The genesis of modern corporate governance can be
dated to 1992 with the publication of the Cadbury report.
During the 1980s there had been a prolonged period
of economic growth which, by the early 1990s, was beginning to go into reverse.
of economic growth which, by the early 1990s, was beginning to go into reverse.
Companies which had previously shown signs of
spectacular success were shown to be built on sand, or at least very high
borrowings, and the successive collapse, in the UK, of Coloroll, Polly peck and
Maxwell communications corporate, which took with it the pension fund of mirror
group newspapers, prompted public concern.
spectacular success were shown to be built on sand, or at least very high
borrowings, and the successive collapse, in the UK, of Coloroll, Polly peck and
Maxwell communications corporate, which took with it the pension fund of mirror
group newspapers, prompted public concern.
This was exacerbated by the £80bn collapse of the
bank of credit and commerce international, which was after revealed to be a
hotbed of fraud and illicit dealings, and the debacle of Delorean which took
with it about £80m of public money. Thousands of individuals had lost their
savings and public concern was mounting.
bank of credit and commerce international, which was after revealed to be a
hotbed of fraud and illicit dealings, and the debacle of Delorean which took
with it about £80m of public money. Thousands of individuals had lost their
savings and public concern was mounting.
The city reacted quickly and commissioned sir peter
Cadbury to come up with some good practice proposals which would:
Cadbury to come up with some good practice proposals which would:
·
Reinforce
the responsibilities of executive directors;
Reinforce
the responsibilities of executive directors;
·
Strengthen
the role of the non-executive directors;
Strengthen
the role of the non-executive directors;
·
Make the
case for audit committees of the board;
Make the
case for audit committees of the board;
·
Restate
the principal responsibilities of auditors; and
Restate
the principal responsibilities of auditors; and
·
Reinforce
the links between shareholders, boards and auditors.
Reinforce
the links between shareholders, boards and auditors.
CADBURY
AND AFTER
AND AFTER
Cadbury was charged with creating a list of
recommended changes. His 90-page report, the financial aspects of corporate
governance, outlined a code of conduct for listed companies that attempted to
address ethnic as well as legal questions.
recommended changes. His 90-page report, the financial aspects of corporate
governance, outlined a code of conduct for listed companies that attempted to
address ethnic as well as legal questions.
These, ultimately, emerged as the basis for the
combined code on corporate governance, which we will look at in the next
section.
combined code on corporate governance, which we will look at in the next
section.
Cadbury’s report was followed by several others.
Students need to be aware of the basic principles of these reports:
Students need to be aware of the basic principles of these reports:
Greenbury-1995-which looked at the question of
directors pay, in particular the role of the remuneration committee in setting
remuneration levels, guidelines on remuneration policy, the level of disclosure
in financial statements and the question of terms of service contracts paying
compensation when directors are dismissed for poor performance.
directors pay, in particular the role of the remuneration committee in setting
remuneration levels, guidelines on remuneration policy, the level of disclosure
in financial statements and the question of terms of service contracts paying
compensation when directors are dismissed for poor performance.
Hampel-1998- which reinforced points made in the
original Cadbury report, in particular the separation of the roles of chairman
and managing director and the balance of the composition of the board between
executive and non-executive directors.
original Cadbury report, in particular the separation of the roles of chairman
and managing director and the balance of the composition of the board between
executive and non-executive directors.
Turnbull-1999-which offered guidance on how directors
should comply with corporate governance, focusing on internal controls and risk
management.
should comply with corporate governance, focusing on internal controls and risk
management.
This report emphasized the importance of internal
and external reporting: ‘this requires the maintenance of proper records and
processes that generate a flow of timely, relevant and reliable information
from within and outside the organization,’ it stated. The report also noted the
key role that IT plays in creating internal controls and in assessing accurately
the risks faced by an organization.
and external reporting: ‘this requires the maintenance of proper records and
processes that generate a flow of timely, relevant and reliable information
from within and outside the organization,’ it stated. The report also noted the
key role that IT plays in creating internal controls and in assessing accurately
the risks faced by an organization.
Higgs-2003-which set out measures designed to
improve the structure and accountability of boardrooms in the UK. It argued
that boards should be free to criticize compositions to no more than half the
board-the remainder being non-executive directors.
improve the structure and accountability of boardrooms in the UK. It argued
that boards should be free to criticize compositions to no more than half the
board-the remainder being non-executive directors.
This proved controversial and Higgs has since
admitted that his recommendation were too harsh.
admitted that his recommendation were too harsh.