“Early skepticism about the self-regulatory nature of the Cadbury Report has melted away. It is now clear that self-regulatory codes have a useful role to play in solving the crisis which has been facing corporate governance. Discuss. i. Usefulness/doubts about Cadbury ii. Self-regulating code iii. Crisis-problem been solved? Introduction In as early as the 1960’s, successful commentators and businessmen have identified the significance and plurality of success and failure in the corporation.
This is today known as the concept of corporate governance. It was also believed that the Watergate scandal was a trigger point that highlighted the importance of this concept in the success of a corporation. In the UK, the emergence of large public companies and the implication of separation of ownership from control presents a very practical problem of governance of the company and how it can effectively be done. It is felt that sometimes the laws enacted are inadequate to deal with such an area. Body: Cadbury Report-what is it about
A series of shocking corporate scandals in the UK clearly giving rise to the idea that law alone may not be the proper mechanism to deal with corporate governance, led to a scramble by the Financial Reporting Council,
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Key emphasis by the Cadbury Report centred around the role of directors, the organs of a company’s functions, with a clear objective to reduce single individual power and with a sound (safe and secure) system of checks and balances ensuring that commercial reasoning takes paramount importance as the basis for a company’s decision. This led to the Cadbury Code of Best Practice being implemented in the UK in 1992. The Cadbury Report went into great detail to illustrate a clearly accepted division of responsibilities in respect of the board of directors.
The encouragement of separation of the post of Chairman and Chief Executive Officer (CEO) was seen as a recommendation of this division of responsibility. The report further asserted the importance of non-executive directors (NEDs) to bring independent judgement bearing on the important issues of the company. Cadbury saw the position of the NED as one that is wholly independent thereby retaining this independence as their main asset in the management of the company. Another major recommendation made by Cadbury was the establishment of effective audit committees.
Cadbury touched on issues relating to procedures and directors taking responsibility to maintain adequate accounting records. Miscellaneous reporting requirements, for example the reporting of financial results should be done via an objective and professional relationship with auditors. Directors are also responsible in these reporting requirements. Response to Cadbury Report The reaction to the Cadbury Report and subsequently the Code of Best Practice were somewhat mixed. There was a clear group of support for the self-regulatory nature of the Code because this would mean that compliance with the Code was on a voluntary basis.
For larger companies, this would not significantly show an increase of costs in order to implement the recommendations made. Studies have also indicated that if a Code remained merely as guidelines, the compliance rate to such Code would be a more accurate description of companies that do value the feedback from the report. It is also seen that the quest for accountability to shareholders, one of the objectives of company law, no longer seeks out traditional methods in the provision of information to shareholders. On the other hand, there was tacit support for a Code of this nature to be annotated as statute.
Many commentators believe that a Code like this is superfluous and useless because of a lack of enforcement initiatives in the event there is no compliance with the Code. These parties also believe that a lack of adherence to corporate governance would not make any difference to economies or businesses. Indeed as it will further be discovered, the Cadbury Report was not one without its flaws. Issues such as directors’ remuneration, for example the ‘fat cat debate’ controversy led to the government appointing the Greenbury Committee. Greenbury Report
Following a public outcry of Cedric Brown who was the Chief Executive of British Gas being awarded a 75% increase in pay rise, the Greenbury Report on Directors’ Remuneration made a key recommendation on the constitution of the Remuneration Committee. It was stipulated that the Remuneration Committee should consist of entirely NEDs with no personal interests and no potential conflict of interest from cross directorship. The Cadbury disclosure of directors’ remuneration was in Greenbury extended. The requirements of such remuneration must be practised on a full transparency nature.
This would entail giving full details of each director’s pay package with non-mandatory recommendations regarding the said directors service contracts, bonuses and share options. It becomes quite clear to us that the Code like Cadbury’s may not be at all sufficiently equipped to capture all aspects of corporate governance. Hampel Report To this end, Sir Ronald Hampel was appointed as part of the Hampel Committee to review corporate governance as a whole whilst taking into account the workings of the Cadbury and Greenbury’s Report.
It may be said that the Hampel Report in some ways hasten the onslaught of the Combined Code of corporate governance in recognition of the shortcomings of the system. Combined Code The Combined Code on corporate governance is a set of principles of good governance and the code of best practice which are appended to but do not form part of the Listing Rules. In a nutshell, the Combined Code is effectively a consolidation of the work of the three committees and reports described. The contents of the Combined Code on corporate governance comprises two sections.
First, issues relating to the board of directors and relation with shareholders and secondly, it contains principles and provisions applicable to institutional shareholders. By way of example, Paragraph 12. 43A of the Listing Rules makes it incumbent for all listed companies incorporated in UK to include certain narrative statements in their annual report and accounts. On the assumption that the company does not comply with such a requirement, it merely needs to give reasons for such non compliance. Paragraph 12.
43(c) of the Listing Rules also requires companies to report to directors on directors’ remuneration especially related to giving details of the company. It is the overall intention of the Combined Code and the Listing Rules reporting requirements that the Cadbury Code of Best Practice should be used together to result in higher standards of corporate governance. It is also noted however that the Code does not form part of the Listing Rules. It is merely the reporting requirements that are mandatory. White Paper
In the Government’s White Paper of July 2002, the recommendation made by the CLRSG include i) the enlightened shareholder value approach and ii) the annual report from the directors titled Business Review as per s. 417 of the CA 2006. These recommendations by the Government are apt and should be taken as a means of moving forward. It is clear at this point of time that corporate governance is no longer a concept that academicians would argue about. It is now a very vital part of the commercial sphere.
This could also be a revelation to Government’s multilateral institutions, banks and corporations that the cause of corporate downfall lay in microeconomics specifics. A quick review of corporate scandals such as the collapse of BCCI and the Robert Maxwell corporation indicate ineffective systems of management. Other factors include a blatant disregard of the importance and integrity of director’s fiduciary duties, weak disclosure and transparency guidelines and enforceability and poor auditing and accounting standards inter alia.
Up until this point of time, the general public have come to accept self-regulatory nature of corporate governance. Although it cannot be said that the self-regulating codes have completely eradicated all problems facing corporate governance, some measure of marked improvement have been recorded. Higgs review However, the crisis in relation to NEDs arose once more in 2002 after the collapse of accounting giant Arthur Anderson following irregular accounting procedures for their client Enron.
The Enron scandal affected the business world globally and was one of the factors leading to the creation of the Sarbanes-Oxley Act 2002 in the US. The Higgs review in the UK commenced an independent review of NEDs to strengthen the quality in the UK. Their key recommendations were that half the board of directors should be NEDs. NEDs’ roles were to cover areas relating to strategy, performance, risk and people. The Higgs review was also the first one to identify a test of independence for NEDs.
These recommendations were implemented by the London Stock Exchange through the Combined Code. Although many companies did not react favourably to the emphasis given to NEDs, there were some identifiable strengths from the Higgs review, namely that it provided detailed guidance on the role of NEDs. However, the independence of these NEDs were determined by the board without external scrutiny. Walker Report A collapse of the global financial system in 2008 further illustrates to us that it is perhaps time to consider a change of the self-regulating mechanism.
Several banking institutions in the UK collapsed and had to be ‘rescued’ by the government thereof. Not surprisingly, corporate governance issues came to the fall. In 2009, Sir David Walker was commissioned to form a committee to review corporate governance in UK bank. It is noted once more that the issue of NEDs was recurrent here. The Walker Report further cited poor risk management, dangerous speculation and no proper stewardship as reasons for the 2008’s collapses.
Although the Walker Report was centred significantly on corporate governance in relation to banks, the recommendations made in therefore could very well spread to other industries. Conclusion The illustration in the above paragraphs makes it clear to us that the role of self-regulation should not be underestimated. The Combined Code on corporate governance has proven to be of significance in the area of corporate governance. It can be said that it has existed side by side with legal provisions on management of the company and the regulation of directors’ duties and conduct.
Although the contents of the Code may have its flaws as indicated by reports following after that to address these flaws, even if its provisions do not form ‘hard’ law, there is still strong support of opinion that regard the Code as ‘soft’ law or customary law that cannot be ignored by corporations. Whether or not corporations would ultimately benefit from a codification of the Code would very much depend on the ability of a new corporate governance Act or statute to ensure effective and better practices in the UK.