INTRODUCTION

Corporate Governance
In a market economy, the policies and procedures that control the interactions between business
owners and managers (corporate insiders) and the people who finance firms (shareholders) are
referred to as corporate governance. Over a period of time, the theories and methods of corporate
governance have changed. Corporate governance initially placed a strong emphasis on
maximizing shareholder profit and guaranteeing the smooth operation of the business. However,
there has been a shift in the direction of including stakeholder concerns and broader ethical
considerations in corporate governance frameworks.

In organizational and management studies, theories of corporate governance such as agency

theory and stakeholder theory are used to examine many facets of governance and decision-
making. While agency theory focuses primarily on the conflicts of interest that might arise
between principals (owners or shareholders) and agents (managers or staff) referred to as
principal-agent problem, stakeholder theory explores the interests and concerns of various groups
that are impacted by or have an interest in the organization. However, as described by Jensen and
Meckling in 1976 and further developed by Fama and Jensen in 1983, the agency theory
approach gained a lot of interest from academics and practitioners.

In response to the agency theory’s perspective, various institutions created a number of

governance standards, codes, and principles to improve corporate governance practices. For
instance, the ICGN (International Corporate Governance Network), the OECD (Organisation for
Economic Co-operation and Development), and CalPERS (California Public Employees'
Retirement System) have all contributed to the development of rules and suggestions to enhance
corporate governance.
These governance guidelines place a strong emphasis on the function of the board of directors.
To protect the interests of shareholders, boards are tasked with the monitoring and control of
executive decision-making processes. It has been suggested that boards should have a sizable
number of independent non-executive directors in order to improve board independence and
performance.

Some notable examples of influential corporate governance codes and principles that have
incorporated agency theory perspectives and promoted these governance practices include the
Cadbury Report from 1992, the OECD Principles of Corporate Governance from 1999 and 2004,
the ICGN guidelines from 1999 and 2005, and the UK Combined Code from 2006.

UK Corporate Governance Code

Corporate governance has drawn more attention since the Cadbury Report 1992, which was
published by the Cadbury Committee, also known as the Committee on the Financial Aspects of
Corporate Governance, established in UK in response to a number of corporate scandals and
worries about the accountability and transparency of listed firms. The Cadbury Report
emphasized the significance of developing a structure that would advance shareholder interests
while also taking other stakeholders' concerns into account. It advised businesses to create
corporate governance guidelines and urged them to make their adherence to these guidelines’
public in their annual reports. The study significantly influenced corporate governance practices
in the UK and laid the groundwork for later advancements in the area.

In fact, not just in the UK but also in other nations throughout the world, the Cadbury Report had
a big influence on corporate governance reform. Further, the Cadbury Report, the Greenbury
Report (1995), and the Hampel Report (1998) were all included in a document known as the
"Combined Code on Corporate Governance," which was first released in 1998. This Combined
Code was created to offer a thorough foundation for UK-wide good corporate governance
practices. The Combined Code underwent numerous updates throughout time to keep up with
evolving best practices and shifting governance requirements. In order to better represent its
importance and authority in the UK governance scenario, it was renamed as the "UK Corporate
Governance Code" in 2010. Since then, the code has undergone frequent updates to address
evolving challenges and expectations.

The statutory guidelines provided in the Companies Act of 2006 are supplemented by the UK
Corporate Governance Code. It encompasses a wide variety of areas of corporate governance,
including board composition, directors' responsibilities, risk management, internal control,
remuneration, and shareholder rights. Companies listed on the London Stock Exchange are
expected to comply with the code's provisions or provide justification for any variances.

UK Corporate Failings
In the development of the UK Corporate Governance Code, the Financial Reporting Council
(FRC) takes into account the approach of agency theory. The UK Corporate Governance Code's
main goal is to advance effective corporate governance in businesses and consequently support
their development. However, there have been a number of high-profile scandals involving poor
governance in recent years, which have resulted in major economic bankruptcies. One of such
famous instances include the collapse of Carillion plc, UK's second-largest construction
company, which was forced into compulsory liquidation on 15 th January 2018 due to its inability
to raise additional funds from creditors after the United Kingdom (UK) Government refused to
provide certain guarantees to those creditors. Carillion had approximately 1.6 billion (GBP) in
debt. This corporate failure is anticipated to have profound effects on the UK economy,
Carillion's creditors (including several German banks who owned a combined sum of roughly
£112 million), and those who worked for the construction company and their pensions.

Therefore, the nature and efficacy of the corporate governance system in the UK have been a
topic of heated debate. The need for a more thorough investigation of the UK's corporate
governance structure was also noted by the Financial Reporting Council (FRC) in 2018 and
several media publications, including the Financial Times and Accountancy Daily in 2020.

These controversies have sparked doubts about the Code's ability to prevent bad governance and
safeguard the interests of stakeholders including shareholders, employees, and other parties. In
order to address these issues, the FRC, which is in charge of policing corporate governance in the
UK, has been amending the Code. The most recent edition of the Code, which was released in
2018, made a number of improvements intended to increase accountability, transparency, and
board performance. However, the question of whether these changes are enough or if more
reforms are required is still up for debate.
According to Platt and Platt (2012), agency theory offers a good paradigm for forecasting
corporate failure. They contend that some aspects of corporate governance, including the
composition and independence of the board, the structure of executive compensation, and the
level of shareholder monitoring, might affect the probability of corporate failure. Therefore,
companies can reduce the risks brought on by agency conflicts and improve their chances of
success by being aware of the agency issues and putting suitable corporate governance practices
into place.

In the above context, it was felt imperative to conduct a study on UK corporate failure in relation
to agency theory. Accordingly, this paper is prepared on the case of Carillion plc by emphasizing
on the role of non-executive directors in corporate governance and firm performance.

THEORETICAL PERSPECTIVE

The UK Corporate Governance Code places a strong focus on the necessity of having an efficient
board of directors in charge of the company's long-term development. This principal, like many
others in the field of corporate governance, has its origins in the Cadbury Report, which
suggested that in order to improve the effectiveness of the board, it be divided into executive and
non-executive directors, and that the non-executive directors (NEDs) be chosen by the board
rather than senior management in order to ensure their independence.

The Greenbury Committee examined the function of executive directors and NEDs, and stressed
it in the ensuing Codes. For instance, the Main Principles of Section A1 of the 2012, 2014, and
2016 Codes (which specifies the role of the board) states that "every company should be headed
by an effective board that is collectively responsible for the long-term success of the company."
The main principle of section A.4, which addresses the function of NEDs, encourages them to
constructively criticise and assist in formulating ideas for strategy.

The Corporate Governance Code clearly identifies responsibility and effectiveness of the board
as key criteria. In accordance with Principle O of the 2018 Code, which is a replication of
Principle C2 from the 2016 Code, the board must continue to operate effective risk management
and internal control mechanisms. After Carillion's collapse, the institute of directors' head of
governance stated that "effective governance was lacking at Carillion."

The fact that 70% of the directors were chosen in 2017 or later shows that the company's
management lacks consistency and continuity. Prior to 2016, the company had presence of only
two long standing directors, namely, Phillip Green, the non-executive independent chairman of
the board, who has held the position since 2011, and Alison Horner, the independent non-
executive director appointed in 2013. Therefore, a board that undergoes as many changes as
Carillion is likely to alter its policies and choices since any enduring procedures that may have
previously been in place would have been implemented by directors who are no longer actively
involved in the operation of the company. The judgements made by prior directors may be
reversed by new directors since they offer new experience and opinions about how certain things
should be done. Since it can take time to put new ideas into practice, frequent change can impede
managerial decisions that would otherwise result in real advancement.
Further, according to Carillion's 2017 annual report and financial statements, they conformed
with all the principals of UK Corporate Governance Code in 2016, just like the major banks that
failed during the 2008 Global Financial Crisis did before them. Given that significant
corporations continue to fail as a result of weak corporate governance, even with "full
compliance," this raises concerns about the intent and effectiveness of the code.

Breach of duties by directors

Directors are required by Section 172 of the Companies Act to consider the interests of creditors
when making decisions that will further the company's development. According to the testimony
presented before the Parliamentary enquiry into the demise of Carilion, it appeared that the board
of directors did not work to advance the company's prosperity, especially not in a manner that
would be seen as serving the interests of the company's creditors. Frank Field, a politician in the
UK, also criticized the company's directors of exhibiting "greed on stilts" in relation to its bonus
and compensation schemes. They have been accused of focusing more on these matters than the
company's interests.

The debate over directors' compensation illustrates a conflict between the interests of
shareholders, who represent the company's ownership, and directors, who represent its
management. The disagreement is a real-world illustration of the firm's agency theory, which is
concerned with the interaction between shareholders and directors. The agency cost hypothesis,
which describes the expense shareholders experience when managers operate the company on
their behalf, is a corollary of the agency theory. It is crucial in this sense that executive
compensation be connected to performance. When remuneration is based on performance, this
might be considered as a justifiable agency cost that shareholders bear by having directors
manage the company on their behalf. When examined critically, empirical data on director
compensation more strongly supports the agency theory than any other corporate theory.

CONCLUSION

Agency theory is based on the notion that the corporate governance system is intended to reduce
the agency problem as well as the agency cost. However, issues occur when directors act as
agents and make choices that are viewed as not being in the best interests of shareholders, who
act as principals. Indeed, the literature has expressed much mistrust regarding the dependability
or trustworthiness of agents, such as directors.

In order to ensure that the interests of the agent and the principal are aligned, some analysts have
suggested to incorporate effective mechanism to the governance system. It might potentially
result in companies being saved from going out of business, however, this would depend on the
decisions taken by the directors in charge of the system.

Therefore, laying emphasis on effective monitoring of directors as well as effective deterrents for
inappropriate director behaviour is the need of the hour. These are the two areas where the UK
Corporate Governance system is most deficient, and genuine action, not the continued updating
of soft law concepts, must be made to guarantee that they are improved, to prevent future large-
scale failures like that of Carillion.
REFERENCES

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Wan Yusoff, W.F. (2012). Insight of Corporate Governance Theories. Journal of Business &
Management, 1(1), pp.52–63. doi:https://doi.org/10.12735/jbm.v1i1p52.

Elsayed, M., Elshandidy, T. and Ahmed, Y. (2022). Corporate failure in the UK: An examination
of corporate governance reforms. International Review of Financial Analysis, 82, p.102165.
doi:https://doi.org/10.1016/j.irfa.2022.102165.

Luiza, A. and Madureira, R. (n.d.). Title: ‘The Carillion Collapse; a Failure in UK Corporate
Governance’ Course: International Business Law LLM. [online] Available at:
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