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Discuss the relationship that exists in the UK between the legal rules that govern directors' duties and principles of corporate governance.

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Introduction

Company Law Coursework. "Companies whose standards of corporate governance are high are the more likely to gain the confidence of investors and support for the development of their businesses". (Report of the committee on the Financial Aspects of Corporate Governance - Cadbury Committee Report (Para 1.6) In the light of this statement discuss the relationship that exists in the UK between the legal rules that govern directors' duties and principles of corporate governance. Corporate governance is a very wide topic area it does not have one set definition its literal meaning is that of united group control however it's a much wider subject area. Corporate governance covers a wide range of issues from the role of the company secretary and legal department, to the business strategy, the roles of the executive and non-executive directors, the relationship between investors and companies and accounting and information systems. A corporate governance structure should set guidelines as to how responsibilities are distributed throughout the company it should also give guidelines on the decision making process. It should structure the way in which objectives are met and monitor the progress in meeting such objectives. Companies need to maintain a good corporate governance structure to ensure that they are efficiently run. Good governance could be seen more as a mentality than an actual set process it is more to do with how the company portrays itself to the public, the investors and to its staff. It is needed in all sizes of organisations. "Good corporate governance is running the company on behalf of the shareholders and other stakeholders." - Chris Jackson (2003),'Foreword', Management Quarterly, Corporate Governance issue 21 (October) ...read more.

Middle

The Companies Act 1985 S8 Table A gives the power to appoint a chair however it doesn't give restrictions on who should be considered for such a position. A clear division in the responsibilities will ensure a balance of power and authority. A Chairman is responsible for the running of the board of directors whereas a Chief Executive is responsible for the running of the companies business, Chief Executive is not a legal term it is something created by the business. This can also be seen to have a relation with the part 3 of S1A; "The board should include a balance of executive and non executive directors (and in particular independent non executive directors) such that no individual or small group of individuals can dominate the board's decision taking." The Combined Code 2003 S1A.3 This principle is suggesting that the board should be of a sufficient size and should hold enough skills and experience to benefit the company; it should also not cause disruption to the running of the company if there are changes to the make-up of the board. This may be seen as common sense but if the board is of sufficient size then it prevents small allegiances from having a concentrated amount of power or knowledge of the company, it also makes decision making a fair process. Again executive and non-executive are not legal terms, in the eye of the law all directors are equal and are treated as equals. The fourth principle on directors is regarding appointments to the board; "There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board." ...read more.

Conclusion

The final section in The Combined Code is surrounding the accounts and auditing it looks at financial reporting and says that an annual report should be issued and should present a balanced and understandable assessment of the position and prospects of the company in the years to come. It also focuses on internal control and emphasises that a sound system of internal control can be maintained. The final area highlighted in the accounting and auditing section is looking at the audit committee and the auditors it again says that the arrangements should be formal and transparent for considering how to apply financial reporting and internal control principles and to also maintain a healthy relationship with the auditors. This should prevent any information asymmetry between principals and agents as was seen in the case of Enron. The UK's approach to governance is a self regulatory approach unlike the US legislative approach. Brussels have looked into creating a European corporate governance code however they came to the conclusion it was not necessary and agreed that the European Union should create a common approach which would coordinate national corporate governance codes. If legislation is brought in it would defeat the point of corporate governance as it would cause restrictions on a company rather than the flexibility provided by The Combined Code. It is said that companies who follow a code of corporate governance have a more stable price/earnings ratio this is due to the management of their financial assets, the code helps them manage their assets more efficiently and so they are seen as more stable companies in which to invest. This in turn creates a confidence in investors who are willing to support the development of their company as they have faith in their investment due to the guidelines the company follows set by The Combined Code. ...read more.

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