Combined code on corporate governance-2003

The financial reporting council drew up guidelines
that were published in July 2003 as part of its combined code on corporate
governance.

The code incorporates the key provisions of the
Cadbury report and the subsequent reports detailed above. These, as they apply
to directors are set out below in the

section on ‘directors’ duties’.

The code is underpinned by a financial services
authority rule that requires companies listed on the London stock exchange to
state, in their annual report, how they complied with its provisions or to
explain why they have not done so.
This is known as the ‘comply or explain’ basis and
differs from the purely regulatory approach adopted in other countries, particularly
the USA.
Directors’
duties
The combined code sets out the key principles of
good corporate governance. Listed companies are supposed to abide by this, but
it is good for all companies to abide by as many of these principles as are
practicable.
The main provisions, as set out in the combined
code, are listed below.
Directors
·        
Every
company should be headed by an effective board, which is collectively
responsible for the success of the company.
·        
There
should be a clear division of responsibilities at the head of the company
between the running of the board and the executive responsibility for the
running of the company’s business. No one individual should have unfettered
powers of decision. What this means, in pratises, is that the chairman of the
board should not be the same individual as the managing director or chief
executive officer.
·        
The board
should include a balance of executive and non-executive directors (and, in
particular, independent non-executive directors) such that no individual or
small group of insivisuals can dominate the board’s decision taking.
·        
There
should be a formal, rigorous and transparent procedure for the appointment of
new directors to the board.
·        
The board
should be supplied in a timely manner with information in a form and of a
quality appropriate to enable it to discharge its duties. This is a requirement
to produce good-quality management information, both financial, in a form the
directors can understand and in a timely manner.
·        
All
directors should receive induction on joining the board and should regularly
update and refresh their skills and knowledge.
·        
The board
should undertake a formal and rigorous annual evaluation of its own performance
and that of its committees and individual directors.
·        
All
directors should be submitted for re-election at regular intervals, subject to
continued satisfactory performance. The board should ensure planned and
progressive refreshing of the board.
Directors’ remuneration
·        
Levels of
remuneration should be sufficient to attract, retain and motivate directors of
the quality required to run the company successfully.
·        
A company
should avoid paying more than is necessary for this purpose.
·        
A
significant proportion of executive directors’ remuneration should be structured
·        
There
should be a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors.
No director should be involved in deciding his or her own remuneration.
In practice this usually takes the form of a
remuneration committee of non-executive directors as recommended by greenbury
see above
Accountability and audit
·        
The board
should present a balanced and understandable assessment of the company’s
position and prospects.
·        
The board
should maintain a sound system of internal control to safeguard shareholders’
investment and the company’s assets.
·        
The board
should establish formal and transparent arrangements for considering how they
should apply the financial reporting and internal control principles and for
maintaining an appropriate relationship with the company’s auditors.
This is should be carried out by an audit
committee, comprising at least three non-executive directors.
The key point good corporate governance is that its
requirements should be met in the spirit of good governance and not just by
observing the letter of the code.’ box ticking’ should not be a substitute for
clear thought and fair exposition.
This leads us into the fundamental doctrine of
‘substance over form’ which students need to understand so they can appreciate
the theoretical framework on which corporate governance in the UK is build.

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