There has been change in the global economy due to the changes associated with development. As a result, changes have made it inevitable to redesign the management of the banking system in order to stay afloat in the economic realm.
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The FRC (Financial Report Council) was to provide regulations that govern the behavior of the leadership in the banking sector. In this report is an explanation of the FRC. It will also highlight the causes and the breakdown in the banking system. Among others the principles as stipulated in the 2010 code will be identified.
The code stipulate good management practice. These practices are long term and reward the company. They include values such as effective and efficient administration as well as responsible decision making. The management practice is designed for the board which is composed of directors in the bank (CTP Global, 2010).
The code is an effective instrument in the changing world. Therefore, it is examined from time to time to establish whether it is outdated or still relevant. The changes made after revision are clearly indicated so that they are recognized. This corporate management recognizes the fact that the world is dynamic and innovative ways have to be embraced in order to remain in the financial business.
Investors have taken a risk in have supported organizations even when the markets are not favorable. The market is unpredictable thus there is no certainty that their investments will bring gains.
It is noted that banking companies have been closed down due to fraud. This has been partly due to taking high risks in the business strategy. Failure to success the financial institutions have been found in to be highly indebted leading to closure of the business. The FRC main aim to regulate the management has been a step forward to curb the problem.
The assessments undertaken in the period before June 2011 manifested that there were financial difficulties being experienced both within and outside boarders. This predicament was attributed to the management of the company. Sir Walker had been given the mandate to conduct investigations in the financial institutions. The findings implied that:
- The ability to give expected desired outcomes had to be revisited with an intension to improve them.
- The share holders could be informed to actively participate as they foster good relations with the organization.
It is also noted in The Council of Foreign Relations (2011, Para 3) that there has been challenges that has led to loss of employment, due to deteriorated economic growth.
Credit rating agencies
There are more loans borrowed with an increase in the interest rate. When the interest increases, the cost of living is high and as a result many refrain from borrowing. Consequently, the banks realize low revenue. People avoid risky borrowing because they may be unable to repay. The result is that the banks engage in loan borrowing to be able to transact normally (Semel & Plimton, 2010, p. 1).
Auditing practices have changed and the companies have to manage the change. Before, plans could be made because the future was predictable. Currently, investors have diverse interest and therefore there is no assurance that what they intend to gain will be attainable. Thus it is difficult to predict from the history.
Purposes of principle
To ensure the success of the organization
The FRC main objective as stated is “to facilitate effective, entrepreneurial, and prudent management that can deliver the long term success of the company”. The companies’ leadership is important in making vital decisions that directly and indirectly affect the revenue collection.
Therefore, it is necessary to regulate the boards of the financial institution. They are in charge of making strategic goals for the development of the company (Financial reporting council, 2010 p. 2).
Protect the shareholders
Dinning (2010, p. 1) indicate that the FRC protects the investor as well as ensure the continuity of the banking facility. This is because companies must disclose information pertaining the company’s fiscal plans and strategy.
Therefore, companies must comply making transparency in the administration inevitable. The FRC offers competent corporate management to companies. This is achieved from regular assessment of the reports to establish the progress of companies.
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Involve shareholders in decision making
The stake holders are involved in the company’s management. FRC require the investors to report annually and engage in the vetting process in the company. This ensures that the stake holders can also be a variable in decision making. Therefore, the investor becomes confidence and can increase transactions with the bank (Dinning 2010, p. 1)
Summary of crisis
Fuelled by low IR
According to Northedge (2010 Para 1) the FRC has not been welcomed by a number of companies. It is believed that, they are afraid that the body is superior and may have a hidden agenda to control the resources of the companies. On the other hand it is not certain whether this corporation will indeed assist financial institutions from going underground. Additionally corruption has also challenged the success of the banks.
Easily available credit
Credit is given with minimal criteria in like earlier. Thus the borrowing institutions and individuals can access the credit and invest. In cases where the credit is awarded then repaying becomes impossible and challenging. The credit may be used on the development of a real estate where the prices may go up or decline after the investment is complete.
In some cases the company is young and growing and may have a different organization structure. As a result, some sections of the code may be irrelevant and cannot be applied. Thus they are recommended to assimilate the code through the assistance of such organizations as the Association of Investment Companies’ Corporate Governance Code and Guide (Financial reporting council 2010, p. 7).
Taking credit has brought about crisis. Investors have taken the challenge of paying losses after what they borrowed for failed to raise enough revenue to pay the loans taken. In this case investor pays for a loan without gaining from it.
The principle is effective and effective since if its values are adopted. The values advocate for good management which is highly effective in the changing environment.
Although Northedge (2010 Para 1) suggests that the principle may have a hidden agenda to control the institutions, CTP Global (2010) reveal that the management values by the FRC will salvage the economic institutions. We believe that the management is the key to financial success and thus the principle should be adopted.
UK Corporate Governance Code 2003
Purpose and Principle
The UK Corporate Governance Code 2010 was designed for the management of the organization where their combined efforts would lead to the progress of the company. Another principle is to have regular reelection of managers at specific intervals. An evaluation for the performance of each leader would be made annually.
There shall be formal appointment of leaders in a transparent manner.
The report emphasizes on the role of auditors. Their key responsibility would to provide an annual report to clients. They would also be required to inform the shareholders of any predicaments in the future so that they engage in informed decisions.
The managers have a responsibility of maintaining good conduct with the auditors. The good relationship will make it possible for decision makers to use given financial reports as well as make internal controls.
UK Corporate Governance Code 2010
The UK Corporate Governance Code 2010 purpose is to ensure that there is effective management of organizations. The code is composed of five values:
The principles of FRC
There are five principles of the FRC that are discussed in the following paragraphs.
A board must be formed in the organization to oversee the sustainable growth of the organization. Responsibilities must be well distributed; evenly and without overlaps among the members of the board. Decisions will be made on collectively and that no one should dominate decision making.
The board members will be led by a chair man who will ensure that the team performs its mandate. The board can recognizes contributions inform of ideas from the other directors.
Background knowledge of the company is what every member of the board must have. This will enable them understand the structure and the organization of the company to make knowledgeable decisions. Accumulated skills in the company will be of great importance. Names of eligible members can be submitted regularly and in a timely manner. The process of recruitment of the leaders must be clear.
After joining the board they can be inaugurated to recapitulate what is done. All the board members will allocate enough time to perform their functions. The board should also have relevant and timely information that is vital for decision making.
The leadership will be responsible for decisions it makes. The strategies must be undertaken with transparency. Decisions made must reflect the objectives of the company and lead success. All different divisions in the organization should put efforts to achieve a goal.
The leaders will make arrangements for that will assist in tackling risks and managing the internal divisions as Tunnacliffe (2010, p. 94) indicates. They should also design a transparent internal hierarchical structure that is efficient.
The company will be required to reward the board timely and adequately. It should not be extremely high or very low: but should be attractive. The reward must go hand in hand with the work done. The remuneration should be directed by policy and not the leaders (Bell, 2009 p. 51).
Relations with share holders
The board will make arrangements to meet and have a dialogue with investors. The agenda should be guided by the company’s objectives. An annual general meeting can be held as it is effective in encouraging the stake holders to attend and to participate. As Hodge (2011, Para 3) mentions, the share holders need to be informed of any changes and risks involved and not only the successes.
The FRC combined code is a collection of regulations that govern the conduct of leaders in the boards to efficiently manage the businesses and keep the best conduct with the share holders (The financial reporting council, 2011 Para 1).
The concerned share holders are required to give their progress with the principals when writing their fiscal reports annually. A clarification is made in every instance that the standards are not followed. A new set was issued and is to be implemented starting June 2010.
To be able to meet the terms of the FRC, businesses must reveal some important information concerning the business. This information includes:
- Stipulations for the form of business that the institution
- Situations that the company involved outside support in evaluation and the relationship of the support.
The revelation should then be made in the complete annual report of the organization. In this case the relevant code is seen in the report that is dated a year after the code was implemented.
The terms take effect in a continuing manner where the organization is expected to be accountable. Therefore, they reveal:
- The accomplishments done in line with the provisions
- The unexploited standards and reasons for failure to undertake them
The FRC is considerate of the time needed to make changes in the company. Some of these changes are seen in some areas as:
- The reappointment of directors.
- The process is not expected to cause difficulties in the management of the company.
- Companies can also request for extension of time
It is a principle that calls for obedience and if it is impossible a clarification can be given. It is acceptable to the shareholders and the company. The code is flexible and the board can have innovative ways of implementing the principle. This is done as long as they can justify their action to the investor.
In the case where the principle is not followed, the investor is involved and his vote on the same matters. This means that the principle can be substituted with the agreement from the investor and the leadership board. If the substituted principle is adopted, then the management must comply with the virtues of accountability and honesty.
The investors should acknowledge the company’s efforts. As they also analyze the organization they can make note of the challenges that it faces as the world changes. Besides noting the challenges, they can also notice the magnitude of difficult in managing the multiple divisions in the organization.
On the other hand the investors can also make enquiries to get clarifications of the code. They can practice a culture of giving feedback inform of ideas and on annual statements.
The FRC is a corporate body that provides values that are to be followed by companies. The purpose of the principles is maintained a constant growth and use creativity in the management of the financial institutions. The values are motivated by change in the economic environment that has led to the collapse and closure or sell of financial institutions.
The principles of FRC as discussed above are remuneration and relations with shareholders, competence in leadership, being accountable and effective in performing its functions.
The combined code of 2010 was introduced making the board responsible for the nature and extend of risks that are attached to every strategic goal they implement. It is believed this move will aid many companies from going underground from such vices as fraud.
Adoption of the 2010 code will put much responsibility on the board. Therefore, decisions made are going to be well informed since any losses made are on them. In addition, the leadership which is based on the principals will be accountable and transparent and lead to the success of the company.
Moreover the principle of comply or reject is good as it makes it possible to give feedback. The stakeholders are encouraged by the 2010 code to participate in the vetting process and keeping check of the progress of their investment.
Bell, P., 2009. Comprehensive annual financial report. Web.
CTP Global., 2010. FRC Combined Code. Web.
Dinning, R., 2010. ISS Disclosure Response to UK Stewardship code. Web.
Hodge, N., 2011. FRC tries to improve dialogue between boards and shareholders. Web.
Financial reporting council., 2010. The UK Corporate Governance Code. Web.
Northedge, R., 2010. Corporate world angry over plans to create a new super- Watchdog. Web.
Semel, W. D & Plimton, L., 2010. The situation in the United States. Web.
The council of foreign relations., 2011. Financial crisis inquiry commission report. Web.
The financial reporting council., 2011. The UK Corporate Governance Code and Associated guidance. Web.
Tunnacliffe, P. D., 2010. Corporate governance report. Web.