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Corporate Governance in the UK & Ireland – Cadbury
The Corporate Governance intention is to facilitate effective, entrepreneurial and prudent management that will deliver the long-term success of an organisation.
The Cadbury committee created the first version of the UK Corporate Governance Code in 1992 as a result of numerous accounting scandals in the 1980s and 1990s (Mirror Group, BCCI, and PollyPeck). The main parts of the code were:
- The wider use of non-executive directors, with independent of management and free from any business which could materially interfere with the exercise of independent judgement, except their fees and shareholding
- Introduction of audit committee of the board with independent members
- Different responsibilities between Charmian and chief executive
- Use of remuneration committee of the board to monitor executive rewords
- Introduction of nomination committee with independent directors to propose new board members
- Reporting publicly that the Corporate Governance Code has been complied and explain if it hasn’t (Tricker, 2012)
The Cadbury report paragraph is still the classic definition of the context of the Code:
“Corporate Governance is the system by which the 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 structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to regulations, laws and the shareholder in the general meetings” (Frc.org.uk, 2015)
There were few critics about Cadbury Report saying that the report went too far. The importance of non-executive directors would introduce the controls of European two tier supervisory board.
The Cadbury Report had a significant influence around the world, other countries followed their own reports on corporate governance. (Tricker, 2012)
In 1995, the Greenbury report included a number of principles regarding remuneration of executive directors. The Cadbury and Greenbury reports were brought together on the Hampel report in 1998 to form the first Combined Code. Following this, in 1999 Turnbull formed a report related to risk management and internal control. In 2002 the Higgs report “Review of the role and effectiveness of non-executive directors” was appointed to produce a single comprehensive code, which was refined by the Financial Reporting Council to produce the Combined Code. (Media, 2012)
The Combined Code was reviewed and changed in 2005 and 2007. Due to the financial crisis in 2008 the Financial Reporting Council undertook an extensive review in 2009 and the revised code, UK Corporate Governance Code, was published in 2010. The code applies to financial years beginning on or after 29th of June 2010.
The major reason for corporate governance failings was a lack of interaction between the boards of listed companies and shareholders. The Financial Reporting Council deemed it necessary to also publish a UK Stewardship Code in July 2010, which provides guidance on good practice for investors and separates out the principles and provisions relevant to institutional shareholders.
In December 2010, the Financial Reporting Council published the “Guidance on Audit Committees” intended to assist company boards in making suitable arrangements for their audit committees and to help company boards to implement the relevant requirements of the UK Corporate Governance Code.
The new Code applies to accounting periods beginning on or after 1st October 2012 and applies to all companies with a premium listing of equity shares regardless of whether they are incorporated in the UK or not. (Media, 2012)
In Ireland the Irish Stock Exchange requires Irish listed companies to comply with the UK Corporate Governance Code starting from 30 September 2010. Irish Stock Exchange also requires the listed companies in Ireland to comply or explain against additional corporate governance provisions of the UK Corporate Governance Code.
The main Principles of the UK Corporate Governance Code
The Corporate Governance Code in the UK is produced by the Financial Reporting Council and sets out standards of good practice of board leadership and effectiveness, accountability, remuneration and relation with shareholders. The Code has been updated last time in September 2012 and applies to accounting periods beginnings on or after 1st of October 2012.
All companies in the UK with Premium Listing of equity shares must report on how they have applied the Code in their annual report and accounts (including companies incorporated outside UK).
The Code covers broad principles and more specific provisions. Listed companies have to report on how they applied the principles and to confirm that they have applied the provisions or, in case they didn’t, to provide an explanation. The reason for not complying should be clearly and fully explained to the shareholders. Any explanation should include details on how actual practices are consistent with the overall principle to which provision relates. (Media, 2012)
All companies should have an effective board, which is responsible for the success of the company in a long-term period.
The responsibilities should be clearly devided at the head of the company between the board and the executive.
The Chairman is responsible for the leadership of the board and ensuring the company’ effectiveness.
Non-executive directors should positively challenge and help development proposals on strategy.
The board and its committees should have appropriate balance of skills, experience, knowledge and independence of the company. This will help them to discharge their responsibilities and duties effectively.
All directors have to be submitted for re-election on regular basis, depending on their continued satisfactory performance.
The board should be provided with information in a timely manner in a form and of an appropriate quality to enable it to discharge its duties.
The directors should allocate necessary time to the company to discharge their responsibilities effectively.
The board should agree to a formal and rigorous annual evaluation of its own performance and of its committee and individual directors.
All directors should receive induction when joining the board and should update and refresh their skills and knowledge regularly.
Accountability: internal control, audit committee and external auditors
Corporate Governance requires effective systems of internal control. The shareholders expect that risk company faces is managed properly and put the controls in place to deal with such risk.
The Code requires that the board monitors the company’s risk management and internal control systems at least annually, to carry out a review of their effectiveness and report on that review in the annual report.
Companies that comply with UK Corporate Governance Code should have a properly constituted Audit Committee which acts independently of the executive to ensure that the interest of the shareholders in relation to financial reporting and internal control are properly protected. (Charteredaccountants.ie, 2015)
The board should establish formal and transparent provisions and consider how they should apply the corporate reporting, the risk management, internal control principles, and maintain an appropriate relationship with the company’s auditor.
The board should present an understandable and balanced assessment of the company’s position and prospects.
Also, the board is responsible to determine the nature and extent of the significant risk the company is exposed in achieving its strategic objectives. To avoid this the board should maintain rigorous risk management and internal controls systems.
All companies should have a formal and transparent procedure for delivering policy on executive remuneration and also to fix the remuneration packages of individual directors. The directors should not be involved in deciding his/her remuneration.
The remuneration packages should be sufficient to motivate directors to run the company successfully, but not to pay more than is necessary for this purpose. The remuneration should be structured to link rewards to corporate and individual performance.
Relation with shareholders
The board should use the Annual General Meeting to link with investors and to encourage their participation.
Also, there should be a communication with shareholders based on the common understanding of objectives. The board has the responsibility to ensure that a satisfactory dialogue with shareholders takes place. (Media, 2012)
Media, B. (2012). ACCA F8 - Audit and Assurance (GBR) - Study Text 2013. London: BPP Learning Media.
Frc.org.uk, (2015). Financial Reporting Council. [online] Available at: http://www.frc.org.uk [Accessed 29 Jan. 2015].
Tricker, R. (2012). Corporate governance. Oxford: Oxford University Press.
Charteredaccountants.ie,. (2015). Audit Committees - Chartered Accountants Ireland. Retrieved 29 January 2015, from http://www.charteredaccountants.ie/en/Members/Technical/Corporate-Governance/Audit-Committees/