NAME:- Deepali Nikale Roll No:- 1435 B

ADRIAN CADBURY REPORT 
The origin of the report
The Committee on the Financial Aspects of Corporate Governance, forever after known as the Cadbury Committee, was established in May 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession. The spur 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 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 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 heightened 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 legislation mandating certain boardroom practices. This was not the strategy the Committee ultimately suggested, but even so the publication of their draft report in May 1992 met with a degree of criticism and hostility by institution which believed themselves to be under attack. Peter Morgan, Director General of the Institute of Directors, described their proposals as 'divisive', particularly language favouring a two-tier board structure, of executive directors on the one hand and of non-executives on the other.

as were proposals that shareholders have the right to directly question the Chairs of audit and remuneration committees at AGMs. or that there be a strong independent element on the board. primarily that the position of Chairman of the Board be separated from that of Chief Executive. rights and role Address various aspects of accountancy profession Raise the standard of corporate governance  The contents of the Report The suggestions which met with such disfavour were considerably toned down come the publication of the final Report in December 1992. that the majority of the Board be comprised of outside 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. are: y y that there be a clear division of responsibilities at the top. Features of the report y Sir Adrian Cadbury was a visionary chairman who energetically promoted the committee recommendations y The committee reflected the main shareholders y The investigation produced the draft report followed by an extensive process of consultation y A final report was produced whose recommendations was widely accepted and adopted  Objective of the report y y y y Uplift the low level of confidence Review the structure. will prove more effective than a statutory code'. The central components of this voluntary code. the Cadbury Code. 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 Board should establish an Audit Committee of at least three Non-Executive Directors with written terms of reference.  The recommendations in the Cadbury code of best practices are:y y y y y y y y Directors¶ service contracts should not exceed three years without shareholders¶ approval. The Directors should report that the business is a going concern. and that the Board should appoint an Audit Committee including at least three non-executive directors. There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-paid Directors. including pension contributions and stock options. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained. which deal clearly with its authority and duties. Executive Directors\ pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of Non-Executive Directors. The Directors should explain their responsibility for preparing the accounts next to a statement by the Auditors about their reporting responsibilities. if all the significant risks had been reviewed and appropriate actions taken to mitigate them and why a wealth destroying event could not be anticipated and acted upon. with supporting assumptions or qualifications as necessary. Governance came to mean the extension of Directors¶ responsibility to all relevant control objectives including business risk assessment and minimizing the risk of fraud. The Directors should report on the effectiveness of the company¶s system of internal control. The shareholders are surely entitled to ask.y y that remuneration committees for Board members be made up in the majority of non-executive directors. It is the Board¶s duty to present a balanced and understandable assessment of the company¶s position. . The report created mixed feelings and with some more frauds emerging in UK.

This was not a strategy Sir Adrian relished. Firstly he declared that it was up to shareholders. there was doubt as to how effective these provisions would prove when companies were under no obligation to enforce them. This has diminished the cult of personality surrounding such figures. Sir Stuart Rose at Marks and Spencers is one of the few prominent people to have recently combined the two. The Reports fits firmly into the AngloAmerican corporate tradition of favouring checks and balances to the potentially heavy hand of regulation. Sir Adrian Cadbury had two responses to these concerns. and thus while its recommendations were widely welcomed. as the owners of these companies. When it became clear that merely reviewing the internal processes of control were not enough and. risk management had to be embodied throughout the organization.  REACTIONS TO THE CADBURY 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 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. and he voiced worries that Adrian Higgs would be unable to resist pressures for legislative solutions in his 2003 report on the role and effectiveness of non-executive directors (worries that ultimately proved unfounded). with the suggestion that if companies were not found to be complying. and despite his stellar performance M&S shareholders voted against him continuing in both jobs by margin of almost 38% at the 2009 AGM. therefore. an easy solution was found by passing on this responsibility to the internal audit.The one common denominator behind the corporate failures and frauds was the lack of effective risk management and the role of the Board of Directors. Added to this was the recommendation for a follow-up committee to evaluate implementation of the Report's findings. "it is probable that legislation and external regulation will be sought". and avoided the domination of boards and companies by individuals whose agendas all too easily went unchecked. to exert the necessary pressure toward compliance. while just over 50% of US companies did so according to a 2008 survey by the National Association of Corporate Directors. .

Without financial reporting premised on sound. To achieve this. do not use their position of knowledge and access to inside information. It is the blood that fills the veins of transparent corporate disclosure and highquality accounting practices. y Strong corporate governance is thus indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets. honest numbers.KUMAR MANGALAM REPORT  The origin of the report y It is almost a truism that the adequacy and the quality of corporate governance shape the growth and the future of any capital market and economy. Progressive firms in India have voluntarily put in place systems of good corporate governance. the corporate are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public. respond positively to them. The concept of corporate governance has been attracting public attention for quite some time in India. insiders abstain from transacting in the securities of the company. and reward such companies. to take unfair advantage over the uninformed stockholders and other investors transacting in the stock of the company. y Studies of firms in India and abroad have shown that markets and investors take notice of well managed companies. capital markets will collapse upon themselves. which include corporate insiders also. . It is important that insiders. It is the muscle that moves a viable and accessible financial reporting structure. y Another important aspect of corporate governance relates to issues of insider trading.

This will enable shareholders to know where the companies in which they have invested stand with respect to specific initiatives taken to ensure robust corporate governance. The Committee felt that under the Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful. y At the heart of the Committee's report is the set of recommendations which distinguishes the responsibilities and obligations of the boards and the management in instituting the systems for good corporate governance and restates the rights of shareholders in demanding corporate governance. the roles of the various committees of the board. The Committee also recognised that the Confederation of Indian Industries had published a Desirable Code of Corporate Governance and was encouraged to note that some of the forward looking companies have already reviewed or are in the process of reviewing their board structures and have also reported in their 199899 annual reports the extent to which they have complied with the Code. The control and reporting functions of boards. to the creation of wealth and to the country¶s economy. Companies above a particular size will be required to comply with the mandatory recommendations of the report by April 2000 and the remaining companies in the next year. the role of management. . The other way of looking at corporate governance is from the contribution of corporate governance to the efficiency of a business enterprise. all assume special significance when viewed from this perspective. For the non-mandatory recommendations the Committee felt that it would be desirable for companies to voluntarily follow these. because they are the raison for corporate governance and also the prime constituency of SEBI. y The Committee agreed that India had in place a basic system of corporate governance and SEBI has already taken a number of initiatives towards raising the existing standards. delineating the steps they have taken to comply with the recommendations of the Committee. The companies will be required to disclose separately in their annual reports. a report on corporate governance.y The Committee's recommendations look at corporate governance from the point of view of the stakeholders and in particular that of the shareholders. A large part of the recommendations are mandatory and are intended to be the listed companies for initial and continuing disclosures in a phased manner within specified dates.

as the custodian of millions of investors came out with its guidelines and Kumar Mangalam Committee recommendations became mandatory and. In India. all the listed companies were obliged to comply in accordance with the listing agreement with these Stock Exchanges. The Board should include nonexecutive Directors of sufficient caliber and number for their views to carry significant weight in the Board¶s decisions. All Directors should have access to the advice and services of the Company Secretary. The clean up of most companies has begun in a big way and the Section 49 of the SEBI Act has now almost become the hallmark of compliance in this country. who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. such that no individual has unfettered powers of decision. Objectives of the report y To enhance the shareholders value and keeping in view the interest of other stakeholders y To treat the code not as a mere structure but as the way of life y Proactive initiatives taken by the companies themselves and not in the external measures  Relating to the director the recommendations are:y y y y y y The Board should meet regularly. with a recognized senior member. the CII came out with its own views. There should be an agreed procedure for Directors in the furtherance of their duties to take independent professional advice if necessary. at the company¶s expense. The Board should have a formal schedule of matters specifically reserved to it for decisions to ensure that the direction and control of the company is firmly in its hands. Any question of the removal of Company Secretary should be a matter for the board as a whole. therefore. In companies where the Chairman is also the Chief Executive. . retain full and effective control over the company and monitor the executive management. but SEBI. which will ensure balance of power and authority. There should be a clearly accepted division of responsibilities at the head of a company. it is essential that there should be a strong and independent element of the Board.

Some of them are: y y y The Board should set up a Remuneration Committee to determine the company¶s policy on specific remuneration packages for Executive Directors. They are responsible for balance sheet compilation and clarificatory notes appearing thereto. and with at least one Director having financial and accounting knowledge. Half-yearly declaration of financial performance including summary of the significant events in the last six months should be sent to each shareholder. recognition of the leadership role of the Chairman of a company. The Audit Committee should have minimum three members. which was drafted by CII was voluntary in nature and did not produce . enforcement of accounting standards. with the majority being independent. appointment of one or more independent Directors. and to ensure that sensitive information is not tucked away in small print. The Chairman of the Audit Committee should be an independent Director. The Board of a company should set up a qualified and an independent Audit Committee.  Apart from these. One may also be aware that the desirable code of Corporate Governance. The Committee also recommended a few provisions. the Kumar Mangalam Committee also made some recommendations that are nonmandatory in nature. Some of the mandatory recommendations are. It will be interesting to note that Kumar Mangalam Committee while drafting its recommendations was faced with the dilemma of statutory v/s voluntary compliance. and so on. which are non-mandatory. This will enable him to discharge the responsibilities effectively. y y The Board of a company should have an optimum combination of executive and non-executive Directors with not less than 50% of the Board comprising the nonexecutive Directors. Non-executive chairman should be entitled to maintain a chairman¶s office at the company¶s expense.The mandatory recommendations of the Kumar Mangalam Committee include the constitution of Audit Committee and Remuneration Committee in all listed companies. the obligation to make more disclosures in annual financial reports. effective use of the power and influence of institutional shareholders. all being nonexecutive Directors.

It is in this context that the Kumar Mangalam Committee felt that under the Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful. In addition to these. such as the Companies Act for their enforcement. and y independent risk management and audit functions. it is important that the key personnel are fit and proper for their jobs (this criterion also extends to selection of Directors). SEBI has given effect to the Kumar Managlam Committee¶s recommendations by a direction to all the Stock Exchanges to amend their listing agreement with various companies in accordance with the µmandatory\ part of the recommendations. This led the Committee to decide between mandatory and non-mandatory provisions. For ensuring good corporate governance in a banking organization the importance of overseeing the various aspects of the corporate functioning needs to be properly understood. The Committee felt that some of the recommendations are absolutely essential for the framework of Corporate Governance and virtually from its code. Besides.  Implementation of the recommendations of Birla committee By introduction of clause 49 in the listing agreement with stock exchanges . the Committee settled for two classes of recommendations. y oversight by individuals not involved in the day-today running of the various business areas. appreciated and implemented. some of the recommendations needed change of statute. while others could be considered as desirable.the expected improvement in Corporate Governance. There are four important forms of oversight that should be included in the organizational structure of any bank in order to ensure the appropriate checks and balances: y oversight by the board of directors or supervisory board. y direct line supervision of different business areas. Faced with this difficulty.

in case of full time chairman.Provisions of clause 49  composition of board . review of internal control systems and its adequacy Requirements of clause 49  Remuneration of directors ± remuneration of non-executive directors to be decided by the board. responsible for review of financial performance 0n half yearly/annually basis. finance director and internal audit head to be special invitees and minimum 3 meetings to be convened. director not to be member of more than 10 committees and chairman of more than 5 committees across all companies  Management discussion & analysis report ± should include:  industry structure & developments  opportunities & threats  segment wise or product wise performance . 50% non-executive directors and 50% executive directors  constitution of audit committee ± with 3 independent directors with chairman having sound financial background. details of remuneration package. appointment/ removal/remuneration of auditors. stock options. performance incentives of directors to be disclosed  Board procedures ± atleast 4 meetings in a year.

minimum 2 meetings in a year  report on corporate governance and certificate from auditors on compliance of provisions of corporate governance as per clause 49 in the listing agreement .     Outlook Risks & concerns Internal control systems & its adequacy Discussion on financial performance Disclosure by directors on material financial and commercial transactions with the company  shareholders¶/investors grievance committee under the chairmanship of independent director.