Corporate Governance in the United Kingdom Essay

Corporate Governance in the United Kingdom - Essay Example The rules-based approach to corporate governance was largely influenced by the Sharbanes and Oxley Act in the USA, which enshrined that the management and the board of an organization are expressly accountable for the financial reports that are published by their organization. (Mallin, 2005) Penalties are put in place for any instances of transgression as wells as setting rules on corporate governance which are also applicable to a company’s subsidiaries. This approach issues liability to directors in case of mismanagement, improves the communication of important issues to an organisation’s shareholders, improves the confidence that investors and the public have in the company, improves the internal control measures that a company puts in place as well as improving an organisation’s overall governance structures. Therefore, this approach is essential in the establishment of the minimum standards of practice that all should abide by. The principles-based approach to corporate governance on the other hand, is a complete contrast to the rules-based approach. This is because instead of the use of hard and strict rules to reform corporate governance as is the case with rules-based approach, the principles-based approach influences a broad set of practices that meet the expectations of all stakeholders. Thus the organization adheres to the spirit rather than adhering to what the code stipulates. This approach is largely used in the UK and is a listing requirement by the stock exchange. (Tricker, 2004) Those that champion the use of this approach argue that by setting up rules that all should follow; the rules-based approach does not speculate the invention of imaginative ways to get around the rules by some organisations. Principles-based approach is the best approach to use for those organisations that do not only want to abide by the minimum standards that are put in place; the implementation of this approach impresses all stakeholders in an or ganization. Part 2 Role of Institutional Investors in a Business Institutional investors are basically organisations which invest money in securities, real property and any other investment assets held in their name or held in trust for others like investment funds and pension funds. Corporate governance codes and principles have over the years stressed the importance of institutional investors in corporate governance. Not only are institutional investors being significantly influential in their home countries, through their increased cross-border ventures, institutional investors are also becoming an integral element in other countries as well. The global financial crisis triggered corporate governance reforms which subsequently stressed on the crucial role that institutional investors play. (Tricker & Mallin, 2005) The Cadbury Report in 1992 accentuated on the role of institutional investors by stating that, ‘We look to the institutions in particular  to use their influenc e as owners to ensure that the companies in which they have invested comply with the Code’. (Tricker & Mallin, 2005) It is the role of institutional investors to ensure that there is a mutual understanding with the company regarding the objectives of the firm. Institutional investors should also evaluate companies’ governance structures, laying particular emphasis on the board structure and composition. The third main role of instituti