Analysis of the Combined Code of Corporate Governance

Analysis of the Combined Code of Corporate Governance Corporate governance is the system or process by which companies are directed and controlled (Cadbury,1992,p.2) Good corporate governance should contribute to better company performance by helping a board discharge its duties in the best interests of shareholders; if it is ignored, the consequence may well be vulnerability or poor performance. Good governance should facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term. The Combined Code on Corporate Governance (the Code) is published by the Financial Reporting Council (FRC) to support these outcomes and promote confidence in corporate reporting and  governance The Code is not a firm set of rules. Rather, it is a guide to the components of good board practice distilled from consultation and widespread  experience over many years. While it is expected that companies will comply wholly or substantially with its provisions, it is recognised that noncompliance may be justified in particular circumstances if good governance can be achieved by other means. A condition of noncompliance is that the reasons for it should be explained to shareholders, who may wish to discuss the position with the company and whose voting intentions may be influenced as a result. This comply or explain approach  has been in operation since the Codes beginnings in 1992 and the flexibility it offers is valued by company boards and by investors in pursuing better corporate governance. The Listing Rules require UK companies listed on the Main Market of theLondon Stock Exchange to describe in the annual report and accounts their corporate governance from two points of view, the first dealinggenerally with their adherence to the Codes main principles, and the second dealing specifically with non-compliance with any of the Codes provisions. The descriptions together should give shareholders a clear and comprehensive picture of a companys governance arrangements in relation to the Code as a criterion of good practice The reason for selecting this combined code on corporate governance as topic of research is that researcher is having a past experience of working with the organization and knows about the prows and corns of the business. 1.2 INITIAL REVIEW OF THE LITERATURE: Corporate governance is an institutional arrangement by which suppliers of finance to corporations assure themselves of getting a proper return on their investment(shleifer and vishney ,1997,p.737). Transparency and accountability are the most significant elements of good corporate governance.   This includes: the timely provision by companies of good quality information; a clear and credible company decision-making process; shareholders giving proper consideration to the information provided and making   considered judgements. The origins of the current Revised Combined Code stem from the report of the Committee on the Financial Aspects of Corporate Governance (the Cadbury Report,  1992) to which was attached a Code of Best Practice. This was further developed through a series of reworkings including those of the Greenbury Committee, which made recommendations on executive pay and a Code of Best Practice. It was then decided that previous governance recommendations should be reviewed and brought  together in a single code. The work was carried out under the chairmanship of Sir Ronald Hampel and culminated in the Final Report: Committee on Corporate Governance with its Combined Code on Corporate Governance in 1998.In 2002 Derek Higgs was asked to report on the role and effectiveness of non-executive directors. His report, published in January 2003, suggested amendments to the Combined Code. At the same time a committee under Sir Robert Smith reported on guidance for audit committees. The revised Combine d Code which was issued in July 2003 by the Financial Reporting Council (FRC) took into account both reports. The 2003 Code has been updated at regular intervals since then, most recently in June 2008. The 2008 edition applies to accounting periods beginning on or after 29 June 2008.The FRC undertakes regular reviews of the impact and continues to work effectively.According to Christine mallin(2007), Main principles of the Combined Code are: Directors 1 The board Every company should be headed by an effective board which is collectievely responsble for the success of the company 2 Chairman and chief executive There should be a clear divission of responsbilities at the head of the company between the running of the board and the executive responsbility for running of the companys business No one individual should comprise imaginative powers of decision. 3 Board balance and independence The board should include a balance of executive and nonexecutive directors (and, in pariticular, independent nonexecutive directors) such that no individual or small group of individuals can dominate the boards decision taking 4 Appointments to the board There should be a formal, rigarous and translucent procedure for the appointment of new directors to the board 5 Information and professional development The board should be supplied in a timely manner with information in a form and of a quality apropriate to enable it to discharge its duteis. All directors should be given induction on joining the board and should regularly update and refresh their skills and knowledge. 6 Performance evaluation The board should undertake a formal and thorough annual evaluation of its own performannce and that of its commitees and individual directors 7 Re-election All directors should be submited for re-election at regular intervals, subject to continued satisfactory performance. The board should certify designed and progresive refreshing of the board B Remuneration 1 The level and make-up of remmuneration Levels of remuneration should be sufficcient to attract, retain and motivate directors of the quality required to run the companys succesfully, but a company should avoid paying more than is neccessary for this purpose. A significant proportion of directors remmuneration should be structured so as to link rewards to corporate and individual performance 2 Procedure There should be a formal and transparent procedure for developing policy on executive remmuneration and for fixing the remmuneration packages of individual directors. No directors should be involved in deciding his or her own remmuneration C Accountability and audit 1 Financial reporting(Andrew tylecote and francsca visintin,2008) The board should present a balanced and understandable asessment of the companys position and prospects 2 Internal control The board should maintain a sound system of intarnal control to safeguard shareholders investment and the companys assets 3 Audit committee and auditors The board should establish formal and translucent arrangements for considering how they should apply the financial reporting and internal control principals and for maintainning an appropriate relationship with the companys auditors D Relations with shareholders 1 Dialogue with institutional shareholders There should be a discussion with shareholders based on the mutual understanding of objectives. The board as a whole has a responsbility for ensurring that a satisfactory dialogue with shareholders takes place. 2 Constructive use of AGM The board should use the AGM to communicate with investors and to encourage their participation. E Institutional shareholders 1 Dialogue with companies Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives. 2 Evaluation of governance disclosures When evaluating a companies governannce arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relavant factors drawn to their atenttion. 3 Shareholder voting Institutional shareholders have a responsbility to make considered use of their votes. 1.3 RESEARCH PURPOSE: The research purpose is to analyse the impact of failures and weaknesses in corporate governance on the financial crisis, including risk management systemsand executive salaries. It concludes that the financial crisis can be to an significant level attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to preserve against excessive risk taking in a number of financial services companies. Accounting principles and regulatory requirements have also proved insufficient in some areas. Last but not least, remuneration systems have in a number of cases not been closely connected to the strategy and risk craving of the company and its longer term interests. The article also suggests that the importance of qualified board oversight and robust risk management is not limited to financial institutions. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries. The current turmoil suggests a need for the OECD to re-examine the adequacy of its corporate governance principles in these key areas.( FINANCIAL MARKET TRENDS ISSN 1995-2864  © OECD 2008) All the UK reports and codes, including the 2003 Combined Code (the Code), have taken the comply or explain approach. Although only quoted companies (those with a full London Stock Exchange listing) are obliged to report how they apply the Code principles and whether they comply with the Code provisions and, where they do not, explain their departures from them. The Code has had a noticeable wider impact on governance of organisations outside the commercial corporate sector where parallel codes of governance are emerging. For a quoted company reporting on its application of the Code is one of its continuing obligations under the Listing Rules published by the UK Listing Authority (UKLA). If quoted companies ignore the Code, then there will be penalties under the Listing rules. The Code is divided into main principles, supporting principles and provisions. For both main principles and supporting principles a company has to state how it applies those principles. In relation to the Code provisions a company has to state whether they comply with the provisions or where they do not give an explanation. It is the Code provisions that contain the detail on matters such as separation of the role of chairman and chief executive, the ratio of non-executive directors and the composition of the main board committees. The first principle of the Code states that: Every company should be headed by an effective board. The boards effectiveness is widely regarded as a prerequisite for sustained corporate success. The quality and effectiveness of directors determines the quality and effectiveness of the board. Formal processes for appointment, induction and development should be adopted. Effectiveness of the board and its individual members has to be assessed. The Code states that no one individual should have unfettered powers of decision-making. It sets out how this can be avoided by splitting the roles of chairman and chief executive, and specifies what the role of the chairman should be. The Code offers valuable guidance on the ratio of non-executive to executive directors and definitions of independence.( http://www.frc.org.uk/corporate/combinedcode.cfm) . 1.4 OBJECTIVES: In the process of research the researcher has to find out the answers for the following questions: To understand how critical governance issues in a established organisation can be solved with optimized corporate governance To formulate an effective method of governing corporates especially at the time of crisis To find out how the country can overcome financial crisis in future with good corporate governance practice? 1.5 SCOPE OF THE STUDY: This research has some limits as the researcher has constraints of time and money. The information provided is of sample size. The research is done in India where the economy is developing. So the results vary from Indian developing economy and any other developed economy. The research is mainly concentrated in Hyderabad city so the research result would vary from that of any other city like Chennai, Mumbai, etc. The research is based on the information provided by SATYAM COMPUTERS on how it was bankrupted during financial crisis due to lack of proper governanace and financial reporting. So the result at the end of research will be useful for other companies inorder to benefit from the combined code of corporate governance. 1.6 RESEARCH STRATEGY: Research the word basically means search for information or data compilation. It mostly means to gather information concerning firm question and to build up a certain approach for that question. If there was no word called research all the scientific and social projects would have been resulted in deduction work and approximated data The approach the researcher would be using in this research is qualitative with an inductive outlook. Qualitative research is concerned with the growth of explanations, in order to know the reasons and motivations of social occurrence (Hussey Huseey 1997). The motto being to know the world in which we live in, by taking into account individual opinions, experiences and feelings According to Saunders et al (2003), in an inductive way; theory will pursue data rather than vice versa in the deductive approach. Induction emphasizes on attaining an understanding of the meanings human attach to events, it approves in the gathering of qualitative data and at last, unlike deduction which is a highly prearranged process, induction is a more supple structure which permits changes as and when the research progresses . Case study : A case study is research method to investigate the phenomenon of topic of research. In this case the researcher is looking at SATYAM COMPUTER SERVICES LTD.which is an IT firm and Collapse of SATYAM COMPUTERS at Indian Stock markets due to lack of proper corporate governance practice. In this research the researcher want to apply the combined code of corporate governance to other companies like SATYAM Grounded theory : Grounded theory is a procedure that is designed to generate a theory around the central theme of data. So this theory would help the researcher in doing his research. 1.7 DATA COLLECTION: Secondary Data The information that is previously available is called secondary information. It is using the study previously undertaken in a particular field so that one does not replicate it while conducting primary research. It is also very cost efficient and useful as this being a student project there are no funds at our disposal to conduct the research. It offers handiness and is easily accessible on databases and also on company websites (Wright and Crimp, 2000). It will be used widely while reviewing the literature on the recommended topic. Some of the secondary sources that will be used are academic journals like HR journals. Also with online information coming to age EBSCO Host and Keynote research reports and statistics issued by the Corporate Governance team in India will also be used. Finally, a number of accomplished authors have written ample on this subject, these books will also be consulted. The secondary research will be used effectively to provide a good background to instigate a good primary research. Primary Data Primary data will be collected through a sequence of recorded semi-structured interviews conducted by the researcher. Prior official authorization would be taken from those who would be interviewed. Semi-structured interviews are interviews where the interviewer would ask a set of questions to interviewees; these questions differ from person to person depending on that persons position with respect to the research. Though the general topic remains the same, some questions will be omitted and some others might be counting depending on who is being interviewed. For example, questions to an HR manager would revolve around how to cope with abrasion and the management view on how they are looking at this problem, on the other hand in an interview with the software engineers. 1.8 DATA ANALYSIS: The researcher understands all the data he would obtain would be based on meaning expressed through words, this kind of information is called qualitative data. The process of qualitative study involves the development of information categories, allocating units of the original information to apt categories and developing and trying hypotheses to produce well grounded conclusions. Now it is enormously important that all this rich data must be transformed to information the researcher could Comprehend and manage Integrate related data from different transcripts and notes Identify key themes or patterns from them to further explorationDevelop or test hypothesis based on these apparent patterns Draw and verify conclusions (Saunders et al, 2003) This researcher would be using Computer Assisted Qualitative Data Analysis Software, (CAQDAS), to assist him with making good sense of the data, there are various softwares available which would help the researcher, quantifying qualitative information if need be, thus making a hypothesis and arriving at a conclusion. 1.9 VALIDITY AND RELIABILITY: The question of reliability and validity of information in any research study is of highest importance. Unless the data obtained is consistent, correct conclusions cannot be drawn. In this study, the validity and reliability issues are associated to access to the correct people for interviews and to get the right information out of them. This will mean that the information should be balanced and unprejudiced. Interviewees should be able to provide the correct information linked to the subject without personal opinions or beliefs. This problem can be conquered to a certain extent by asking to the point questions and framing them up in such a way that eliminates capacity for bias. For this purpose, the researcher will spend quality time on designing good interview questions and will get them checked from a senior supervisor. The issue of access to the correct people for the data is also very important since the research will be based on the answers obtained from them. Another matter related to validity and reliability is the use of precise sources for obtaining secondary data. The researcher should gain contact to the right books, journals and articles for getting quality information about the topic. For this purpose, scholarly articles will be obtained from the library and internet. 2.0 ACCESS: The researcher was providential to have some significant contacts in the IT sector back in Hyderabad, India, this was partly because he was born and brought up there and also because he comes from a strong IT background both academic and professional. The researcher intends to conduct semi structured interviews with the following people. Ms. Pratyusha gogineni (HR Team, Satyam computers, Hyd) Mr. suma Kirthi (HR Team, Satyam computers, Hyd ) Mr. Madhusudhan Santhana (Project Manager, Satyam computers, Hyd) Mr. Prabhakar Govind (Analyst, Satyam computers, Hyd) Mrs. Amruta devi ( MD, HND Recruitment, Hyd ) The first member, Nandini is an old friend who had grown quite fast in the organization has been handling recruitments since the past four years; through her the researcher had got in contact with Mr. Kirthi, a senior HR manager who also assured official access. To get the other side of the story, the researcher has got in contact with Mr Santhana, who also is the researchers ex manager who used to work with SATYAM computers before. Mr Santhana promised he will do all he could to aid me with this research. Mr Govind along with a few of his colleagues would help in giving me the required information. The researcher intends to leave no stone unturned and would contact more people if need be to help him with this research.