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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 180 Oman 181 Pakistan 181 Peru 181 The Philippines 181 Poland 181 Portugal 182 Qatar 182 Romania 182 Russia 182 Saudi Arabia 183 Singapore 184 Slovakia 184 Slovenia 184 South Africa 184 South Korea 185 n Illustration 8.1: The Influence of Culture on Corporate Governance 186 Spain 186 Sri Lanka 187 Sweden 187 xx Contents Switzerland 187 Taiwan 187 Thailand 188 Trinidad & Tobago 188 Tunisia 188 Turkey 188 Uganda 189 Ukraine 189 United States 189 Venezuela 190 Vietnam 190 Chapter Summary 191 Questions for Reflection and Discussion 191 Part 3 Holistic Governance 193 9 Corporate Governance and Stakeholder Accountability 195 Introduction 195 n Illustration 9.1: The Risks Associated with Climate Change and Global Warming 196 n Illustration 9.2: Assessing the Impact of the UK Company Law Review 198 Early Roots of Corporate Social Responsibility in the UK 199 Friedman and Corporate Social Responsibility 200 Does Corporate Social Responsibility Improve Financial Performance? 201 n Illustration 9.3: Enron and Ethics 201 n Illustration 9.4: The Mexican Gulf Oil Spill 2010 203 n Illustration 9.5: Sports Direct 204 n Illustration 9.6 204 Corporate Environmental Reporting 205 Incentives for Corporate Environmental Reporting 206 Disincentives for Corporate Environmental Reporting 208 A Risk Society Theory of Social and Environmental Reporting 209 Users of Corporate Environmental Reporting 210 Qualitative Characteristics of Corporate Environmental Reporting 210 Elements of Corporate Environmental Reporting 211 Bearing the Cost of Corporate Environmental Reporting 211 Time Period and Communication of Corporate Environmental Reporting 211 The Suggested Content of Corporate Environmental Reports 212 Sustainability and a Stakeholder Perspective 212 Sustainability Reporting 212 Accounting for Biodiversity, Accounting for Bees, and Extinction Accounting 214 Bee-Ing Bee-Friendly at Every Level: What Can Local Councils and Gardeners Do? 215 Integrated Reporting: The Dawning of a New Reality? 216 Assurance of Social, Environmental, Sustainability and Integrated Reporting 218 Stakeholder Engagement 221 Scepticism about Stakeholder Engagement 222 A Theoretical Framework for Stakeholder Engagement 222 Stakeholder Engagement in Challenging International Environments 223 n Illustration 9.7: W(h)ither Accountability? Striking Miners in South Africa 224 Governance in Public and Third-Sector Organizations 225 Governance in the Public Sector 227 The Nolan Committee Principles, 1995 228 The Good Governance Standard for Public Services, 2004 228 Corporate Governance in Central Government Departments 229 Code of Good Practice, July 2005 229 Governance in the Third Sector 230 Chapter Summary 232 Workshop Activity 232 10 Responsible Investment 233 Introduction 233 Terminology and Definitions 235 From SEE to ESG 237 From ESG to EAI and Extra Financials 237 United Nations Principles of Responsible Investment (UNPRI, Now PRI) 238 The UK Social Investment Forum, UKSIF 239 The European Social Investment Forum, EUROSIF 239 Some Statistics on Responsible Investment 239 Responsible Investment Strategies 241 Screening 241 Best in Sector 241 The Financial Performance of Responsible Investment 241 The Drivers of Responsible Investment 244 A Growing Demand for Social Ethical and Environmental Disclosure 247 Private Social and Environmental Reporting 250 n Illustration 10.1: Shareholder Activism on Animal Rights: The Case of Huntingdon Life Sciences 251 n Illustration 10.2: Backlash Against Animal Rights Extremists 252 n Illustration 10.3: The Role of Lobby Groups in Corporate Environmental Issues: The Case of BP Amoco in Alaska 253 Private Social and Environmental Reporting: Mythicizing or Demythologizing Reality? 254 Impression Management in Private Social and Environmental Reporting 255 Private Climate Change Reporting 255 Responsible Investment, Pollinators and Species Extinction 255 Responsible Investment and an Integrated Approach to Institutional Investment 255 Pension Fund Trustees and Responsible Investment 255 UKSIF Report on Pensions and Responsible Investment 261 The Role of Pension Fund Trustees in Climate Change 261 Socially Responsible Investment in an International Context 262 Socially Responsible Investment in the USA 262 Socially Responsible Investment in Canada 263 Socially Responsible Investment in Australia 263 Socially Responsible Investment in Continental Europe 264 Socially Responsible Investment in Japan 264 Socially Responsible Investment in South Africa 265 Chapter Summary 265 Questions for Reflection and Discussion 266 11 Future Directions for Corporate Governance and Accountability 267 The Future of Institutional Investor Activism 268 A Global Convergence in Corporate Governance 269 A Continuing Broadening of the Corporate Governance Agenda: Holistic Governance and Stakeholder Accountability 270 Has Corporate Governance Reform Gone Too Far? Or has it Gone Far Enough? 271 Endnotes N-1 References R-1 Index I-1

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