Corporate Governance

Task 1

Corporate governance has become a major issue in business over the last few decades. In light of corporate financial scandals such as Poly Peck and Maxwell many reports were made headed by various different people and each one tried to highlight problems and suggest solutions. The process of improving corporate governance in the UK began with the Cadbury Report and ended with the current revised Combined Code of Corporate Governance. Aspects of this code were revised in 2004 by the Financial Reporting Council, who considered the impact of internal control and whether it needed to be updated.

Financial reporting was not seen as being a truthful representation of a company's position after the major scandals. This caused people to be distrustful of the documents and the people responsible for the creation of those documents. In an attempt to combat this, the Cadbury Report was set up in 1992, led by Sir Adrian Cadbury. It outlined recommendations concerning boards of directors (such as the separation of the role of chief executive and chairman, selection processes for non-executive directors and a balanced composition of members); financial reporting and the need for good internal controls. It was a greatly significant report in the scheme of things and set a benchmark for which people should comply. It was the first of its kind and was essential in the development of good governance. The majority of the recommendations are now mandatory and have helped prevent situations that occurred before it was published. Its recommendations were incorporated into the Listing Rules of the Stock Exchange.

In 1995, the Greenbury Report was released and was chaired by Sir Richard Greenbury. It was set up after growing concern about directors' remuneration. The report recommended that there be extensive disclosure on remuneration in annual reports and a remuneration committee be set up and consist only of non-executive directors. The majority of the recommendations were endorsed by the Listing Rules of the Stock Exchange. It was again a benchmark for which people should comply to ensure good governance and its importance is highlighted by the fact that the Combined Code is an amalgamation of this and the Cadbury report.

In 1996, the Hampell committee set out to look into the extent to which the Cadbury and Greenbury Reports had been put into practice and whether the objectives of the reports had been met. It led to the Combined Code of Corporate Governance (1998) which covered the following areas: accountability and audit; director's remuneration; structure and practices of the boards; responsibilities of institutional shareholders and relations with those shareholders. The Hampell Report led to the Code for which every listed company complied with after the date 31 December 1998 so its importance is indeed great though it was, in essence, a reinstatement of what had already been said.

The Turnbull Committee was set up in 1998 to give guidance to companies as to how to approach the new requirement laid out by the Combined Code for a statement in the annual report explaining how they have applied the Code Principle and Code Provisions relating to internal control. This resulted in the Turnbull Guidance report being published in 1999 which is an approved structure for which management can show that they have sufficient internal control structures and financial reporting procedures to comply with section 404 of the Sarbanes-Oxley Act (which has to be complied with in order to trade on the United States Stock Market). It was an important document not only because it showed dedicated managers how to comply with the law but because it gave no excuse to other managerial members of companies not to comply.

In 2001, the government commissioned a report that addressed the relationship between companies and their institutional investors. It was called the Myners Review and the intention of the review was to consider whether there were things that were distorting the decision making of institutions. It suggested that companies improve their communication with institutions and vice versa. It also recommended that institutional investors consider their responsibilities as owners and how those rights should best be used on behalf of beneficiaries. Its importance and relevance to overall good governance is not as substantial as the reports previously discussed but did however fill a void that had not yet been properly addressed.

In 2002, two reports were released - the Higgs Report and the Smith Report. The Higgs Report came after a review of the Combined Code that was carried out following a review of company law. It concerned the role and effectiveness of non-executive directors. It called for these directors to be 'independent' and with that attached a definition of the word. It called for added emphasis on there being a transparent and meticulous process of nominations to the board and evaluation of the performance of the board, its committees and individual directors.

The Smith Report gave guidance on the Combined Code of Corporate Governance with relation to audit committees. Both reports released in 2002 led to changes in the Combined Code of Corporate Governance published in 2003. It has been applied to all listed companies on the primary market of the London Stock Exchange since 1 November 2003.

All of these documents have gone some way to creating overall good governance in the UK which should protect out society from major upsets like Maxwell reoccurring. Cadbury was the instigator and his report will be highlighted and remembered for the impact it had in bringing to light the extent to which things needed to be changed. All the reports that followed highlighted in more detail or perhaps with more specificity what exactly needed to be done about specific areas of governance. The result of these reports is the Combined Code of Corporate Governance which