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Introduction of corporate governance and its importance in the responsibilities of a board of directors Assignment
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Corporate governance is a system that involves rules, processes, and practices by which companies are controlled and directed. For the governance of companies board of directors are responsible. The responsibilities of the Board of directors towards the governance of companies include setting the strategies for the achievement of companies' aims, providing leadership for putting the strategies into effect, supervising the management of the business, and providing feedback to shareholders on their management. The study concluded by Yermack, (2017) shareholder's role in the governance of companies is to appoint auditors and directors, for looking out for the management of companies. Shareholders satisfy themselves by placing an appropriate governance structure for companies.
According to Pargendler, (2016) Corporate governance includes balancing many stakeholders' interests, like shareholders, customers, suppliers, financiers, government, senior managers, executives, and the community. Corporate governance is all about what the board of companies does and how they plan on setting values for companies. The Board of companies also looks into day-to-day operational management of the companies by appointing full-time executives.
The report of ICAEW, (2022) says that in the UK, corporate governance of listed companies is part of the legal system according to UK Corporate Governance Code. This code is applied to all listed companies of the UK, from the beginning of the accounting period or after January 1, 2019. UK Corporate Governance Code applies to all premium listing of companies' equity shares regardless of whether they have incorporated in the UK or any other country. Good governance can behave a better impact on the nonlisted companies because it is all about improving accountability and transparency in the existing system of companies.
According to the study by Mallin, (2016) on how corporate mechanisms are used for facilitating organizational-level outcomes and how corporate governance helps an organization establish its identities and reputations. By reviewing the literature work on corporate governance this report provides corporate recommendations that would help full for companies to plan better and more effective corporate governance strategies.
Corporate Governance
Corporate governance is a model which includes policies, patterns, and functions that manages the communication and relationships with proprietors, governing body, directors, and different parties. In a study done by Elmagrhi et. al. (2017) says that Corporate governance involves all the bodies which are affected by the change in companies' tendencies and activities. The UK system of corporate governance is one of the most effective models among all the countries, UK system of corporate governance has successfully influenced many other jurisdictions in Europe and Asia. The study of Moore and Petrin (2017) of corporate governance of the UK helps to attract international companies which are interested in gaining access to a vast pool of investors. The study of Akbar et. al. (2016) focuses on theories of corporate governance and how its methods and principle works for companies. Corporate governance involves certain sets of principles as companies believe play an important role all follows:
Fairness – every shareholder whether having a small holding in the company or a large holding, should receive equal treatment and consideration. The board of directors should fairly and equally treat all the shareholders, employees, vendors, and communities.
Transparency – there should be transparency in the company, stakeholders should have all information about the company's activities, strategies used, plans, and risks if any. The board needs to provide information timely and accurate about things like conflicts and actual financial performance to shareholders and stakeholders.
Risk management – the board of directors and management must focus on determining risks of all kinds and are required to make plans to control them. The Board of directors must provide information to all relevant parties about the risk status.
Responsibility – the board has the authority to act on behalf of the company and is also responsible for all the management activities and corporate matters. Board must be aware of all the matters and should support the ongoing performance of the company, it therefore must act in the best interest of the company.
Accountability – corporate accountability refers to the responsibility to provide explanations or reasons for a company's actions. Such as the board is responsible for determining the nature of risk, and maintaining proper risk management strategies. Board is also accountable for maintaining regular communication with stakeholders by providing them with a clear and understandable goal.
Corporate Governance of UK
According to the study of Turnbull, (2019) UK's corporate governance patterns have bought universal rules which focus on keeping the industries away from fraud and misdirection. Companies and shareholders across the world are concerned about good corporate governance and best practices that support good governance. Each country has its own rules, regulations, and laws that ensure the protection of companies' shareholders. The corporate governance codes apply to companies that are established in the UK and are registered on the London Stock Exchange. In the study of Afrifa and Tauringana, (2015) main principle behind the corporate governance code is to make aware the shareholders and stakeholders about the principles applied to the corporation. However, the companies which are subjected to the code must follow the provisions of the code. If companies cannot comply with the code they are required to provide a reasonable explanation for not complying with the code.
UK's corporate governance is influenced by a lot of legislative and regulatory sources. The main legislation is set out in the Companies Act 2006, altogether with the rules for listing and disclosure of guidance and rules of transparency made by the Financial Conduct Authority (FCA). The main governance regulations are the UK corporate governance code (UKCG Code) for companies and institutional investors and the UK Stewardship code. Each is currently administered and issued by the Financial Reporting Council (FRC). The current version of the UKCG Code applies to financial years beginning with 1 January 2019, and the stewardship code is applicable from 1 January 2020.
In a report comducted by Tom and Dominic,( 2021) describes that Stewardship is defined as the responsible allocation and management of capital for creating long-term value for beneficiaries which leads to long-term benefits for the economy and society. The Stewardship Code imposes obligations on participants and the obligations apply on a comply or explain basis. The stewardship code protects and maximizes the wealth of shareholders with companies' performance. Stewards are companies executives and managers who work for companies' shareholders, to protect their interests, and to make profits.
The UK stewardship code 2020, set a high standard for the investors who are investing on the behalf of UK's savers and those who support them. The codes apply to asset owners, asset managers, and service providers. These stewardship signatories are required to report annually on their policies, processes, activities, and outcomes for the reporting period of 12 months.
Review on Corporate Governance code of UK
Corporations and shareholders across the world have a concern about good corporate governance and also concern about the best practices which help in supporting good governance. Each country has its corporate governance which has its laws and regulatory bodies and practices that ensures protection for stakeholders and shareholders. As it is stated above corporate governance code applies to companies that are incorporated in the UK and are registered in London Stock Exchange.
This report is a theoretical framework for the corporate governance of the UK, and this part of the report reviews the corporate governance theories. The theory conducted by Clarke, (2016) enhance the main objectives of corporate governance which is maximizing the value of shareholders by providing social and environmental performance. This section of the report discusses the empirical review of literature, and empirical research, on corporate governance.
In the year, 2020 the corporate governance review shows the best-performing companies are implementing governance activities, not distinct compliance needs, but as important for business. All these are fundamentally linked to risk and rewards. Companies succeed by using corporate governance as dynamics which helps in sharping operational agility, building resilience, and to create value for companies. The corporate governance code is a guide to the purification of governance practice and report that could be used as a blueprint of a plan to build and develop a governance strategy. The corporate governance code encourages the approach that embraces the connectivity of purpose, culture, Board effectiveness, risk mitigation, and diversity and inclusion.
In July 2022, FRC published a position paper, which states how FRC will support the UK's government's audit, corporate governance, and corporate reporting. The FRC is planning to enhance UK corporate governance code with the following amendments:
By providing additional support to code provisions, in which reporting is quite weaker currently.
Evidencing the effectiveness of control of internal factors around the year and strengthening based on reporting processes.
The board and audit committee need to reflect wider responsibilities toward sustainability and ESG reporting.
For the expansion of market diversity, the board requires to consider how to audit suggestions takes account.
Meditation is required for reflecting the proposed changes set in the government's response, including strengthing malus and clawback reporting arrangements.
The FRC, 2022 report states that FRC is also looking forward to having a meeting with the stakeholders in the second half of 2022, for planning on developing the standards, which will be available by the 2023 financial year ends.
In against this review report UK's government published its response, key components are as follows:
Changes will be applied to current public interest companies, which include those companies which are publicly listed securities in the UK, insurance companies, large private companies with 750 or more employees, and companies trading on AIM, etc.
The new guidance is to be issued on what should be treated as realized profits and losses for determining the reserves.
Internal controls and fraud measures to be taken for the effectiveness of the company's internal controls
Companies need to prepare an annual resilience statement, which will help in reporting matters which are material challenges to resilience.
The audit and assurance policy, which will be of three years describes the approach for the director to seek internal and external information which companies report to their shareholder
The audit reporting and governance authority (ARGA) will replace FRC. ARGA will have new powers to tackle the fraud and breach of duties of the company's directors related to corporate governance.
All these responses given by the government did not set out any particular timetable for implementation, instead, these just outline actions that the government is planning to take. By critically analyzing and studying all the theories and reviews, the report concludes that there are still a few major points that required the focus of the government. For an improved and effective corporate governance UK's government should also focus on the following points:
Government should provide a compliance statement that shows the provisions that have been implemented and also provides a clear view and meaningful reasons for those provisions which are being implemented.
Improvement is required in process of corporate governance, how the purpose, values, and strategies are concerned and important for companies
Corporate governance of the UK should focus more on how companies are accessing and monitoring the culture. What steps companies are taking to the alignment of culture with purpose, values, and strategies?
Companies should focus on their shareholder not only the large ones but also those who have small shares in companies. Companies need to communicate the views of shareholders and also provide clear and full information to its stakeholder about the board decisions and actions.
With the help of corporate governance, companies should focus on diversifying their policies and focus on reporting on succession planning and how it links to board diversity.
Companies are required to focus more on risk and effective management in internal control systems.
Companies should explain how executive remuneration is lined up with purpose, values, and strategies.
These are the major requirements that companies need to fulfill for effective results.
Corporate Social Responsibility
Corporate social responsibility (CSR) is a business model that helps different companies for being socially accountable to its shareholder and the public. According to Ding et. al. ( 2016) With help of Corporate social responsibility, companies can look into the impacts they are having on society, including factors like social, economic, and environmental. Lu et. al, (2019) states that the main objective of corporate social responsibility is to enhance the society and environment by contributing positive factors. Study done by Ali et. al. (2017) mention that corporate social responsibility is further divided into four categories ethical responsibility, environmental impacts, financial responsibilities, and philanthropic endeavors.
The Empirical study of CSR and Firm performance
In process of the understanding interrelationship between corporate social responsibility and firms' performance, many studies are been conducted. The researchers concluded the connection between CSR and firms in terms of market value added. And research also provides the implication that if a code of ethics is followed by companies, they are capable to achieve higher economic value added. In the end, it implies that firms with a code of ethics can achieve desired goals and enhance their profit level. Similarly Bagh et. al. (2017) tried to explain the association of CSR with the economic performance of the firms. In which the author has considered the positive effects along with the negative impacts of CSR activities on the financial performance of firms in various industries. The findings of the study by Chetty et. al. (2015) provide a mixed structure of corporate social responsibility that affects various industries in different patterns. It concluded that the effects of CSR on the firms' performance depend on the industry. The main reason behind this is the disclosure of CSR activities to firms' customers, the public, and shareholders of the firms. A study conducted by Cho et. al. (2019) also concluded that the relationship between CSR and a firm's financial performance is much better when firms are engaged in CSR activities.
In this regard, Saeidi et. al. (2015) has determined that firms engaged in CSR activities are successful in increasing their reputation in the market, among customers, and its stakeholders. Firms by involving in CSR activities firms can make strong connections with their customers and improve their financial performance. However, firms should focus on contributing directly to those activities which give a positive effect on the environment and society.
Similarly to this Gautam et. al. (2016) has concluded a study that involves a regression model which helped in determining the effects of CSR disclosure on a firm's performance. It revealed that a firm's performance is positively affected by the disclosure of corporate social responsibility. In support of these arguments Beck, Frost, and Jones (2018) conducted a study that says CSR disclosure is quite critical for leveraging the investment. Because involvement in CSR activities tends to be highly valuable for firms to increase their transparency.
By reviewing the above study it is concluded that firms earn more profits and fame by engaging in corporate social responsibility. Firms should focus more on the ethical responsibility of CSR, which will help firms to understand and deal with the internal problem that affects the goals of firms.
Conclusion
This study aims to understand the meaning of corporate governance and its importance in the responsibilities of a board of directors. This study determines the role of the board of directors towards the governance of companies by setting purpose, values, and strategy. This report focuses on how corporate mechanisms are used for corporate governance of the UK and helps to understand the outcomes of it. It involves the role of corporate governance in establishing the identities and reputations of companies in the UK to achieve their desired goals. This report gives a critical review of corporate governance theories in the UK, in light of corporate recommendations, by studying different literature and reviewing them.
Similarly, this report also provides a detailed description of the corporate social responsibilities of firms and their impacts on the composition of firms. At last, this report includes an empirical study that involves the impacts of CSR on a firm's performance.
Reference
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