant

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The United Kingdom’s corporate governance has the codes that are commonly used in mostly countries of the world. The United Kingdom’s corporate governance was formulated with the following purposes:

  • To contribute to the growth of the UK economy and employment;
  • To advocate for transparency and accountability in the corporate organizations. This is achieved through good management that comes with strict adherence to the codes outlined in the corporate governance;
  • To provide companies which are unlisted with the appropriate guidelines to be followed in designing of appropriate corporate governance codes;
  • To establish the framework for companies and their processes and attitudes.

From the above we can judge that the UK corporate governance had very important role to play in the business world. Its establishment came with various objectives. Some of these objectives included:

  • To ensure that the assets of the firm are managed appropriately in a manner that is productive and contributes to the effectiveness and efficiency of the firm;
  • To ensure that financial statements are produced in a manner that meets standard requirements. This enables the external users to get a true insight of the financial situation in the particular firm;
  • To ensure that the motivation of value-maximization objective is accomplished. This is through ensuring that there is a conducive environment for business growth in the firm. Under this point, it is the responsibility of the firm to solve their conflicts using various guidelines stipulated in the codes of good governance. These objectives and purposes were fundamental and favoured the rights of the stakeholders. As such, most countries around the world adopted the UK corporate governance. Other countries became significantly influenced, including the United States and other European countries. The East Asian countries, for example, after undergoing a major financial crisis adopted their own corporate governance codes. These Asian countries included Malaysia, Indonesia, Philippines and South Korea. Financial crisis started in the Thailand after investors from other nations lost confidence and started withdrawing their holdings due to the depreciation in the currency. This brought about massive loss of equities and the interest rates sky-rocketed seriously. In controlling the situation, Malaysia, for example, adopted the Malaysian Code on Corporate Governance which was mainly based on the United Kingdom’s corporate finance.

The milestone advances in the corporate governance came after release of the Cardbury report of the 1992 on the Financial Aspects of Corporate Finance. There are various approaches of corporate governance. They include:

Rule-based approach

It came by after collapse of the Enron and WorldCom in the United States. The United States then formulated the Sarbanes-Oxley Act in the year 2002. This was a rule that called for total compliance to the corporate governance. The compliance issue became a law that had to be adhered to by companies and no defaulting.

In the rule aproach, both small and large companies are to adhere to the rules stipulated in this Sox rule, unlike in the flexible Principle Approach where small companies are exempted.

This approach proves to be very expensive for small businesses because the cost of collecting and analyzing financial information for the purpose of internal use by management and also for external use is very costly and inapplicable for small and middle-scaled businesses. 

Principle-Based Approach

This rule is commonly used in the United Kingdom and the countries that being to the commonwealth organization. This approach was commonly based on the rule of compliance for corporate firms. This means that the firms had to strictly adhere to the rules and guidelines provided in this approach including following to the latter corporate governance codes. The protocols on the collection and analysis of financial information had to be followed.

However, this approach has some elements of flexibility in that the small and middle-scaled firms could manoeuvre their ways in the business field without following the guidelines stipulated and would not face any negative consequences. This was important since the collection and analysis of the financial information and reports are very expensive to these small business enterprises and as such the cost is avoided. This enables these small scale firms to grow and increase in the corporate world. It is, however, important to note that flexibility of the approach does not allow for shifting from compliance to non-compliance forms.

Institutional investors are organizations that accumulate large amounts of money and then invest this money in security or even the real properties. Institutional investors include financial institutions, such as banks and security agencies among others.

Institutional investors buy shares as a way of investing in the firm. The ultimate reason is to make profits or increase their holdings in the particular company. The corporate organizations usually have a structure comprising of three important groups: the shareholders, the board of directors and the executive committees on the lower end. This structure is tied to the agency theory in that work is delegated from the top management or unit (shareholders) then to the board of directors and, finally, the executive committee executes the task. These units are discussed below:

  • The general shareholders who are responsible for making fundamental decisions about the corporate firm. They have the right of voting as a block through which they make their decisions. They can vote in or vote out a director. They also vote to approve the bringing of an editor from outside;
  • Below the general shareholders is the board of directors. The board of directors oversees the daily activities of the firm and sets the strategies to be used in implementation of the daily business transactions so as to realize efficiency and effectiveness.
  • Below the board of directors we have the executive board, which is responsible for control of the operations of the organization.  

According to the research I conducted iin Alfa Bank, I discovered that the organization has this particular structure. In the category of board of directors we have two fundamental categories: the executive and the non-executive directors. The non-executive directors play very important role in the committees. Some of their roles include:

  • They provide creative contribution to the firm through positive criticism. This serves as a way to provide strategic sense of direction to the company;
  • They also monitor progress of the executive directors and put question to them if they have any issues of concern;
  • They usually have wide range of experience hence are important in provision of managerial advice.

Despite of these great roles played by the non-executive committee, the research conducted indicated that they still do great tasks which are supposed to be done by the executive management. Some of these roles include being left the responsibility of overseeing the daily operations of the firm or organization by managing the committees and staff on behalf of the executive committees. They also represent the executive management in important forum, yet the latter might not be engaged in any activities.

It should be noted, that despite of this workload, the non-executive directors have continued to execute their roles very well and this has led to the increased management of the firm. The profits have also increased and there has been a significant increment in the number of institutional investors in the firms. The increase or dominance in the institutional investors can be attributed to various factors. These are:

  • The institutional investors can readily monitor performance of the management in the corporate firms, since their shares are large and they may not wish the firm to be mismanaged as the loss to them would be very high. As such, they have the right to exercise their opinions concerning changes effected or these are to be effected in the firms. This right they exercise through voting as shareholders in the firm. In small business firms such rights do not exist and it is the sole role of the owner to manage the firm. As such, the level of management is low.
  • There are institutions, which try to find the style of investment that accepts and puts into consideration the risks and uncertainty of small firms. This means that they search for the firms with good governance and management, which in other words are the corporate firms.
  • With better management in the corporate firms, the institutional investors find it easy to trust the firms with their large holdings. This is according to the research conducted by Del Guercio in the year 1990. In the research he asserts that usually these firms do not have many cases of fraud. This shows that being that institutions would prefer firms which have straightforward deeds; they therefore find themselves in the corporate governance.
  • It is important to note that the cost incurred by institutional investors when it comes to the management of their holdings is usually very large and, as a result, they look for a well-managed firm to manage their holdings on their behalf.

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