1

Corporate Governance.
The Laws
Cadbury Report – UK - 1992
 2

Topics
Code of Best Practice

Based upon the principles of openness, integrity and accountability

“Corporate governance is the system by which companies are

directed and controlled. Boards of directors are responsible for the
governance of their companies. The shareholders’ role in
governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance is in place”
It started the Rules vs. Principles debate

Cadbury Report and Code looked beyond the financial control

Director responsibilities, behaviour, duties, independence

Disclosures
 3

Topics
Compensation practices

Split the chairman-chief executive roles

Strengthen the audit committee by ensuring that only

independent directors serve on it
Ensure that independent directors have access to
external legal advice paid for by the company
Highlight the importance of skills and competence for
the chairman, the company secretary and the
independent directors
 4

The Cadbury Report

 5

Corporate Governance.
The Laws
The Hempel Report aka Combined Code – UK - 1998
 6

Hempel Code aka Combined Code

Code of Best Practice

Revises and combines the Cadbury and Greenbury report

Remunerations committees

It encouraged more interactions between institutional investors and companies

It required that all but the smallest companies to set up a nominating committee to
oversee appointments to the board.
Companies should have a formal remuneration committee, made up of fully
independent non-executive directors, which make recommendations on remuneration
Boards should maintain a “balance” between independent non-executive directors and
executive directors, specifically independent directors should make up at lest 1/3 of
the board membership
Attendance at shareholder meetings by the chairmen of the board committees
(remuneration, audit and nominating)
 7

Corporate Governance.
The Laws
The Turnbull Report– UK - 1999
 8

Topics
Code of Best Practice

Guidance on the review of internal control and risks

including use of audit committees and internal audit
Boards should report annually on their risk assessment
and decision-making processes or explain why they had
not reported
 9

Corporate Governance.
The Laws
The Myners Report– UK - 2001
 10

The Myners Report

Code of Best Practice

Quality of fund trustees, voting shares held, reporting

transaction expenses and performance reporting
Myners proposed that there were 3 ways of achieving
skilled trustee decision making:
1. Recruit professional trustees
2. Delegate authority for decision-making to a competent
third party
3. Improve the ability of the trustees to make effective
decisions
 11

Corporate Governance.
The Laws
Enterprise Act – UK - 2002
 12

Topics
New criminal offence for individual engaged in hard-
core cartel activity
A new power granted to Office of Fair Trading to ask the
High Court for directors to be disqualified from serving
as a director for up to 15 years for competition offences
Consumer bodies will now have the ability to make
complaints as a representative body to the Office of
Fair Trading
Corporate manslaughter
 13

Corporate Governance.
The Laws
The Smith Report– UK - 2003
 14

The Smith Report

Review of the role and effectiveness of non-executive directors

Code of Best Practice

A chief executive should not become a chairman of the same company

Non-executive directors should meet at least once a year without the chairman
or executive directors present
It highlighted that the pool of director candidates was too restricted

A non-executive director should serve no more than 2-3 year terms

Whistle blowing

“The primary role of audit committee is to ensure the integrity of financial

reporting and the audit process by ensuring that the external auditor is
independent and objective and does a through job and by fostering a culture
and expectation of effective oversight”
 15

Corporate Governance.
The Laws
The New Combined Code – UK - 2003
 16

Topics
The principal differences from the previous code were:
 Compensation practices (from Greenbury and Cadbury)
 Board Balance
 At least, half the member of the board should be independent non-executive
directors, with an exception for smaller companies
 Listed companies need include only 2 such independent non-executive directors
 Chairman and the chief executive
 The role are split
 New definitions were provided for the role of the non-executive director
 A senior independent director should be available to receive shareholders’
concerns
 Appointment and tenure
 The nomination committee should consist of a majority of independent non-
executive directors
 17

Corporate Governance.
The Laws
Treadway /COSO Report – US - 1987
 18

Topics
Code of Best Practice

It is considered the “grandfather” of contemporary

corporate governance reform efforts
COSO has continued to promote improved quality of financial
reporting through “business ethics, effective internal control
and corporate governance
It was focused on improving internal financial control

 “Risk Assessment is the identification and analysis by

management, non internal audit, of the relevant risks threatening
achievement of an organisation’s intended objectives”
 19

Treadway
Treadway concluded that 3 objectives of internal financial
control are to ensure:
1. Efficient and effective operations
2. Accurate financial reporting
3. Compliance with the laws and regulations

 The report set out the components needed to achieve an

effective internal control system
 Control environment
 Risk assessment
 Control activities
 Information and communication
 Monitoring
 20

Corporate Governance.
The Laws
Sarbanes–Oxley Act - US - 2002
 21

Topics
The audit committee of US-listed companies must have a committee member who is a
financial expert, which is defined by the SEC as a person who has the following
attributes:
 An understanding of generally accepted accounting principles
 Understanding of internal controls and financial reporting
 An understanding of audit committee functions
 Ability to connect such a principles with the accounting for estimates, accruals and reserves

It is advisable to meet good practice standards in any company, whether listed or
privately owned
It requires that chief executives and chief financial officers to certify the adequacy of
their internal controls
Outside auditors must attest to that opinion

Independent directors on the board must verify the capability of the auditor to form
that opinion
There were mandates from regulators such as SEC and Exchange Commission about
disclosure of transactions with affiliates and executives
 22

More Topic of SarBOX

Establish public company accounting oversight board

Auditor independence

Corporate responsibility

Enhanced financial disclosures

Analyst conflict of interest

Commission resource and authority

Studies commissioned

Corporate and financial fraud accountability

White – collar crime penalty enhanced

Corporate tax returns

Corporate fraud and accountability