The UK and USA Corporate Governance frameworks are predicated on fundamentally different approaches to principal/stakeholder protection, one being rules-based, the other principles-based.

Critically evaluate why these different approaches are used and how the specific system adopted in each country reflects the respective authorities’ responses to the major corporate collapses during the period 1990-2002


In the research in corporate governance, the US and UK system refers to the Anglo-American model. However, there are differences in the corporate governance system from these two nations. The American model adopts the rigorous legitimate approach. Whereas, the initiatives of reforming the corporate governance base on a flexible approach emerged in the UK in early 1990s, and has been widely accepted since then. In reacting to the collapse of Enron in 2002, the US and UK government reform the corporate governance respectively based on the review of current system. It is too simple to say which one is better without carefully access and examine the economical and social environment. This essay firstly, will analyse the differences between the US and UK corporate governance system, Then compare both nations actions to reform the system after the Enron to evaluate the two corporate governance systems.

The similarity and difference in the corporate governance in the UK and the US

The corporate governance is described as the method of governing, directing, operating and controlling of a company (Hemraj 2002). The researches in the corporate governance are widely accepted two distinguish systems. The one is named as the Anglo-American shareholders model, and another one refers to the continental European and Japanese stakeholders system (Aguilera, et al, 2006). There are long number of researches focus on the differences of these two models. However, there are only few researches which draw attentions on the corporate governance system differences between the US and the UK within the Anglo-American model (Aguilera, et al, 2006; Toms and Wright, 2005).

The US and the UK shares the significant similarities in protect shareholders benefits in their corporate governance system. However, there are fundamental differences exist which need to be investigated, as the American regulation is based on the rules or laws, the British models is rooted in the principle bases. This essay attempts to explore the different approaches adopted by the US and the UK government, and try to evaluate the policymakers’ responses to the major corporate collation in the 1990s.

The US and the UK corporate governance systems share the similar features in wide range of areas. These sharing perceptions can be classified into five aspects: (1) the primacy status of shareholders as beneficiaries of fiduciary duties in the companies; (2) the important role of equity financing; (2) dispersed share ownership from the uncommitted shareholders; (4) active markets for corporate control as mechanism of managerial accountability; (5) the flexible labour markets. (Aguilera et al, 2006)

The key differences in the corporate governance system between the US and UK can be summarised as the UK system treat the shareholders and the corporate social responsibility more seriously than the US system (Aguilera et al, 2006; Bruner, 2011). More specifically, it can be interpreted into two aspects. (1) the top management usually refers to the Chief Executive Officer (CEO), power, and (2) the relationship between firm and its shareholders and its equity investors.

International governance relationship CEO power

In the UK, the companies follow the more restrict regulation by the Combined Code on Corporate Governance (2003) and exercise the dual strategic leadership pattern (Higgs, 2003).

In details, the Combined Code significantly rule out that the CEO and the chairman of the board has to be separate role, and appoint the senior independent directors as the members of the board. Such regulation confine the power of the top management team, and empower the board of directors operate the independent management and effectively monitor the executives behaviour on behalf of the shareholders.

By contrast, the US companies’ top management has more anatomy powers than the UK counterpart. As in 80 percent of American companies, the CEO and the chairman of the board is same person. The highly concentrated powers have eliminated the monitoring duties which the board should to implement.

External governance environment

The equity market environment in the US and the UK has eventually impacted on the companies corporate governance practices. The institutional investors have reached to nearly 85 percent in UK equity market in 2004. Furthermore, near one third of the UK equity institutional investors are the insurance companies and the pension funds. Due to the obligation for the long-term payout, these investors tend to adopt the long-term strategies.

The UK corporate governance standards, the Cadbury Reports in 1992 and the Combined Code 2003 encourage the institutional investors and shareholders to enter the dialogue with the companies by. The “quite diplomacy” between the institutional investors and the top management access the professional dynamics on the corporate strategies, board effectiveness and executive remuneration and COE success (Black and Coffee, 1994; and Holland 1998).

Contrast to the US, the proportion only was less than 60 percent in 2002, in which the 14 percent of the institutional investors are pension funds, but 65 percent were public and independent investment companies. Therefore, the US institutional investors pursue the higher profit return from the stock market and resist the long-term engagement with the management in the public companies (Black and Coffee, 1994).

Meanwhile, the Regulation Full Disclosure issued by the Securities and Exchanges Commission (SEC) in the US discourage the “quiet dialogue” and request the companies to release the any material information publicly within a certain period of time. Instead of, the SEC introduced new rules that pass the right to the shareholders, who own 3 percent of equity to nominate the directors, and monitor the company’s expenditure.

To sum up, the UK institutional investors tend to more collaborate with the company management and board, even act in the strategic consulting role which seeking the long-term health development. In the US, the communication between the instructional investors and the companies are less committed. It usually acts as the analysts and the managers in the corporate investor departments meet up quarterly.

Enron collapse and the US reforms the corporate governance system

Enron bankruptcy in December 2001 filed $62.8 billion in assets, which became the largest bankruptcy in American history. The employees lost their life savings and thousand of investors’ loss billions locked in the stock market which the company share price dropped to $0.72. Enron has caused the serious corporate disaster which triggered the anti-capitalism in America, and deeply questionable of the failure of the corporate governance system.

The US federal and the authority in response, introduced several movement to reform the public confidence to the corporate governance system. These actions are designed to enhance the accountability, and the integrity of the American corporate governance system. It also refers as the “2002 reforms” by some scholars (Chandler and Strine, 2003). These actions mainly focus on the accounting and auditing industry, and the complementary regulation to the internal governance procedure which inside the designed to improve the transparency between the management team and the broad of directors.

The “2002 reforms” contains the act, rules, regulation, and proposals from the major U.S authorities. The Congress introduced the Sarbanes-Oxley Act of 2002 (Sarbox). The Securities and Exchange Commission (SEC) introduced the new approval. Both New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ) introduce the listing requirements.

The Sarbanes-Oxley Act of 2002 which introduce the changes in the existing audit process and the internal corporate governance structure, which can be summarised into few aspects.

  • to create the new accountingregulation system, the Public Company Accounting Oversight Board who supervising the federal accounting industry; 
  • to limit accounting firms who auditing thepublic companies to provide the consulting service; 
  • to command the auditors report to the audit committee in the board instead of to the management team; 
  • the majority of the audit committee members should be the independent directors in the board; 
  • to prohibitthe company provides the personal loans to the executives; 
  • the CEO and CFO claiming for bonuses and related compensation or profits in stock sales, if it will cause the company to restate the balance sheet; 
  • elaborate rules require company advocate to report evidenceof material infringements to securities law or breaches of fiduciary duty; 
  • to prohibiton the insider trade; 
  • Commandthe SEC to disclose the relating off-balance sheet transactions and pro-forma figures;
  • To require the companies disclosure of the ethics code by the senior financial officers; 

The SEC approval includes the actions as:

  • to create the new DispensaryBoard which independent from the existing American Institute of Certified Public Accountant (AICPA) to monitor the auditors of the public companies; 
  • to establishthe new agency to monitor compliance with the SEC practice the standards, and refer the non-compliance to the diplomacy board;
  • both two bodies members majority are public members and operate outside of the existing self-regulatory structure;
  • AICPA will provide certain non-audit services to public company;
  • AICPA raises the audit standardsand measurement to detect fraud from internal control procedure for management, boards, and audit committee. 

The listing requirement by the NYST and NASDAQ exchanges, which in (1) requires the majority in the board are independent directors, and (2) requires the three committees, in which the audit committee, compensation committee, and the governance committee, are formed by the entirely independent directors.

Critical discuss the 2002 reforms in the U.S corporate governance system

The “2002 reform” attempt to reform the public confidences in the corporate governance from many aspects. It systematically raised the corporate standards from a wide range of the drafts of Congress legislation, the regulation from the SEC, to requirements from the exchanges in the US. To some tend, it learnt the lesson from Enron, and mended the gaps in the accounting and auditing system and prevent the similar incident repeated again in the future.

However, there are criticises on the “2002 reforms” from various aspects. These reforms were too general focused on the mending the superficial mistakes rather can tackle on the core problems (Chandler and Strine, 2003). There was lack of the support from the state laws (Thompson, 2003). Chandler and Strine (2003) pointed out the three core inducements for the corporate governance failures as: (1) the difficulties to detect and prosecute the frauds within the accounting and expenditure through the audit alone; (2) the weak accounting principles provide the opportunities for the companies to take the risky actions; (3) the perverse accounting and tax rules encouraged the questionable executives compensation arrangement.

Meanwhile, there were huge resistances in put the reforms into practices. First of all, due to the federal government unwillingness of sharing the resources, it made the SEC unable to enhance the existing rules and regulations which would violate the potential threats of the scandals. Secondly, some resistances came from the inside of SEC who reluctant to allow other agency to play the full bodied role in regulating the accounting industry. Last but not least, Chandler and Strine (2003) criticised as ‘…‘it is remarkable that neither Congress nor the Exchanges took action on rectify the perverse accounting incentives that now exist for executive and director compensation’’ (p.954).

Furthermore, there were lack of consistence and still the weakness in the reforms the corporate governance system. Largevoort (2001) pointed out that the “2002 reform” if the majority of board members are impendent directors, it will empower the CEOs in many circumstances due to monopoly power of controls the information and setting the board agenda. In addition, the greater resistances came from part of the executives in the companies when confront the demand of the accountability from outside of the company (Toms and Wright, 2005). Thompson (2003) pointed out hat there was lack of supports for reform the corporate governance system by the state law.

The UK recommendation in the corporate governance system after Enron case

In responses to the corporate governance failure in the cases, such as the Polly Peck and Maxwell Communications the UK in 1980s, the Cadbury Report in 1992 drafted the new regulation approach which different from the legislated perspective applied the US. The approach refers to the “comply and complain” which Arcto et al (2010) describes as the introduction of a set of recommendations which guiding the commonly recognised the best principles on various the corporate governance activities of board structure, committee composition, and independence.

The approach shares the perspective with the contingency theory which recognised the diversity of the companies, and the best practices in corporate governance cannot supplely achieve be raising the standard s of the structures and rules. The best corporate governance derive from the match between the structure and the company’s features.

The later appeared the Combined Code in the Corporate Governance (refers as Combined Code) since 1998 brought the earlier committees and incorporated into the Stock Exchanges Listing Rules. The Combined Code clarified the provision includes: (1) the chairman and CEO should have the clear division in responsibility; (2) introduce the senior non-executive directors in the board; (3) at least one third of board members are the non-executives which majority should independent from the management; (4) setting up the nomination committee, remuneration committee, and audit committee;

After the Enron collapse, the UK government undertook the series of reviews supported by the Department of Trade and Industry (DTI) to examine the existing audit regulation and corporate governance system. In 1999, a new independent Accountancy Foundation established which contains the new Ethics Standards Board and Investigation and Discipline Board, and a reformed Auditing Practice Board.

The Co-ordinating Group on Audit and Accounting Issues (CGAA) set up in 2002 to review the current regulation in audit and financial reporting. The CGAA final report in 2003 contains 27 conclusion from the aspects of (1) auditor independence; (2) audit firm transparency; (3) monitoring audit firms; (4) financial reporting standards and enforcement; (5) corporate governance and (6) competition issues. Many of these recommendations have been introduced into the practices.

Furthermore, the latest vision of the Combined Code (2003) has brought the recommendations from the previous Higgs and Smith Report in 2002. The Higgs Report which measure the effectiveness of the non-executive directors in the current corporate governance system. The later on Smith report which demanded by the CGAA report developed the guidance to set up the audit committee into the Combined Code

Due to the “comply and explain” nature of the UK corporate governance system, the Higgs and Smith Reports brought the debates and controversy. How quick the new reacted authorities could reach their designed function leave the questions to the government. The significant challenges for the UK reforms are how effectively consist with the wider, restrict, and legitimate changes in the US and the European Union (EU).


The corporate governance system in the US and the UK based on the fundamental principle of sustain the primacy of shareholders benefits. However, there are different approaches both nations pursue the best practices, in which the US model trend to seek the solution through law and rules. The legitimate the “2002 reforms” gave clear orders and requests to the companies which ensure the reform the corporate governance system within a limited time scale. However, the efficiency of the legitimate approach depends on the exhaustive and exclusive the rules and regulation.

Contrarily, the UK model is based on the more flexible “comply and complain” approach. This approach leads to more debates and controversy in the practices, and the diversity firm structures which increase the difficulties to monitoring the corporate governance practices. Notwithstanding, the increasingly awareness of the corporate social responsibility and the stakeholders perception in the UK make the firms elaborately adopt the long-term strategies and reduce the risky decisions.

It is hardly to judge which model lead the best practices in the corporate governance alone with failures happened in the past. The market environment and the social values need take into account. The equity market feature determinate the behaviour of the institutional investors which potentially impact on the corporate governance. Meanwhile, the social value and the corporate social responsibility differences between these tow nations also has the influence on firms’ behaviours. The international collaboration in the corporate governance is necessary due to increasingly development in the global business transactions.



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原文链接:Corporate Accountability