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The Cadbury Report on Corporate Governance

The Cadbury Report on Corporate Governance

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Published by Harsheel Shah

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Published by: Harsheel Shah on Mar 19, 2012
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THE CADBURY REPORT ON CORPORATE GOVERNANCE

Introduction:
The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a board committee chaired by Adrian Cadbury that gives out recommendations on the arrangement of company boards and accounting systems to relieve corporate governance risks and failures. The report was published in December, 1992. The establishment of the committee was made in May, 1991 by the Financial Reporting Council, the London Stock Exchange. The report's recommendations have been adopted in varying degree by the European Union, the United States, the World Bank, and others.

The Cadbury Committee:
Sir Adrian Cadbury Ian Butler Jim Butler Jonathan Charkham Hugh Collum Sir Ron Dearing Andrew Likierman Nigel Macdonald Mike Sandland Mark Sheldon Sir Andrew Hugh Smith Sir Dermot de Trafford

Origin of the Report:
The need arose for the Committee's creation was an increasing lack of investor confidence in the honesty and accountability of listed companies, occasioned in particular by the sudden financial collapses of two big companies, Wallpaper group Coloroll and Asil Nadir's Polly Peck Consortium: neither of these sudden failures was at all foreshadowed in their apparently healthy published accounts. Even as the Committee was getting down to business, two more further scandals shook the financial world: the collapse of the Bank of Credit and Commerce International and exposure of its widespread criminal practices; and the posthumous discovery of Robert Maxwell's appropriation of £440m from his companies' pension funds as the Maxwell Group filed for bankruptcy in 1992. The shockwaves from these two incidents only increased the sense of urgency behind the Committee's work and ensured that all eyes would be on its eventual report. The effect of these multiple blows to the perceived probity and integrity of UK financial institutions was such that many feared an overly heavy-handed response, perhaps even strict

will prove more effective than a statutory code'. that the Board should appoint an Audit Committee including at least three non-executive directors. including pension contributions and stock options.  There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-paid Directors. the Cadbury Code are as follows:  that there be a clear division of responsibilities at the top. or that there be a strong independent element on the board. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained. as were proposals that shareholders have the right to directly question the Chairs of audit and remuneration committees at AGMs. that the majority of the Board be comprised of outside directors. This was not the strategy the Committee ultimately suggested. primarily that the position of Chairman of the Board be separated from that of Chief Executive. Peter Morgan. and that there be a Senior Non-Executive Director to represent shareholders' interests in the event that the positions of CEO and Chairman are combined. The central components of this voluntary code. but even then the publication of their draft report in May 1992 met with a degree of criticism and hostility by institution which believed their selves to be under attack.  Executive Directors’ pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of Non-Executive Directors. of executive directors on the one hand and of non-executives on the other.    Recommendations of the Report: The recommendations in the Cadbury Code of Best Practices are as follows:  Directors’ service contracts should not exceed three years without shareholders’ approval. Director General of the Institute of Directors. principally its belief that an approach 'based on compliance with a voluntary code coupled with disclosure. Nevertheless the broad substance of the Report remained intact. . particularly language favouring a two-tier board structure. Contents of the Report: The suggestions which met with such disfavor were considerably toned down come the publication of the final Report in December 1992. that remuneration committees for Board members be made up in the majority of nonexecutive directors and.legislation mandating certain boardroom practices. described their proposals as 'divisive'.

The Reports fits firmly into the Anglo-American corporate tradition of favouring checks and balances to the potentially heavy hand of regulation. The major legacy of the report is the widespread acceptance of the division of the roles of Chief Executive and Chairman: almost 90% of listed UK companies had separate individuals fulfilling these positions in 2007. while just over 50% of US companies did so according to a 2008 survey by the National Association of Corporate Directors.  The Board should establish an Audit Committee of at least three Non-Executive Directors’ with written terms of reference.  The Directors’ should report that the business is a going concern. which deal clearly with its authority and duties. and avoided the domination of boards and companies by individuals whose agendas all too easily went unchecked. Sir Stuart Rose at Marks and Spencers is one of the few prominent people to have recently combined the two. and thus while its recommendations were widely welcomed. and despite his stellar performance M&S shareholders voted against him continuing in both jobs by margin of almost 38% at the 2009 AGM. Reactions to the Report: Much of the initially adverse reaction to the draft of the Cadbury Report published in May 1992 was mollified by the mellowing of the language in the final report that December.  The Directors’ should report on the effectiveness of the company’s system of internal control. It is the Board’s duty to present a balanced and understandable assessment of the company’s position. This has diminished the cult of personality surrounding such figures. with supporting assumptions or qualifications as necessary. there was doubt as to how effective these provisions would prove when companies were under no obligation to enforce them. .  The Directors’ should explain their responsibility for preparing the accounts next to a statement by the Auditors about their reporting responsibilities.

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