United Kingdom Major Governance Codes

United Kingdom Major Governance Codes

The Cadbury Report

            UK Cadbury committee was set up due to the lack of confidence observed in financial reporting and in the aptitude of auditors to present the assurances needed by the stakeholders of financial statements. The most important difficulties were identified in the relationship between boards of directors and auditors. Especially, the commercial stress on both auditors and directors caused stress to be brought to bear on external auditors by the board of directors and the auditors often surrender. Harms were also expected in the ability of the board of directors to direct and control their organisations.

1. Corporate governance responsibilities

The responsibilities of those people concerned with the financial Statements are presented in the Cadbury report that was published in 1992.

• The directors are accountable and responsible for the company’s corporate governance.
• The shareholders are associated to the directors through the system of financial reporting.
• The auditors present the shareholders with an external purpose check on the financial statements of directors.
• Other concerned stakeholders, generally employees (to whom the directors owe some accountability) are ultimately addressed by the financial statements.

2. Code of Best Practice

The Code of Best Practice incorporated in the Cadbury report and afterward amended by reports that were published aimed at the directors of all United Kingdom public companies, but all companies’ directors were encouraged to implement the Code. Provisions in the Cadbury report included;

                     i.            The board of directors should meet on a regular basis, retain full control over the company and monitor executive management. Certain matters such as major acquisitions or disposals of assets should be referred automatically to the board. There should be a clear division of responsibilities at the head of a company, with no one person having complete power. Generally this would mean the posts of chairman and chief executive being held by different people.

                   ii.            The report sees non-executive directors as important figures because of the independent judgment they bring to bear on important issues. There should be at least three non-executive directors on the board, a majority of whom should be independent of management.

                  iii.            The report contains provisions about the length of directors' service contracts and disclosure of remuneration that are developed further in the Greenbury and Hampel reports.

                 iv.            The audit committee was soon by the Cadbury committee as a key board committee. The audit committee should liaise with internal and external auditors, and provide a forum for both to express their concerns. The committee should also review half yearly and annual statements.

                   v.            The annual report should present a balanced and understandable assessment of the company's position. The directors should explain their responsibilities for preparing accounts. Statements should also be made about the company s ability to continue as a going concern, and the effectiveness of its internal controls.

The Greenbury code

In 1995, the Greenbury committee published a code which established principles for the determination of directors' pay and detailing disclosures to be given in the annual reports and accounts. The Greenbury code went beyond the Cadbury code. The Greenbury code recommends that the remuneration committee should determine executive director’s remuneration and that this committee should be comprised solely of non-executive directors. Directors' service contracts should be limited to one year.

The Hampel report

The Hampel committee followed up in 1998 matters raised in the Cadbury and Greenbury reports, as we have seen aiming to restrict the regulatory burden on companies and substituting principles for detail whenever possible. Under Hampel:

a)      The accounts should contain a statement of how the company applies the corporate governance principles.

b)      The accounts should explain their policies, including any circumstances justifying departure for best practice.