Corporate Governance and Combined Code
Corporate governance is a dynamic and sustainable system that consists of series of laws, codes, and regulations that serve to the company’s running. This system helps guide and constrain company behaviour, set the objectives of the company, define liability and rights of different participants- shareholders, directors, management and employees, and clarify the relationship between these participants. Board of directors is under the right system to fulfil its role. Once the system is broken, the board will be dysfunctional and the company might in risk (Maguire, 1993, 29-34). Professional bodies and legislators across the world have to focus on the pathology of governance failure through collapses and scandals in recent years. It is found that poor governance- including financial opaqueness, conflicts with interest, the lack of monitor and audit, and excessive executive compensation, is the central reason to lead to corporate failure. Combined Code is an important discipline that is gaining popularity and recognition, both as a governance best practice and as just good management. More often risk executives in related roles are getting involved or are being assigned the challenging task to implement Combined Code. (Jones, 2003, 10-15)
The Cadbury committee reviewed the structure and responsibilities of boards of directors and one of the first recommendations was to separate the role of chairman and Chief Executive Officer (CEO). The aim of this was to "ensure a balance of power and authority, such that no one individual has unfettered powers of decision". (Charkham, 1995, 21-25) The advantage of this was to "limit the power of an overbearing business leader (think Robert Maxwell) who might railroad his board into disastrous decisions." (Charkham, 1995, 21-25)
The Cadbury Report (1992) also raised concerns about the perceived low level of confidence in financial reporting and about the inability of auditors to provide what was required of them. The committee therefore reviewed the role of auditors and made a number of recommendations to the accountancy profession. The aim of the recommendations was to have
"An accounting system based on true and fair disclosure – telling investors what they need to know rather than merely meeting a legal requirement." (Jones, 2003, 10-15)
Had these recommendations been in place prior to several scandals such as Maxwell and Enron they may have prevented them occurring or at least provided early warning signs. Following the recommendations of the Cadbury and Greenbury Committees that a new committee should review the implementations of their findings, the Hampel Committee was set up. The review of the two previous reports raised doubts that
"Good corporate governance was not merely a matter of complying with a number of hard and fast rules" and there seemed to be a need for broad principles. (Jones, 2003, 10-15)
As a result of the past three reports the London Stock Exchange published a ‘combined code’. The code requires listed companies to disclose, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. The final strand in this U.K corporate governance review of the 1990’s is the Turnbull Report, 1999. Like that of Cadbury, the Turnbull committee wanted organisations and company’s to establish a sound system of internal control (to help minimise the risk of administrative inaccuracies) and review its effectiveness. The report recommended that ultimate responsibility of internal control lie with the board of directors (which is usually delegated to management). (Jones, 2003, 10-15)
When facing the issue of corporate compliance, developing a system to deal with compliance and corporate governance is recommended. The system should analyze alternatives and integrate them. Beginning with internal control and governance, a process of defining compliance steps and preventive solutions will help mitigate risk. This system is needed to ensure complete compliance. To develop preventive, detective, and corrective measures, strategic planning and development are necessary. Prevention controls in place will reduce possible compliance violations (Maguire, 1993, 29-34). This will entail conducting reviews of all ethics policies and any conflict of interest procedures currently in place. Comparison of industry regulations and familiarity with recent updates and the latest filings from the government are a cumbersome but necessary procedure. Taking a proactive compliance review stance will position U.K. listed companies to avoid future violations through aggressive prevention. (Welford, 1994, 62-65)
Detective control procedures for compliance are also needed. This detection should include prompt reporting of any compliance issues and violations, while adhering to U.K. listed company’s code of ethics and compliance regulation as suggested by government regulatory policies. A detective controls compliance program in place will ensure early recognition of potential violation risks. Corrective compliance measures will complete a total system to detect risk and address it. An effective corporate governance system will be created through the application of corrective controls in addition to preventive and detective measures, which are essential to an effective corporate governance system. Combined Code is a disciplined approach to help management foresee risk uncertainties. The objective is to protect and enhance shareholder value through U.K. listed companies organizational objectives. (Maguire, 1993, 29-34)
Incorporating risk mitigation through preventive solutions is recommended by COSO new Combined Code framework that aligns with governance. Corporate governance is designed to provide direction, oversight, and authority of management for the company stakeholders. The executives, senior management, and all the external and internal auditors are the core foundation of corporate governance as defined in organizational charts for U.K. listed companies. Risk management is the responsibility of senior management or the ‘risk owners’ of U.K. listed companies to include the chief legal officer and they are ultimately responsible for U.K. listed companies legal risk. (Karpoff, 1994, 102-107)
Finance and accounting systems will need to become compatible to ensure consolidation of customer and marketing information to ensure past order history is accessible. The consolidated close of the general ledgers and the income statement and balance sheets has become cumbersome and labour intensive causing a 15-20 day delay at the end of the month. Compliance with new government reporting requirements has become difficult and is partly related to compatibility of the finance and accounting systems (Maguire, 1993, 29-34). These inconsistencies in accounting data files, data input conversion, and hard copy files could become a security concern. Revision of the IT environment to provide operating system site compatibility will reduce risk associated with sharing information and leaking protected client information. The protection of all sensitive data and trade secrets on the Web and networks would be well served with the introduction of a software platform that authenticates users and verifies electronic signatures. This should be implemented during an upgrade of our infrastructure to ensure network and server compatibility of all operating systems. (Welford, 1994, 62-65)
For a company to ensure complete corporate compliance, it is imperative that there is a developed internal control and corporate governance system. To develop such a system, strategic planning and development are required. This strategic planning includes developing preventive, detective, and corrective controls to cover the various aspects of corporate compliance (Karpoff, 1994, 102-107). Principles addressing global tax operations for corporate tax governance are evolving and require an understanding of the Treadway Commission (COSO) in the US and section 404 of the Sarbanes-Oxley requirements as well as the Turnbull in the UK and compliance to section C-2 of the Combined Code for corporate governance. Providing a practical approach to effective corporate tax governance requires a basic understanding of the corporate income tax process and the corporate infrastructure required to manage and report the company’s global income taxes. Through the building of a compliant enterprise, institutions can transform the cost of compliance into an investment. Technologies that automate, standardize, control, and optimize business processes provide an opportunity to drive out costs and improve business conduct. Active compliance reduces risk and builds confidence in financial integrity. (Welford, 1994, 62-65)
Failure to participate actively in an acceptable corporate governance and financial tax compliance plan would place U.K. listed companies officers and directors at increased risk for corporate non-compliance. These requirements create an obligation for participation by U.K. listed company’s senior management and administrative officers in an effort to establish a system of internal controls for accurate and ethical business operations. Preventive controls must be established to avert possible compliance violations. Preventive controls include development of guidelines and assignment of responsibilities to conduct reviews of ethics policies, conflict-of-interest procedures and updates of corporate compliance procedures that will protect and position the company to prevent compliance violations. Regular comparison of the organization’s current conflict-of-interest policy with industry regulations, review of recent government filings, and evaluation of U.K. listed companies current compliance program will help to avoid potential future compliance violations. (Bain and Band, 1996, 65-69)
U.K. listed companies must ensure corporate compliance by use of detective control. This control will enable the company to detect compliance violations which have occurred or represent future risk thereof. An associate or group of associates will be assigned the responsibilities of taking detective control measures in regard to compliance regulations. These control responsibilities include reporting promptly and addressing objectively any compliance violations, ensuring that a prescribed observation program is in place to make certain the organization adheres to its code of ethics and compliance regulations, and formally reviewing and aligning company policy with government regulations. By having detective compliance controls in place, companies can ensure that their corporate governance systems are aligned with government regulatory standards and recognize potential risks for violations. (Maguire, 1993, 29-34)
Additional controls for U.K. listed companies compliance system would involve the application of corrective measures. Corrective controls will allow U.K. listed companies to repair compliance violations which do occur. Corrective controls which should be applied will include an understanding of the provisions of the various government compliance acts and regulations, scheduling the corrective measures in a timely manner to alleviate the risks, recognizing the implementation of the corrective measures, and reporting the risk and corrective implementations to the appropriate parties. Through applying corrective controls, companies will maintain compliance and have an effective corporate governance system. (Karpoff, 1994, 102-107)
Development and implementation of internal controls through a corporate governance system will allow U.K. listed companies to reduce compliance risks by adhering to government regulations. Development of preventive, detective, and corrective controls constitute the essential aspects of a corporate governance system. By implementing these controls, U.K. listed companies will develop preventative solutions that incorporate risk mitigation (Welford, 1994, 62-65). Since the expectation exists that in spite of established policy and efforts to avoid compliance and legal problems, problems will occur and U.K. listed companies must include alternative methods for dispute resolution. Among these would be mediation and arbitration. Mediation is the less formal procedure and requires an acceptable third party to attempt to settle a dispute. This method, however, may not settle a dispute but is considerably less costly than other alternatives. Arbitration is a less formal method to settle disputes than full litigation and may or may not be less costly. They do offer alternative solutions which may save considerable time and expense. (Bain and Band, 1996, 65-69)
U.K. listed companies is tasked with the logistics of managing various properties which require documents of title to be registered in order to establish ownership and constructive usage. Among these properties would be office equipment including desks, machinery, chairs and fixtures as well as an extraordinary amount of equipment requiring bills of sale in order to ascertain ownership. U.K. listed companies will need to apply their own internally generated numerical serial numbers to what might be considered to be capitol or other types of equipment. In addition to these identified tangible properties would be various properties which are used for temporary purposes. The various lease contracts which establish the terms of use need to be carefully maintained with respect to our legal commitments and the associated expenses connected with these contracts. (Karpoff, 1994, 102-107)
Identification of how to protect the tangible property rights of for U.K. listed companies requires that a security plan be in place. Evaluations must be conducted periodically to determine the adequacy of the plan. An established procedure should be implemented in order that contingency plans could be initiated when problems such as theft, damage or obsolescence arise. Management must assume total responsibility for all tangible property. This is an essential and ongoing task for the organization. Managers should be aware of the laws that protect the company against theft and which provide remedies if someone harms or destroys the property. Because U.K. listed companies devotes a large effort and investment in research and development, the commitment to the protection of inherent intangible property rights must be of concern:
“Protecting Intellectual Property (IP) should not therefore, be seen as a specialized function better left to IP specialists such as, patent attorneys or copyright experts but it should be seen as an important element of corporate strategy.” (Clarke, 2007, 77-82)
Ownership of these intellectual properties is recognized by use of patents, trademarks and copyrights. Registration of patents, trademarks and copyrights by the organization is an imperative for management. Registration is the primary protection afforded within our legal system for this type of property. Protection in addition to registration may also include working with U.K. Customs on the seizure of infringing articles and ensuring the trustworthiness of suppliers. Trade secrets are advantageous formulas, devices, or compilation of information that last indefinitely as long as the secret is not disclosed to the public (Maguire, 1993, 29-34). Management must identify and protect the organizations intellectual property which calls for a security plan to be in place. Evaluations should be conducted on a regular and irregular basis to determine the safety of such property. Management should distribute warnings to all personnel to be alert to potential problems that may arise. (Welford, 1994, 62-65)
To better protect intellectual assets, business managers need to know the threats. This information should be communicated to all levels of employment. Since threats can vary, technology experts can help management to evaluate risks. U.K. listed companies should establish an educational process with all employees in order that an ongoing effort exists to recognize the existence of intellectual property rights. A firm knowledge of the organizations various marks and trade secrets would be critical in order to be able to recognize and acknowledge the rights belonging to others. The potential for violating these laws is something that should be well known with the knowledge well distributed throughout the organization. Those departments of the organization which deal with research and development, publishing, marketing, advertising and other creative work are especially vulnerable to these violations. (Clarke, 2007, 77-82)
Management will implement criminal background checks on employees who will be responsible for accessing and storing sensitive information, policies and practices for creative development and implementation as well as for those who make regular updates to protocol defining manuals. U.K. listed companies competitive position could suffer if an insider used or issued intellectual property or trade secrets which proved to be at cross purposes with outside organizations. Protection includes enforcing civil actions and criminal prosecution. U.K. listed companies management must possess knowledge of intellectual property law in order to protect its intellectual property and to keep from violating the rights of others:
“Intellectual property is the product of human creativity, such as writings, designs, inventions, melodies, and processes. They are things that can be stolen without being physically taken.” (Welford, 1994, 62-65)
Management must evaluate risk continuously and have policies and procedures in place to safeguard the organizations vulnerability. U.K. listed companies should also reduce the opportunities for information to be copied onto disks. Sensitive data should be stored on encrypted drives in the event that the whole drive or computer is stolen. Finally, valuable information should only be shared on a need-to-know basis (Charkham, 1995, 21-25). Corporate Governance’ including updating combined code and guidance in the internal controls and the regulation of a Audit, Including the establishment of POB (Professional Oversight Board) which is responsible for the independent oversight of the regulation of the accountancy and auditing profession in the UK, AIU (Audit Inspection Unit) this was created to make sure that a audit was independent and of audit quality. Finally they introduced the AIDB (Accounting Investigation and Discipline Board) it was created to establish independent investigation into the discipline of accounts for the publics’ interest. (Maguire, 1993, 29-34)
In an attempt to improve consistency of financial reporting in the EU, the IFRS (International Finance Reporting Standards) were introduced on January 2005. With companies trying to access foreign markets, the demand for national financial reporting standard has never been stronger. The IRFS looks to fulfil a global role. Using IRFS has been recognised by many audit firms such as PwC, they say ‘the IRFS concept can dramatically improve quality of financial reporting and international investors’ confidence’. To reduce the likely hood of fraud the government has introduced changes to the company law that are intended to provide a more effective hindrance to fraudulent activities by company directors. (Clarke, 2007, 77-82)