Corporate Gvernance, and Its Relevance in the United Kingdom

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Table of Contents

Introduction
Critical Review of Corporate Governance
Defining theories of corporate governance
Findings
Conclusion
List of References

Introduction

Corporate governance has gained a lot of relevance in the modern society where firms are faced with stiff competition due to the open market policy that is practiced by many countries around the world. It means that firms must find ways of improving their service delivery in order to gain a competitive edge over their competitors.

Brayley and McLean (2008, p. 56) define corporate governance as “A set of systems, principles and processes by which a company is governed.” In their definition, these scholars emphasize the fact that corporate governance involves principles and systems that helps in the management of a company.

Thatcher (2008, p. 34) says, “Corporate governance provides the guidelines as to how the company can be directed or controlled in order to fulfill its goals and objectives in a manner that adds value to the company and that is also beneficial for all stakeholders in the long term.”

In this context, it would be necessary to define the stakeholders involved in the corporate governance. Coleman and Anderson (2000, p. 68) say, “Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and the society.” This means that corporate governance seeks to address the objectives of the stakeholders identified above in a way that would lead to the overall development of a firm.

Corporate governance in the United Kingdom has overemphasized on addressing the interests of stockholders, giving little or no consideration at all on the interest of other stakeholders (Bryans 2005, p. 76). This research is focused on analyzing corporate governance, and the relevance of its system in financial resource management in the United Kingdom.

Critical Review of Corporate Governance

Corporate governance has become a fundamental issue in management of companies, especially those that are categorized as medium or large companies. According to Kleynhans (2006, p. 23), there should be a standard set for good practice in reference to leadership offered by board of directors and its effectiveness, the remuneration of respective stakeholders, relations with other stakeholders, and accountability of the activities of the firm and its financial expenditures should be clearly outlined (Harrington 2006, p. 35).

Corporate governance offers strategic leadership to a firm. It would always dictate how successful or unsuccessful a firm would be in the market based on the set strategies. The boards of directors always form the top most management organ of a firm. It always define the futuristic strategies that a firm must set in order to make it relevant in the market despite the changing environmental factors.

As Nuberg and Reid (2009, p. 56) observe, corporate governance should not be considered as an arena where the interests of shareholders are protected. In the contrary, this should be considered as an opportunity offered to the leadership of a company to champion strategies that would lead to the overall success of a firm (Thoma 2001, p. 27).

Restricting the focus of this board to protecting the interests of shareholders, may not only affect the overall performance of a firm, but also affects the same shareholders, especially when the firm is forced out of the market due to its inability to implement policies that would help it remain competitive in the market (Norton & Kelly 1997, p. 68).

According to Storey (1999, p. 45), corporate governance in the United Kingdom is slowly shifting from the traditional Anglo-American Model of corporate governance to a more comprehensive approach that focuses on the overall success of the firm.

In fact, some of the issues that boards of directors may be forced to come up with in the current society would be how to convince shareholders to make some personal sacrifices for the benefit of the firm in future. Many of the stakeholders in a company, other than the shareholders, may not see the reason to sacrifice today for the benefit of the firm tomorrow (

Bucknall & Wei 2006, p. 78) For instance, employees may not be easily convinced to make some personal sacrifice for the firm because they may not be part of such a firm in the future. This means that the benefit that comes with the sacrifice shall not be experienced by them.

However, the owners stand to benefit directly from the growth that would be experienced (Foot & Hook 2008, p. 58). The United Kingdom’s Corporate Governance Code has set some standards of good practice that should be followed by the board of directors of firms listed in the stock market. It is necessary to clarify that the set principles and codes are not only meant for firms listed in the stock market, but also for other firms that are interested in good governance within the country (Pieper 1990, p. 83).

Although the principles are compulsory for some firms, other smaller firms may consider using them as a way of improving their accountability and management approach. Some of the guiding principles that have been set by this body have been discussed in this paper (Bingham & Savory 1990, p. 64).

One of the most important principles set by this body talks about rights of shareholders and the relevance of equitable treatment. This principle is based on the premise that shareholders form the base of the firm’s financial strength. They offer a company the financial strength it needs to operate in the market (Phillips & Gully 2013, p. 97).

For this reason, they should be treated with respect by those entrusted with the management of the firm. They should have access to relevant information whenever this is necessary. All the shareholders should be treated equally, without disrespecting others. However, the decision of the shareholders would be based on the number of shares held by individual shareholders.

Another principle focuses on the other stakeholder’s interests. A firm depends on various non-shareholders stakeholders (Cooper & Burke 2007, p. 96). A firm must be conscious of its contractual environment. It must be able to understand how relevant it is to develop a positive relationship with these other stakeholders (Blandford 1997, p. 34). For instance, a firm depends on its employees to implement various policies and help in the normal running.

The dictatorial approach of managing employees that was used in the past may not work today. In its place, Transformational Leadership Theory should be used to help ensure that employees remain constantly motivated (Parry, Stavrou & Lazarova 2013, p. 52). Customers should also be treated with a lot of esteem. Their interests should always be given priority in order to create a pool of loyal customers to help in the firm’s growth.

Suppliers should always be paid on time as per the terms of agreement, and the local community should be incorporated in the business, especially by employing the local residents (Brewster & Mayrhofer 2012, p. 87). This would help ensure that the firm experiences a positive relationship with its stakeholders.

The principle also defines the roles and responsibilities of the board of directors (Sparrow & Marchington 1998, p. 51). In various cases, it is always common to see a situation where the board of directors forget about their roles and responsibilities in corporate governance. According to Savory (1988, p. 73), it is not the responsibility of the board of directors to dictate the daily management approach that a firm takes.

That is the responsibility of the chief executive and his or her team of managers. However, the board should focus in setting strategic goals of the firm, the vision and mission, and approving the overall expenditure of the firm. It is their responsibility to ensure that a firm has enough resources that can support various projects (Mayers & Mayers 2004, p. 69).

There is the principle of integrity among the board members and the need for ethical behavior, especially when hiring top ranking managers. According to Mohr and Slater 2010, p. 33), board of directors is charged with the responsibility of hiring top officials within the firm. It is vital to ensure that when doing this, integrity and ethical behavior is maintained by people who are responsible.

Schilling and Tomal (2013, p. 67) warn that there are cases where the board of directors hire employees based on personal interests instead of merit. This may affect the overall success of such a firm, especially when positions that require technical skills are filled with incompetent individuals. This board should also be ethical when conducting its oversight duties. It should avoid temptation of micromanaging activities of the executive managers of the firm (Truss, Mankin & Kelliher 2012, p. 75).

Lastly, the principle of disclosure and transparency of the board’s activities should be upheld for the prosperity of the firm (Zhu 2012, p. 97). According to Sreenivas (2006, p. 56), it is common to find some board of directors trying to avoid their responsibility of releasing true books of account after getting involved in financial misappropriation.

Such board members would use their power based on the shares they hold in the firm, or strategic role assigned to them in the firm by other stakeholders to benefit themselves at the cost of other employees. They would then avoid full disclosure of the books of accounts to other stakeholders.

Some companies even avoid telling the truth to the government as a way of evading or reducing the value of tax they have to pay to the government. This is not only an unethical practice, but it also constitutes a crime that can be prosecuted in a court of law.

Defining theories of corporate governance

It would be necessary to understand some of the theories of corporate governance that have been commonly used in corporate governance. One of the most popular theories of corporate governance is the Agency Theory. This theory holds that in a firm, the owners (shareholders) always hire experts (managers) to take the responsibility of running activities of the firm. The manager would, therefore, act as an agent of the shareholder in the daily management of the firm.

The more a firm gets bigger, the more it would be necessary for the shareholders to hire agents to take control of the firm. This theory highlights some of the constraints that may exist in corporate governance between the agent and the owner. Savory (1988, p. 23) says that the interest of the agent and that of the owner will always differ. The agent would be interested in higher benefits from the owner in the process of managing the business.

On the other hand, the owner would want maximum returns from the business. If the agent’s need is met, it would mean that the owner must sacrifice personal benefits and increase payments of the agent. However, if the owner decides to retain the benefits, then it may not be easy to meet the agent’s interests (Arcota, Brunob & Faure-Grimaudc 2010, p. 32). Such antagonizing interests may create suspicion between the two entities that may lead to mistrust.

When there is mistrust, it would be common to experience a scenario where the shareholders make an attempt to have full control in the income and expenditure of the firm, ignoring the role of the technical team hired to perform various functions. The Shareholders Theory is another very common theory of corporate governance (Jungmann 2006, p. 78). This theory holds that shareholders are the most important people within a business entity.

The firm exists out of their own initiatives, and they deserve to be respected. The theory emphasizes on the need for the managers and all their stakeholders to work hard to ensure that the interests of the shareholders are met. As Davidson (2003, p. 54) observes, this theory holds that the primary role of a firm is to make profits for the benefit of a firm.

In corporate governance, this theory has been replaced with the Stakeholders Theory, which holds that a firm is not only responsible to the shareholders, but also other stakeholders who are directly or indirectly involved in the company. The Stakeholders Theory holds that every stakeholder’s interest must be taken care of if a firm seeks to achieve success in the market (Dobson & Hietala 2011, p. 45).

Findings

This research has demonstrated that corporate governance approach in the modern society always dictates how successful a firm can be in achieving its objectives. The research methodology used in this study focused on secondary sources of information, especially from peer-reviewed journals and relevant books. It was clear that the corporate governance in the United Kingdom has taken a shift from the Anglo-American Model that focused on the need to protect the interests of the shareholders at the expense of other stakeholders.

Hamilton (2004, p. 72) says that the United Kingdom Corporate Governance Code has been setting guidelines on corporate governance structure, principles, and policies. This body always review these policies whenever it appears to them that a review is necessary (Harvey 2005, p. 61).

According to Dent (2011, p.13), in the modern society, businesses have come to realize that there are many stakeholders whose interests must always be taken care of by companies. In the past, the focus had been on the owners, employees, creditors, suppliers, customers, and the government as the main stakeholders that a firm must be responsible to in its operations. This has changed in the recent past (Fenwick & Wertime 2013, p. 24).

Firms have realized that they have other stakeholders that were ignored in the past, but can no longer be ignored. The environment has been ignored for a very long time. However, firms have realized that it is their responsibility to protect the environment to make it support the activities of various companies (Lamb 2012, p. 37). The society within which a firm operates has also been neglected. It is important to appreciate the fact that such a society is affected by pollution from these companies.

This may affect them in one way or the other. Their concerns must be factored in by the firm in its strategic management strategies. These issues are always addressed through corporate social responsibility events (McDonald 2012, p. 69). A company can organize an event that is meant to protect the environment.

This may involve taking part in activities such as collecting non-biodegradable wastes such as plastic materials, or planting of trees as a way of fighting carbon emission into the air (Schwalbe 2005, p. 28). The shareholders must appreciate that although these activities are necessary in building the image of the firm, they involve expenditures whose results cannot be traced directly in the firm.

Conclusion

Financial resource management is one of the most important activities within a firm. Corporate governance was started as a way of finding lasting solutions to the problem of protecting the interests of shareholders. When it was started, the focus was to ensure that shareholders received maximum benefits from the operations of a firm.

This has, however, changed over the years as firms have come to realize that it is more important to take care of all the stakeholders’ interests. Corporate governance seeks to ensure that the role and responsibilities of the board of directors is distinct from that of the executive management. It also seeks to ensure that there is credibility in the financial resource management at all levels. Transparency should be maintained at all levels of management.

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