(a) Reasons for Emergence of CG Regulation around the world

Corporate Governance has grown in importance in recent years as a reaction to a number of things. The 1980s is often seen as a decade of greed, and partly as a result of this there were a lot of business scandals and collapses at the end of that decade and in the early 1990s. To a great extent corporate governance is a reaction to those scandals and collapses. The 1990s also saw a rise in social and environmental concerns and an increase in the feeling that businesses should act ethically, be managed effectively, and should be more accountable both to their shareholders and to the rest of society.

In more recent times, the collapse of Enron in late 2001, closely followed by WorldCom in 2002, further prompted legislators that action was required. It is no accident that the Sarbanes-Oxley Act was created in the US immediately after these events, just as it is no accident that the UK Cadbury Code came out in 1992, shortly after the Maxwell scandal. 

Overall, the trust placed in company directors has collapsed and needs to be rebuilt. Corporate governance is an attempt to achieve this.

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(b) Six principles which are at the core of good CG

1. Objectivity

Anyone in a monitoring role should carry out their role objectively, meaning that their mind is only thinking about the matter being monitored and no other issues are influencing their thinking. Objectivity is easier to achieve if the person is independent of the matter that they are monitoring. 

Within corporate governance, Non-Executive Directors (NEDs) should be independent of the company and from the Executive Directors who they monitor. Also, the external auditors should be independent from the company and certainly should have no links with anyone in the finance department. Internal auditors should, as far as possible, be independent from the company and the operations that they are auditing. 

Ideally the Chairman should be independent of the CEO.

2. Integrity

Someone (or thing) with integrity is someone who is consistent in their actions, usually because they have principles from which they never deviate. As a result of this consistency, they can be relied upon (i.e. trusted) and this creates increased assurance to stakeholders. 

Directors and auditors need to have integrity as both need to be trusted by the company’s shareholders. But integrity should also be a characteristic of risk management and internal control systems, the accounting records, the company’s IT systems and the financial statements.

3. Probity

As well as basic honesty, directors and auditors should show probity. This means not simply assuming something to be true, but fully investigating all of the facts before reaching an opinion. For example, this concept can be applied to how strategy decisions are made by the board and the quality of audit work done.

4. Accountability

Those in a position of responsibility in a company will often delegate this responsibility down through the company’s management structure, largely because it is impossible for directors to remain directly responsible for everything. 

However, whilst direct responsibility can be delegated to others, it is the directors who remain “accountable” for the performance of the company. In other words, it is the directors who must be willing to be judged by the shareholders and it is the directors who may lose their jobs if company performance is not up to standard.

5. Transparency

The directors should act in a clear way, being open with all information and not seeking to “spin” it to try to create a different impression. Transparency should be at the heart of all communication with stakeholders through the annual report and financial statements, the AGM, Stock Exchange announcements, press statements, and in all company brochures and other literature, including its website. 

Being transparent allows stakeholders to judge your performance accurately and effectively.

6. Fairness

Companies should treat stakeholders evenly with no preferential treatment for one member of a stakeholder group over other similar members. 

If one major shareholder has access to the chairman for a meeting, all shareholders should be given the opportunity to have the same meeting and information. 

The fact that the annual report and financial statements are made available to all shareholders at the same time is an example of the fairness concept.