Preface vii

Acknowledgements ix

Part 1 Frameworks and Mechanisms 1

1 Defining Corporate Governance 3

Introduction 3

What is Corporate Governance? 5

Theoretical Frameworks 7

Agency Theory 8

Transaction Cost Theory 11

Transaction Cost Theory Versus Agency Theory 12

Stakeholder Theory 13

Stakeholder Versus Agency Theory 15

The Enlightened Shareholder Versus the Stakeholder-Inclusive Approach 17

Institutional Theory 17

The Evolving Framework of Corporate Governance 18

Academic Research: The Frontiers of Corporate Governance Research 19

Chapter Summary 20

Questions for Reflection and Discussion 21

2 The Impact of Corporate Governance Weaknesses and Failure 22

Introduction 22

The Collapse of Enron in 2001 23

Laying the Foundations 23

Glittering Success 23

Early Worries 24

Signs of Distress 25

The Fall . . . and Fall . . . of Enron 25

Creative Accounting at Enron and Its Impact on the Accounting Profession 26

The Aftermath 28

The Trial and the Human Dimension 29

A Reflection on the Corporate Governance Problems in Enron 30

The Collapse of the World's Banking Sector and Governance Failure: 2008 32

Learning from the Crisis: Identifying Corporate Governance Failures 33

The Collapse of Carillion in 2018 35

An Overview of Carillion and its Activities 35

Carillion Spent Zillions 35

The Road to Ruin 36

Failure of the Board of Directors and a 'Rotten Corporate Culture' 36

Through a Glass Darkly: Lack of Transparency in Accounting and Auditing 37

Unethical Treatment of Shareholders: Dividends as Impression Management? 37

Unethical Treatment of Non-Shareholding Stakeholders 38

'Enrillion': Similar Governance Weaknesses in the Two Corporate Collapses 39

Chapter Summary 39

Questions for Reflection and Discussion 40

3 Corporate Governance Reform 41

Introduction 41

n Illustration 3.1: The Maxwell Affair 1991 42

The Cadbury Report 1992 45

The Greenbury Report 1995 45

The Hampel Report 1998 46

The Turnbull Report 1999 48

The Higgs Report 2003 49

The Tyson Report 2003 49

The Smith Report 2003 50

Revised Guidance on Audit Committees 2008 50

Redraft of the Combined Code 2003, Revised 2006 50

Internal Control: Revised Guidance for Directors on the Combined Code 2005 50

Further Revision of the Combined Code 2008 51

Turner Review March 2009 51

Walker Review July 2009 51

The Stewardship Code 2010 52

Corporate Governance Code 2012 52

The Kay Review 53

Corporate Governance Code 2016 and 2018 53

Corporate Governance Consultations Following Recent Corporate Collapses 54

The Kingman Review and the End of the FRC: Introducing the Arga 54

A Review 54

Comply or Explain 55

Applying the Codes of Practice to Small Companies 55

Ranking Corporate Governance Initiatives 56

Why is Good Corporate Governance Important? 57

Corporate Governance and Corporate Performance 57

A Risk Perspective on Corporate Governance 59

Corporate Governance Ratings, Indexes and Links with Financial Performance 59

Chapter Summary 60

Questions for Reflection and Discussion 60

4 The Role of Boards in Corporate Governance 61

Introduction: Enhancing Board Effectiveness 61

Unitary and Two-Tier Board Structures 62

Splitting the Role of Chairman and Chief Executive 62

Research into Split Roles 63

The Role of Non-Executive Directors in Corporate Governance 64

n Illustration 4.1: The Non-Executive Director Function in the Wake of the Financial Crisis 65

Research into the Role of Non-Executive Directors 70

Getting the Balance Right 72

Who Wants the Job Anyway? 73

Executive Remuneration 73

n Illustration 4.2: Executive Remuneration in Banks in the Wake of the Financial Crisis 74

n Illustration 4.3: Bankers Called to Account and Apologize 76

The High Pay Commission: Cheques with Balances 77

Academic Research into Executive Remuneration 77

Voting on Directors' Remuneration 79

n Illustration 4.4: Reforming Executive Pay: Establishing a Blueprint for Change 80

Directors' Training 80

What Else Can Contribute to Board Effectiveness? 81

Boardroom Diversity 81

Brave New Boardrooms? How Can Governance and Boards Be Reformed? 83

Addressing the Ethical Health of Boards: Focusing on Boardroom Culture 84

n Illustration 4.5: Broadening Stakeholder Representation on Boards: A New Framework 85

Chapter Summary 86

Questions for Reflection and Discussion 87

5 The Role of Institutional Investors in Corporate Governance 88

Introduction 88

The Ongoing Transformation of UK Institutional Ownership 89

A Complex Web of Ownership 91

What Do We Mean by Stewardship? 94

The Kay Review (2012) Principles and Recommendations 96

Conflict and Pension Fund Trustees 96

The Growth of Institutional Investor Activism 97

n Illustration 5.1: Trust Institutional Investment and the Kay Review 99

Institutional Investor Voting 100

Reviewing the Impediments to Voting Shares 101

Voting on Remuneration Policy 102

n Illustration 5.2: Fat Cat Slim 102

Research into Voting by Institutional Investors 104

Institutional Investors: Engagement and Dialogue 106

n Illustration 5.3: Failure of Engagement in the Financial Crisis 108

Research into Engagement with Institutional Investors 110

Institutional Investor Engagement and Power 112

Factors Affecting Shareholder Activism 112

Shareholder Activism and Financial Performance 113

Emerging Trends in Research on Shareholder Activism 114

Chapter Summary 115

Questions for Reflection and Discussion 115

6 The Role of Transparency, Audit, Internal Control and Risk Management in Corporate Governance 116

Introduction 116

Transparency and Disclosure 117

Research into Disclosure and Corporate Governance 118

Improving Transparency: Cutting Clutter? 119

Corporate Disclosure and Executive Remuneration 119

Corporate Disclosure and Non-Executive Directors 120

Developments in Governance Reporting 120

The Role of Internal Control, Internal Audit, External Audit and Audit Committees in Effective Corporate Governance 123

Corporate Governance and Risk in the Wake of the Financial Crisis 124

Turnbull, Internal Control: A UK Perspective 125

Risk and Risk Prioritization 125

An Existing Implicit Framework for Internal Control 126

The Turnbull Framework for Internal Control 126

The Revised Guidance on Internal Control 128

Risk Disclosure and Corporate Governance 129

An 'Ideal' Framework for Corporate Risk Disclosure 129

The Revised Guidelines and Corporate Risk Disclosure 132

Recent Research into Risk Disclosure 132

The Operating and Financial Review Fiasco 133

Sarbanes-Oxley and Internal Control: A US Perspective 134

Dodd-Frank Act 136

Sarbanes-Oxley 17 Years Later 136

The Role of Audit in Corporate Governance 136

The External Audit 136

The Audit Committee 139

Research into the Effectiveness of Audit Committees 140

The Internal Audit 141

Research into the Effectiveness of the Internal Audit Function 141

Chapter Summary 142

Questions for Reflection and Discussion 142

Part 2 Global Corporate Governance 143

7 An Introduction to Corporate Governance Systems Worldwide: Global Corporate Governance 145

Introduction 145

Categorizing Corporate Governance 145

Insider-Dominated Systems 146

Outsider-Dominated Systems 147

Factors Influencing Corporate Governance in an International Context 148

Global Convergence in Corporate Governance 151

The OECD Principles 152

The Revised OECD Principles 2004 153

OECD Principles 2015 154

The European Union 154

The Commonwealth Guidelines 157

Corporate Governance in the Middle East and North Africa 157

Andean Corporate Governance Code 2004 157

Ethical Issues in International Corporate Governance: Controlling Bribery and Corruption 157

The Outcome of Corporate Governance Convergence 158

Country Studies 160

Chapter Summary 161

Questions for Reflection and Discussion 161

8 A Reference Dictionary of Corporate Governance Systems: Global Corporate Governance 162

Albania 162

Argentina 162

Australia 163

Bahrain 163

Bangladesh 163

Belgium 164

Botswana 164

Brazil 164

Canada 164

Chile 165

China 166

Colombia 166

Cyprus 167

Czech Republic 167

Denmark 168

Egypt 169

Estonia 169

Finland 169

France 169

Germany 170

Ghana 171

Greece 171

Hong Kong 172

Hungary 172

Iceland 172

India 173

Indonesia 173

Iraq 174

Ireland 174

Italy 174

Case Study on Italian Governance: The 'European Enron': Parmalat 175

Corporate Governance Failure in Parmalat 175

Jamaica 176

Japan 176

Jordan 178

Kenya 178

Latvia 178

Lebanon 178

Libya 178

Lithuania 178

Luxembourg 178

Macedonia 178

Malaysia 179

The Netherlands 179

New Zealand 180

Nigeria 180

Norway...