Introduction

My dissertation will focus on the examination and the comparison of the corporate governance
practices followed in UK and USA. The extensive reforms that have taken place in the particular
sector have led to the development of many doubts regarding the effectiveness and the credibility
of the corporate governance systems applied on these two countries. For this reason, the
examination of the particular issue is considered to be really valuable offering to researchers and
managers around the world the chance to understand the various aspects of corporate governance
and align (where possible) their business strategies with the relevant corporate governance
principles applied on each specific market (referring to the cases of UK and USA). Moreover,
this study could help to the identification of any potential weaknesses of the corporate
governance policies applied on UK and USA suggesting appropriate reforms on the relevant
rules.

Background:

Business activities around the world have often caused the interest of governments within the
particular states. The reason is that all parts of these activities need to be appropriately regulated
in order to offer adequate and effective protection to the stakeholders and the public in general
(referring mostly to protection from severe financial losses that can threat the viability of the
company but even the level of the development of the local economy – when the firm under
examination is a well established one, eg Enron). However, because there are many differences
in corporate structure internationally, it is necessary for legislators to each specific state to try to
adapt the legal principles that are related with business activity with the social and cultural
characteristics of each particular state; the size of the firm and its culture should be also taken
into consideration. The particular issue was examined by Douglas et al. (1989, 440) who noticed
that ‘differences in environmental conditions in different country markets, in terms, for example,
of market size and growth, rate of technological change, or barriers to entry, may also lead to
differences in strategy’. In other words, corporate activity is a complex network of actions and
initiatives that need a careful review and close monitoring by the governmental authorities in
order to ensure the safety of the transactions without influencing the development of the various
corporate projects.

As noticed above, the dissertation will focus on the examination of a specific aspect of corporate
activity: the corporate governance. The latter can refer to a series of elements within a particular
organisation starting from the principles that should be applied to the governance of a firm up to
the relationships between the employer (board of directors) and the employees. On the other
hand, globally two major corporate governance systems are recognised: the liberal form of
corporate governance (UK and USA) in which the interests of shareholders are considered to be
the major priority for legislators when developing laws related with business activities. In
accordance with the coordinative model (accepted mostly by Europe and Japan) the interests of
other participants (in the corporate activities) like employees, customers and suppliers are
considered to have a crucial role in the formulation of the laws regulating business activities.
This study will refer primarily to the corporate governance schemes applied in UK and USA. For
this reason, the corporate governance system of these two countries will be analytically presented
highlighting the potential differences and also the advantages of each one of them within the
modern market.

From another point of view, the examination of the various aspects of corporate governance
cannot be achieved without the analytical presentation of the characteristics of corporate
governance through an appropriately customised definition. In this context, it is stated by Buck et
al. (2005, 42) that ‘corporate governance and governance institutions in general terms are
concerned with the means by which a firm's stakeholders control the decisions of senior
managers; these stakeholders can include shareholders, executive directors, employees who are
not executives, customers, creditors, suppliers (including banks as suppliers of credit),
competitors, and the State’. From another point of view, Pedersen (1999, 45) supported that
‘corporate governance - the mechanisms by which companies are controlled and directed - is a
complex subject that consists of owner-manager relations, stakeholder relations, board structures
and practices, management compensation, capital structure, company law, and other variables’.
Both the above definitions present the particular aspects of corporate governance within the
modern market; no differentiation in corporate structure seems to be made in accordance with the
principles of the state of activity (or the state of origin). On the other hand, the study of Fort
(2000, 829) led to the conclusion that ‘corporate governance can be described as the top
management process that manages and mediates value creation for, and value transference
among, various corporate claimants in a context that ensures accountability to these claimants’.
In accordance with the above definition the development of the various aspects of corporate
activities is decided by the firm’s managers; the intervention of the state is rather limited. Indeed,
the increase of the power of top management in modern businesses around the world is also
highlighted by the literature and the empirical research. In a relevant report it is noticed that ‘the
principal weakness of corporate governance today is the excessive concentration of power in the
hands of top management; rebalancing or equalising this power is a prerequisite for controlling
management fraud and promoting accurate financial reporting’ (CPA Journal, 2008). The above
described concentration of power can have severe consequences for both the stakeholders and
the public in general. In the case of Enron the concentration of power in the firm’s top managers
led to the unexpected collapse of the firm and the development of severe turbulences in
American economy.

Literature Review

Corporate governance – general aspects

Firms that operate within the modern market have to face a series of challenges related with both
their internal and external environment. In this context, it is supported by Wooldridge et al.
(2001, 17) that ‘the main challenge for companies in a global economy is to situate themselves in
various centers of excellence and weave together different centers of excellence into a global
production network’. From a different point of view, Gooderham et al. (1999, 507) noticed that
‘despite their very different assumptions, both rational and institutional explanations of
organizational structure and management practices predict similarity among firms that operate in
the same industry within the context of a simple country’. In other words, the regulation of
business activities today can be effective only if it takes into consideration the various aspects of
these activities as they are formulated within the modern market – taking always into
consideration the changes in the needs of the firm’s shareholders but also in the needs of the
stakeholders. On the other hand, it is clear that extensive differentiations can be observed in the
methods of corporate governance applied to modern firms in accordance with the social and
cultural characteristics of these firms but also the social and cultural context of the country in
which the firms’ operations are based.

The theoretical and empirical research has proved that significant differences can be observed in
all aspects of business activities in accordance with the social and cultural characteristics of a
specific region – where business activities are mainly developed. The differences mentioned
above can refer to specific management issues or they can refer to all business context. In the
case of British firms, Scullion (1994, 86) noticed that ‘very few British companies can claim to
have a truly international top management team’. Other issues of corporate activity may be
differentiated under the influence of the social and cultural trends applied on a specific country/
region.

In order to understand the importance of corporate governance for the development of the
business activities, we should refer primarily to a clear description of the interests existed within
any corporation: the stakeholders from one side and the shareholders from the other. Regarding
this issue, it is noticed that ‘stakeholders, broadly defined as society as a whole, are interested in
the collateral benefits derived from the success of the enterprise, such as the abundance of a
product or a service, a clean environment, or a general rise in the standard of living; stockholders
have a dual interest in the success of the enterprise: direct interest as a reward for their
investment, and collateral benefit as stakeholders’ (CPA Journal, 2008). The conflict of interests
of these two sides can lead to the development of severe turbulences within the organization. On
the other hand, in firms that the interests of both these sides are protected it is very likely that
there will be no severe problems in the communication and the cooperation between these parties
towards the increase of the firm’s performance.

It should be noticed that the principles of corporate governance are primarily stated by the
governmental authorities (referring to the firms of a particular country). Apart from these orders,
the international community can intervene in the business activities presenting a series of
standards that should be met in the corporate activities worldwide. OECD is a well known
international organization that provides appropriate solutions to a series of issues related with
international business activities. The specific organization has set several rules regarding the
various aspects of corporate governance. In accordance with these rules: ‘’all shareholders
should be treated equally; insider trading and abusive-self dealing should be prohibited; capital
structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership should be disclosed’ (OECD, 2004, 18-19). It is clear
from the above rules that international organizations can set rules regarding business activities
around the world; however these rules can be characterized rather as ‘principles’ of commerce
being similar with the ethics held in corporate activities worldwide.

Corporate governance in Britain

In the case of Britain, the regulation of business activities is realized through the application of a
series of legislative texts and orders. The history of business activity in the particular country
was examined by Pedersen (1999, 45) who noticed that ‘the industrial revolution took its
beginning in the United Kingdom more than 250 years ago; therefore, the hypothesis of greater
differentiation in the early industrialized nations than in later industrialized nations can be tested
by examining the extent to which the corporate governance structures of U.K. firms are more or
less similar to the governance structures of firms in other nations’. In other words, Britain is a
country with a significant history in business activities. The importance of the latter in the
economy should be considered as extremely high. For this reason the legislator pays a significant
attention to the development of the appropriate legal framework for the regulation of the various
aspects of corporate governance. The above assumption is in accordance with the view of Kay
(1995, 84) who supported that ‘British statute law is virtually silent on how corporations are to
be organised; since the corporation is regarded as a creation of private contract, obligations on
companies are mainly there to prevent abuse of the privilege of limited liability, and concern
formal matters such as registration and audit’. Because of the above phenomenon, additional
legislative texts (as described below) have been introduced and applied in order to support the
effective regulation of all corporate governance in British firms (foreign firms that operate in
Britain may have the right to claim the application of the laws of their country of origin – it
depends on the law applicable on each case taking into account the firm’s articles of association
but also the legislation of the country of origin and the country of operations). However, it could
be noticed that the British statute law recognizes to the firm’s leaders (board of directors) the
right to decide on the firm’s corporate governance.

The legal framework applied in UK regarding the corporate governance includes a variety of
legislative texts:

 ‘Common law rules (e.g. directors' fiduciary duties).

 Statute (notably the Companies Act 1985).

 A company's constitutional documents (the memorandum and articles of association).

 The Listing Rules, which apply to all companies that are listed on the Official List (or
AIM Rules, as appropriate).

 The Combined Code on Corporate Governance; the Code is supplemented by: the
Turnbull Guidance (relating to the internal control requirements of the Code), the Smith
Guidance (on audit committees and auditors) and suggestions of good practice from the
Higgs Review.

 Non-legal guidelines issued by bodies that represent institutional investors (such as the
Association of British Insurers (ABI), the National Association of Pension Funds (NAPF)
and the Pensions & Investment Research Consultants (PIRC).

 In the context of takeovers of public companies, the City Code on Takeovers and Mergers
and the rules of the Takeover Panel apply.
  The Financial Services Authority's Code of Market Conduct (relating to the disclosure
and use of confidential and price sensitive information and the creation of a false market)’
(Metropolitan Corporate Cousel, 2008)

In other words, corporate governance in Britain is regulated by a series of legal texts the most
important of which is the Combined Code on Corporate Governance as described above. The
specific Code includes provisions that refer to all particular aspects of corporate governance of
firms operating in Britain; however because in some cases additional provisions may be required
(like in the case of a merger) it is possible that other legislative texts are used in order for the
relevant issues to be appropriately addressed. In any case the common law rules and the
Companies Act of 1985 are applied (the former are rules that can be applied in any dispute –
whenever necessary – whether the latter can be applied in any issue related with the business
activity – i.e. not only to the corporate governance).

Corporate governance in USA

On the other hand, in USA there is no Code for the regulation specifically of the corporate
governance issues; instead a series of laws and courts’ decisions can be used in order to resolve
problems that are related with the corporate governance of firms operating across the country.
There are certain issues that are regulated directly by the law but these are limited; in the high
majority of the disputes appeared in the area of firms’ corporate governance various statutes and
other legislative texts can be applied. In accordance with a report published recently in USA
‘corporate governance practices in the United States are not regulated by any one particular
statute but instead are affected by the governing instruments, the corporate law and the court
decisions of each issuer’s state of incorporation, and, in the case of many publicly-owned issuers,
by the U.S. federal securities laws and requirements of the national securities markets (Security
and Exchange Commission of Brazil, 2008). On the other hand, it should be noticed that
corporate governance issues are likely to be regulated differently by each one of the 50 states of
USA. In this context, the Sarbanes-Oxley law which was introduced in 2002 has been formulated
in order to offer a valuable legislative base for the regulation of various issues referring to the
corporate governance of firms across USA. The above is considered to have influenced also the
UK legislation related with the corporate governance. Regarding the specific legislative text it is
noticed by Tran (2004) that ‘Sarbanes-Oxley, which called for tighter internal company controls,
caused a rethink of corporate governance laws in the UK as well, with the publication of the
Higgs report, written by Derek Higgs, the former investment banker’. The effectiveness of
Sarbanes-Oxley Act 2002 has been extensively criticized. In accordance with Atkins
(commissioner in United States Securities and Exchange Commission, 2003) the specific
legislative text ‘contains many advances for corporate governance and attempts to provide best
practices to prevent the misdeeds that have led to the investor losses. Many of these ideas are not
new, but have been floating around in one form or another for quite a number of years’ (Atkins,
2003). In other words, Sarbanes-Oxley Act has been introduced in order to resolve specific
problems in corporate governance for firms operating in USA; in the long term the achievement
of this target can be doubted and only the examination of the consequences of application of this
Act in practice could lead to a ‘safe’ assumption regarding the particular issue. It is for this
reason that the incorporation of the empirical research (questionnaire) in current study has been
considered as necessary.
Research question and objectives

In accordance with the issues developed above, current study will focus on the regulation of
corporate governance in two specific countries: UK and USA. Because the particular issues can
include a variety of aspects, it is necessary for the relevant research to be expanded to the
following questions: a) which is the current trends in corporate governance around the world, b)
which are the major differences between the corporate governance practices followed by the
Anglo-American countries and the countries of continental Europe/ Japan, c) which are the
benefits and the pitfalls of the statutes and the other legislative texts applied on UK and USA
regarding the corporate governance d) which are the most common problems related with the
corporate governance in these two countries.

References

Atkins, P. (2003) Recent Experience With Corporate Governance in the USA, online, available at

http://www.sec.gov/news/speech/spch062603psa.htm

Buck, T., Shahrim, A. (2005) The Translation of Corporate Governance Changes across National
Cultures: The Case of Germany. Journal of International Business Studies, 36(1): 42-69

CPA Journal (2008) A Comprehensive Structure of Corporate Governance in Post-Enron

Corporate America

http://www.nysscpa.org/cpajournal/2004/1204/essentials/p46.htm

Fort, T., Schipani, C. (2000) Corporate Governance in a Global Environment: The Search for the
Best of All Worlds. Vanderbilt Journal of Transnational Law, 33(4): 829-859

Kim, H. (1995) Markets, Financial Institutions, and Corporate Governance: Perspectives from
Germany. Law and Policy in International Business, 26(2): 371-405

OECD Principles of Corporate Governance (2004), available at

http://www.oecd.org/dataoecd/32/18/31557724.pdf

Pedersen, T., Thomsen, S. (1999) Business Systems and Corporate Governance. International
Studies of Management & Organization, 29(2): 43-54

Scullion, H., (1994) ‘Staffing policies and strategic control in British multinationals’,
International Studies of Management and Organization, 24(3): 86-97

Security and Exchange Commission of Brazil (2008) available at

http://www.cvm.gov.br/ingl/inter/cosra/corpgov/usa-e.asp
Tran, M. (2004) USA: Corporate Governance Law 'Too Strict' available at

http://www.corpwatch.org/article.php?id=11374

Metropolitan Corporate Counsel (2008) Corporate Governance In The UK And U.S. Comparison

http://www.metrocorpcounsel.com/current.php?
artType=view&artMonth=December&artYear=2005&EntryNo=3957