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Home → All Courses → Business and Economics Courses → Executive Program in Corporate Governance → Flashcard

How do regulatory bodies influence corporate governance practices, and what are some key regulations that boards must comply with?



Influence of Regulatory Bodies on Corporate Governance Practices

Regulatory bodies play a crucial role in shaping corporate governance practices by establishing rules, standards, and guidelines that govern how companies operate and are governed. These regulations are designed to promote transparency, accountability, and fairness, protecting the interests of shareholders, investors, employees, and other stakeholders. Here's an in-depth look at how regulatory bodies influence corporate governance practices and some key regulations that boards must comply with, along with relevant examples:

1. Establishing Standards and Guidelines

Influence: Regulatory bodies set standards and guidelines for corporate governance practices, providing a framework for companies to follow. These standards cover various aspects of governance, including board composition, director responsibilities, disclosure requirements, and internal controls.

Example: The Securities and Exchange Commission (SEC) in the United States sets forth regulations such as the Sarbanes-Oxley Act (SOX) and Dodd-Frank Act, which establish standards for financial reporting, internal controls, and corporate governance practices for publicly traded companies.

2. Enhancing Transparency and Disclosure

Influence: Regulatory bodies mandate transparency and disclosure requirements to ensure that companies provide accurate and timely information to shareholders and the public. This includes financial reporting, executive compensation disclosure, related-party transactions, and other material information.

Example: The Financial Conduct Authority (FCA) in the United Kingdom requires listed companies to comply with the UK Corporate Governance Code, which sets out principles of good governance and disclosure requirements for listed companies on the London Stock Exchange.

3. Ensuring Accountability and Oversight

Influence: Regulatory bodies enforce rules and regulations that hold directors, officers, and executives accountable for their actions and decisions. They also provide oversight mechanisms to monitor compliance with governance standards and investigate misconduct or violations.

Example: The Public Company Accounting Oversight Board (PCAOB) in the United States oversees the audits of public companies to ensure compliance with auditing and accounting standards, promoting integrity and transparency in financial reporting.

4. Protecting Shareholder Rights

Influence: Regulatory bodies protect shareholder rights by establishing rules for shareholder voting, proxy access, and shareholder activism. These regulations aim to empower shareholders and enable them to hold management and the board accountable.

Example: The Securities and Exchange Board of India (SEBI) mandates that listed companies in India comply with regulations such as the SEBI (Listing Obligations and Disclosure Requirements) Regulations, which include provisions for shareholder rights, board composition, and corporate governance disclosures.

5. Promoting Ethical Conduct and Corporate Responsibility

Influence: Regulatory bodies promote ethical conduct and corporate responsibility by establishing rules and guidelines for business ethics, corporate social responsibility (CSR), and sustainability reporting. These regulations encourage companies to operate ethically and responsibly, considering environmental, social, and governance (ESG) factors.

Example: The European Union’s Directive on Non-Financial Reporting requires certain large companies to disclose information on environmental, social, and employee matters, human rights, anti-corruption, and diversity policies in their annual reports.

Key Regulations Boards Must Comply With

1. Sarbanes-Oxley Act (SOX):
- Description: SOX was enacted in response to corporate accounting scandals and aims to protect investors by improving the accuracy and reliability of corporate disclosures.
- Compliance Requirements: SOX mandates requirements for financial reporting, internal controls, audit committees, and corporate governance practices for publicly traded companies in the United States.

2. UK Corporate Governance Code:
- Description: The UK Corporate Governance Code sets out principles of good governance for listed companies in the UK, focusing on board composition, director responsibilities, remuneration, and shareholder engagement.
- Compliance Requirements: Listed companies on the London Stock Exchange must comply with the UK Corporate Governance Code or explain any deviations from its principles and provisions.

3. EU General Data Protection Regulation (GDPR):
- Description: GDPR is a regulation that protects the privacy and personal data of individuals within the European Union (EU) and the European Economic Area (EEA).
- Compliance Requirements: Companies that collect or process personal data of EU/EEA residents must comply with GDPR requirements, including data protection principles, consent mechanisms, data subject rights, and data breach notification obligations.

4. Foreign Corrupt Practices Act (FCPA):
- Description: FCPA is a U.S. law that prohibits bribery of foreign officials and requires accurate record-keeping and internal controls for companies with securities listed on U.S. exchanges.
- Compliance Requirements: Companies subject to FCPA must implement anti-corruption compliance programs, conduct due diligence on business partners, and maintain accurate books and records.

5. MiFID II (Markets in Financial Instruments Directive II):
- Description: MiFID II is an EU directive that regulates financial markets and investment services in the European Union, aiming to improve investor protection, market transparency, and integrity.
- Compliance Requirements: MiFID II imposes requirements on investment firms, trading venues, and market participants regarding transparency, best execution, investor protection, and reporting obligations.

Conclusion

Regulatory bodies exert significant influence on corporate governance practices by establishing standards, enhancing transparency, ensuring accountability, protecting shareholder rights, and promoting ethical conduct. Boards must comply with key regulations such as the Sarbanes-Oxley Act, UK Corporate Governance Code, GDPR, FCPA, and MiFID II to maintain effective governance, mitigate risks, and uphold the trust and confidence of stakeholders. By adhering to regulatory requirements and best practices, boards can demonstrate their commitment to sound governance principles and contribute to the long-term success and sustainability of their organizations.