CIMA E1 Syllabus A. Role of the finance function - Corporate Governance - USA vs UK - Notes ^{7 / 8}

USA

Some of the earliest considerations of corporate governance came from the United States.

• In 1987 the Treadway Commission issued a report on fraudulent financial reporting which confirmed the role and status of audit committees (the audit committee monitors the integrity of the financial reporting of a company and independence of the audit process both internal and external).

• The Treadway Report prompted the Securities and Exchange Commission (SEC) to incorporate a listing requirement which, from 1988, required all SEC-regulated companies have an audit committee with a majority of Non-executive directors (NEDs - these are independent directors, not involved in the day to day running of the company).

• The Committee of Sponsoring Organizations (COSO), a sub-group of the Treadway Commission, developed a framework for internal control, providing detailed criteria for management to assess internal control systems and provide guidance for reporting publicly on internal control.

The UK

In the United Kingdom, the corporate governance debate was stimulated by a series of corporate scandals and unexpected collapses in the late 1980s and early 1990s.

• The press coverage of the Bank of Credit and Commerce International (BCCI), Polly Peck and the Maxwell Communications Group pension funds caused much public questioning about the effectiveness of company boards in monitoring the actions of their executive management. 

  It also highlighted the difficulties that NEDs and auditors face in standing up to dominant senior management staff.

The primary reason for corporate governance

is to protect stakeholders, such as shareholders, employees and pensioners. 

Many of the scandals that led to the development of different corporate governance regimes, were a direct result of directors abusing the power of their positions. 

Corporate governance regulation is, therefore, primarily intended to remind directors of the limitations of their power and to enforce the primary agency relationship of business—that directors work on behalf of the shareholders and other stakeholders.

One of the main debates surrounding corporate governance regulation is whether it should be a legal requirement, as in the United States, or a set of best practice guidelines, as in the United Kingdom.

Individual governments around the world have to choose which approach is most appropriate according to the culture and situation in their countries.