Summary of the Reports and Acts of Parliament which have influenced Corporate Governance in the UK
Cadbury (1992)
Scope:
Checks and balances
Key Principle:
Power corrupts; and absolute power corrupts absolutely
Impact:
Scope of Chairman’s Role:
• Shareholder interests
• Compliance
Scope of CEO’s Role:
• Resources
• Results
Scope of Independent Committees:
• Compliance
• Audit
• Remuneration
• Nominations
Consequence:
Roles of Chairman and CEO should be separated
Greenbury (1995)
Scope:
Executive Compensation
Key Principle:
Don’t put the fox in charge of the chicken coop
Impact:
Composition of Remuneration
Committee:
• All non-executives
Consequence:
All non-executives should be excluded from incentive bonuses and share options.
Hampel (1998)
Scope:
Compliance
Key Principle:
Compliance is not merely box-ticking
Impact:
Compliance must be:
• Integral to control systems
• Capable of being measured
• Subjected to a quantitative audit
Consequence:
A qualitative assurance of compliance is not sufficient
Nolan (1998)
Scope:
Ethical Standards (for the Public Sector)
Key Principle:
Deception by omission is as unacceptable as deception by commission
Impact:
Sets seven standards for behaviour in public life:
• Selflessness
• Integrity
• Objectivity
• Accountability
• Openness (Transparency)
• Honesty
• Leadership
Deemed to be no less relevant for business with the possible exception of selflessness
Consequence:
No hiding places from legitimate enquiry
Turnbull (1999)
Scope:
Mitigation of Risk
Key Principle:
If it can’t be measured, it can’t be controlled
Impact:
Controls must be quantitative
Contingency planning is mandatory
Shareholders must be made aware of all corporate risk assessments
Consequence:
No legitimate hiding places for potentially embarrassing risk
Smith (2003)
Scope:
Audit Committee
Key Principle:
Oversight should be untrammelled
Impact:
Auditors must be chosen for their objectivity
Nothing is to be outside the scope of enquiry
Nothing should be hidden from enquiry
Consequence:
Confidential channels for whistleblowers need to be provided
Higgs (2003)
Scope:
Role of Non-Executive Directors
Key Principle:
Executive directors need supervision to save them from falling into the vices of conflicts of interest
Impact:
At least half the board should comprise non-executive directors
Service as a non-executive should be limited to six years
A senior non-executive should have a liaison role with shareholders at shareholder meetings
Consequence:
Non-executive directors are empowered to interfere whenever executive behaviour is too cosy
Combined Code 2006 and 2008
This sets out in a convenient form the latest guidance on corporate governance and a rational summary of the codes of practice from Cadbury onwards.
Companies Act 2006
This sets out new statutory duties. The most controversial is Section 172 which requires directors to act in a way most likely to promote the success of the company for the benefit of its members as a whole. Section 172 goes on to list the factors to consider and introduces the concept of corporate social responsibility into company law which it defines as the concept of enlightened shareholder value. Whereas directors are exhorted to consider the interests of employees, suppliers, customers, the community and the environment, there is no mention of the desirability of making profits.
Walker Review (2009)
The principles of corporate governance and the Combined Code are still evolving. The Walker Review of 2009 makes recommendations for the next round of changes in corporate governance as a result of perceived failings in the finance sector which emerged from the banking crisis in 2008.
Scope:
Risk Management and Reward in Financial Services
Key Principle:
Non-executive directors need to exercise greater supervision over risk assessment and senior executive remuneration and have blocking powers to constrain the more rash powers to constrain the more rash behaviour.
Impact:
Non-executives should chair the Risk Committee.
The Remuneration Committee should have oversight of all executive compensation and the practice of deferred bonus components should be introduced when performance outturns cannot be assessed immediately.
Consequence:
Better shareholder protections should result.
UK Corporate Governance Code (2010)
Scope:
This replaces the previous Combined Code on Corporate Governance (2008). It essentially updates and simplifies previous guidance and adds some new provisions to avoid certain practices that were exposed during the aftermath of the 2008 financial sector crisis. The Code is still regarded as voluntary (to preserve flexibility) but its application will be monitored by the Financial Reporting Council (FRC). It is targeted at FTSE 350 companies but many of its provisions will apply to all companies.
(1) Key Principle: Either comply or explain
(2) Poor performances will not be rewarded on early termination
Impact:
Directors’ contracts will adopt one year service / termination provisions and the Remuneration Committee will be expected to consider the effects of the early termination of directors’ contracts resulting from poor performance.
Consequence:
Poor performances, which may result in early terminations, may also lead to the application of some claw-back provisions where bonuses may not have been earned or justified.
