Business

Corporate governance refers to a set of policies, processes, institutions, customs and laws that affect the administration, control and direction of corporations. Corporate governance also encompasses the relationship that exists between the various stakeholders and also the goals governing a corporation or a company. The major stakeholders of corporations include the shareholders, board of directors and the management. Others include the customers, employees, regulators, suppliers, the community and the creditors. The subject of corporate governance is multi faceted with the most vital corporate governance theme being to enhance and maintain accountability of key people within a company via a mechanism that seeks to reduce principal-agent related problems (Kendall, 1999).

The concept of corporate governance has been of interest in the modern corporations practices especially due to the increasing collapse of major corporations around the world. Most of these failures and collapse of large international and multinational firms has been attributed to lack of good corporate governance practices and this has led to the formulations of different laws and policies by the governments with an aim of ensuring good business practices or corporate governance is maintained. The United States is one of the countries that have been affected negatively by lack of good corporate governance evidenced by collapse of big companies such as WorldCom Inc and Enron which in turn led to the formulation of the Sarbanes Oxley Act in the year 2002 (COLE, 2004). Canada has also been struggling with the issue of corporate governance for a long time with corporate scandals in companies such as Hollinger, Bre-X and Nortel being experienced. Corporate governance practices dictate the performance of an organization hence affecting the overall performance of a nation. Each country has its own corporate governance laws, policies, standards and procedures that each corporation is expected to follow while carrying out its businesses (Gopalsamy, 2006).
A comparison of corporate governance of the United States and that of Canada

In the recent past, corporate governance issues have taken a center stage in both the United States and in Canada. However, the compliance and standards of corporate governance employed by these two countries vary significantly. In the United States for example, stringent rules, regulations and practices that target the board of directors, auditing and accounting profession and top managers have been implemented following the formulations of the Sarbanes Oxley Act passage with non compliance to the rules and practices attracting steep penalties (Glassman, 2006). In Canada on the other hand, the countrys response has been more of a fragmented and reactive stance with no concerted or unified efforts aimed at regulatory enforcement strengthening. Different arguments have been put forward by different authors assessing the corporate governance of these two countries. Some analysts argue that formulation of the Sarbanes Oxley Act has acted as a catalyst to the highly required reforms in corporate governance to increase compliance. Those assessing the corporate governance of Canada assert that Canadian regulators have been unable to formulate new corporate governance rules owing to the fact that Canadas system is highly fragmented. Unlike in the United States where corporate scandals are highly scrutinized by the government and regulators, most of the scandals involving Canadian corporations are subjected to or given minimum attention in their country, a factor attributed to lack of effective reforms in corporate governance rules and policies in this country (McLuhan, 2006).

Corporate governance in the United States
Corporate governance is regulated by the Sarbanes Oxley Act passed in the year 2002. This act applies to all states alongside the corporate governance requirements of each state. In the United States, the shareholders, board of directors and the top management forms the hierarchy of corporate decision making with the bottom most part of the hierarchy being held by the management although most chief executive officers of most corporations in the United States tend to ignore this fact. However, the management is charged with the role of making most of the vital decisions in a corporation including formulation of business strategies as well as their implementation. The management also has a responsibility of overseeing all the daily operations and running of an entity (Campbell  Woodley, 2004). Board of directors occupies the second place in the corporate governance in the United States corporations. Its main role is to give directions to the management, to safeguard the shareholders interests and to preserve the assets of a corporation. Two major fiduciary roles are entrusted to the board of directors duties of loyalty and care. The care duty asserts that which undertaking their duties, members of the board must exercise similar care to the one a prudent and ordinary person would exhibit if subjected to similar situations or if under such circumstances (Glassman, 2006).

The loyalty duty demands that the members of the board act in corporations best interest and in good faith. These duties are also owed to the shareholders and not the management of the corporation or other stakeholders including the employees and the customers. These duties are also subjected to corporations having controlling shareholders. Some of the other duties of the board of directors include choosing the CEO, setting his compensation, making decisions on whether to issue dividends or not, giving authorization of securities issuance, and discouraging or recommending shareholders actions including acquisition and merger proposals. The board of directors has the right to delegate some of the above functions to board committees, for example the compensation committee or audit committee (Berghe  Ridder, 1999). Such committees are usually board members subset. Shareholders occupy the highest rank in the hierarchy in the United States. They have a voice in corporate matters deemed vital such as directors elections and corporations chapter amendment. They also have a voting right on the issue of security issuance authorization and in approving the sales of assets of a corporation that are substantial. Shareholders also have to be consulted before undertaking acquisitions or mergers (Mntysaari, 2005).

As mentioned earlier, corporate governance in the United States is regulated by the Sarbanes Oxley act which became law in the year 2002.  The provisions of this act target the auditing profession with more emphasis of financial and accounting reporting of all public companies, the board members and the top management. The CEO and CFO or the chief financial officers of all public companies are under this act necessitated to certify that all the financial reports of a corporation are accurate and that they reflect the financial conditions of that firm (Roberts, Weetman  Gordon, 2008). Any falsification of such information amounts to criminal activities thus subjected to criminal law. The executives are also prevented by this law from being granted loans by the same corporations they work for. Section 404 of the Sarbanes Oxley Act requires the management (managers) to annually review the financial control of a corporation and to certify their adequacy. Public accounting firms and the board of directors have also been affected by the Sarbanes Oxley act (Holmstrom  Kaplan, 2003).

The major aim of this act is to cut the link between outside auditors and the management hence improving transparency and reducing conflict of interest. The act also aims at providing an audit that is coordinated among all involved parties. As a result, it demands that the audit committee of the board must supervise the internal audits of a corporation and also take full responsibility of the relationship of the external auditors with the company. Audit committees also have to be purely made up of independent directors inclusive of one or more financial experts (Gray  Manson, 2007). On the other hand, public accounting firms have been restricted on undertaking consulting work for their audit clients. Their work for such clients has been confined to non audit work. Deloitte  Touche is the only public accounting firm that is authorized to carry out consulting work or practice currently. To oversee the the audit of public companies subject to security laws, the act established the public accounting oversight board. All corporations in the United States are required to comply with the stipulations of this act (Rezaee, 2007).

Security and exchange commission (SEC) in the United States also regulate the corporate governance in this country. However, it does not directly set directions for corporations but it is concerned with the information given to the investors by the corporations. It thus requires corporations to give accurate, full or fair disclosure of any information deemed material for making investment decisions. Such information includes the financial condition of a company, and the operating results. Standards of SEC are not imposed on issuers although they are also expected to disclosure of vital information to investors. SEC demands or fights for investors rights and demands continuous disclosure of major changes in an organization to the investors. The disclosure rules of SEC do not contradict with state rules and exchange listing rules or requirements but rather compliment such rules (Carleen et al, 2009).

Corporate governance in Canada
In Canada, corporations directors have various responsibilities not only to the shareholders but also the society especially with increasing scrutiny on corporate governance being experienced in the recent past. New security regulations have been implemented with an aim of increasing accountability of directors of corporations. Directors of corporations in Canada are charged with the role of monitoring the corporations activities and are held personally liable for the financial conditions of these corporations. The Canadian business corporations act (CBCA) is the one that governs the Canadian corporations and it outlines the various liabilities and duties that are imposed on the corporations directors (Hoskin, 2005). Despite the fact that provincial corporations legislation and CBCA are almost similar, major differences exists between statutes and provisions pertaining to treatment of directors. Due to these sharp differences, directors are required to seek counsel to make sure that they are aware of the corporation governing statutes imposing responsibilities on them. Corporate statutes are not imposed on corporations undertaking their businesses on regulated industries, for example in the banking industry. Most of the responsibilities imposed on the directors are similar across different industries although there are some specific responsibilities imposed by each industry on its directors (GOODMAN, 2002).

A directors duty in Canadian corporations is to the corporation one heads or directs. Some of the basic principles forming the foundation for such duties include good faith principles, accountability and stewardship. Common law requirements and requirements of the statutes only aim at creating the parameters of directors duty but they do not limit the principles flexibility.  The board of directors is charged with a stewardship role (Sussex Circle Inc, 2002). Corporation directors have a duty of supervision of the corporations management. Shareholders on the other hand have a right to vote and appoint directors of a company. They also have a right to re-elect, remove or refuse a re-election of directors they are not satisfied with. However, they rarely directly participate in the decision making process in the corporation and although the board may seek to know the shareholders views, they are not mandated to act according to the interests of the shareholders. Directors are also given full discretion on means of exercising powers in the best way they feel like with the only constraint being the law imposed on their power. However, directors are expected to act in good faith for the general good of a corporation and should also exercise skills, diligence and care as a prudent person would if subjected to the same circumstances. It is the sole responsibility of directors in Canada to make major decisions on behalf of their corporations. Managers are however not involved in the daily running of the business but they periodically monitor the progress of the top management comprising of the chief financial officer, chief operating officer and chief executive officer. The board of directors has a duty of appointing the officers and assessing their performance. The boards mandate varies across different corporations although directors in all corporations are held personally liable for mistakes and activities of the corporations (GOODMAN, 2002).

Following the introduction of Sarbanes Oxley act in the United States, Canada began to strengthen its corporate governance rules and to improve its standards. It tightened its audit and accounting professions and it also improved its financial reporting standards and adopted new corporate governance rules.  However, Canada is faced with a lot of barriers in implementing stringent rules and regulations pertaining to corporate governance. To begin with, the regulatory framework of the capital market and securities industry in Canada has some specific weaknesses. The regulators for example do not have the ability to implement the rules or to act mainly because the Canadian system is highly fragmented (Morck  Yeung, 2006). The system is made up of multiple territorial and provincial security regulators, federal and provincial laws, institutions of federal financial regulators and enforcement authorities that exist at the three government levels. This makes it difficult for reforms to be instituted in the corporate governance given the fact that the federal, provincial and territories are poorly coordinated and have no agency accountability. Also, as a result of the geographic concentration of Canadian markets and the small size, fragmentation has lowered the regulatory systems confidence and complicated the reform process. This is evidenced by the laxity exhibited by the Canadian government to counteract serious scandals of its corporations such as Hollinger, Bre-X and Nortel (McLuhan, 2006).

The criminal code in Canada contains several stipulations pertaining to corporate governance and in recent past, several amendments have been made to this code with an aim of restricting insider trading, imposing tougher criminal penalties for individuals convicted for various corporate crimes and to enable endorsement of whistle blowing in corporate sector. In the year 2003, the Canadian federal government set apart some funds that were meant for establishment of integrated market enforcement teams (McCahery, 2002). Despite the fact that the regulatory teams were established with a lot of enthusiasm, only three charges have been laid by these teams in over years and the three charges are only minor cases. Market timing trades abuses is one issue that attracted public attention in this country resulting in two regulatory bodies and OSC imposing settlements on five dealers and five managers of mutual funds respectively. Although the penalties imposed were substantial including penal amounts and restitution, no proceedings were initiated by the regulators on the real market timers or even all fund managers who were culpable (McLuhan, 2006). This is unlike the case of Enron and WorldCom Inc corporations scandals in the United States. Managers of these companies were taken to court and charged with all involved partners being involved in the prosecution process.
In Canada, the accounting bodies are allowed to regulate their own standards pertaining to this profession. In the year 1997, the Canadian Supreme Court passed a decision that has enabled the auditors to have increased immunity. This is not the case in the United States whereby self regulation is not allowed. In Canada, self regulation is highly prevalent an issue brought about by an oversight of new bodies such as the CPAB or the Canadian public accountability board, the accounting and assurance standards oversight council and the ASB or the accounting standards board (GOODMAN, 2002). The model of CPAB is per the stipulations of the PCAOB or the public company accounting oversight board that was established by the United States Sarbanes Oxley act with an aim of protecting the investors. However, its authority is relatively less extensive (Rezaee, 2007).

In Canada unlike in the United States, the country employs auditor standards that are independent and that in turn incorporates a framework of principle based system formulated by international federation of accountants. The other provisions of security and exchange commission as stipulated by the Sarbanes Act. Prior to participating in CPAB, the auditors of public companies in Canada have to comply with all the standards contained therein. In the year 2005, regulations of Canada business corporations act underwent amendments to allow Canadian companies with their securities registered with security and exchange commission to make their companies financial statement based on the general accepted accounting principles of the United States (McMillan Binch LLP, 2004).

In Canada, directors are held personally liable for mistakes and risks undertaken by corporations they direct. The business judgment rule differs significantly in the United States and in Canada as far as corporate governance is concerned. In Canada, business judgment rules demands that the actions of the directors be based on best of the corporation alone with less regard to the shareholders or even the creditors. In the United States on the other hand, directors are given a fiduciary duty of loyalty and care to shareholders (Du Plessis, McConvill  Bagaric, 2005). As such, their decisions must be in the best interests not of the corporation but rather of the shareholders who rank top in the corporate management hierarchy. The second difference between Canadian and the United States business judgment rule is that in the latter country, directors are protected by the law if decisions they take can be considered to be rational. This is not the case in Canadian corporate governance. The decisions of the directors ought to be reasonable, not rational. Rational decisions may amount to gross negligence in Canada laying liability on directors (McLuhan, 2006).

Corporate governance statutes, laws, policies and regulations in the United States and Canada differ significantly owing to the differences in economic systems in these two countries. Canada is highly fragmented with regional provisional and federal corporate governing agencies being loosely coordinated, in the United States the federal and state regulations pertaining to corporate governance tend to reinforce each other and are closely coordinated. While the United States acts on a rule based system, Canada employs a principle based system. Rules guide the corporate governance in the United States with various regulations and statutes overseeing that the rules are enforced. In Canada, corporate governance is founded on the principle of stewardship. This governs the directors actions as wells as the overall direction of a corporations. Also, unlike in the United States whereby accounting and audit firms are highly regulated by rules, different principles guide such firms in Canada.