Business organizations are deemed to operate at an independent level; however, they, in reality, operate in a complex system wherein varied natural and social factors are inter-connected. In this aspect, the actions and conducts of one company is said to have a transcending impact on the other companies and the entire financial markets (Gray, Adams and Owen, 2014). Multiple issues concerning with the failure in complying with the integration of fair governance and accounting practices in the financial markets are reported across the major developed countries of the world (Gray, Adams and Owen, 2014). The financial advisory boards and policy designers direct that the integration of transparency practices concerning with the corporate accountability practices are considered as an important tool of intelligent accountability, avoiding financial risks and ensure fairness of financial statements (Robert, 2009). The transparency practices designed by the regulatory frameworks for the financial markets failed to build confidence among the investors and resulted in the creation of anxiety and frustration (Roberts, 2009). The concept of intelligent accountability directs that the integration of transparent practices helps the shareholders management team, and others in the identification and effective management of complex systems, better understanding of responsibilities, and varied relations that are key aspects for a company to achieve success (Roberts, 2009; Roberts, 2018). Active accountability focuses on talking, asking questions, seeing, and listening with high alertness and compare the extent to which claims are upheld. Integrating more reflexive and less paranoid accountancy practices can ensure in deriving supportive results by following transparent practices (Roberts, 2018).
In this aspect, the key aim of this essay is to understand the importance of integrating three key values of corporate governance transparency, governance and accountability by the organizations in their business operations to support the long-term sustainability of the organization and overall development of the economy. The essay comprises of three parts wherein importance of integrating corporate governance practices will be highlighted using theoretical perspectives, a brief review of the regulatory codes in the UK, followed by a critical review of case reflecting issues faced by ‘Debenhams’ the UK based company concerning with the violation of corporate governance practices will be undertaken. Further, some recommendations for enhancing the follow of corporate governance practices by the organizations will be integrated.
1.2 Theoretical Perspectives
The economists believe that the large-scale organizations must ensure that along with making significant improvements in their financial performance, the business practices integrated by them support overall economic development and sustenance of the ecological environment. In this aspect, varied theoretical perspectives have been outlined concerning with directing the managers, leaders, staff members, investors, and shareholders in gaining a better understanding of their roles and responsibilities towards the organization, environment and economy at a large scale. The policymakers at the organizations are directed towards the integration of accountable and transparent business practices as they are considered effective for resolution of conflicts, risk minimization, and to make well-informed decisions to attain set targets and objectives (Messner, 2009). Theorists believe that the integration of ill practices, misconducts and ignorance on the part of the management team are the key contributors for the occurrence of issues at the organizational level. In this aspect, the corporate governance practices direct that all managerial personnel must aim at the integration of three key principles of transparency, accountability and governance while making important decisions and designing business practices. Avoiding the use of fair practices increases the risks and may cause the fall of the organization along with causing wide-scale disruption in the economy over the long run (Messner, 2009).
The agency theory focuses on evaluating and ensuring better management of the relationships shared among the principal and agent, the two parties primarily engaged in carrying out business. This theory evaluates the impact of external control and monitoring on the ethical behavior and intrinsic motivation of the agents (Jensen and Meckling 1976). The agency theory is constructed on the assumption that the key motivation for the parties acting in the business is based on serving their self-interests. The principal hires an agent to perform specific tasks that cannot be performed by the principal. The agency theory primarily aims at the identification and resolution of challenges and issues associated with risks, transparency, and corporate governance practices that may take place between the agent and the principle (Shi, Connelly and Hoskisson, 2017). The shareholders play the role of the principal, and the executives play the role of agents in a business organization. The corporate governance principles reflect that the presence of differences in interests causes the high cost to the agency and directs that both parties must integrate fair, transparent, accountable practices that support towards the attainment of common goals (Glinkowska and Kaczmarek, 2015). Agency theory directs that follow of internal governance practices supports in reducing information asymmetry among the outsiders and insiders associated with the company and as a result is considered effective for following of fraudulent or unethical practices (Glinkowska and Kaczmarek, 2015).
Another theory that focuses on not just the interest of shareholders but stakeholders as the whole is the stakeholder theory. Stakeholder theory emphasizes on the broader form of actors, forming a part of corporate governance without focusing on the influence of the varied environment of the organization. A stakeholder is any individual or group who is affected by the achievement of organization’s objectives (Freeman, 1984).. The theory also stresses on the fact that the interests and rights of the stakeholders with regards to the generation along with protection and distribution of wealth is respected by the top executives of the organization (Filatotchev, 2008). Stakeholder theory focuses on all the stakeholders of the organization and directs itself on the principle of “many masters”. Since there is an involvement of many masters, the stakeholder theory is criticized for not defining the clear objective of the executive mission. It also leads to managerial conflicts, and confusion along with inefficiency, which results in the failure of the management and executives to abide by the stakeholder theory (Messner, 2009).
Both the chosen theories; namely, stakeholder theory and agency theory, not just focus on the investors but help in analyzing the management practices. The major reason for selecting stakeholders theory was to shift the focus of the management and executives from the shareholders to all the stakeholders of the organization; whereas, agency theory focuses on sharing a better relationship between the management and the parties engaged in carrying out the business.
1.3 Regulatory Backgrounds Regulatory Codes in the UK
The government of the United Kingdom (UK) has assigned the responsibility for setting up regulatory codes concerning with the accounting, actuarial, and auditing work along with the corporate governance practices on the Financial Reporting Council (FRC) of the UK. Turnbull Report was designed in the year 1999, for providing detailed guidance concerning the controlling and development of strong internal mechanisms integrated by the companies operating in the UK. Turnbull report directs that the management team of the company and auditors must maintain a formal relationship to ensure following of fair governance practices (Price et al., 2018).
The Cadbury report (1992) was designed for elaborating on the role of non-executive directors in concern with directing and controlling the varied business actions. The Cadbury report issued guidelines that the non-executive directors must be fair while reporting about the effectiveness of the internal control systems and the entire work carried out at the company must be audited (Michelberger, 2016).
Tyson report was initiated in concern with gaining a detailed insight in assuring appropriate selection of non-executive directors based on the nature of work and challenges associated with the particular company. The report directed on the integration of rigorous and fair audit practices for ensuring that board members are performing assigned duties with high transparency. Tyson report focused on giving special training to individuals playing the role of the audit committee, remuneration committee, and non-executive directors (Agyemang-Mintah and Schadewitz, 2018; London Business School, 2003).
Smith Report (2003) was designed by FRC for making essential revisions in the audit practices wherein key emphasis was on strengthening the monitoring practices for ensuring accounts and financial statements reflects integrity. In this aspect, internal audit practices were to be carried out for reviewing the internal risks at specific time intervals. The board was recommended to appoint the external auditor and present detailed information of terms and conditions and remuneration of an auditor to the shareholders/CEO (Elmagrhi et al., 2017).
1.4 The Three Aspects of Corporate Governance as per Debenhams
Role of Audit Committee with reference to Tyson report/Smith Report
The internal audit committee of Debenhams formed a part of the risk-management department, which comprised of the anti-fraud, profit protection and insurance departments. After the collapse in the year 2006, the internal audit committee of Debenhams underwent a restructuring as per the Smith and Tyson report. The internal audit committee now helped Debenhams in maintaining a cohesive approach in all the aspects with regards to the risk management (Annual Report and Accounts, 2008).
Role of non-executive directors Cadbury Report 1992
David Adams is an independent, non-executive director of Debenhams who is also the chairman of the audit and remuneration committee. The team of directors, including the non-executive directors of Debenhams is responsible for delivering the desired goals and plans. Non-executive directors of Debenhams are also responsible for delivering strong internal controls, along with building the format for the future for reshaping the business, as stated in the Cadbury report (Butler, 2019).
Internal control mechanisms (Turnbull Report 1999)
The internal control mechanism of Debenhams is confined to its risk management activities, which involves risk identification, risk evaluation, risk treatment, risk reporting and viability assessment. The board is responsible for conducting an effective review of the effectiveness of the internal controls of Debenhams. In case, the board gets satisfied wherein the internal controls are effective as per the Turnbull report; it will result in effective management and control of all the mechanisms of internal control (Strategic Report, 2017).
1.5 Case Study Analysis
Debenhams is a departmental store operating in the United Kingdom for more than 200 years. The valuation of the shares of Debenhams fell drastically in the stock market during the year 2006, resulting in an astonishing loss of approximately 95 per cent of the share value. The sudden fall of one of the high-end and well-known brands of the UK reflects the presence of certain significant loophole in the regulatory practices governing the conduct of business practices in the UK (Chapman, 2018). The detailed review of the performance of Debenhams in concern with the corporate governance practices was found to initiate since the company planned at the launching of an initial public offering for listing on the UK stock market in the year 2003. Debenhams resorted to the consortium of private equity firms for raising of funds wherein Texas Pacific Group, Merrill Lynch, and CVC were the private equity firms that made huge financial investments worth £600 million in Debenhams (CG Lytics, 2019; Chapman, 2018). It was observed that during the same time the company opened one of its largest store in the UK and owing to low growth in wages the sales of the company declined and the private investors sold out the spare property at a huge profit for themselves leaving the company to pay off debt worth £1.2 billion. In this aspect, even before the company listed its shares on the stock market the company was issued warnings concerning with making manipulations in its financial statements and missing of forecasts concerning with sales volume and profit percentage (CG Lytics, 2019).
Evaluating the issues faced by Debenhams in concern with the board members and directors it was observed that two shareholders voted against the chief executive officer and chairman of Debenhams after addressing the issues concerning with misconducts in the business operations and failure to meet set sales targets (Kollewe and Butler, 2019). The directors and the management did not have an account of the investments of funds that were raised from outside. Aligning with this, it is evaluated that a lack of integrating three practices of corporate governance concerning maintaining transparency, governance, and accountability was absent at Debenhams. In this similar aspects, it is further evaluated that the corporate governance practices of the UK as stated in Turnbull and Cadbury report directs the use of effective control measures for controlling the internal processes by sharing and exchange of all the essential information among the members of board and shareholders, design fair benefits and reward policy and reduce varied risks exposure. However, it was evident in the case of Debenhams owing to lack of integrating effective internal control measures and not reporting of the true picture of the company by the directors Debenhams faced huge scale monetary losses wherein situation came up that the company needs to undergo insolvency (Price et al., 2018).
The Board members of Debenhams, along with the audit committee advisors, were suspected of integrating unethical practices and presentation of false financial statements. They were accused of not conducting meetings at a time and sharing real information with the shareholders, resulting in huge losses for investors, customers, other business partners, and economy (Makortoff, 2019). The regulatory codes also identify the rights of varied parties, including the shareholders, along with presenting a detailed description of the duties and power extended to the review committee and the audit committee and reflecting that the management team and auditors failed to integrate the corporate governance practices of integrating fair audit practices as directed by Tyson and Smith report.
Further, issues faced by Debenhams aligning with the perspectives of agency theory directs that the parties acting as principal served their purpose and failed to integrate uniform practices and effective control measures for ensuring unity among internal and external control measures. Debenhams also failed to ensure that the financial measures and business practices followed did not take into consideration the good of all the stakeholders and limited to the profit-making of private investors.
1.6 Recommendations and Conclusion
Some recommendations are stated for the management team, directors and shareholders of the companies operating in the UK:
- The integration of the corporate governance practices acts as an effective tool for the identification of loopholes present in the legal practices and the financial system. The integration of intelligent accounting practices that focuses on questioning and evaluating results with high effectiveness can be of significant help in making relevant improvements in the disclosure and preparation of the financial statements for the companies operating in the UK (Financial Reporting Council Limited, 2016).
- The management team of the company must work towards the promotion of effective entrepreneurship culture and ethical management practices for supporting the growth and well fare of all the stakeholders. Corporate governance practices will also support the sustenance of the company in the long run (The Financial Reporting Council, 2018).
Based on the above evaluation, it can be concluded that the integration of corporate governance practices of transparency, accountability, and governance is essential for enhancing their viability and ensuring the development of a fair marketplace. The companies operating at large scale are engaged in performing complex tasks and cannot manage to work without integrating the concept of transparency for the long term. The key objective of corporate governance practice is building trust among the individuals in the practices followed for carrying out businesses by assuring that responsible corporate governance practices are followed to a large extent and investment is fostered.
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