Download Corporate Governance

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‘Bubble Act’ 1720
 Recognised the ‘moral hazard (Risk)’ of the relationship
in the principle-agent relationship
 A key theme that was established and continues to
today is that directors are accountable to shareholders
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Companies Act (CA) 1844
 Required audited balance sheet (a ‘value statement’ at
year-end) to be presented to shareholders
▪ Problem: Anyone could be the auditor.
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Companies Act 1856
 The CA 1844 audit provision was removed
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Companies Act 1900
 Reintroduction of balance sheet audit
 Auditor to be appointed by shareholders
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CA 1929
 P&L a/c required
▪ Shows how the company has fared over the year.
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CA 1948; CA 1967
 Required auditor to be qualified
 Auditor to express ‘an opinion’
 A lot of disclosures to shareholders required
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CA 1981
 Aspects of GAAP introduced into law
 Directors’ report to be audited
 Directors’ report to contain comment on the companies
future development
 Small and medium sized companies exemptions
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CA 1985; CA 1989; CA 2006 (Mainly consolidation)
 Director’s ‘duty of competence’ (Common Law) codified
▪ Negligence where a failure of a reasonable standard of competence
 IFRS for listed companies
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The government’s role in a capitalist economy
 To protect the public interest
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Most of the statutes have resulted from a public
scandal
 Usually involving fraudulent activity
 Thus legislation has attempted to make directors
increasingly more accountable to shareholders over
time
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 Cadbury 1992
 Greenbury 1995
 Hampel 1998
 Turnbull 1999
 Higgs 2003
 Tyson 2003
 Smith 2003
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Corporate governance (CG) - not a ‘new’ thing
 Based on existing, implicit CG behaviour
 It may thus be considered a ‘codification’ exercise of good
CG practice in the UK in 1992
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Public concern over several corporate failures
 Particularly the Pollypeck and Maxwell Communications
Corporation cases in 1991
 The rapid growth in executive remuneration and conflicts
of interest between directors and shareholders
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The Stock Exchange initiated the Cadbury enquiry
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‘The committee on the financial aspects of
corporate governance’
The Code of Best Practice’ (1992)
 Voluntary code
▪ But for listed companies a compliance statement was
required
▪ ‘Comply or explain’ – Principles rather than rules
 The ‘principles v rules’ argument (UK v USA)
 The following example is a true case, but in a non-financial
setting (from China Daily, December 2007)
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Hospital Doctor –
What will he or she
do here?
Underlying
principles of medical
profession
Rules of the hospital
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In financial accounting –
 Should there be strict and detailed rules trying to cover all
situations (US approach) or
 Limited rules with ‘overriding’ principles (true and fair / fair
presentation) (UK/International approach)
 In practice there is a concerted effort to bring US and
UK/International accounting standards together.
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Back to UK CG…
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‘This, more than any other initiative in corporate
governance reform, has led to the shift of directors’
dialogue towards greater accountability and
engagement with shareholders…’ and
 ‘…has generated the more significant change of
corporate responsibility toward a range of
stakeholders, encouraging greater corporate social
responsibility in general’
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Solomon, 2007
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The report covered three areas
 Directors
▪ It defined the composition of the board, its responsibilities,
and the responsibilities of the chairman, and the audit and
remuneration committees.
 Auditing
 Shareholders
‘Fat cats’
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The Greenbury Report released in 1995 was
the product of a committee established by
the United Kingdom Confederation of
Business and Industry on corporate
governance. It followed in the tradition of
the Cadbury Report and addressed a
growing concern about the level of director
remuneration.
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‘Fat cats’
 Continued public concern over several incidences
of very high directors’ remuneration
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Objective to set up a Code of Practice for
directors’ remuneration
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The Committee on Corporate Governance
(the Hampel Committee) was established in
November 1995 to review the Cadbury
Committee's
recommendations
on
corporate governance. The Hampel
Committee released a preliminary report in
August 1997, followed by a final report in
January 1998.
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Continued public concern over corporate failures
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The Hampel Committee
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Notably that of Barings Bank, 1995
The intention was to ‘combine, harmonise and clarify’ the
Cadbury and Greenbury recommendations and create an
overall code of corporate governance
Issue of a revised and extended ‘Combined Code’,
1998
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More extensive, covering…
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Board performance
Disclosure of information
Remuneration
Role of the audit committee
Training
Role of the nomination committee
Conduct of AGM’s
Role of the remuneration committee
Roles of chairman and chief executive
Directors’ contracts
Key elements incorporated in the Stock Exchange Rules
(1998)
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It also underlined the voluntary, ‘principlesbased’ approach as a key element
Refocused the emphasis on accountability
primarily to the shareholders, then to other
stakeholders
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The report covered two areas
1. Principles
▪
▪
▪
▪
Directors
Directors’ remuneration
Relations with shareholders
Accountability and audit
2. Institutional shareholder provisions
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The ‘Codes’ issued after Hampel’s are mainly
modifications of the basic CadburyGreebury-Hampel model
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The Turnbull Report was first published in
1999 and set out best practice on internal
control for UK listed companies. In October
2005 the Financial Reporting Council (FRC)
issued an updated version of the guidance
with the title 'Internal Control: Guidance for
Directors on the Combined Code'.
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Public concern over risk management and
control
 Barings Bank, 1995
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At this point we need to re-consider what risk
management, systems and internal control
are…
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It initiated the Higgs Report on “The Role and
Effectiveness of Non-Executive Directors” (Nonworking director of a firm) does not participate in
the day-to-day management of the firm) which
was
published
in
January
2003.
Recommendations from Higgs included a
definition of ‘independence’ and the proportion
of independent non-executive directors on the
board and its committees; added emphasis on
the process of nominations to the board through
a transparent and rigorous process.
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 Around
the same time, the Financial
Reporting Council published the
Smith Report, “Guidance on Audit
Committees”. Both the Higgs and
Smith Reports were published in
January 2003.
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