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’.
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.
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.
‘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 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.
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.
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 practice, is
that the chairman of the board should not be the same individual as the
managing director or chief executive officer.
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 practice, 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 individuals can dominate
the board’s decision taking.
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 individuals 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.
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.
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.
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.
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.
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.
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 company should avoid paying more than is necessary
for this purpose.
·
A significant proportion of executive directors’
remuneration should be structured
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.
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.
takes the form of a remuneration committee of non-executive directors as
recommended by Greenbury.
Accountability and audit
·
The board should present a balanced and understandable
assessment of the company’s position and prospects.
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 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.
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.
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.
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 people need to understand so they can appreciate
the theoretical framework on which corporate governance in the UK is build.
‘substance over form’ which people need to understand so they can appreciate
the theoretical framework on which corporate governance in the UK is build.
