Nowadays, many people invest in different
kind of businesses such as the Apple, Nike and the Facebook…etc. in order to
earn a profit through their investment. Shareholders want to maximize their own
wealth and companies want to maximize the value of their own company. Different
companies around the globe have their own “corporate governance” to maximize
the value of the firms. Maximizing the value of the firms can result in a
long-term profitable return in the future which can benefit the different
stakeholders of the companies such as the shareholders. “Corporate Governance”
can be understood as the system of the company. It is a system with rules and
practices. It is a system that direct and controls the company of how it works.
Boards of directors of the company are responsible for the governance of their
companies. Corporate governance includes things such as balancing the interests
of different stakeholders of the firm like the shareholders, managers, the
society and the government etc. Corporate governance also provides the
framework for the company to achieve the objectives. For example, the framework
includes the management of the company, the internal and the external control
of the business and the performance measurement etc. The purpose of corporate
governance e is ‘to facilitate effective, entrepreneurial and prudent
management that can deliver the long-term success of the company’.

In August 2017, the United Kingdom’s government announced the
“Corporate Governance Report” to the public. According to the report, four main
parts will be discussed. “The executive pay”, “Strengthening employee, customer
and supplier voice”, “Private businesses” and “the other issues”. And there are
three main areas will be reform. One of the areas is the executive pay. The
reform in the executive pay area will be about shareholder opposition to
executive pay, the responsibilities of remuneration committees and the minimum
vesting and post-vesting holding periods for executive share awards. Moreover,
the reform will stipulate the listed companies establish the directors’
remuneration and the ratio of the pay of CEO pay to the average pay of their UK
workforce. So, if the ratio of CEO pay to the average pay of their UK workforce
is 100, it means that the CEO of the company gets paid 100 times more than the
average workforce. Also, the reform forcing listed companies to explain in
detail on the changes of the ratio from year to year and how the ratio affects
the pay and condition across the wider workforce. The government of United
Kingdom saying that the reform of the corporate governance can achieve a
long-term success of the firm. First of all, the government claims the reform
in the executive pay area can improve the responsibilities of remuneration
committees. In order to achieve this, the government of United Kingdom may need
to set up new regulations for the listed companies to follow. If so, this may
affect companies and the business market. It is because according to Adam
Smith’s Capitalism, Government should limit their use of “visible hand” which
is the authority of the government. It means that government should not
interrupt companies and the business market, the government should let the
market and business compete without setting up new regulations on companies and
the market. Therefore, if the United Kingdom government wants to set up new
regulations in order to achieve the reform of the corporate governance, it may
affect different listed companies on their business performing. It is because
it is against the idea of Adam Smith’s Capitalism as he suggested government
should not use their power to interrupt the “Free market” and business
companies. The government should just let the “invisible hand” works in the
market which is to allow different companies to compete with others without
interruption from the regulators of the government. Moreover, if the government
sets up regulations for different listed companies to follow, it is kind of
against one of the principles of the United Kingdome governance code. The
“Comply or explain”. The United Kingdom Governance Code is part of the UK
company law. The United Kingdom Governance Code is a set of principles for
listed companies to comply. The idea of “comply and explain” has been adopted
by many different countries. Not just the United Kingdom but also Germany, the
Netherland and other countries. The concept of “Comply or explain” is an
approach in the area of corporate governance and the supervision of companies’
financial area. The regulators from the government will set up a code and
establish it for listed companies to comply rather than just setting up new
laws for the listed companies to follow. If the listed company does not comply,
the listed company needs to publicly explain the reasons why it does not
comply. This idea was first presented after the Cadbury Report in 1992. The
purpose of the “comply or explain” is to allow stakeholders such as the
shareholders to decide that the standards are suitable for the company or not.
Due to the code requires listed companies to publicly explain to the investors,
if shareholders do not accept the explanations from the company, the
shareholders will no longer invest into the company but to sell the company’s
shares in the market. Therefore, rather than the government have a legal action
to the listed company if the company does not comply, the shareholders will
create a “market sanction” by themselves as the shareholders are expected to react
rationally in the market. If the United Kingdom Government is going to build up
new laws for listed companies to follow, it may kind of against one of the
principles from the United Kingdom Corporate Code which is the concept of the
“Comply or explain”. Moreover, it may also affect investors from other
countries to invest in the United Kingdom. It is because it is one of the
reasons that attract different investors from different countries to make an
investment in the United Kingdom. Therefore, setting up new laws may reduce the
interest of different investors to invest in the United Kingdom. Also, setting
up new laws may require the United Kingdom government to spend money in order
to put the new laws into action and a period of time to let listed companies
adapt. In addition, the reform in the executive pay area requires listed
companies establish the directors’ remuneration and the ratio of the pay of CEO
pay to the average pay of their UK workforce. This may cause the demotivation
occurs within the company which can affect the working efficiency of the
managers and the directors of the company. Also, announcing the directors’
remuneration and the ratio of the pay of CEO pay to the average pay of the
company UK workforce can lead to one of the main issue that occurs in the field
of corporate governance which is the “Agency theory”. It is also known as the
agency dilemma or the agency problem. The agency theory is a theory about the
relationship between principal and agents in the company or business. Normally,
the board of the company or the managers which can understand as the “Agent”.
They make business decisions for the companies which is to maximize the value
of the firm. Stakeholders such as the shareholders can be understood as the
“Principle” who want to maximize their own wealth through their own investment.
The problem occurs when the agents do not make the best decisions for the
principal. The agents prefer to act in their own interests which can be
understand as the “agency cost” rather than to act in the best interest of the
principal. This action contrary to their principals. It is because the primary
objective for agents is to maximizing shareholders wealth through maximize the
value of the company. However, in reality, the board of the company or the
company managers prefer to follow their own personal objectives such as aiming
to gain the maximum bonuses possible rather than to maximize shareholders’
wealth. This problem happens because there is a conflict between the goal of
the principal and the goal of the agent. The agency problems commonly happen
between the managers and the shareholders of the company.

The next area that the United Kingdom government intends to reform
in order to improve the corporate governance is to strengthen the voice of
stakeholders of the company such as the employee, customer and supplier etc. In
order to strengthen the voice of stakeholders, the United Kingdom government
intends to introduce new legislation to force all private and public companies
to justify how the directors of the company balance the interests of their
stakeholders such as employee. Also, the United Kingdom government intends to
work with the Financial Reporting Council to consult a new code for companies
to adopt. Such as to adopt the one of three employee engagement mechanisms, a
designated non-executive director, a formal employee advisory council or a
director that comes from the workforce. Moreover, the United Kingdom government
will invite some largest listed firms to complete and establish new guidelines
about the directors’ duties. First of all, I think directors’ disclosure on
about how the directors balance the stakeholders’ interests can lead companies
to have a good corporate governance. It is because a good corporate governance
company should have a good transparency of the company. This can help
stakeholders understanding more about how the company works rather than reading
the financial reports published by the company. However, as I mention before,
if the United Kingdom government setting up new laws, it can affect the
company’s working or even the business market as Adam Smith’s suggests that
under capitalism, the government should minimize to use their power to
interrupt companies and the business market. Therefore, the United Kingdom
should avoid setting new laws because it is kind of against the idea of
capitalism and it may affect the companies performing and the business market.
Moreover, I think that the United Kingdom government create the new requirement
in the code for listed companies to adopt can improve balancing the best
interests of different stakeholders of the company in the board level. Also, it
can increase the discussion of board activities and the transparency as more
stakeholders participate in the board level which can deliver more information
of the company to the other. However, as more stakeholders participate in the
board level, it may occur unethical business environment which can lead to
illegal activities happen within the company. For example, due to more
stakeholders are able to get the information of the company easily by
participating in the board level, some stakeholders may use the information to
benefit themselves such as selling the information to other companies.
Moreover, more people participate in the board level can lead to conflicts of
different stakeholders’ interests which can also lead to the common problem of
corporate governance. The agency problem. Due to different stakeholders in the
companies have different goals, it is difficult to balance the best interests
of different stakeholders in the companies. Also, it is difficult to choose the
right people to represent for a group in the board level. For example, one of
the new requirements of the code suggests the idea to input a director from the
workforce. But it is hard to find a person that can really represents for a
group of workers. It is because the person may have different goals compare
with the others. Another problem is that by inputting different stakeholders
such as employee and supplier into the board level can affect the
accountability of the companies. Accountability is an idea about the
responsibility of the company’s actions, decisions making, company’s policies
and the company’s products. Also, the company should also report, explain and
is able to answer the consequences for the specific actions or policies of the
company. One of the concept of the accountability is the stewardship which is
an ethic that covers the responsibility of planning and management. A company
with a good corporate governance should have a good accountability.
Accountability can strengthen the company which can lead to the improvement of
the company’s performing. So, if different stakeholders of the company
participate into the board level of the company, it can lead to a problem of
who is responsible for the company. For example, if the board of the company
made a decision or adopt a new policy for the company which ends up in a bad
performing of the company, it will come to an issue of who is responsible for
that specific actions of the company. As the board level agreed for the action,
but due to the board is combined with different stakeholders of the company. It
is difficult to identify who is responsible for the specific actions of the
company. Especially, when the actions operated by the company affect the
interests of the stakeholders or causing a huge society issue, someone needs to
take the responsibility for the actions. Therefore, listed companies should be
accountable to the stakeholders such as the shareholders.

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The next area that the United Kingdom government tries to reform is
the governance of large private companies. The United Kingdom government
intends to improve the governance of large private companies by inviting the
Financial reporting council to work with others such as the Institute for
Family Business and the Institute of Directors to develop a set of corporate
governance principles for large private companies to follow. However, it is not
compulsory for the large private companies to comply all these principles.
Large private companies can choose rather to comply these principles or not.
Moreover, the United Kingdom government also intends to introduce secondary
legislation for companies including private companies with at least 2000
employees to disclose their corporate governance regime in the company’s
directors’ report and on the company’s website as well to publicly explain that
the directors follow any formal code or not. In addition, I think the United
Kingdom government’s reforms on the corporate governance for large private
companies improve the transparency of large private companies. It can lead to a
better understanding of how the business operates for the stakeholders such as
the government and the employee of the company. It can also lead to large
private companies more accountable to their own stakeholders. Secondly, I think
the legislation to requires companies disclose their arrangement of corporate
governance in the directors’ reports can also improve the accountability of the
companies. However, it may affect the business perform or even the market as it
is kind of against the idea of capitalism. Moreover, it comes to another
problem in corporate governance. One of the main issues is that companies are
not going above and beyond enough when reporting CG as they do not want to
report to stakeholders due to criticisms. As the set of corporate governance
principles are not a legal requirement. It is not compulsory for companies to
follow these set of corporate governance principles. Moreover, although the
United Kingdom government intends to introduce legislation to require different
companies to disclose on the directors’ report and website whether they have
complied any code or not, but the legislation does not really require how much
they need to disclose which it needs to have more detailed information about
the minimum information that it needs to disclose on the directors’ report and
websites such as how it can change or affect the business performance regard to
balancing the interests of stakeholders or the consequences etc.

In addition, the United Kingdom government will ask the Financial
Reporting Council to work with other departments such as the Insolvency Service
and the Financial Conduct Authority in order to develop a set of corporate
governance principles and to make sure that they can use their existing
authority to sanction directors if the directors failed to disclose the
corporate governance reporting. However, it is a problem whether or not the
Financial Reporting Council have the authority and resources to do this. As the
corporate governance codes are not laws, the Financial Reporting Council maybe
requires more power in order to do so.

Overall, I think these proposals established by the United Kingdom government
is good. All these proposals can lead to a better corporate governance and the
accountability of listed companies and private companies. Also, these proposals
have a wider purpose rather than just achieve the long-term success of
different companies. For example, the reform in the executive pay area is more
about improving the social justice rather than the effectiveness of the
companies’ management. Improving the social justice can cause different
companies to build up an ethical working environment which can minimize illegal
activities occurs in the companies. Moreover, the proposed reforms of
strengthening the voice of stakeholders of the company and the corporate
governance for large private companies are beyond the existing code and these proposed
reforms look corporate governance more widely. For example, these two proposals
not just apply to the listed companies only like the existing code but also
apply to large private companies. Also, it can lead to listed companies and
private companies more accountable to their own shareholders. The proposals can
make the companies’ boards have a better reflection on the views and diversity
of the firms’ customers, workforce and the wider community. Therefore, I would
say these proposals are good as it can lead to a better corporate governance.
However, it can be improved and developed in much more details. For example,
explain how these proposals can avoid some common problems in corporate
governance such as the agency problem. Also, especially for those large
privately-owned companies. Even if they choose to disclosure about their
internal governance arrangements, it is not mandatory. The United Kingdom
government may need to set up laws in order to form a better corporate
governance and to avoid corporate governance failure happens such as the Enron
scandal.

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