Corporate Governance: UK Vs. US

The concept of corporate governance comes in handy shape corporate decision making amidst the backdrop of raising corporate collapses and global financial crisis. In any case, the concept defines the performance of an organization with respect to trust and integrity elements during their business interactions with the community.

Traditionally, the aspect of Corporate governance in the USA takes shape through the dictates of shareholder wealth maximization principles. However, in the wake of the scandal affecting Enron and WorldCom led to criticism of the above model of corporate governance and as such, Sarbanes Oxley(SOX) legislation.  The market-based approach to corporate governance had loopholes that could be easily exploited by executives. For instance, in the case of Enron, the use of Market-to -market approach to financial reporting allowed the firm to capture future transactional benefits in current financial reporting. The approach would enable the firm to keep its stock optimally performing in the exchanges.

The US corporate governance currently takes after “regulator led” approach in which case, SEC, and the exchanges are tasked with putting in place laws and enforce the same towards ensuring sound corporate governance. Conversely, the UK uses “principle-based” approach where shareholders are given the autonomy to define measures necessary to protect their interests in the wake of corporate governance (Financial Reporting Council, 2018). It is worth noting how the UK economy is dominated by strong institutional and mobile capital thus making the principle approach most suitable as opposed to the US case where the market more retail-investor based. The advantages of the US regulator approach are that the entities tasked with the role of setting corporate governance rules set the platform from where all players can refer to, and in the event, cultivate a level playing ground where there is a limit to behavior that may be risky for investors (Gregory, et al., 2017). The US approach is proactive in the sense that it prevents problems before they arise. In any case, the regulator-led systems come in handy to place prohibitive mechanisms that expose the corporate executives to punishment as stipulated by law whenever violations arise. The US approach has made it possible to keep a watchful eye on all “gatekeepers” who were at the center of shareholder approach.

It is worth noting that, the US legislation on corporate governance has stood firm in defining the role of gatekeepers. For instance, the audit process is highly regulated to ensure transparency and accountability (Rosenbaum & Hoang, 2017).  However, the approach has not succeeded in taking care of high levels of managerial incentives that come with risk-taking and the role of independent directors which remains conflicting within corporate boards.

The UK based “shareholder approach” has its flaws and benefits as well. First, shareholders rarely have enough votes to put the management at the task and most shareholders will only react during whenever confronted by a crisis (Gibbon, et al., 2017). Shareholders may not be ready to criticize stocks they own, and in any case, large shareholders of any company can hold informal communication with top executives to sell shares if things are not working.

The advantage of this approach is that managers will work hard to maintain performance or else if stocks are poorly performing, new shareholders will take over the firm and as such, remove them from their position. The agency theory dictates that board members will come in handy to oversee the activities of a firm on behalf of shareholders. The board members will, therefore, be in a position to evaluate the performance of managers and propose rewards and punishments. This approach is limited in the sense that, the board of directors may lack adequate knowledge of the inside happenings as the insiders would (Veldman & Willmott, 2015).  Tesco a UK based supermarket is a case in point where there were accounting flaws in its reporting. This points to the flaws of the principles approach of corporate governance which does not afford protection to shareholders and other stakeholders.

In any case, the US rule-based approach gives investors more confidence than the Shareholder approach used in Britain.

References

Financial Reporting Council. (2018). UK Corporate Governance Code. Retrieved 2018, from https://www.frc.org.uk/directors/corporate-governance-and-stewardship/uk-corporate-governance-code

Gibbon, N., Peel, G., Garston, C., & Salaman, B. (2017). Corporate governance and directors’ duties in the UK (England and Wales): overview. Retrieved 2018, from https://uk.practicallaw.thomsonreuters.com/3-597-4626?__lrTS=20171014182838848&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1

Gregory, H., Grapsas, R., & Holland, C. (2017). Corporate Governance. Retrieved 2018, from https://gettingthedealthrough.com/area/8/jurisdiction/23/corporate-governance-2017-united-states/

Rosenbaum, R., & Hoang, C. (2017). Corporate Governance 2017| USA. Retrieved 2018, from https://iclg.com/practice-areas/corporate-governance/corporate-governance-2017/usa

Veldman, J., & Willmott, H. (2015). Britain’s broken corporate governance regime. Retrieved 2018, from https://theconversation.com/britains-broken-corporate-governance-regime