AC6001

Corporate Accountability
Introduction
 Aims and objectives
• Introduce to the module
• Review assessments
• Introduction to corporate governance
 Introduction to the module
• Through analysis and discussion of case studies this module will
cover:
• The theoretical bases and underpinning principles of corporate
governance.
• Its continuing development and evolution around the world.
• The key role of directors and the board as agents and risk managers.
• The role and responsibilities of institutional investors in achieving
good corporate governance.
• The factors which caused corporate collapse and their significance for
corporate governance.
 Assessments
• 1st assessment – Individual presentation
• 2nd assessment – Individual assignment
Why are we studying corporate
governance?
 Why are we studying corporate
accountability?
• UK – Robert Maxwell (1991)
• UK – Barings Bank (1995)
• US – Enron (2001)
• US – Worldcom (2002)
• UK – Northern Rock (2007)
• US – Lehman Brothers (2008)
• US – American International Group (AIG) (2008)
• UK – RBS, HBOS and Lloyds TSB (2009)
What’s the problem?
Toxic
False Assets Bonuses
Accounting

Bail- Corporations Fraud

outs

Loop- Greed
holes Deception
What’s the problem?
‘The directors of companies, being the managers
of other people’s money rather than their own,
cannot be expected to watch over it with the
same anxious vigilance with which (they) watch
over their own.’ (p.6) (Adam Smith, 1776, cited
in Tricker, 2012)
 Topic 1
Introduction to Corporate
Governance
Chapter 1 of
Corporate Governance and
Accountability by Prof Jill Solomon
Learning Outcomes
• This lecture aims to introduce students to the concept and context
of corporate governance and relevant theoretical frameworks

By the end of this lecture you should be able to:

• define corporate governance in a variety of ways

• explain the different theoretical approaches to corporate
governance
• appreciate why corporate governance is an increasingly important
issue for business at a global level
Why is Corporate Governance
Important?
• Weaknesses in corporate governance can lead to
corporate failure (as seen from previous examples)
• The 2007-09 financial crisis has emphasised the need for
good corporate governance
• Corporate governance can affect corporate financial
performance
• Corporate governance can affect social welfare
History of separation of
ownership and control
• In 1600 the East India Company issued first joint stock
• The South Sea Bubble of 1720. Following this, companies
were banned
• 1800s saw railway boom and the need to raise huge
amount of cash in UK and US.
• In 1855 the Limited Liability Act was passed in the UK
• In 1865 US constitution provided corporations same right as
human beings
• 1897 Solomon Vs Solomon
• 1932, Bearle and Means discussed corporate depression
and the separation of ownership and control. Shareholders
exit rather than exercising their rights.
• 1950s-1960s – growth of corporations and globalisation
Company ownership and control
Defining Corporate Governance?
• Due to the evolving and dynamic nature of corporate
governance there is no single, accepted definition.
• The Cadbury Report (1992) defines it as ‘the way in
which companies are directed and controlled’
• The Walker Review (2009) defines it as ‘to protect and
advance the interests of shareholders through setting the
strategic direction of a company and appointing and
monitoring capable management to achieve this.’
Defining Corporate Governance?
• Existing definitions fall along a spectrum ranging
from narrow (shareholder-oriented) to broad
(stakeholder-oriented)
• Solomon (2013) defines CG as ‘The system of
checks and balances, both internal and external to
companies, which ensures that companies discharge
their accountability to all their stakeholders and act
in a socially responsible way in all areas of their
business activity’ (p.7).
The business case for governance
• Increased accountability of management and
maximising sustainable wealth creation
• Better financial performance and more
attractiveness to the investors
• Leading to increase in share price and value
of the company
• Socially responsible company is more
attractive to customers, therefore increase in
revenue
Purpose and objectives of
corporate governance
• Basic purpose: monitor those parties within a
company which control the resources owned
by investors
• Primary objective: contribute to improved
corporate performance and accountability in
creating long-term shareholder value
Activity
• Discuss the role of corporate governance
• The role of corporate governance is to
protect shareholder rights, enhance
disclosure and transparency, facilitate
effective functioning of the board and provide
an efficient legal and regulatory enforcement
framework.
Key concepts
The foundation to governance is the action of the individual.
These actions
• are guided by a person’s moral stance.
• Fairness
• Openness/transparency
• Independence
• Probity/honesty
• Responsibility
• Accountability
• Reputation
• Judgement
Activity
Fred is a certified accountant. He runs his own accountancy practice from home, where he
prepares personal taxation and small business accounts for about 75 clients. Fred
believes that he provides a good service and his clients generally seem happy with the
work Fred provides.
At work, Fred tends to give priority to his business friends that he plays golf with. Charges
made to these clients tend to be lower than others – although Fred tends to guess how
much each client should be charged as this is quicker than keeping detailed time records.
Fred is also careful not to ask too many questions about clients affairs when preparing
personal and company taxation returns. His clients are grateful that Fred does not pry too
far into their affairs, although the taxation authorities have found some irregularities in
some tax returns submitted by Fred. Fortunately the client has always accepted
responsibility for the errors and Fred has kindly provided his services free of charge for the
next year to assist the client with any financial penalties.

Required:
Discuss whether the moral stance taken by Fred is appropriate.
Overall, it can be argued that Fred is providing a professional service in accordance
with the expectations of his clients.
However, the moral stance taken by Fred can be queried as follows.
• The guessing of the amounts to charge clients implies a lack of openness and
transparency in invoicing and has the effect of being unfair. Friends may be
charged less than other clients for the same amount of work. If other clients
were aware of the situation, they would no doubt request similar treatment.
• The lack of questioning of clients about their affairs appears to be appreciated.
However, this can be taken as a lack of probity on the part of Fred – without full
disclose of information Fred cannot prepare accurate taxation returns. It is likely
that Fred realises this and that some errors will occur. However, Fred does not
have to take responsibility for those errors; his clients do instead.
• While Fred does appear to be acting with integrity in the eyes of his clients, the
lack of accuracy in the information provided to the taxation authorities eventually
will affect his reputation, especially if more returns are found to be in error. In
effect, Fred is not being honest with the authorities.
• Fred may wish to start ensuring that information provided to the taxation
authorities is of an appropriate standard to retain his reputation and ensure that
clients do trust the information he is preparing for them.
Theoretical Frameworks
• Agency theory
• Transaction cost theory
• Stakeholder theory
Agency Theory
• Relationship between the shareholder (the
principal) and the directors (the agents).
• Directors – maximise personal gains
sometimes detrimental to shareholders.
• Motivating one party (the agents), to act in the
best interests of another (the principal) rather
than in his own interests.
• Costly to monitor.
How can shareholders control agents?
• voting at annual general meetings
• take-over mechanism
• passing of shareholder resolutions
• divesting (selling their shares)
• one-to-one meetings
• regulation or formal guidance
• Markets are not perfectly competitive and
therefore intervention is necessary
• Since early 1990s 'voluntary' codes of practice and
policy documents
Agency costs
• Agency costs arise largely from principals monitoring activities of
agents, and may be viewed in monetary terms, resources consumed or
time taken in monitoring.
• E.g.
• Incentive schemes and remuniration packages
• Cost of annual report data such as committee, activty and risk
management analysis
• Cost of meetings with financial analysts
• Cost of accepting higher risks
• Cost of monitoring behaviour
• Residual loss
• https://youtu.be/7g_d-phoUrU
Agency problem resolution
measures
• Meetings between the directors and key
institutional investors
• Voting rights at the AGM in support of or
against resolution
• Accepting takeover
• Divestment of shares
Need for corporate governance
• If the shareholder activities are not enough
to monitor the company then some form of
regulation is needed.
• Codes of conduct and recommendations
issued by governments and stock exchanges
• E.g. the UK Corporate Governance Code
(2014) issued by Financial Services Authority
(FSA).
Activity – case study
Stakeholder Theory
• Began in 1970s developed by Freeman (1984).
• Hold a ‘stake’ not solely a ‘share’ in companies
• shareholders
• employees
• suppliers
• customers
• creditors
• local communities
• the environment
• animal species
• future generations
Stakeholder theory by Freeman
• https://youtu.be/bIRUaLcvPe8
Stakeholder versus Agency
• Can companies maximize shareholder wealth AND
satisfy a broad range of stakeholder needs?
• Problems of balancing needs of stakeholders
• Often different groups have diverse and contradictory
needs and concerns
• Hill, C. and Jones, T. (1992) STAKEHOLDER-
AGENCY THEORY, Journal of Management Studies,
Vol.29, pp.131–154.
The Enlightened Shareholder approach is based
on a growing belief that:
• maximising stakeholder welfare/wealth leads to long-
term value maximisation
• creating value for stakeholders is synonymous with
creating financial value for shareholders
• ignoring the needs of stakeholders can lead to lower
financial performance and even corporate failure –
LOOK AT BP and the Gulf of Mexico!
• corporate social, ethical and environmental performance
are indicators of management quality
Corporate Social Responsibility
• There is an urgent need for all society to address
stakeholder issues:
• Human rights
• Treatment of employees
• treatment of customers
• Climate change
• The Stern Report
• Companies are pervasive in their impact on society and
on the environment
• They have to be called to account for their actions
• They have to be accountable to society
• They have to behave responsibly
• Things are changing but is the change happening quickly
enough?
• Corporate Governance is about improving
companies’ ACCOUNTABILITY to shareholders
and to non-shareholding stakeholders
• Sustainable, accountable companies are the only
means of ensuring a safe global environment for
the future
The Global Financial Crisis
• The collapse of banks around the world has been
attributed partly to bad corporate governance
• excessive remuneration encouraging the taking of
excessive risks
• poor understanding of risks by board members
• Inadequate risk management systems and systems of
internal control
More causes:

• Bad boardroom ethics

• Lack of personal integrity
• Excessive greed among boardroom members
• Inadequate risk disclosures
• Lack of linkage between audit, internal audit,
board
Who Suffers from Bad Corporate
Governance?
• EVERYONE!
• People with savings
• People who hold shares
• People who have borrowed
• People who own houses
• People who pay taxes
• People who lose their jobs
• People who are retired
• University students, lecturers, schools
• Hospitals and patients
Post-session activity and in-
class activity for next week
• Read the articles and conduct further research and prepare
15 minute presentation for the class next week on the
following topic:
• Explain agency theory and stakeholder theory.
• Are both theories trying to achieve the same goal or are
there any fundamental differences?
• Critically evaluate how the company selected (Enron or
Maxwell Corporation) failed to serve both, agency and
stakeholder relationships.
Additional reading:
• Moxey and Berendt (2008)”Corporate Governance and the Credit Crunch” (ACCA Paper)
• Solomon (2009) Directions for Corporate Governance (ACCA Paper)
• Brennan and Solomon (2008) “Corporate Governance, Accountability and Mechanisms of
Accountability”, AAAJ Editorial
Academic Papers and other Relevant Readings
• Hill, C. W. and Jones, T. M. (1992) ‘Stakeholder–agency theory’, Journal of Management
Studies, 29, 134–154.
• Shankman, N. A. (1999) ‘Reframing the debate between agency and stakeholder theories
of the firm’, Journal of Business Ethics, 19, 319–334.