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Sir Adrian Cadbury Committee of 1992 (A 90 page final report)

1. BCCI (Bank of Credit and Commerce International), Washington Post termed it as Bank of
Crooks and Criminals. Scandal in 1991
2. Polly Peck International which grew rapidly and became listed in FTSE 100 and collapsed in
1991 with 1.3 billion pounds debt leading to the flight of its CEO
3. Maxwell Group Publishing company scandal in 1991

After these series of CG failure in UK, The Committee was set up in May 1991 by the Financial
Reporting Council, the London Stock Exchange and the accountancy profession to address the
financial aspects of corporate governance.

Profile of Adrian Cadbury-

Descendent of the Cadbury family, the family behind Cadbury (Mondelez)

Director of IBM UK
Director of Confederation of British Industry (CBI)
Director of the Bank Of England
Deputy Chairman, Chairman and Managing Director of Cadbury Schweppes


The board should meet regularly and assess their control and the company and monitor the
executive management performance

Non-executive directors should play the major role in any company and should consist the major
part of the committee setup for various activities. If possible, they should be chairing the committee

The majority should be independent of management and free from any business or other
relationship which could materially interfere with the exercise of their independent judgement.
Apart from their fees and shareholding. Their fees should reflect the time which they commit to the

Professional advice should be sought in a proper formal procedure and should be documented in a
proper format. The expense should be borne by the company

Director’s Training – readily available courses for first time directors, internal or external trainings

Appointment of committees like remuneration, nomination and audit –

Nomination: Should have a majority of non-executive directors and should be chaired by chairman
or non-exec director
Audit: Minimum of 3 members and membership exclusive to non-exec directors. Should meet a
minimum of twice a year. Making recommendations regarding the appointment of external auditor,
fees, review of financial statements, management letter. Appointment of Internal Auditors as
complementary to external auditors. External audit firms should not provide any other service to the
audit clients as it might lead to conflict of interest
Remuneration: Openness of the director’s remuneration to the shareholders. Separate figures for
their salary, performance related pay and criteria of performance evaluation, stock options, and
future contract extensions. Contract length should not exceed 3 years without shareholders’

The Company Secretary has to be appointed to guide the board so that they meet all the laid out
government regulations. A person deemed to be worthy by the entire board of directors has to be
appointed ideally. All directors should have equal access to the Company Secretary’s advice

Financial Reports Recommendations:

One major problem is same figures can be published in different ways leading to different results by
using different accounting treatments to make the results impressive to investors, analysts

Listen companies should publish annual, half-yearly reports to keep the shareholders up to date of
what’s happening with the company. Apart from this interim reports should be published to keep
the investors up to date. No need to publish quarterly reports as it is a tedious work for the company
and only adds up additional cost to the companies.

Shorter and simplified reports of the same reports should be published alongside the full reports for
easier reading of the share holders

Audit should be quarantined from the other functions of the company and the management

Rotation of auditors should be made mandatory

Company management should specify that they accept the principle of going concern and the
auditors should give their views on how they expect it to happen in the future

Fraud should be reported by auditors to the senior management of the company and if the auditors
doesn’t have confidence in the senior management then the fraud should be reported to the
authorities like CBI and ASB or any other professional bodies


No system of corporate governance can be totally proof against fraud or incompetence. The test is
how far such aberrations can be discouraged and how quickly they can be brought to light. The risks
can be reduced by making the participants in the governance process as effectively accountable as
possible. The key safeguards are properly constituted boards, separation of the functions of
chairman and of chief executive, audit committees, vigilant shareholders and financial reporting and
auditing systems which provide full and timely disclosure.

Update: The current corporate governance code that’s in force in UK is ‘The UK Corporate
Governance Code’ which is built upon the foundations of The Cadbury Committee with some
changes made which are apt to the present day. It came into force from 1st January 2019

Sarbanes-Oxley Act of 2002 (A 66 page final document)

Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or expanded
requirements for all U.S. public company boards, management and public accounting firms.

Paul Sarbanes – a former politician and a graduate of Princeton University and Harvard Law School
Mike Oxley – a former politician and ex-FBI employee
The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate
and accounting scandals, including Enron and WorldCom.

The SOX Act is very vast and the following are the major highlights and most of these are similar to
Cadbury Committee recommendations


1. PCAOB: Established a non-profit, quasi-public organization for overseeing public company

audit reports, Public Company Accounting Oversight Board (PCAOB)
2. Auditor Independence: Minimum standards for auditors, time, rotation, reporting
requirements, conflict of interest situations
3. Corporate Responsibility: Accountability of the board in disclosing the financial reports and
its completeness
4. White Collar crimes penalty
5. Frauds accountability
6. Whistle blower protection
7. Annual reports and accounting disclosures

Three of its key provisions and sections are:

Section 302: It mandates that senior corporate officers personally certify in writing that the
company's financial statements "comply with SEC disclosure requirements and fairly present in all
material aspects the operations and financial condition of the issuer." Officers who sign off on
financial statements that they know to be inaccurate are subject to criminal penalties, including
prison terms.

Section 404 of the SOX Act of 2002 requires that management and auditors establish internal
controls and reporting methods to ensure the adequacy of those controls. Some critics of the law
have complained that the requirements in Section 404 can have a negative impact on publicly traded
companies because it's often expensive to establish and maintain the necessary internal controls.

Section 802 of the SOX Act of 2002 contains the three rules that affect recordkeeping. The first deals
with destruction and falsification of records. The second strictly defines the retention period for
storing records. The third rule outlines the specific business records that companies need to store,
which includes electronic communications.


Although SOX is widely accepted and praised to be extremely effective in detecting and preventing
potential corporate frauds it is also heavily criticized for over burdening the companies with
unnecessary internal controls which delay decision making process making the companies
ineffective and adds unnecessary costs increasing the operational expenses of the companies. But
still, many of the auditors like the Big4 strongly support the implementation of SOX Act after it
caused the downfall of their sibling Arthur Anderson

Kumar Mangalam Birla Committee of 1999 (A 28 page final report)

Kumar Mangalam Birla
MBA from London Business School
Qualified Chartered Accountant from ICAI
Chairman of Aditya Birla Group
Chairman of Vodafone Idea Limited
Chairman of IIM-Ahmedabad
Served as the Chairman of IIT-Delhi Board of Governors


The committee has identified three key constituents of corporate governance as the Shareholders,
the Board of Directors and the Management

a. To suggest suitable amendments to the listing agreement executed by the stock exchanges with
the companies and any other measures to improve the standards of corporate governance in the
listed companies, in areas such as continuous disclosure of material information, both financial and
non-financial, manner and frequency of such disclosures, responsibilities of independent and outside

b. To draft a code of corporate best practices; and

c. To suggest safeguards to be instituted within the companies to deal with insider information and
insider trading.


Mandatory and Non-mandatory recommendations.

Those recommendations which are absolutely essential for corporate governance, can be defined
with precision and which can be enforced through the amendment of the listing agreement could be
classified as mandatory. Others, which are either desirable or which may require change of laws,
may, for the time being, be classified as non-mandatory.

Recommendations are applicable to all the listed public and private companies and it can be
implemented in phases with the major companies implementing the recommendations first and
then slowly passed onto the smaller companies.

 Till now, it has been the practice by Indian companies to fill the board with representatives
of the promoters and also independent directors we handpicked making them powerless.
Now, it has changed drastically in the following manner:
Promoter Director, Executive Directors, Non-executive Director and Independent Directors,
Nominee Directors
 Among the non-executive directors are independent directors. The term Independent
Directors is defined as follows, "Independent directors are directors who apart from
receiving director’s remuneration do not have any other material pecuniary relationship or
transactions with the company, its promoters, its management or its subsidiaries, which in
the judgement of the board may affect their independence of judgement
 The Committee is also of the view that it is important that adequate compensation package
be given to the non-executive independent directors so that these positions become
sufficiently financially attractive to attract talent and that the non-executive directors are
sufficiently compensated for undertaking this work.
 The Committee recommends that the board of a company have an optimum combination of
executive and non-executive directors with not less than fifty percent of the board
comprising the non-executive directors. The number of independent directors
(independence being as defined in the foregoing paragraph) would depend on the nature of
the chairman of the board. In case a company has a non-executive chairman, at least one-
third of board should comprise of independent directors and in case a company has an
executive chairman, at least half of board should be independent. This is a mandatory
 The nominees of the financial institutions or banks are often chosen from among the
present or retired employees of the institutions or from outside
 The Chairman is responsible for board meetings to be conducted in a fair and transparent
manner and everyone in the board contributes to the wellbeing of the company and every
director receives equal and fair treatment. The role of Chairman is different from the role of
CEO but the same individual can hold both the offices
 A separate audit committee should be setup for overseeing the company’s financial reports.
The Board, internal auditors and external auditors form the three legged stool of any
company’s financial reports
 Composition of audit committee: Minimum 3 members, all being non-executive directors
with majority being independent director and the chairman should be an independent
director. The committee should meet at least thrice a year with one necessary meeting for
every 6 months
 All other recommendations of audit committee and remuneration committee are similar to
the recommendations of the Cadbury Committee
 Complete transparency should be maintained in terms of compensation of the directors
 One important recommendation is that, disclosures must be made by the Management to
the Board of Directors relating to any financial or personal interests of the management that
might have conflict of interests with the company


There are several corporate governance structures available in the developed world but there is no
one structure, which can be singled out as being better than the others. There is no "one size fits all"
structure for corporate governance. The Committee’s recommendations are not therefore based on
any one model but are designed for the Indian environment. Corporate governance extends beyond
corporate law. Its fundamental objective is not mere fulfillment of the requirements of law but in
ensuring commitment of the board in managing the company in a transparent manner for
maximising long term shareholder value. The corporate governance has as many votaries as

Suggested List of Items to Be Included In ‘The Report on Corporate Governance in the Annual Report
of Companies’

1. A brief statement on company’s philosophy on code of governance

2. Board of Directors

3. Audit Committee

4. Remuneration Committee

5. Shareholders Committee

6. General Body meetings

7. Disclosures

8. Means of communication

9. General Shareholder information