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Corporate Governance
• ‘Way businesses structured and controlled’• CG varies across national boundaries:
• cultural reasons• social contexts• historical reasons• commercial focus
• CG regime impacts nature of accounting• strong shareholding culture will require strong
reporting culture
• Importance reasserted by recent frauds etc.
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Corporate Governance in UK
• Anglo/American CG model common to English-speaking world
• Characterised by:• gulf between directors and owners
• board of directors
• stock exchange as major source of finance
• Financial accounts seen as one means of bridging gulf between directors and owners
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Best Practice
• Frauds have led to model being questioned• Flaws:
• too rigid• open to abuse• too focused on rights of investors
• Accounting bodies, government have been proactive• Various reports address different aspects• Best Practice reports and codes
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Cadbury Report
• Commissioned by FRC, Stock Exchange etc.
• Chaired by Sir Adrian Cadbury
• Reviewed CG with specific reference to:
• responsibilities of directors
• nature of accounting information required
• audit committees
• relationship between owners, boards and auditors,
etc.
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Cadbury recommendations
• Board:
• importance of efficient board emphasised
• separate CEO and Chairman
• Executive Directors
• service contracts to be limited to 3 years
• disclosure of remuneration
• Non-Executive Directors
• greater role
• independence important
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Cadbury recommendations ctd.
• Reporting and Controls:• responsibility of board in relation to accounts• importance of supplementary narrative info.
• Audit Committee• critical role in liaising with auditor• should comprise of 3 non-executive directors• has emerged as critical element of CG regime
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Greenbury Report
• CBI formed group to produce code in relation to directors’ remuneration
• Chaired by Sir Richard Greenbury• Recommendations in respect of:
• remuneration committee• disclosure provisions• remuneration policy• service contracts and compensation
• Directors’ remuneration still source of controversy
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Hampel Report
• Group formed to continue work of Cadbury• Chaired by Sir Ronald Hampel• Reiterated much of Cadbury & Greenbury• Important in maintaining momentum• Recommendations:
• different individuals as Chairman and CEO• directors contracts not to exceed 1 year• non-executives on remuneration committee• training of directors
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Turnbull Report
• ICAEW set up group to pursue Cadbury ideas on internal control & risk
• Chaired by Sir Nigel Turnbull• Assigns a strategic importance to these areas in
context of CG• Shows directors how these areas are to be
integrated into CG model
• In future may be seen as seminal report
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Turnbull Report (Continued).
• Focus on principles rather than rules• Emphasis on:
• successful risk management as means of adding value
• internal control only possible if embedded in internal processes
• role of board in reviewing and implementing• key risks to be identified and managed
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Higgs
• Focus on Non-Executive Directors (NEDs)
• Reflects increasingly important role:
• Independent
• Strategy, control and governance roles
• Higgs Report (2003) recommended:
• NEDs to comprise at least 50% of board
• Separation of CEO and Chairman roles
• Ideally NEDs might serve two three-year terms
• Commended for avoiding perceived excesses of SOX
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Smith
• Reflected increased importance of Audit Committee
• Now seen as vital element of CG architecture
• Recommended that Audit Committee:
• Be comprised of at least 3 independent NEDs
• One member to have financial experience
• Monitor and review integrity of financial statements, controls, etc.
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Combined Code
• Cadbury, Greenbury and Hampel formed basis of original Combined Code adopted by SE
• Supplemented by Turnbull, Higgs and Smith• Code based on “Comply or Explain” approach
• Different to US• Essentially ‘principles-based’
• Significantly impacts company disclosure, e.g. in Annual Report
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Stakeholder theory
• Looks beyond investors and their needs• Recognises a broader constituency, e.g.:
• employees• environmentalists• others
• Challenges primacy of financial markets• Champions greater transparency and
accountability• Potential for radical reform of CG model
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Summary
• CG a critical influence on nature, content and focus of the accounting process
• CG regime in UK part of Anglo-American scheme
• Characterised by investor emphasis• Frauds, scandals were catalysts for change• Cadbury, Greenbury, Hampel, Turnbull, Higgs
& Smith• “Comply or Explain”• UK now world-leader in ‘best practice’