Cadbury Report,

1992

Submitted By:
Sourabh Kumar
(4121029)
Introduction
• The Cadbury Report, titled Financial Aspects of Corporate
Governance, is a report issued on by "The Committee on
the Financial Aspects of Corporate Governance" chaired
by Adrian Cadbury .
• The report was published in draft version in May 1992. Its
revised and final version was issued in December 1992.
• It was formed by the Financial Reporting Council, the
London Stock of Exchange and the accountancy
profession, with the main aim of addressing the financial
aspects of Corporate Governance.
 History
• A series of risky acquisitions in the mid-eighties had led Maxwell
Communications into high debts, which was being financed by diverting
resources from the pension funds of his companies., while £440 millions
were missing from the company's pension funds. Despite the suspicion of
manipulation of the pension schemes, there was a widespread feeling in
the City of London that no action was taken by UK or US regulators against
the Maxwell Communications Corp. Eventually, in 1992 Maxwell's
companies filed for bankruptcy protection in the UK and US.
• At around the same time the Bank of Credit and Commerce International
(BCCI) went bust and lost billions of dollars for its depositors, shareholders
and employees. Another company, Polly Peck, reported healthy profits one
year while declaring bankruptcy the next. Following the raft of governance
failures, Sir Adrian Cadbury chaired a committee whose aims were to
investigate the British corporate governance system and to suggest
improvements restore investor confidence in the system.
Objectives
• (i) Uplift the low level of confidence both in financial
reporting and in the ability of auditors to provide the
safeguards which the users of company's reports sought
and expected;
• (ii) review the structure, rights and roles of board of
directors, shareholders and auditors by making them more
effective and accountable;
• (iii) address various aspects of accountancy profession and
make appropriate recommendations, wherever necessary;
• (iv) raise the standard of corporate governance; etc.
 Cadbury Report
• focus on three areas :
1)Board of Directors: Reviewing the structure and
responsibilities of Boards of Directors and
recommending a Code of Best Practice.
2)Auditing: Considering the role of Auditors and
addressing a number of recommendations to the
Accountancy Profession.
3)Shareholders: Dealing with the Rights and
Responsibilities of Shareholders.
 The Code of Best Practice
Segregated into four sections:
• Board of Directors - The board should meet
regularly, retain full and effective control over the
company and monitor the executive management.
• Non-Executive Directors -The non-executive
directors should bring an independent judgement
to bear on issues of strategy, performance,
resources, including key appointments, and
standards of conduct.
 Cont’d
• Executive Directors - There should be full and clear
disclosure of directors’ total emoluments and those of the
chairman and highest-paid directors, including pension
contributions and stock options, in the company's annual
report.

• Financial Reporting and Controls - It is the duty of the

board to present a balanced and understandable
assessment of their company’s position, in reporting of
financial statements, for providing true and fair picture of
financial reporting.
 Recommendation for BOD
• The board should meet regularly, retain full and effective control
over the company and monitor the executive management.
• The boards of all listed companies should comply with the Code of
Best Practice. All listed companies should make a statement about
their compliance with the Code in their report and accounts as well
as give reasons for any areas of non-compliance.
• There should be a clearly accepted division of responsibilities at the
head of a company, which will ensure a balance of power and
authority.
Chairman and CEO – The roles to be separated
Chairman – Head of the Board and
CEO- Head of the Company Management
Cont’d
• The board should include non-executive directors of
sufficient caliber and number for their views to carry
significant weight in the board’s decisions.
• The board should have a formal schedule of matters
specifically reserved to it for decision to ensure that the
direction and control of the company is firmly in its hands.
• 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.
Cont’d
• All directors should have access to the advice
and services of the company secretary, who is
responsible to the Board for ensuring that
board procedures are followed and that
applicable rules and regulations are complied
with.
 Recommendation for Non Executive
• Non-executive directors should bring an
independent judgment to bear on issues of strategy,
performance, resources, including key
appointments, and standards of conduct.
• The majority of non-executive directors should be
independent of management and free from any
business or other relationship which could
materially interfere with the exercise of their
independent judgment, apart from their fees and
shareholding.
Cont’d
• Non-executive directors should be appointed
for specified terms and reappointment should
not be automatic.
• Non-executive directors should be selected
through a formal process and both this
process and their appointment should be a
matter for the board as a whole.
Recommendation for executive directors

• Directors’ service contracts should not exceed three years

without shareholders’ approval.
• There should be full and clear disclosure of directors’ total
emoluments and those of the chairman and highest-paid
directors, including pension contributions and stock
options, in the company's annual report, including
separate figures for salary and performance-related pay.
• Executive directors’ pay should be subject to the
recommendations of a remuneration committee made up
wholly or mainly of non-executive directors.
Recommendation for reporting and
controls
• It is the board’s duty to present a balanced and
assessment of the company’s position.
• The board should ensure that an objective and
professional relationship is maintained with the
auditors.
• The board should establish an audit committee
of at least three non - executive directors with
written terms of reference which deal clearly
with its authority and duties.
Cont’d
• The directors should explain their responsibility
for preparing the accounts next to a statement by
the auditors about their reporting responsibilities.
• The directors should report on the effectiveness
of the company’s system of internal control.
• The directors should report that the business is a
going concern, with supporting assumptions or
qualifications as necessary.
 Recommendation for Auditors
• Every listed company should form an audit
committee which gives the auditors direct
access to the non-executive members of the
board.
• The Committee further recommended for a
regular rotation of audit partners to prevent
unhealthy relationship between auditors and
the management.
 Cont’d
• It also recommended for disclosure of
payments to the auditors for non-audit
services to the company.
• Developing guidance for auditors on relevant
audit procedures and the form in which
auditors should report. However, it should
continue to improve its standards and
procedures.
 Recommendation for Shareholders
• It is encouraged that the institutional
investors/shareholders to make greater use of their
voting rights and take positive interest in the board
functioning
• Focus on corporate transparency and communication
with shareholders.
• Both shareholders and boards of directors should
consider how the effectiveness of general meetings
could be increased as well as how to strengthen the
accountability of boards of directors to shareholders.
 Reference
• Cadbury report on 1992
• Scribd.com
• http://business.gov.in/corporate_governance/
cadbury_report.php
Thank You