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In our last two blog posts, we saw what corporate governance is and the various models that can be adopted. Now, let us look at the various regulations and codes and guidelines that are followed.

The laws and regulations of a particular jurisdiction make a corporation into a “legal person”. Different countries have different laws and therefore the legal person status of a corporation varies from country to country. However, a corporation’s legal person status is fundamental to all jurisdictions and is conferred by statute. So this makes an entity or a corporation able to hold property without having to reference a real physical person.

Along with the statutory laws of a particular jurisdiction, corporations also need to follow common law in some countries as well as various laws and regulations that affect business practices. Corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. The shareholders can modify this constitution but in varying capacities.

The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977 which made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. Similarly, in the UK, the Bribery Act was passed in 2010 and this law made it illegal to bribe either government or private citizens or make facilitating payments. It also required corporations to establish controls to prevent bribery.

After a series of high-profile corporate scandals occurred, the Sarbanes-Oxley Act of 2002 was enacted to prevent such occurrence in the future. The requirements established by it affected corporate governance in the U.S. and influenced similar laws in many other countries. Some of the law’s requirements are:

  • Auditing was self-regulated before, however, the Public Company Accounting Oversight Board was established to regulate the auditing profession.
  • The Chief Executive Officer and Chief Financial Officer are required to attest to the financial statements.
  • Board audit committees have independent members.
  • External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specific senior management roles worked for the auditor previously.

Now to look at a few codes and guidelines.

Corporate governance principles and codes have been developed in different countries. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.

Organization for Economic Co-operation and Development principles

One of the most influential guidelines on corporate governance are the G20/OECD Principles of Corporate Governance. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure. This internationally agreed benchmark consists of more than fifty distinct disclosure items across the five broad categories of

  • Auditing
  • Board and management structure and process
  • Corporate responsibility and compliance in an organization
  • Financial transparency and information disclosure
  • Ownership structure and exercise of control rights.

Stock exchange listing standards

Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires

  • Independent directors
  • Board meetings that exclude management
  • Boards organize their members into committees with specific responsibilities as per defined charters.

Apart from these two some other guidelines are followed as well.

The investor-led organization, International Corporate Governance Network (ICGN), was set up by individuals centered around the ten largest pension funds in the world 1995 with an aim to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics.

The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on Accounting and Reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda.

In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance – the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability.

Most codes are largely voluntary and therefore, how your corporation functions mainly depend on  the Board of Directors as well as the employees, as long as you are functioning well within your judiciary.

These codes and regulations, along with the aid software tools like VComply, which helps you to manage and keep a track of your corporation’s working, will ensure that you’re always a step ahead when it comes to avoiding potential corporate scandals.

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