Corporate Governance Benchmarking Project|
BDO LLP UK|
Melanie Lloyd, B00532809|
Table of Contents
2. Theories of Corporate Governance6
3. BDO Governance in Practice12
1.1. Evolution of Corporate Governance
There are a number of ways of defining ‘corporate governance’; operationally it is considered to be “the process by which companies are directed and controlled” (Cadbury Report, 1999), it has also been described as the relationship between shareholders, management and the board of directors, which determines the strategy and direction of the company (Monks and Minow, 2001). When considered in general terms Turnbull described it as: “All influences affecting the institution processes, including those for appointing the controllers and/or regulators involved in organising the production and sale of good and services…..it includes all types of firms whether or not they are incorporated under civil law.” (Turnbull, 2002:181) Factoring in all other definitions, in its simplest terms it can be defined as the “exercise of power over corporate entities” (Clarke, 2004). It is not the same as the management and the running of the company, it is concerned with how the Board of Directors, who are the governing body of a company, supervise management, because it is they who are responsible for holding the management of a company accountable and ensuring the company is being ran in a way which is favourable towards the shareholders and other stakeholders. It is the Directors’ responsibility to develop strategy and policies for the company and to determine the direction the management should take the business in and the Directors have overall responsibility for the performance of the company (Tricker, 2012). While the phrase ‘corporate governance’ wasn’t coined until the 1960’s and not commonly used until the 1980’s, it has really been in a gradual process of evolution since the 16th century and joint venture trading. One of the major developments in world economies which brought the need for corporate governance to the fore was the introduction of limited liability companies in the 19th century.
What this meant was when companies were incorporated they became a separate legal entity, separate from their shareholders and with similar legal rights to buy, sell and transfer shares and assets, to employ people and to sue and be sued in the name of the company. This meant the liability for any company debts lay with the shareholders and not the management or the company. Add to this the fact that because of the introduction of the stock market, shares could be easily bought and sold, meaning the shareholders could be vast in numbers and have a large geographical spread. Due to the fact that all corporate entitites need to governed, the implications of this were that the management (executive control) and the shareholders (owners) were often separated (Tricker, 2012). Situations such as these, are where corporate governance is deemed to be most necessary because there is a root assumption, that members of management who do not own the company are likely to be more reckless with someone else’s money, i.e. the company’s, than they would be with their own money (Having Their Cake, 2013). This is known as the agency dilemma, which will be expanded upon later. Electing a Board of Directors who have the interest of the shareholders at the forefront of their mind, allows members to indirectly oversee the actions undertaken by the management, in order to ensure that as agents of the shareholders, the management is performing in line with the best interests of the corporation (Lashgari, 2004).
1.2. Selection of a Case Company
However, as Turnbull pointed out in ‘Corporate Governance: Its scope, concerns and theories’ (2002), having a restriction of only publicly traded corporations in studies...