Corporate governance regulation
This article unveils the reasons behind the deluge of corporate governance regulation issued during the past decade. The differing nature of the various standards as well as their potential effectiveness in satisfying needs of different stakeholder is analysed by presenting the similarities, differences and the main construction blocks of the corporate governance standards and highlighting the challenges faced by the regulators. The article also suggests that the key step to compliance with the corporate governance regulation is taking a ‘step back’ to take closer look on the needs of various stakeholder groups both in- and outside of the company.
Over the last decade, an almost incessant deluge of corporate governance regulation, codes of practice and guidance has been issued by a range of government bodies, international organisations and regulators of financial markets. This can largely be attributed to corporate collapses following the end of the Internet bubble and financial statement scandals of the early 2000s. Later, recent credit crisis, which led to the downfall of Lehmann Brothers and required various governments to bail out other large financial institutions further exacerbated the trend. It is often being forgotten what the added value of these regulations and codes is, making compliance a mere ‘box-ticking’ exercise. This articles attempts to recall the reasons behind the regulation in this area, address its fundamental principles and objectives and answer some of the prominent questions regarding usefulness of the corporate governance regulation to date: “Does compliance with such codes and regulation actually improve the way organisations are controlled and their disclosures? Is standardization required? Furthermore, does compliance to these codes satisfy the needs of company stakeholders?” In order to adequately address these questions, this article first provides a brief historical perspective and overview of the various (characteristics of) corporate governance rules. Historical background
The concept of corporate governance is nothing new. It is fundamentally based on the separation of ownership and management of a company. The potential issues resulting from this were already indentified in 1776 by Adam Smith, one of founders of modern economics. Over a century and a half later, Berle and Means recognized the consequences of the separation and another half a century after that, the widely known agency theory was introduced by Jensen and Meckling. The need to address corporate governance evolved in accordance with the increasing number of stock-listed organisations as well as the ongoing consolidation and increasing size of those organisations. This has distanced ‘control’ further from ‘ownership’, the adverse affects of which were amply demonstrated by a succession of failures, financial statement frauds and scandals. Finally it became evident that moral hazard arising in ‘any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly’ reinforces the need for system, a set of rules or information to control for them. In that sense, the need for corporate governance regulation became similar and complementary to the need for reliable financial statements. Corporate governance regulation
The first widely accepted influential standard on corporate governance was issued in the UK in 1992: the Cadbury Report on Financial Aspects of Corporate Governance. This code, which was applicable to listed companies in the UK, introduced a common benchmark for corporate governance and required companies to report on a ‘comply-or-explain’ basis. Although the issuance of the Cadbury code was originally triggered by UK public concerns about standards of financial reporting and accountability, the report's recommendations have been adopted in varying degree by the European Union, the...
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