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N420 Accounting and Finance

Published : 28-Sep,2021  |  Views : 10

Question:

Part 1:

a)follow what the details request, I choose Italy, so compare Italy and UK.
Main important differences.Key points and explain.
Really life examples explained well.
fror each of each of them (uk and Italy) give real life example if success and failure of their system.and explain why.
 
b) what lessons can be learnt from other countries jurisdictions about ways to improve the UK system and explain why.

Part2

Follow the instruction on the paper and put real life example( such as business etc.)

A)Discuss whether or not the definition correctly summarises the role of NED ' in uk bussines? Why? Support with real life examples from recent business practice and evidence.

Give a real life example from recent business practices of where NED have failed(Uk) in one or more of these roles and explain
 
B) Institutitonal investors have been described as "absentee landlords" in their approach to corporate governance because they have consistently fail led to intervene in the management of companies that they hold a stake in.

Is this statement generally true or are institutions actively promoting good governance in business.
Discuss, explain and support with evidence and real life example of recent business practice

Answer:

Part 1:

1 A: The origins of the UK corporate governance system and laws are relied on the values of individualism and freedom of contract. Currently UK makes the use of one-tire board structure having non-executive directors and independent auditors who are used to protect the accountability for shareholders. It is noteworthy to denote that the financial reporting council Combined Code on corporate governance forms the chief tool of governance in UK. The unitary board is collective accountability whereas the duties of chief executive and chairman are separated (Tricker and Tricker 2015). In addition to this, the executive and independent non-executive directors possess particular and distinct power.

Italy in comparison to UK is more flexible and organisations can make the selection from three board models. During the yearly years of 1998, Italy ushered in specific rules for listed companies, which lead the establishment of external and internal auditing. Currently companies in Italy are run on the principles of “Collegio Sindacale” which facilitates internal auditing functions and overseas compliance in accordance with the laws and articles. After passing the “Vietti-Reform” for Italy, it resulted in significant internal control reforms (Laoworapong, Supattarakul and Swierczek 2015). The revised code of conduct for Italy lays down the companies should have an adequate number of non-executive directors and also provides that the internal control committee should have the composition of non-executives so that it can advise the board.

Success and failures of UK & Italy corporate governance: 

Failures and Success:

The UK approach combines high standard of corporate governance with low amount of associated cost. Several comparative studies have consistently represented that UK have outperformed nations like Italy in terms of governance standards. The compliance cost are estimated to be lower than Italy with comparable standards. The UK corporate governance is capable of dealing with wide range of circumstances (Christensen, et al. 2015). The UK combined code of corporate governance recognises the good governance practices, which enable several organisations to adopt different approach to suit appropriate circumstances.

The UK corporate governance report overlooks the financial reporting council and its failure to address the auditing and accounting standards have precipitated banking crisis throughout the UK. The corporate governance system of UK has been provincial in the financial failures in the financial crisis and corporate governance accounting principles are not technical. For example, the relevant of corporate governance came into the enlightenment when a high profile organisation such as Rober Maxwell collapsed.  The UK financial corporate governance fails to address the culture of short-term profit maximisation and excessive bonuses for CEO’s. Failures have often been noticed where banks have regularly exploited millions of customers representing a malfunctioned financial crisis (Veldman and Willmott 2015). As identified by the OECD there are four areas of failed corporate governance such as risk management, executive remuneration and exercise of shareholders rights. For example, Parmalat Finanziara one of the Italian dairy food company have joined the likes of Enron for corporate governance failures due to their involvement in fraudulent activities of $4 billion. The reason for their failure was that the board and independent non-executives members were not truthfully vigilant. The role of external auditors have become an issue of inquiry along with the weak structure of key board committee has resulted in failures in organisational level.

On the other hand, companies such as Cadbury and Matteo Arpe have gained significantly from UK and Italy corporate governance by adopting the wise principles of code and complying with the legislative measures incorporated through corporate governance code.     

1 B: It is evident that the UK code of corporate governance promotes chairman’s to report personally, however it is often noticed that the chairman statement hardly lays down an insight into the view of the good governance and the activities of board. The culture of UK corporate governance is often debated concerning the contributions made by the non-executive directors. Below stated are the suggestions to improve the UK corporate governance systems. UK can learn from the Global financial crisis for its weak risk management system. Companies such as JP Morgan constantly analyses the functions and guiding major corporate strategy for ensuring reliability of the corporation secretarial and operative controls.          

  1. The UK corporate Governance Code promotes personal reporting by the chairman concerning the principles of code dealing with leadership and effectiveness. To improve the corporate practices either the main chairman’s statement or separate chairman’s statement on corporate governance can be used for this purpose.
  2. Narrative reporting and governance reporting is understood as an opportunity for companies to break down the barriers amid the governance and the rest of the narrative reporting with the help of integrated team (Elshandidy and Neri 2015).
  3. The statement of chairman presently provides nothing on governance outside bland assurances. It is recommended that demonstration of leadership could result in consistency with vital corporate events with the company’s culture and values.
  4. Compliance reporting is necessary for listing rules along with the key aspects of board committee reports for governance code. Such reporting would help in higher profile compliance. Therefore, adopting such kind of governance reporting helps in cluttering the governance story.  
  5. Creating a new reported structure will help in reporting of governance processes. The new integrated reporting will help in setting out the information in broad categories based on modern dynamic business throughout each sectors (Elshandidy and Neri 2015).
  6. Given that the explicit reference is made to the business models in UK governance reports it is recommended that consolidating the current reporting content under the section of business models will provide the basis of challenging the existing content. Creating a single reference point will help in demonstrating the signpost from the governance report (Larcker and Tayan 2015).
  7. A personalised report of chairman should provide an introduction to the governance section and must act in the form of executive summary and index so that it support the details. The personalised report of chairman in UK system should be introduced to report the perspective of board, its cultural and overall effectiveness. It should be so designed that it provides the highlight of particular actions throughout the year to support the picture (Young and Thyil 2014).  
  8. A personal perspective beyond the chairman can be brought forward by taking into the considerations the quotes from board members both executive and non-executive. This will help in reflecting their views on boards, its balance and their process of operations.

Part 2

2A: A non-executive director also known as NED is identified as a member of the board of directors who do not form part of the executive management hierarchy. They are usually considered to have a different role from the day-to-day operations of the business. They need to be particularly careful, due to the absence of legal distinction among executive and non-executive directors. As per the UK Corporate Governance code of conduct, the responsibilities of the NED’s has been identified in terms of contributing to the development of organizational strategy, scrutinizing and monitoring of the performance of the business, taking  robust and defensible control to avert the risk of the management and determination of the remuneration of the executive directors. However, in the recent times the NEDs are having a much more challenging role by having them to go through the various intricacies and a detailed understanding of the operations of a company. Hence, the input of the individual NEDs differs from the ownership structure of the business entity (Inceif.org. 2017). For example, in the start of a new business, they might be considered as a mentor however and an NED of the listed PLC may be only allowed to be present at the board meetings in few occasions in a particular financial period. In order to understand the suitability of the definition the very nature of duties performed by the NEDs in public and private companies needs to be understood. In a public listed company, the NEDs need to acquaint themselves with special skills, development to deal with a scheduled question brought in the board meetings held in public. Hence, it is difficult to say whether they can influence the outcomes and contribute to the value of the organization without compromising with the role of executive management. In addition to this, the NEDs should be capable of understanding the dissimilarity between an executive and non-executive. Instead, the management is responsible for appointing the right NED who can influence the business activities in UK (Accaglobal,  2017).

In several instances, corporate governance has failed due to lack of efficiency, accountability and transparency in the business. In many situations, conflict of interest was observed as another problem as loyalties were compromised for personal benefits. The Higgs review 2003, is very important for focusing on the failures of UK companies such as Cadbury. Cadbury saw this with a hostile takeover bid of Kraft Foods in 2009 (Ft.com. 2017). In several other instance Royal Bank of Scotland (RBS) was noted with similar issues of corporate governance report. The main reason for the failure was due to the culture of the institution. It was observed that the bank was following the culture of its competitors however, it did not perform any due diligence with ABN Amro bid and the acquisition took place with an inadequate due diligence. Due to this, the bank faced systematic crisis and its position was extremely vulnerable due to flawed corporate governance practices and failure of NEDs (Hodges and Lapsley 2016).

2B: An institutional investor is identified as a nonbanking person or an organization, which trades in large quantities of securities, which qualifies for preferential treatment and reduced commission rates. Some of the well-known institutional investors include life insurance companies and as well, as pension funds. A retail investor is allowed to deal in stocks in round lots of hundred shares or more whereas an institutional investor deals in blocks of shares of 10,000 shares or more than that (McCahery, Sautner and Starks 2016).

In various types of empirical research, it has been identified that institutional investors has an active role to play in securing a long-term stability of an organization. This is particularly done by promoting a strong practice of corporate governance relating to the independent board and fully independent audit remuneration committees. The encouraging turnover of institutional investor is identified with an active engagement in enhancing the firm’s performance and introducing risk (Bell Filatotchev and Aguilera 2014). The different types of activities of the institutional investors in promoting good corporate governance practice has been seen with pre-alerting of investors expectation and  addressing several coalitions of a company with social responsibility in terms of social issues, environmental factors, HIV or AIDS, climate change or issues related to revenue transparency (Abdn.ac.uk. 2017). However, prior to the last financial crisis institutional investors has failed to perform their expected role in supporting the corporate governance culture among financial companies. In several instances, they are often identified as culprit of corporate failure in financial institution being labelled as “absentee landlord”. It was reviewed by Walker that the duty of stewardship provided the shareholders with significant rights of ownership and benefits related to limited liability under the legislation of the company. It was further recommended in the review that institutional shareholders and the investment managers to voluntarily make commitments in stewardship obligations based on the combined code (Tricker and Tricker 2015). The ISC code of 2009 was aimed to provide the principal for the best practices related to institutional investors and engage with investor companies in order to ensure long-term relationship thereby reducing the risks involved in corporate decision. It has been further observed that the listing requirement helps the investors to gain knowledge about their investee companies and hence the self-regulatory approach is observed to be conducive in adopting optimal corporate governance structure.

Reference:

Abdn.ac.uk. (2017). [online] Available at: https://www.abdn.ac.uk/law/documents/Corporate_Governance_after_the_financial_crisis.pdf [Accessed 15 Mar. 2017].

Accaglobal,  A. (2017). Corporate governance | F1 Accountant in Business | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available at: http://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f1/technical-articles/corpgovernance.html [Accessed 15 Mar. 2017].

 ArAs, G., 2016. A handbook of corporate governance and social responsibility. CRC Press.

Bell, R.G., Filatotchev, I. and Aguilera, R.V., 2014. Corporate governance and investors' perceptions of foreign IPO value: An institutional perspective. Academy of Management Journal, 57(1), pp.301-320.

Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), pp.133-164.

Elshandidy, T. and Neri, L., 2015. Corporate governance, risk disclosure practices, and market liquidity: comparative evidence from the UK and Italy. Corporate Governance: An International Review, 23(4), pp.331-356.

Ft.com. (2017). Case study: Kraft’s takeover of Cadbury. [online] Available at: https://www.ft.com/content/1cb06d30-332f-11e1-a51e-00144feabdc0 [Accessed 15 Mar. 2017].

Hodges, R. and Lapsley, I., 2016. A Private Sector Failure, a Public Sector Crisis–Reflections on the Great Recession. Financial Accountability & Management, 32(3), pp.265-280.

Inceif.org. (2017). [online] Available at: http://www.inceif.org/wp-content/uploads/2013/11/Simon-Gray-speakers-slide.pdf [Accessed 15 Mar. 2017].

Laoworapong, M., Supattarakul, S. and Swierczek, F.W., 2015. Corporate Governance, Board Effectiveness, and Performance of Thai Listed Firms. AU Journal of Management, 13(1).

Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.

McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Veldman, J. and Willmott, H.C., 2015. The cultural grammar of governance: The UK Code of Corporate Governance, reflexivity, and the limits of ‘soft’regulation. human relations, p.0018726715593160.

Young, S. and Thyil, V., 2014. Corporate social responsibility and corporate governance: Role of context in international settings. Journal of Business Ethics, 122(1), pp.1-24.

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