1. Structure: Since this is a very open question you will need to provide a very clear structure for me to understand what your thesis is and how you will present it.
2. Headings: I like lots of headings, no more than three paragraphs without another heading or sub-heading. The headings help me to know what to expect and often cause you the writer to have better order and structure. No paragraph should be longer than 1/3 of a page. If longer, break it up into the different issues or sub-issues.
3. Table of Contents: A table of contents will help to make that structure clear.
4. Introduction: The first paragraph should be an introduction that tells the reader what the paper is required to present and the thesis of the paper.
5. Content: You are required to analyse the purpose and goals of the shareholders and the directors according to UK code and other countries code. In order to effectively present an analysis you will need to define what it is that you are starting with. You must describe the governance structure and then the specifics about the governance in relation to shareholders and directors, and then present your analysis.
6. Comparison: There are significant differences between a single tier system and a two tier system. I expect a clear and complete description of the role the different parties play in each system and then a clear analysis of the benefits and detriments of each system of governance in relations to the shareholders and directors.
7. Turnitin: You will need to run your paper through the Turnitin software before you post. Your score should be less than 30%. I will look to see how much is quoted material as this can cause the Turnitin score to be higher than the 30%. If I find that you have copied on-line material without the proper quotations or references it will be flagged for review by the Dean for further action.
8. References: The paper is to be no more than 3000 words including the footnotes, but excluding the bibliography and table of contents. It is to follow the OSCOLA format for footnotes and include a bibliography. The information for the OSCOLA format can be found under the “Support” tab at the top or at: https://campus.college.ch/support/363
Table of contents
1.0 Title page 1
2.0 The board 3
2.01 The board-Objectives and mission 3
2.02 US (NYSE & NACD Report) on board objectives and mission 4
2.03 OECD principles on the role and objectives of the board 4
2.1 The board composition and directors duties and responsibilities 5
2.11 US NYSE and NACD codes on the board composition and directors duties and responsibilities 5
2.12 OECD principles on the board composition and directors duties and responsibilities 6
3.0 Audit 6
3.1 NYSE and NACD code on auditors duties and responsibilities, independence and professional objectivity 7
3.2 OECD principles on auditing, responsibilities, independence of the auditor 8
4.0 Shareholders 8
4.1 NYSE code and NACD report on shareholders duties and responsibilities on directors appointments 9
4.2 OECD principles on role of shareholders on director’s appointment 9
5.0 Comparison between one and two-tier boards 9
6.0 Conclusion 10
7.0 References 11
Corporate governance gained prominence in the early 90’s, in the wake of plummeting investor confidence in the financial reporting amongst listed companies after two companies (wallpaper group Coloroll and Asil Nadir’s Polly Peck consortium) collapsed soon after receiving a clean bill of health from their auditors. The financial reporting council commissioned a committee, popularly known as the Cadbury Committee that came up with the hitherto famous Cadbury committee. As the committee was getting down to work, two other major scandals shook the world, i.e. the collapse of the BCCI bank and Maxwell’s group fraud. These mega scandals heightened expectations on the outcome of the Cadbury report, which has become a cornerstone of corporate governance in modern times. The main recommendations of this report were the clear division of responsibility between the board of directors and the chief executive, with an independent board overseeing the work of the chief executive.
The composition of the board of directors was also a key issue, with the committee recommending that majority of the directors must be non-executive and lastly, there should be a remuneration and audit committee whose memberships should comprise mainly of outsiders. The goals of the committee recommendations were to embolden the pillars of good corporate governance which are accountability, independence, transparency, and fairness. This paper examines in-depth, the elements of corporate governance which include an effective board of directors, an independent auditor, and vigilant shareholders. It explores the recommendations of the Cadbury report in relation to other codes of corporate governance and accounting standards mainly the US NYSE and NASD codes of corporate governance and the OECD principles of corporate governance and compares one and two-tier boards. It and finally makes recommendations on how shareholders can satisfy themselves that there are sufficient structures to ensure good corporate governance in listed companies.
2.01 Objectives and mission
The board of directors is one of the key pillars of corporate governance. According to the UK’s Cadbury report, which guides corporate governance structures in the UK, every listed company must have in place a board of directors, which is tasked with the responsibility of providing leadership to the company and setting up strategic aims of the business. Other tasks include supervising of the businesses management and consequently reporting to the shareholders, providing entrepreneurial leadership, ensuring that the company has sufficient internal controls that would help in the protection of the business assets. It should also ensure that the business has the necessary financial and human resources that are can sufficiently enable the company to meet its objectives and review of management performance (Christine Maline, 2012). Ultimately, the board of directors is responsible for the success of the business.
2.02 US (NYSE & NACD Report) on board objectives and mission
to the US NYSE report, investors expect that all listed companies comply with
the laid down financial reporting standards and policies of disclosure. In line
with the NYSE commitment to ethical standards of corporate democracy, listed
companies are expected to maintain certain practices that improve on the
standards corporate responsibility, accountability to shareholders and
integrity (Weil, Gotshal & Manges LLP, 2014)
NACD, on the other hand, identifies the objectives of the corporation, and by extension, those of the board of directors is to ensure that the business is run in a manner that enhances corporate profits for the shareholders. This means that the board assumes accountability for the success of the business and is responsible for the management of the business whether in success or failure. To this extend the duties and objectives of the board of directors would be to select a successful team of managers, oversee corporate performance and strategy and also act as a resource for the managerial team in terms of policy and planning. The ultimate goal of the board, therefore, is to ensure that there is value for shareholders through successful corporate performance and enhanced internal financial controls.
2.03 OECD principles on the role and objectives of the board
According to the OECD principles/Millstein Report, the role of the board of directors in corporate governance is anchored in the provision of guidance and strategic direction to the company, monitoring of management performance and accountability/reporting to shareholders. To this end, the board of directors is expected to act good faith, with care and due diligence and in the best interest of shareholders. They should uphold very high ethical standards; promote transparency, rule of law and efficiency of operations by ensuring that there is a clear division of responsibilities between the supervisory, management and regulatory frameworks within the organization.
2.1 The board composition and directors duties and responsibilities
The Cadbury report recommended that the board of directors should comprise an appropriate mix of skills and leadership that is necessary to provide appropriate guidance and strategy towards the success of the business. The size of the board should be such that besides an appropriate mix of skills, the size should allow for changes in the board composition without undue disruption of the business. Due to the supervisory nature of the board of directors, the report recommends that most of the board should be non-executive, and without interests in the company so as to enhance their objectivity in the conduct of their work. Non-executive directors should be recruited on the basis of their expertise in their fields of specialization, and are expected to bring an element of independent judgment in issues of strategy formulation and execution, resources allocation, performance, recruitment and remuneration and standards of conduct. To enhance the performance of the board, the there report recommended that there should be sub-committees such as the audit committee, the remuneration committee among others, whose composition should be entirely comprised of non-executive directors so as to enhance their independence. These committees are expected to provide an independent oversight of the operations of the business and should, therefore, be empowered through appropriate legal and policy frameworks.
Aside from providing strategic direction and monitoring the performance of the business, and due to the fact that the board of directors reports directly to shareholders through the annual general meetings, the report recommends that directors must accept the responsibility of ensuring that the company maintains proper financial records and that financial statements prepared reflect a true and fair view of the company’s performance and financial position at the reporting date. They are also responsible for ensuring the designing and implementation of sufficient internal controls that help in prevention and detection of fraud in the organization, which would otherwise impact on the integrity of financial information presented to shareholders.
2.11 US NYSE and NACD codes on the board composition and directors duties and responsibilities
According to the NYSE code, listed company’s boards must comprise mostly of independent non-executive directors, so as to increase the board oversight role, a similar requirement is expected under the NACD code. Bothe US codes do not recommend a specific size of the board, but rather recommend that the board should recommend its own size and ensure periodic review to check the sufficiency of its composition. The NYSE does not cover the responsibilities of the board, but NACD recommends that each board of directors has the freedom to define its roles and duties. In general however, the broader roles and responsibilities include selection and replacement of the chief executive, reviewing of the management strategic plans, monitoring of the business strategic performance, ensuring that the business complies with the ethical and regulatory frameworks, review and approval of material business transactions that are not in the ordinary course of business such as mergers and acquisitions and finally review of the business financial objectives.
2.12 OECD Principles on the board composition and directors duties and responsibilities
The OECD principles do not recommend a particular board size but make observations that the size should depend on whether the board is unitary or two tiers. In both cases, it’s recommended that there should be a sufficient mix of skills that should be beneficial for providing and supporting the strategic direction of the business. According to the OECD principles, the board is involved in review and providing guidance on the corporate strategy of the business, ensuring that the company is legally compliant and has appropriate corporate governance structures, recruitment and replacement of key executives within the business, in-charge of proper composition of the board, ensuring the process and integrity of the company’s financial reporting systems including external audits and finally ensuring that the company makes the required disclosures and communications.
The annual independent audit is one of the pillars of corporate governance. Due to the separation of ownership and management of businesses, shareholders require the directors to report on their management and stewardship of the business through the annual reports in the annual general meetings. In order to verify the accuracy of financial statements and management assertions, the shareholders appoint independent auditors so that can provide the necessary assurance, checks, and balances. In order to ensure accountability in organizations, the boards of directors must make appropriate disclosures, which must be verified by independent audits conducted under strict accounting guidelines and standards. In order to ensure that the audit report is independent and objective, auditors must ensure that they adhere to a strict code of ethics which demand that auditors must be competent, independent, and professionally objective. Auditors must ensure competence by undergoing the necessary training and continuous professional educations as to remain abreast with developments in the accounting profession. They must also be independent and also be seen to be so, in order to enhance their professional objectivity in the conduct of their job. In order to enhance this independence, auditors must not be too familiar to their clients and must also not accept unnecessary gifts that must impair their independence and objectivity in conducting their work. Lastly, auditors must ensure that they completely separate independent audit work from the performance of other tasks to the client. For instance, auditors must not provide other services to the same client such as tax advisory or other consultancy services. Other ways that an audit firm ensures their independence and professional objectivity is through auditor’s rotation, which reduces familiarity between the auditors and the clients.
In summary, the Cadbury report notes that the responsibilities of the auditors are to obtain sufficient evidence to enable them to express their opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework and whether they are presented in a true and fair manner. In doing so, the auditors are expected to conduct the appropriate auditing procedures and risk assessments depending on their judgments. The auditor evaluates the organizing relevant internal controls and accounting estimates and the reasonableness of those estimates in making their conclusion and opinion on the financial statements.
3.1 NYSE and NACD code on auditors duties and responsibilities, independence and professional objectivity
The NYSE and NACD do not make specific pronouncements on the auditor’s independence, duties, and responsibilities regarding the financial statements although the role of auditors has been more pronounced in the recent past in the wake of the Enron scandal. Under the federal securities regulations and intervening laws, publicly held companies are expected to prepare and file reports with the SEC that are truthful, accurate and complete. The rules also require that such financial statements must be examined by an independent auditor so as to ensure that such financial statements meet not only the above criteria but are also prepared under the applicable generally accepted accounting principles (GAAP). The auditor is then expected to issue a written report that contains his opinion the financial statements comply in all material respects with the applicable GAAP’s.
3.2 OECD principles on auditing, responsibilities, independence of the auditor
OECD principles require that for all listed companies, an annual audit must be conducted by a competent and independent auditor in order to provide an assurance to the board of directors that financial statements issued fairly represent the state of performance of the organization and financial position and that such financial statements comply with the applicable standards in all material respects. The auditor should also issue an opinion on the way in which the financial statements have been prepared and presented. This, according to the OECD principles, would improve the internal control environment in the organization. The principles also provide guidelines on how the external auditor is to be appointed, including the appropriate safeguards to guarantee independence.
The recommendations of the Cadbury report highlight that the relationship between shareholders and the board of directors is that of an employer-employee relationship. The shareholders elect the directors while directors formally report on their stewardship of the company to the shareholders who are the owners of the business, with auditors appointed by the shareholders to check the director’s financial statements and assertions. Corporate governance, in this case, is concerned with how the shareholders can strengthen the accountability of the directors. Through the annual general meetings, shareholders have an opportunity to interrogate the annual report, approve a business that is to be conducted or ratify business transactions already entered into by the company, appoint independent auditors and finally to elect new directors in the place of retiring ones.
According to the report, shareholders have delegated their management responsibilities to the directors who act in a stewardship capacity. The roles of shareholders in corporate governance are to ensure that there is a board of directors in place that oversees the management of the business and provides strategic leadership. Shareholders are also tasked with the responsibility of appointing the independent auditor, who reviews the financial statements issued by the board who are responsible for the preparation of financial statements that are free from material errors and misstatements. Shareholders, during the annual general meeting, approve the appointment, rotation, and retirement of directors. This gives them an opportunity to assert their powers over who is involved in the running of their business. The Cadburys report finally recommends that for good corporate governance, the shareholders must actively be involved in the annual general meetings and take the opportunity to ensure that their boards comply with the recommendations of the Cadburys report regarding corporate governance.
4.1 NYSE code and NACD report on shareholders duties and responsibilities on directors appointments
Under the NYSE code, a nominating committee is responsible for identifying individuals that are qualified for appointment as directors as per the board issued criteria. Under the NACD report, the board should appoint an independent committee that is responsible for the nomination of directors to the board. This is expected to enhance the board’s accountability to shareholders and also reinforce the perception of trust among the management and members of the board. People that are eligible for appointment as directors must meet share ownership requirement, understand the business and also devote the required time for the business of the company.
4.2 OECD principles on role of shareholders on director’s appointment
OECD principles demand that shareholders rights to elect and remove directors from the board should be upheld. While the board of directors is expected to select a committee of nominations which is tasked with the responsibility of identifying suitable candidates, For the effective selection process, shareholders should participate in the nomination of board members at the annual general meeting or through extraordinary general meetings if need be.
5.0 Comparison between one and two-tier boards
The foregoing discussions identified noted that board of directors operates in a variety of systems. In the US, UK, and Japan, boards operate in a one-tier system while non-executive directors in countries such as Germany, China, and Netherlands supervise executive directors in a two-tier board system. Russia, on the other hand, operates a hybrid system that combines the characteristics of both one tier and two tier models. This system allows non-executive directors to monitor the management. One tier boards integrate decision control and management into one body while two-tier boards provide a separation of both roles. In these two-tier boards, the executive directors who form the management board is responsible for the day to day operations of the company, while non-executive directors who are the supervisory board supervise the executive directors.
There has been a continuing debate on the relative strengths and weaknesses of the two board systems. Scholars agree that the main difference between the two boards relates to the question of whether there is the need for independent monitors in organizational decision making. Fewer organizational layers associated with one tier models is advantageous as it reduces information asymmetries which delay decision making, as opposed to two-tier board systems where more layers of the boards complicate the decision-making process thereby delaying key decisions in the organization. In their study (Block, David, and Gerstner, Anne-Marie, 2016), observed that non-executive directors in two-tier boards experience challenges in areas such as information asymmetry, ability to ask the critical questions to the management, and the relationship management between the executive and non-executive directors.
Opponents of a one-tier system argue that a combination of both executive and non-executive directors may jeopardize the ability of the board to monitor the management directors or even to provide independent, professional and objective advice to the management. There is also the argument that one-tier boards which have mostly insider-dominated may miss opportunities that may be easily available to outsiders, who may have a wider view of the business.
Evidently, there is no consensus on the best model of the board between the two, with scholars agreeing that in both cases, major corporate governance scandals have happened. There is also the issue of boardroom challenges, such as information asymmetry, dominant CEO’s, boardroom tensions with scholars agreeing that these problems exist in both models.
The foregoing discussion points to the fact that there is no system of corporate governance that totally fools proof against incompetence and fraud. The test for the success of corporate governance lies in the extent to which these aberrations can be discouraged or disclosed. Risk management in an organization can be enhanced if all participants in the corporate governance process are made effectively accountable for their actions. The various codes of corporate governance discussed above identify properly constituted a board of directors, proper separation of duties between the chairman of the board and chief executive, vigilant shareholders, independent committees of the boards, and proper financial reporting frameworks and audit systems as some of the key safeguards that enhance corporate governance in organizations. These safeguards would work best if there is a clear definition of responsibility and acceptance of all that are involved in corporate governance that they need to uphold the highest levels of commitment to integrity and efficiency in their work.
Mallin, C ‘‘Handbook on International
Corporate Governance: Country Analyses’’, (2012)
OECD Principles of Corporate Governance (2004), OECD Publications Service. <http://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf> accessed 24 November 2016.
The Cadbury report ‘‘The Financial Aspects of Corporate Governance’’ (1991): Burgess Science Press
Weil, Gotshal & Manges LLP: ‘‘International Comparison of Selected Corporate Governance Guidelines and Codes of Best Practice, network’’ (2014).
Block, David, and Gerstner, Anne-Marie, “One-Tier vs. Two-Tier Board Structure: A Comparison Between the United States and Germany” (2016). Comparative Corporate Governance and Financial Regulation. Paper 1.