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.
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.
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.
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:
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
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.
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.
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.
that his recommendation were too harsh.
