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Introduction to Corporate Governance: Regulatory Frameworks in the UK and Beyond

This lecture explores the foundational aspects of corporate governance in the UK, including key principles from the Cadbury Report and the Combined Code on Corporate Governance (2008). It discusses the roles and responsibilities of directors, the agency theory, and concepts of accountability and stakeholder engagement. It also examines relevant guidance and theories including the Turnbull and Smith Guidance, agency issues, and different theoretical perspectives such as transaction cost and stakeholder theory. This content is also applicable for equivalent institutions in Hong Kong SAR, Malaysia, and Singapore.

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Introduction to Corporate Governance: Regulatory Frameworks in the UK and Beyond

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  1. Audit and assurance Introduction to corporate governance regulatory frameworks - UK Lecture 4a (Hong Kong SAR, Malaysian and Singaporean institutions may study equivalent structures in their countries) AA - Intro to CG - L4a

  2. Cadbury Report, 1992 • ‘The way companies are directed and controlled’ • Definition used by Solomon (2007) • Corporate Governance and Accountability 2nd edn. • ‘…principally a study of the mechanics of capitalist systems’ • Solomon, 2007 AA - Intro to CG - L4a

  3. The Combined Code on CorporateGovernance2008(FRC) • Directors are in a privileged position • They run the business • For owners and other stakeholders • Good CG means that all stakeholders’ needs are appropriately taken into account • OECD • ‘Principles’ of CG • In the UK • ‘The Code’ AA - Intro to CG - L4a

  4. The Combined Code on CorporateGovernance2008(FRC) (cont.) • Main Principle • ‘Every company should be headed by an effective board, which is collectively responsible for the success of the company’ • The ‘Turnbull Guidance’ and ‘Smith Guidance’ • Detailed guidance that accompanies ‘the Code’ (revised September, 2005) AA - Intro to CG - L4a

  5. The Combined Code on CorporateGovernance2008(FRC) (cont.) • Some key areas • Directors’ remuneration • Going concern • Internal control • Audit committees • An ‘independent’ sub-committee of the Board of Directors • Non-executive directors (NED’s) AA - Intro to CG - L4a

  6. Agency theory • ‘Stewardship accounting’ • Owners, shareholders… • Directors, stewards, managers… • Agency theory • Principal (P) • Agent (A) • ‘The agency problem’ • Separation of ownership and control • Objectives of P and A may be different AA - Intro to CG - L4a

  7. Agency theory (cont.) • Short-termism • Agents • Bonuses, salaries, benefits-in-kind… • ‘Residual losses’ • Principals (institutional investors) • ‘Churning’ • Long term investment • Relies on optimum NPV from projects • wealth maximisation for shareholders AA - Intro to CG - L4a

  8. Agency theory (cont.) • Control • AGM • Time for agents to account for themselves? • Practical problems • Large ownership base • Interested in return not control AA - Intro to CG - L4a

  9. Other theoretical viewpoints • Transaction cost theory • Stakeholder theory • The ‘Corporate Report’ (ASSC*, 1975) • Specifically considering financial reporting questioned: • Who should report what to whom • Public accountability • Users of corporate reports • Equityholders • Loan creditors • Employee • Analysts and advisors • Business contacts • Government • The public * The original UK accounting standards body, now the ASB AA - Intro to CG - L4a

  10. References • Combined Code (2008) http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf • OECD Principles of Corporate Governance (2004)http://www.oecd.org/dataoecd/32/18/31557724.pdf AA - Intro to CG - L4a

  11. References (cont.) • Hong Kong – The Code on Corporate Governance Practices (2005) • http://www.charltonslaw.com/corporategovernance/english.pdf • http://aci.kpmg.com.hk/docs/Internal_control_Guide.pdf • http://www.ecgi.org/index.htm AA - Intro to CG - L4a

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