Corporate governance is a set of rules and regulations for the companies that how companies should be run and managed. It is a model by which board of directors ensures accountability and transparency to the stakeholders of the company. It gives a process for solving the issues like conflict of interests of stakeholders in accordance with their responsibility in the company. Corporate governance provides a system of fair management and proper control where authority and responsibility are with separate departments and it can be called as a system of checks and balances.
A number of corporate scandals which took place in 1980s made the world think about how companies should be regulated to avoid such unethical activities. The history of corporate governance revolves around the scandals of US companies. Big Scandals which occurred due to the unethical and inadequate behavior in the companies. Thus, the formation of corporate governance first started in United States of America. Further, this system of corporate governance was introduced in United Kingdom with the Cadbury Report in 1992.
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The report was the result of corporate collapses such as BCCI Bank and Robert Maxwell pension funds scandal in 1991. DEVELOPMENT OF CORPORATE GOVERNANCE IN UK A committee “Financial Aspect of Corporate Governance Committee” chaired by Adrian Cadbury was formed to give suggestions for making the financial reporting system more transparent and avoid such scandal in future. The committee made up a report called Cadbury Report which gave a number of proposals and consisted of proper code of conduct for the organization.
Proposals were also included in the rules of London Stock Exchange. The suggestions were about making the role of chief executive and chairman separate, board should be much organised, non-executive directors must be properly selected, salaries and packages of directors, internal power and control should be good. More over, transparency and accountability should be present in the financial reporting system. After this report, a Rutteman Report was published in 1994 to guide the companies the way they should act
in accordance with the clause of Cadbury report which is about the effectiveness of company’s internal control. The growing concerns over the directors pay and incentives to motivate him to perform well led to the formation of Greenbury Report in 1995. Its key focus was on the directors pay and suggested that a committee consisting of non-executive directors should be formed for this and all the details about remuneration should be included in the annual report. Some of these suggestions were also included in the rules of London Stock Exchange.
However, it was not favored as much as Cadbury Report because people criticized that suggestions made does not truly link the director’s salaries with company’s performance After the publication of these reports, there was a need to find out how far the objectives of these reports have been achieved. Thus, Hampel Committee was formed which published Hampel Report. in 1998. The report objective was to revise, combine, uniform, standardize and clarify the recommendations of Cadbury and Greensbury Report. However the report views about governance was a bit different from Cadbury and Greensbury.
As it supported shareholders involvement in company’s affair to a great extent. In contrary to Cadbury, it also made the board accountable for all aspects of risk management where as Cadbury suggested that it should only be accountable for financial controls. The report mainly focused on code for good governance and to make the regulations on companies easy and simple. Following the Hampel Report, the Combine code of Corporate Governance was also published which focuses on all the aspects related to structure, functions and work of the board, institutional shareholders, directors pay .
It is called combined code as it consisted of clauses from all the three reports Cadbury, Greensbury and Hampel report. The code is a standardize form of rules for all listed companies. Every company is required to clearly states in there annual report that how an where they have applied it. This code was implemented in all the listed companies from 1998 till a revised code was introduced in 2003. The Company’s which were following Combined Code were required to add a statement explaining how they have applied the rules and provisions of combined code.
Thus, a Turnbull Committee was formed in 1998 by ICAEW whose role was to guide the companies with ways to fulfill the requirement of the Combined Code. It resulted in the publication of Turnbull Guidance in 1999 “Internal Control: Guidance for Directors on the Combined Code”. Basically, the report provided assistance to the director’s about how to follow and abide by the Combined Code. In 2003, following the review of Combined Code and then company law, Higgs Report on the role of effectiveness of the non executive directors was published.
It focuses and gives suggestions on the importance and independence of the non executive directors. The report gives the definition of non-executive director and explains its duties and responsibility . It also highlights the role of the chairman and suggests that statement should be published in the annual report explaining and giving a detailed insight of the board which should include the number of board members and meetings and it also recommends that half of the board should be consisted of non-executive directors.
It also gave the definition of ‘independence’ and explains that there should be a senior independent director who will deal with concerns of shareholders. The report also enlightens and gave suggestions related to different aspects of an organization like remuneration, recruitment, tenure, professional development, resignation, liability, relationship with shareholders and audit and remuneration committees. In the mean time, Smith report was also published and both these reports recommendations were taken in consideration which led to the alteration in Combined Code of Corporate Governance.
The Turnbull guidance was reviewed and a revised version of it was published in 2005. Since April 2005, Operating and Financial Review was necessary to provide by the companies which shall include all information regarding company’s performance and future strategy. Corporate Governance was also greatly influenced by Europeoon Union in United Kingdom. In 2001, Enron scandal arose concerns about corporate governance through out the world and now the global financial crises has again brought Corporate governance under consideration around the world. Big companies and leading
banks of the world collapsed due to the downturn in the economy. Thus, it proves that there are some flaws in the corporate governance. The UK government came forward and asked Lord Turner to review th causes of the crisis. It led the formation of Turner Review which gave suggestions to form a more effective and strong system of corporate governance in future. In 2009, FRC wanted some alteration in the Combined Code. After a discussion on the changes FRC asked for, it was concluded that the revised code will be effected from 29June 2010 and it will be known as UK Corporate Governance Code.
http://aci. kpmg. com. hk/docs/CG%20in%20UK/Higgs%20summary. pdf http://www. slideshare. net/upu21/corporate-governance-an-analysis http://www. corporategovernanceboard. se/corporate-governance/history http://www. manifest. co. uk/reports/governance/UK%20Corporate%20Governance%20Milestones. pdf CONCLUSION: The Corporate Governance Code 2010 of UK consisted of 5 Sections i. e Leadership, Accountability, Effectiveness, Remuneration and Relations with shareholders.
Moreover, it has 18 main principles, 15 supporting principles, 53 code provisions and 3 schedules. In this code 8 key changes were mad http://geniusmethods. com/wp-content/documents/Summary%20of%20UK%20Code. pdf http://www. grant-thornton. co. uk/thinking/the_boardroom/index. php/article/eight_key_changes_in_the_uk_corporate_governance_code/ us rule based approach: http://www. jstor. org/pss/25123509 comply or exp approach: http://eprints. lse. ac. uk/24673/1/dp581_Corporate_Governance_at_LSE_001. pdf
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