UK Corporate Governance Code Essay Example | Topics and Well Written Essays - 1750 words

UK Corporate Governance Code - Essay Example As a result, the board of directors of a company, which is the ultimate decision making authority of a company, has been forced to become more accountable to the shareholders. However, the present Combined Code on Corporate Governance has been more of a reaction to worldwide business scandals rather than being a pro-active measure that ensures business legitimacy (Porter, 2009). Notwithstanding this fact, there has been a considerable amount of progress made in the direction of ensuring accountability and transparency, especially in Britain. It started with the formation of the Corporate Governance Code in the early 1990s. Hence, in the below sections we study the Code and the legislative framework in its present form and determine its effectiveness in the face of modern scandals and financial debacles. UK Corporate Governance Code Since the 1970s, there has been an increased amount of focus on corporate governance. This may largely be attributed to the development of big multi-natio nal companies; however, the process is still in motion. As a consequence, some of the board of directors of listed companies, who form the most powerful body in the company, of the US and UK are required to be non-executive. The CEO is no longer the sole head of the company and shares responsibilities with the non-executive directors. The idea of creating an independent atmosphere where all perspectives can be included has been extended through a number of measures as a "force for good" in the economy. The "comply or explain" principle which is one of the main features of the Code has its roots in the Cadbury Committee or the Committee on the Financial Aspects of Corporate Governance report of 1992. Originally setup to come up with recommendations for financial auditing and other financial matters due to the scandals involving the Polly Peck and Robert Maxwell companies, the Cadbury Committee headed by Sir Adrian Cadbury made four important recommendations. These were with respect t o the board of directors, non - executive directors, executive directors and reporting and control mechanisms. However, these were not mandatory and the companies were free to follow their own course since it was determined that a legalistic approach would result in compliance only to a minimum basic level that negated the main aims of the Code. It was also felt that a "one size fits all" formula must not be adopted and that companies must be allowed the option to choose their own course that satisfies their unique requirements. Subsequently there was the Greenbury Report of 1998 that dealt with the remuneration of directors issue (Barker, 2008). The Code underwent a significant review in 1998 when Sir Ronnie Hampel was charged with the duty of validating the effectiveness of the existent Code. It was recommended that there was no need for radical or revolutionary changes, instead the principles needed to be extended to detailed measures for the listed companies to implement. This w as called the Combined Code on Corporate Governance which contained two levels of prescriptive practices, one of which was a set of detailed provisions and the other was a set of open - ended principles. The companies were similarly required to present a two level declaration of the compliance of the above measures in their annual report. The Code underwent another review in 2003 following the Higgs and Smith report which added another layer of compliance norms to the existing Code. It was made up of high – level main principles, mid –