Agency theory and corporate governance Assignment

Agency theory and corporate governance - Assignment Example Involving a series of intentional fraud and corruption, the Enron, Worldcom, Northern Rock and Bank of Credit and Commerce International scandals were just a few of the biggest financial scandals ever recorded for the last two decades. Intervention of regulatory authorities and shareholders for corporate governance increased (Burton, 2000) in a way that provoked the initiation of several conventions -- particularly notable are the Cadbury (1992), Greenbury (1995) reports and the Combined Code (1998). In this light, this paper determines whether the actual and strict compliance to the code, while may not be legally binding, had in a way assisted in improving corporate governance among listed companies. The Combined Code for UK Listed Companies It was following the bankruptcy of a large UK company, Polly Peck, the defunct of the Bank of Credit and Commerce International, and the fraud committed by Robert Maxwell when the Cadbury Commission was founded in 1992 and provoked the issuance of the code of best practice for corporate governance, the Cadbury Code (Davidson, 2008). The Cadbury Code clearly laid out the framework for corporate governance in the guise of accountability, integrity, or honesty (Applied Corporate Governance, 2009). The Greenbury Code, on the other hand, centered on the director’s remuneration and its lack of transparency . The Combined Code, a result of both the Cadbury (1992) and Greenbury (1995) codes (hence the name), includes the best practices for corporate governance specifically with regard to the quality of the board, division of offices of the chairman and the managing director, balance of the executives and the non-executives, remuneration of directors, and the nomination committee (Sealy & Worthington, 2007). As opposed to the previous codes, the combined code employs principles (Davidson, 2008). In the Cadbury convention, the most notable aspect which the Combined Code adopted was its approach on ‘compliance and explan ation’ in a way that the listed firms should report the extent to which they have complied with the code and/or explain any form of non-compliance (Sealy & Worthington, 2007). This approach does not only produce external impacts but also importantly internal impacts for it allows a firm to identify which parts or principles of the code worked best for the company and what did not. As a head start, regulatory authorities may now be able to determine which parts of the code are faulty or that do not yield positive results. Added to strict rules and requirements for capital and liquidity, the said approach will define the most effective method for corporate governance (Walker, n.d. as cited in Haddrill, n.d.). Although the Cadbury report and the succeeding ones do not bind companies into a legal obligation, it has become habitual among listed companies in that the Stock Exchange deems it necessary (Sealy & Worthington, 2007). The Combined Code ensures that all constituents in th e corporation incur optimal gains and minimal losses in the course of maximizing profit and reducing costs. In essence, the concept of corporate governance seems easy to apply. In practice, however, the connectedness between the shareholders and the managers for the most part creates conflicts of interests -- the agency problem. The abstraction arising from contracts allows agents (e.g. managers) to act in effort to benefit from an endeavor that may, in turn, work against the favor or interests of the principal (e.g. shareholders). Effectiveness of the Combined Code in