Analysis of UK Corporate Governance Code in Financial Crisis Context

This report provides a critical analysis of the UK Corporate Governance Code, examining its effectiveness, particularly during financial crises. It begins by outlining the purpose and principles of the code, highlighting its reliance on a principle-based approach and comparing it to the rules-based Sarbanes-Oxley Act in the US. The report discusses the comply and explain approach of the UK code and its aim to protect investors' interests through reliable financial information. Several case laws, including Salmon v. Salmon & Co., Robert Maxwell's fraud, the BCCI scandal, and the Polly Peck collapse, are analyzed to illustrate the shortcomings of the UK corporate governance system and the need for potential reforms, possibly drawing from the stricter regulations of the US system. The report suggests that improved transparency, board effectiveness, and auditor independence are crucial for enhancing corporate governance in the UK and better managing financial crises. Desklib offers a wide range of resources, including similar reports and solved assignments, for students seeking to deepen their understanding of corporate governance and related legal issues.

LAW OF BUSINESS
ORGANSIATION

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY ..................................................................................................................................3
CASE LAWS...............................................................................................................................5
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Law is defined as the various kinds of rules and principles and refers to the set or rules
and regulation that is created by government and is enforceable by court. Law imposes a and
obligation on the citizens to comply with the rules and regulations. Various acts have been made
for the protection of the society , related to the business that is company law (Sachko, 2019).
The provisions are mentioned under these acts which the company or and individual is bound to
follow and it also helps in protecting the rights of the citizens and protect the society form
exploitation. Every country has its own laws and procedures which the citizens are bound to
follow. The report is based on the UK Corporate Governance Code and critical analysis of
importance of this code in the situation of financial crisis.
MAIN BODY
The UK Governance Code was firstly introduced in 1992 by the Cadbury committee with
the main purpose of facilitating effective management which results into long term success of the
company. Corporate governance is a system through which the management of the organisation
is managed and controlled (Anheier, and Baums, 2020). The board of directors of the company
is responsible for the its governance. The shareholders of the company have the role in the
governance as they appoint the directors and auditors in order to satisfy about the present
position of the company. The company also sets out the standards for good practices related to
the issues division of responsibilities, audit, internal control and evaluation.
The issue stated is that in the situation of financial crisis, The UK Corporate Governance code
insufficient and inadequate in those times and there is a need to make modifications in it.
The UK corporate governance code is based on the principle based approach which is defined as
the set of inappropriate principles(Ong, 2018). It states that every company has its own set of
corporate governance practices and the these practices can change depending upon the
situations.
The Sarbanes Oxley Act 2002 refers to Federal law that established sweeping auditing
and financial regulations for the public companies (Gorshunov, and et.al, 2020). It is the law in
U.S. That was passed in order to protect and help the investors from financial frauds This act is

also known as Corporate responsibility act 2002. The provisions of this act was made more strict
and also imposed new penalties on the companies who violates the provisions of the act. The act
was reformed and added new set of reforms such as corporate responsibility, increased
punishment related to the criminal acts, various regulation related to accounting and other new
provisions related to the protection of the interest of the investors and shareholders(Gao, and
Zhang, 2019). This act is incorporated in order to help the shareholders, employees and public
from any accounting errors. With the establishment of new set of rules , the auditors and officers
are held accountable . This act was created in order to improve the reliability of the pubic
companies and eliminate errors which can benefit the company and there shareholders. The
Sarbanes Oxley Act 2002 is a complex and lengthy set of legislation. Some of its key provisions
are mentioned under section 302, 404, and 802.
The section 302 of the act makes it mandatory for the senior corporate officers to certify
in writing the financial statement of the company and also bound to disclose all the material
facts regarding the financial position of the company (Williams, 2018). Furthermore, section 404
of the act states that the management and auditors should establish the internal reports and
reporting methods for effective functioning of the financials of the company. Section 802 of the
act mention three rules regarding the record keeping that is associated with the fabrication of the
records, second is defining the retention period of the records and specific records that need to be
mandatory stored by the company.
The corporate governance of US is defined as the set of fiduciary and managerial
responsibilities that helps the management of the company, its shareholders which is defined by
the rules and regulations (Atkinson, and Duca, 2019). The UK corporate governance follows
the comply and explain approach that depends on the transparency of the operation of
companies. There are many reasons for the codes of corporate finance as it help in the protection
of the interest of the investors as they need more reliable information about the companies which
helps in taking decisions whether to invest in the company or not. Therefore the financial
statements should be reliable (Westland, 2020). The main purpose of these approaches is to get
the required information about the internal management of the company such as internal control,
risk management etc. The countries are making continuous efforts in developing effective
corporate governance codes which help in attracting large number of investors in the company.
The approach of corporate governance of US Is based on rules which is named as Sarbanes

Oxley Act 2002 which faced a setback in the stock exchange that damaged the investors
confidence. Under this various case laws were identified where the a company faced various
difficulties that was dominated by chief executive and various other subordinates which focused
on personal interest rather than in the interest of the shareholders. Earlier this approach was
unsuccessful as the financial reporting was misleading and the financial controls was weak and
inadequate in order to prevent the misleading reports of the company.
In the U.S. Corporate governance is determined by the legislation which is defined by
Sarbanes -Oxley Act 2002. The approaches of the UK corporate governance is different from the
UK corporate governance that is SOX (Ma, and Pope, 2020). SOX sometimes used the comply
and explain regulations in some circumstances but sometimes the US corporate governance rely
on the regulations of the SOX in terms of fine and imprisonment in case of contravention. In the
year 2017, FRC published revisions in the corporate governance of UK which will include a
different reforms that include consultation on corporate governance reform , report on corporate
culture and business enterprise and industrial strategy report on corporate governance. The main
purpose of making such modification is to make the current code precise and easy to understand .
The areas of changes such as leadership, responsibilities , composition of board etc. The major
aim for enacting such changes will facilitate alignment between the corporate governance of UK
and US.
CASE LAWS
In the case of Salmon v. Salmon and company which is a leading case which is
associated with the principle of corporate veil. This was a landmark case that upheld the
principle of corporate personality as as separate legal entity and stated that shareholders will not
be personally liable in the situation of insolvency (Ascui, and et.al, 2018). The facts of the case
was that the appellant was the supplier of export quality leather boot since 30 years and after
that he transferred the business to a firm where the appellant , his wife and daughter were the
subscriber to the memorandum of association. The appellant business was sold to the company
for a specified sum from which some amount was to be paid in terms of cash or debenture. Later
on the company faced financial crisis and the court ordered winding up of the company. The
company don't have enough funds for the repayment of the debts so liquidator ordered the
appellant to indemnify the debts of the company. The liquidator found Salmon guilty for not
indemnifying the debts of unsecured creditors and being shareholder of the company. Court of

appeal in the judgment stated that the appellant is held liable to pay the debts of the company and
the court considers that the company's business is the Salmon business and the appellant is
earning enough profit hence liable to pay debts (Callegari, and Mikhailova, 2021). It can be said
that applying the US Sarbanes- Oxley act or more reliable approaches it can be useful as the
regulation are more effective and can be applied in case of crisis.
The case of Robert Maxwell and was observed that in November 1991 , and apparently
successful businessman and leader with newspaper and publishing interest. Maxwell built a vast
empire in 1980 and after he collapsed under the mountain of financial difficulties and fraud .
Robert was the CEO of Maxwell publishing and group (Picard, 2021). It was stated that Robert
stole around 727 million from the pension funds of the company. In this case , the assets was
under pledge as security for additional loans and the party also misappropriated with the funds of
the company. The intention behind committing this act was to save the company from
bankruptcy but on the other hand the employees suffered a huge loss regarding the
misappropriation of the pension funds. After the death of the Maxwell , his son was declared
insolvent with the debt of 400 million (Ward, 2021). The corporate governance of the UK is
ineffective it has ineffective board and the directors are not following their duties in right way
and also there is lack of transparency which is very necessary in this act and hence, the Sarbanes
Oxley act or similar to this act can be adopted for better transparency. In order to implement this
act in UK , the company that complete 8.1 item of the registration form.
The case related to the Bank of Credit and Commerce International (BCCI), bank that
was establishes in 1972 by Agha Hassan Abedi , a Pakistani banker which further in 1980 was
licenced to trade in UK which was granted by Bank of England. In the year 1987, the bank of
England and with others investigated about the allegation which was made against BCCI
regarding money laundering (Barker, and Chiu, 2018). Further investigation exposed BCCI and
found out that there was number of evidence of massive and widespread fraud and declared that
BCCI never earned any profits and have liabilities of $4 million. The case was associated with
the fraud which was cone against the auditors and also number of falsification of accounts in
order to cover their losses.
The corporate governance act is more effective as it contains the provisions regarding the
enhancement of the independence of the external auditors including the mandatory rotation
which is lacking in UK corporate governance. The Sarbanes -Oxley act 2002 contains the

provisions relating to building the effectiveness of the audit committees (Picard, 2021). It is
mandatory to apply new approaches similar to US governance approach so that cases can be
managed in the financial crisis .
Polly Peck company was British textile company operating at small scale which
collapsed in 1990 which led to the reform of Cadbury Report which stated to change the role of
chairman and chief executive and ensuring a majority of non -executive directors(Na, and
Younies, 2020). The CEO of the company was alleged with the fraud of 29 million and was
committed without the consulting the board of directors of the company. The investigation
revealed that the money was transferred from the company;s account to other companies but it
was stated by Serious Fraud office that the fund transferred was converted into the purchase of
shares. The further investigation revealed that Asil Nadir was charged of 18 offences of theft
and falsification in the accounts ( Chizea, and Isukul, 2018). The provisions of the corporate
governance highlights the the provisions to safeguard the interest of he shareholders and in order
to handle the situation of financial crisis more new reform should be made. After this case , there
were reforms which resulted in the foundation of Cadbury report (1992), Greenbury report(1995)
and combined code on corporate governance.
In the case of Baring Bank , The management of the financial institution completely
failed in the internal controls of the company resulting in loss to the employee of $1.4 billion in
the stock trading. The company was founded in 1762 by Sir Francis Baring which collapse in
1995. The person alleged was found guilty in the misappropriation of payments, reconciliation
statements, accounting entries(Farida, and et.al, 2019). After the investigation and trial, The
alleged party was convicted of fraud and sentenced to six years of imprisonment. The case
revealed that the corporate governance of the country should b effective in order to manage the
situation of financial crisis or in other case , UK should adopt various other approaches similar to
US corporate governance act.
In the case of Carillion Plc which is a big construction firm in UK that collapsed in 2018.
The company was found under the liability of pension of worth £2.6 billion and debt of £2
billion to their suppliers and creditors. The accounts of the company stated paying the dividend
t the shareholders and awarding bonus to the superior level managers of the company. In 2017,
the company declared low profits and decrease in the value of contracts. The company decided to
liquidate in 2018 (Kingston, 2019). AS per the investigation it was declared that the firm

exploited their sully chain finance scheme in which they invested £500 million. They also used
illegal accounting strategies in order to show their high cash flows and decrease debts. In 2016 it
was observed that there was deficit in the pension funds of around £811 million which was more
that was mentioned in the balance sheet. The auditing should be done correctly so that
companies cannot hide their frauds. Based in the investigation of the financial statements, it was
discovered that there was no fraud conducted by the company but it was revealed that Carillian
that the top management misappropriate used window- dress their financial statements of the
company. Further the company had issues regarding the accounting , pension and remuneration
policies that was displayed in the financial accounts of the company.

CONCLUSION
From he above report it can be concluded that having an effective corporate governance
helps to build the company culture of integrity resulting in positive performance of the company
and also sustainable development of the company in the market. It also helps to increase the
performance of the employees and accountability within the company resulting in less error and
mistakes . It is defined as the rules and regulations that defines the operations of the company.
Corporate governance also highlights the rights and responsibilities of the members in the firm ,
boosting the efficiency in the internal management and provide profits to the shareholders for
long-term. It helps to identify the errors and take steps to avoid the effects of such on the
performance of the company. All the above case studies is based on the corporate governance of
UK and the reform is made in order to reduce the effect of errors. The corporate governance of
US is considered as effective act which can manage the situation of financial crisis easily or
there can more effective approaches can be used for the company.

REFERENCES
Books and journals
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Barker, R.M. and Chiu, I.H., 2018. Unfinished Work in UK Company Law, Reforms: A
Normative and European Perspective to Addressing the Gaping Holes in Directors’
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Callegari, B. and Mikhailova, O., 2021. RRI and Corporate Stakeholder Engagement: The
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Farida, and et.al, 2019. Determinant variables of enterprise risk management (ERM), audit
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Williams, T., 2018. Role of management, corporate governance, and Sarbanes-Oxley in fraud: A
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