Ethics of Corporate Governance Report

Running head: CORPORATE GOVERNANCE
Development of corporate governance
Name of the Student:
Name of the University:
Author note:

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Executive summary
The purpose of this report is to analyse the codes and ethics of corporate governance. The
recent collapse of different giant corporations as well as small organisations has shaken the
mindset of the private business owners. The Regulations and codes of ethics have been redefined
after the economy has faced massive loss and numerous people have lost their jobs. The scandals
have made people aware and conscious of the fraudulent purpose of the company’s standards and
procedures to be checked. The report discusses the corporate governance approaches by UK and
USA. The Sarbanes Oxley act of US and PCAOB (Public Company Accounting Oversight
Board) of UK are the ultimate regulations. The critical discussion and evaluation of laws are
discussed. The scandals of the giant corporation like Enron, Barrings, and Lehman Brothers are
also discussed in the following report.

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Table of Contents
Introduction......................................................................................................................................3
The scandals.....................................................................................................................................3
The traditional approach..................................................................................................................6
The modern approach......................................................................................................................8
Critical discussion in the differences among the approaches used in UK and US corporate
governance.....................................................................................................................................10
Issues in the approaches as well as the benefits............................................................................11
Conclusion.....................................................................................................................................12

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Introduction
Corporate governance is the process by which corporate organisations are monitored and
administered. Corporate governance is needed for the modern organizations to maintain a
balance between the organizational goals and the interest of stakeholders of the organization.
After globalisation, the work environment of corporations has changed. With the increase in
opportunities, the accountability of the corporation has also increased. Large corporate and even
small organisations have collapsed due to the lack of proper governance. The factors that are
accountable are: the motive of social welfare and their responsibility, delegation, autonomy,
authority, power and other disclosure agreements and their legitimacy. The collapse of the
corporations like Enron, Lehman Brothers, Robert Maxwell due to fraudulent cases are the most
important and noteworthy instances (Agrawal and Cooper 2017). These collapses have shaken
the roots of the respected governance bodies. The Regulations and codes of ethics have been
redefined after the government has learnt the lesson because of major losses in the economy and
job cuts. The scandals have made people aware of the fraudulent ways of the company standards
and procedures to be checked (Solomon, 2013).
The scandals
Enron is a company in Houston founded established by Kenneth Lay and Jeffrey Skilling
in the year 1985. It became the largest energy providing organization in USA. Later on the
company expanded to Oil and natural gases division, broadband and internet connections,
Electricity, water and paper trading (Agrawal and Cooper 2017). This expansion helped the
company to diversify in the global international market. After the bankruptcy, the analysis
revealed that the company has significant problems regarding the dealings reported on directors.

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Different questions were raised regarding Enron’s managerial problems and corporate ethical
approaches they took when they were in active business. It showed several unethical means that
was employed by the organisation over the years. In 2001, the company announced a major loss
and was coaxed to admit their false account and profitability information of $600 million (Fox et
al .2016). The accounting method of Enron was very unethical as they presented non-transparent
financial statements. In accrual accounting method their recorded cost and revenue were also
incorrect and misleading. The hidden debt, taking excessive risks, violation in formation of
balance sheets, disclosure of minimal details, overstated equity and profits to engage more
shareholders were the unethical approaches adopted by the organization. These helped them to
hide their losses for a short period but the strategy failed. The proliferation of the company
books, checks and balances were detected to be filled with unethical practises and also a major
cause of the breakdown in corporation’s governance (Shrives and Brennan 2015). The trials in
court after the company’s decline highlighted major issues that were overlooked by the civil
lawyers. Excessive use of power by the CEO, private undisclosed partnerships was also the cause
of the Enron’s fall.
The Parmalet Diary’s scandal was a result of a failure in the governance and accounting
discrepancies in privately owned corporate entity (McAlister et al. 2016). The Italian Food
company’s governance failed due to the founder’s unethical practises. He controlled the
shareholders and channelled their resources illegally. This was also done at the expense of
minority shareholders resources. The monitoring and controlling process failed leading to the
Parmalat’s crisis. The Organizational structure was at fault as both the CEO and the owner held
the position of chairperson as per the codes of Parmalat Finanziaria (McAlister et al. 2016). The
lack of compliance of the company’s independent policy related to the controlling of

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shareholders interests affected the company. The monitoring structure of the company’s
governance framework, made the abuse of power and fraudulent activity to rise easily in that
situation.
A similar case can be discussed form the UK. The infamous case of Robert Maxwell and
his media corporation is a perfect example of the failure in governance framework. In order to
survive in the sector he adopted fraudulent practises. It was estimated that they stole 727 million
Euros from the pension funds of the two public companies as well as the assets from the
companies (McAlister et al. 2016). The undivided control in operation in the Maxwell
Communication and governance ultimately caused the downfall of the company. The non-
executive directors were involved in the function of performing independent function. The
auditors were involved in providing non-transparent information of financial activities and
practises. The pension fund trustees also failed to observe the money laundering activities of the
companies by transferring the money from one unidentified account to another (Eling and Marek
2014). This scandal also helped in raising the issues related to corporate governance ethics and
codes. It was also reasoned that leadership of the company was very much incapable of using the
stewardship of the company and making it properly function under their guidance (McAlister et
al. 2016).
During the recession years 2008-2009, Lehman Brothers collapsed because of the reasons
aforementioned (Eling and Marek 2014). The unethical business practises of the top executives
in the board and auditing firms were the reason of the collapse of the company. The
discrepancies in the transaction and imbalance in the balance sheet drew attention of the
company. The financial information was not disclosed then. Later on, the corporation got

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involved in a debt of $ 613 billion where unsecured creditors in different countries owed money
from them (Eling and Marek 2014).
The traditional approach
The corporate governance is a considerably old concept, evolving after the private
organisations were established. The firms provided value of control regarding governance and
ethics. Most importantly, the problem of monitoring and directing the process is one of the most
important parts of governing the organisation (Akinteye et al. 2015). The traditional approach
also included the overview of the agency problem; ownership and control of the large publicly
held corporation were also questionable. The legislative power of the company was directed by
the economic policies set by government (Zalata and Roberts 2016). Traditional approach
emphasises on the models that only takes into consideration the exchange and transactions taking
place in the market among the investors, customers, suppliers, employees and other groups
(Larcker and Tayan 2015.). The two tier models were responsible for the being the foundation of
governance structure of companies. It also takes into account the agency costs and transactional
cost related to the financial structure of the company. It also includes the legal responsibilities of
the directors as well as the shareholder’s legal mechanisms used in business. The corporate laws
started to reform after 2004 (Shrives and Brennan 2015). The alternative models were also
adopted during this time.
There are two types of theoretical framework, one is of broader view and the other is of
narrower view. Thus, considering all factors, the models were defined for providing a solution
for the companies that wants to enter the industry. The theoretical framework of the governance
structure is one of the most important part to be considered. The traditional approach to share

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ownership and Anglo-American corporate governance goes by the transactional and agency
theory of system (Shrives and Brennan 2015). In the modern joint stock market of America, the
910 companies were included.
In the perspective of UK, corporate governance was functional and the role of board of
directors and owners, chief executives were defined perfectly. The focus was on the activism of
the shareholder’s instruments. The transparency and financial reporting were there but the
Financial Reporting Council did not play its part effectively (Zalata and Roberts 2016). The
companies that were involved in Financial Crisis were involved in breaking the codes of ethics
and illegal activities. Implementation of the European Union Audit Regulations and Directives
Section C3 reviewed the changes in information that the companies started to send regarding
solvency, liquidity, viability and risk management and investment changes (Akinteye et al.
2015). The scandals related to those data provided in the company’s journals were wrong which
later stimulated in their downfall. The structure of the corporate governance was also at fault the
company. Many companies were characterised as family owned and then different kinds of
features were seen in the process.
The traditional approach to corporate governance is based on the agency theory, which
takes into consideration the factors of financial paradigm and economic factors. The agents that
are considered in this supervisions and control structure are stakeholders of the organization
(Zalata and Roberts 2016). The principles that are used in this structure are the delegation of the
everyday decision making system, related to the shareholders. In this theory, shareholders wealth
maximisation was an important motive of building the rules of corporate governance. The
managers play with egoism and are known for being “short-termism” according to this

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traditional approach that has affected the company (Akinteye et al. 2015). The reduction in
shareholder’s welfare is known as the residual loss in this theory.
Transaction cost theory, takes into account the important element of the behavioural
theory and its components. The resources of the market that are used to coordinate the
transaction among the companies are related costs control theory of transaction. Internalisation
of the transaction related activities is of utmost importance in this regard. The bounded
rationality is an essential part of this theory (Shrives and Brennan 2015). According to this
theory, the managers are individuals who are opportunistic by nature.
The modern approach
Stakeholder’s theory was developed considering the individual entities. Incorporation of
corporate accountability is one of the most important elements in this concept. The broad
research and unified approach of this theory makes it more relevant in the current time. This
research takes the best out of the traditional approach of the corporate governance as well as
incorporates philosophy, ethics, political theory, economical factors and stakeholders of the
organisation (Dimopoulos and Wagner 2016). The commonality acknowledged in this theory is
in the exchange relationship among the stakeholders. The stakeholders are shareholders,
employees, suppliers, customers, creditors and all the personnel directly or indirectly related to
the company.
The modern approach of corporate governance is of the following factors. They are
supervision, cooperation and information exchange, coordination, decision-making, consulting,
supervision. These significant matters are considered in this report. The task in hand is more
considered in this process, emphasis is given on the situation of economic, financial,

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organisational, and market. There is one theory that needs to be taken into consideration in
defining the modern approach, the stewardship theory (Larcker and Tayan 2015). The function
of this theory is to consider the supervisory board in relation with management. The main factor
that is considered in the modern approach is the motivation factor. The agent motivation was
purely financial. The behavioural approach was not considered in the old age. This gave an
outcome in the governance structure, which was less effective in nature. The stewardship theory
talks about the control mechanisms of the individual’s in situational factors. The situational
factors talks about the trust, employee engagement, collectivism, power distance and
collaboration needs of the company (Boreiko and Murgia 2016). This is the main contrast from
the agency theory. The governance of the companies is mainly based on the guidelines of
Corporate Governance given by the OECD org amended on 2004 (Larcker and Tayan 2015).
This organisation dictates the basic rules of the governance structure, accountability
limitations. The following is the features, which need to be considered.
 The key ownership functions, rights and regulations of the companies regarding their
shareholders are to be decided first.
 Treatments should be similar for all shareholders and not based on their ownership of
shares
 Roles are correctly defined by this process
 Responsibility of the company’s body (Dimopoulos and Wagner 2016)
The recently added feature of social welfare that is included in the corporate structure
depicts that the governance must give emphasis in planning the welfare of the society. The
modern approach has different views that are presented to the government. The new

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recommendations presented have considered different holes that have been identified from the
previous mishaps in corporate governance. The Hample report, Cadbury report and Higgs report
were presented based on the modernisation of the corporate governance spirit (Boreiko and
Murgia 2016). Different factors involved in this new method of calculation of director’s
remuneration are also given in the approach. Corporate social responsibility, social welfare
improvement in pension fund regulations and other rules regarding corporate governance needs
to be adopted. Shareholder’s reports, trustee’s role, responsibilities, and information that need to
be presented in the report and other aspects of the company should be transparent according the
new approach. The impact of the new approach helps in combining the codes in UK Company’s
directors and institutional investor’s relationship. Pro activism of the shareholding governance is
also considered in the matter.
Critical discussion in the differences among the approaches used in UK and US corporate
governance
The separation in the ownership and control was incorporated as an essential policy in the
new approach. The companies, which was in major need of improvement learnt from the
scandals that plagued the noted companies as discussed above. This also affected the economy of
those countries immensely. The scandals also involved major theft in some cases.
Different reports on the failure issues were presented in the federal government of USA,
they presented the Sarbanes-Oxley Act 2002 in USA after the report was submitted, Higgs report
in January 2001, and Smiths Report was presented in UK around that time (Al-Najjar and Abed
2014). Lack of solid foundations in UK government officials lead the investors to believe that

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they can earn huge profits and this helped them earning profit after investing in technological
stocks. This was a good incident that happened in the late 1990s (Akinteye et al. 2015). The
unlimited liability of the investors implied that the policies were not effective regarding
investments. The Limited Liability act 1855 helped the company to rip off all the shareholders to
earn profits that was due for the shareholders(Al-Najjar and Abed 2014).
There have been significant influences of the collapse of Giant Corporation like Enron
and WorldCom, which made it necessary to redefine the possible changes in the governance
structures. The Hampel Report 1998 presented in the Britain is a successor of the Cadbury
report. The report is based on the regulation of director’s remunerations. This also summarizes
the best practises of the UK companies. The UK companies defined separate rules in their report
of governance. The common rules for directors fiduciary duties, Companies act and documents
1985 and listing rules in UK are different than the US regulations, that includes the SOX act
2002 (Honoré et al. 2015). The Sarbanes-Oxley Act 2002 is detailed regulation listed for the
companies in US and is very different from the rules of “comply and explain” in UK (Al-Najjar
and Abed 2014). The US regulations depend on the fines, penalties and imprisonment for
violating the requirements of SOX act. The securities act 2004 consists of audit, investigations
and community requirements of the companies in UK (Armstrong et al. 2015). The committee
has greater power in this regard. However, the establishments of the PCAOB (Public Company
Accounting Oversight Board) have the ultimate power regarding all the auditors and US security
law (Bushee et al. 2013) in the country. The provisions stated in the state’s regulation in SOX,
that there must be mandatory rotations in the audit partners but the restrictions in non-audit
services. The external auditors can provide only the non-audit services. However, in US the
auditors or the audit partners of the company can provide the audit and non-audit services (Bain

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and Band 2016). The CEO and CFOs of the company must regularly certify the reports to help
the company mitigate the penalties of false credit citations or engaging in criminal activities
(Zalata and Robert 2016). However, in UK the director’s report must contain the statement of the
directors regarding relevancy of the audit information or false information given in the report. It
is criminal offense for the company to make a false statement. The US legislations contain the
prohibition act effective on insider trading during the pension fund scandal that happened in the
country. The board does not specify it but the companies must go by the pension part 5 of the
criminal justice act 1993 or Market Abuse Regime (Elmagrhi et al. 2017). However, the rules of
management report and internal audit attested that the management report given in US SOC and
SEC and adoption of codes of ethics is essential but it does not have any equivalent rules in UK
regulations. In UK, it is expected that the companies will maintain the minimum ethics as a
matter of fact (Carberry et al. 2017).
Issues in the approaches as well as the benefits
For a company it is essential to incorporate corporate governance in the operations of
the business. Both of the discussed regulations, SOX in US and Smith, Higgs, Cadbury,
Greenburg report in UK and other reports has very important part in the corporate governance
(Tricker and Tricker, 2015). The separation in the roles of CEO, CFO, chairman and board of
directors have provided the companies with an advantage of taking different perspectives and
thus form different viewpoints. The codes of corporate governance and ethics in other companies
are strictly maintained after the scandals of the companies discussed above. The main issue in
modern approach of corporate governance is, it does not identify consistency and significance in
the relationships between performance of the firm and executives remuneration (Elmagrhi et al.
2017). The monitoring and the evaluation system is also given lesser emphasis in the acts that

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needs to be implemented. The Cadbury Act in UK does not consider the accounting standard
changes that are modified after the commencements of the report (Denis 2016). The share
repurchase from the shareholders are also an issue in corporate governance approach, which
should be considered. These issues have been highlighted in this framework.
Conclusion
The constant update of the corporate governance ethics and codes of practice along
methodical review of corporate governance structures are necessary to avoid downfall of
companies like Enron in the future. The concept of corporate governance deals with the changes
in the approach of the top level management along with the effective implementation of human
resource in the company. The approach to use the penalties, fines and restrictions in case of
illegal activities and breach of any contract is effective. The use of rational external auditing
partners and the tight control in the internal audit members in both the countries, especially the
US regulations are very essential and effective. This provides the company to safeguard the
information as well as provide a transparent report.

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