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• Cadbury report

The Cadbury Report

The report ‘financial aspects of corporate governance committee’ (usually known as the cadbury report) was published in december 1992 and contained a number of recommendations to raise standards in corporate governance. on this page you can access a selection of resources on the report., useful links, online articles, articles and books in the icaew library collection.

The committee was chaired by Sir Adrian Cadbury and had a remit to review those aspects of corporate governance relating to financial reporting and accountability. The final report 'The financial aspects of corporate governance' (usually known as the Cadbury Report) was published in December 1992 and contained a number of recommendations to raise standards in corporate governance.

• The final report of the Committee on the Financial Aspects of Corporate Governance as published in December 1992

The Cadbury Archive   The Cadbury Archive at Cambridge Judge Business School is a collection of material from Sir Adrian Cadbury's time as chairman of the Committee on the Financial Aspects of Corporate Governance. The archive includes agendas, minutes and research relating to the committee's activities with a search tool to locate material of interest.

When is comply or explain the right approach? A December 2013 ICAEW report on promoting good corporate governance and the role of comply or explain as a means to that end. The Cadbury Code is widely seen as the first comply-or-explain governance code.

The Library provides full text access to a selection of key business and reference eBooks from leading publishers. eBooks are available to logged-in ICAEW members, ACA students and other entitled users. If you are unable to access an eBook, please see our Help and support  advice or contact [email protected] .

• 01 Jan 2007
• Sonia Mckay, Andrea Oates, Glynis Morris
• CIMA Publishing
• Finance Directors Handbook
• 03 Mar 2008
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• Corporate Governance - A Practical Guide to Legal Frameworks
• 01 Jul 2017
• ICSA Publishing
• The ICSA Corporate Governance Handbook
• 01 Jan 2008
• Alexander Davidson
• How the City Really Works

Terms of use

You are permitted to access, download, copy, or print out content from eBooks for your own research or study only, subject to the terms of use set by our suppliers and any restrictions imposed by individual publishers. Please see individual supplier pages for full terms of use.

More eBooks

• eBooks on Corporate Governance
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• 01 Aug 2013
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• 01 Sep 1999
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• 01 Oct 1998
• Jonathan Charkham

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Selected articles and books.

Click on the links below to see our catalogue record and holdings for each item.

Stay in control: boards risk losing sight of committees Governance and Compliance: the ICSA Magazine, January 2015, pages 26-27 The UK Corporate Governance Code, says the author, has evolved into a code on nomination, remuneration and audit committees, with some overarching principles applicable to the board as a whole. The Financial Reporting Council (FRC) needs to start a debate on how the non-executive role should evolve, says the author: the model envisaged by the Cadbury Committee is rapidly becoming obsolete.

The Cadbury committee: a history   Spira, L.F. (Oxford University Press, 2013) This book explores the origins of the Committee, provides insights into the way in which it worked, and documents the reaction to the publication of the Committee's report.

Comply or explain: 20th anniversary of the UK Corporate Governance Code (FRC, 2012) A collection of essays published by the Financial Reporting Council to mark the 20th anniversary of the Cadbury Code, which introduced the UK's 'comply or explain' approach to best practice in the organisation of corporate boardrooms and their relations with shareholders. The collection draws on the experience of a wide range of individuals both here and overseas, reflecting the global impact of 'comply or explain' and its contribution to the UK's role as an international financial centre.

Find more articles and books

• View a list of articles and books in our collection on the Cadbury Report

To find out how you can borrow books from the Library please see our guide to borrowing books.

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• UK Corporate Governance Code

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Read out this code to the operator.

• Standards, codes & policy
• Corporate Governance

Corporate Governance (overview)

Published: 4 October 2023

6 minute read

The 2018 Corporate Governance Code (the Code) was updated in January 2024 following a limited consultation which concentrated on a limited number of changes. The 2024 Code applies to financial years beginning on or after 1 January 2025. The 2018 Code remains in place until then. The 2024 Code is supported by revised guidance which will be published on 29 January 2024.

The Importance of Corporate Governance

Corporate Governance is the system of rules, practices and processes that are put in place to manage and control a company. It is underpinned by the UK Corporate Governance Code.

Good corporate governance contributes to long-term company performance by helping to build an environment of trust, transparency and accountability. These values help businesses foster long-term investments, financial stability and business integrity.

Businesses with good corporate governance policies see stronger growth, and help contribute to more inclusive societies by ensuring the interests of all stakeholders are balanced.

The UK Corporate Governance Code

The UK Corporate Governance code (the Code) is an important part of UK company law and corporate governance framework. It applies to all premium listed companies on the London Stock Exchange.

The Code is maintained by the FRC and incorporates a set of Principles of good corporate governance. It is supported by a number of more specific Provisions and underpinned by the Financial Conduct Authority's Listing Rules.

The Listing Rules are given statutory authority under the Financial Services and Markets Act 2000. It is required that premium-listed companies disclose how they have applied the Principles of the Code and complied with its Provisions, and they must explain if they have not complied with a Provision. The Code refers to this as 'comply or explain'.

• Infomation about the UK Corporate Governance Code and its application

History of the Corporate Governance Code

Uk corporate governance code 2024.

The revised UK Corporate Governance Code was published on 22 January 2024 and will apply to financial years beginning on or after 1 January 2025, other than provision 29 which will apply to financial years beginning on or after 1 January 2026.

Revised guidance to accompany the Code was published on 29 January 2024 in a new digital format.

Corporate Governance Consultation

Following the consultation on Restoring Trust in Audit and Corporate Governance, in 2022, the government invited the FRC to strengthen the UK Corporate Governance Code in specific areas.

The key objectives were to improve the quality of companies' risk management and internal controls, and board's consideration of corporate governance activity to acheive their company's strategic objectives. We consulted on several other changes to the Code aimed at removing duplication and strengthening or streamlining reporting.

For more information review our Corporate Governance Consultation

Comprehensive Code Review

The revision of the Code took account of work done by the FRC on corporate culture and succession planning, and the issues raised in the Government’s Green Paper and the BEIS Select Committee inquiry.

Apart from giving centre stage to corporate culture and purpose, the 2018 Code Review broadened the definition of governance and emphasised the importance of positive relationships between Shareholders and Stakeholders. It also stressed the significance of independence and constructive challenge in the boardroom.

Audit Updates

Following the introduction of the EU Audit Directive and the Regulation , the Code was amended to ensure that it worked alongside the new legislation.

Risk & Viability

The Guidance on Risk Management, Internal Control and Related Financial and Business Reporting was primarily directed at companies subject to the UK Corporate Governance Code.

The purpose of the guidance was to bring together elements of best practice for risk management; prompt boards to consider how to discharge their responsibilities in relation to the existing and emerging principal risks; and highlight related reporting responsibilities.

Risk & Viability (2014)

The 2003 update to the Combined Code to include the recommendations of the Higgs Report and the Smith Report was followed by the 2010 review.

In the wake of financial crises that came to a head in 2008-09, the FRC decided to bring forward the review and the Code was renamed the UK Corporate Governance Code. The review concluded, among other things, that more attention needed to be paid to following the spirit of the Code as well as its letter.

Revised Turnbull Guidance

The Turnbull Review Group concluded that the original Turnbull Guidance contributed to an overall improvement to the standard of risk management and internal control, and therefore no significant edits were required.

A small number of amendments were proposed, among them requiring the inclusion in annual reports of information to allow shareholders to understand the principal features of a company's internal control procedures and risk management system.

Revised Turnbull Guidance (2005)

Smith Report

The FRC Group on Audit Committees, chaired by Sir Robert Smith, was tasked with developing the guidance on audit committees in the Combined Code. The group's report codified the role of audit committees. It was subsequently revised and is now known as the Guidance on Audit Committees .

Higgs Review

The Higgs review, conducted by Derek Higgs, was an independent review of the role and effectiveness of non-executive directors and the audit committee. It aimed to improve and strengthen the Combined Code.

While the review backed the existing non-prescriptive approach to corporate governance ( ‘comply or explain’) it also advocated for more provisions with set criteria for the board composition and evaluation of independent directors. This guidance has now been replaced by the Guidance on Board Effectiveness .

Higgs Review (2003)

Turnbull Report

The report, written by the committee chaired by Nigel Turnbull, set out obligations for directors under the Combined Code . The guidance on good practice for listed companies included keeping good internal controls, or having good audits and checks to ensure the quality of financial reporting and catch any fraud before it becomes a problem.

Turnbull Report (1999)

Hampel Report

The Hampel Committee, chaired by Sir Ronnie Hampel, was set up to review the implementation of the Cadbury and Greenbury reports.

The Hampel Report aimed to harmonise, clarify and combine the two sets of recommendations into one Code. It relied on broad principles and a 'common sense' approach, which was necessary to apply to different situations, rather than Cadbury and Greenbury's perceived 'box-ticking' approach.

Hampel Report (1998)

Greenbury Report

The Greenbury Report was published in response to public and shareholder concerns about Directors' remuneration.

The Report was published by the Study Group on Directors' remuneration under the chairmanship of Sir Richard Greenbury. It included Principles of best practice, which encouraged greater visibility of remuneration structures and attached KPIs and the time horizons over which pay is released.

Greenbury Report (1995)

Cadbury Report

The Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury, developed a set of principles of good corporate governance. These principles were incorporated into the London Stock Exchange's Listing Rules and introduced the principle of 'comply or explain'.

The Cadbury Code was the first Corporate Governance Code in the world. The recommendations focused on the control and reporting functions of boards, and the role of auditors.

Cadbury Report (1992)

Links to the Stewardship Code

The UK Stewardship Code sets high stewardship standards for asset owners and asset managers, and for service providers that support them. It provides the framework for signatories to demonstrate how they are meeting their clients’ and beneficiaries’ needs, and their own commitments, by providing evidence on the activities and outcomes of their stewardship.

The Stewardship Code works in tandem with the UK Corporate Governance Code to underpin high-quality reporting and accountability for investment and governance. Good governance and good stewardship should go hand in hand.

Information about the Stewardship Code and how to become a signatory

Corporate Governance Publications

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Cadbury Report was more than a product of its time

Friday 08, december 2017.

The Cadbury Committee on the Financial Aspects of Corporate Governance published its final report on 1 December 1992

On 1 December 1992, Whitney Houston was atop the charts with ‘I Will Always Love You’ and ‘The Bodyguard’ was showing in cinemas.

It was less than a month since Bill Clinton had been elected as US president and in the world of business a string of high profile corporate scandals – including Guinness, BCCI, Polly Peck and Maxwell – were still fresh in the memory.

Against this backdrop, the Cadbury Committee on the Financial Aspects of Corporate Governance published its final report.

Time capsule

The Barclays’ 1992 annual report was published a few months later – the scanned document is still available as a PDF on their website – and included three paragraphs on the Cadbury Code of Best Practice.

This consisted of a statement that Barclays Group complied with the disclosure requirements of the code, apart from three provisions, and a brief explanation of how the board was comprised of a majority of non-executive directors, how it maintained an audit and compensation committee and how the chief executive had been appointed to also serve as chairman of the board. 

Fast-forward to 2017, and governance disclosures look very different. Barclays’ 2016 governance report tells a detailed and insightful, company-specific story. Case studies and a detailed explanation of the board evaluation process are presented with clear linkage between board activities, strategy and principal risks.

Comparing these two reports provides a clear sense of how the governance report has evolved to become an insightful narrative account of the company’s governance practices.

A changing relationship

Governance and reporting have gone hand-in-hand since the Cadbury Report’s conception. The original Cadbury Report stated that ‘boards should aim for the highest level of disclosure consonant with presenting reports which are understandable’. Improving transparency has therefore always been a goal of corporate governance in the UK.

However, the relationship between governance and reporting has changed. The initial focus of the Cadbury Report was on improving oversight of companies’ financial reporting and on strengthening internal control.

“Companies are beginning to recognise the link between good reporting and good governance”

However, as investors are increasingly holding boards to account over their governance arrangements, there has been pressure to produce more insightful governance reports that explain how the company’s governance framework supports long-term value creation.

Companies are themselves beginning to see the benefits of greater transparency and to recognise the link between good reporting and good governance.

In a recent speech, FRC CEO Stephen Haddrill emphasised this point by highlighting that ‘trustworthy information and trustworthy behaviour support the needs of investors and generate confidence in boards, ultimately leading to the long-term success and health of an organisation’.

Tracking developments

We have been able to track the development of governance reporting through our annual ‘Complete 100’ research – first published in 2006 – into the narrative reporting trends of the FTSE 100.

In the initial years of our research the governance section changed little and was largely compliance-driven. Between 2004 and 2006 the number of companies whose governance sections were less than five pages long remained around the 50% mark (2004: 50%; 2005: 47%; 2006: 48%).

By comparison, in 2016 the average length of FTSE 100 governance reports was 55 pages, reflecting a clear increase in the level of insight and disclosure.

The fact that companies were not using the annual report to clearly communicate key messages around governance is underlined by the fact that in 2008 only 13% of companies included diagrams, images or charts to bring the governance section to life.

The financial crisis

The financial crisis of 2008–2009 was a watershed moment for governance reporting.

In March 2009, many respondents to the FRC’s call for evidence on the UK Corporate Governance Code commented on the poor quality and limited usefulness of governance disclosures, arguing that governance statements provided only minimal information and tended to be boilerplate in nature.

Later that year, the Walker Review published its final recommendations. Although focused on banks, it put forward a number of suggestions that were adopted by the FRC in their review of code.

One of the recommendations included was that there should be ‘enhanced reporting of the board evaluation, the process for identifying the board’s skill requirements, and the chair’s communication with shareholders’.

The review also recommended the development of a stewardship code to enhance the quality of engagement between investors and companies, which the FRC duly introduced in 2010. This called for investors to do more to hold companies to account over their governance practices, increasing the pressure on companies to demonstrate transparency.

The code was updated in 2010 and encouraged chairmen to ‘report personally on how the principles relating to the leadership and effectiveness of the board have been applied’. Also included was the requirement to conduct externally-facilitated board evaluations every three years and a requirement to discuss the company’s business model.

The key themes of the debates that took place between 2008 and 2010 are reflected in the reporting trends. For example, in 2009, 17% of companies provided a personal introduction to governance. This number had jumped dramatically to 49% by 2011.

The number of personal governance statements has continued to rise steadily and in our latest research 77% of companies included a chairman’s introduction to corporate governance that provides a real personal insight into governance at the company, with an additional 16% providing a more boilerplate letter.

Increased disclosure of the objectives and outcomes resulting from the board evaluation process is another trend that has its roots in this period.

Between 2011 and 2014, the percentage of companies disclosing outcomes rose from 52% to 64%, with those disclosing objectives increasing from 40% to 63% in the same period. By 2016, the figures for outcomes and objectives rose to 72% and 73% respectively.

Finally, although the business model must now be included in the strategic report, it was originally introduced as a code requirement. Even before the introduction of the strategic report, the code clearly impacted business model reporting.

In 2009, only 42% of the FTSE 100 mentioned their business model, whereas in 2011, 84% of companies included a business model in their report. In our latest research, all the FTSE 100 referred to the business model, with 81% providing detailed or very detailed discussion.

Real innovation

The debates arising from the financial crisis lit the blue touch paper for reporting on governance. Since then, governance reporting has gained a momentum of its own, with companies going beyond what is strictly required and providing greater insight into their governance practices.

A major driver came in 2012, when the FRC’s update to the code included a supporting principle for the board to confirm that the annual report as a whole is fair, balanced and understandable.

This was important as it encouraged greater board engagement with the annual reporting process and got boards to think about the annual report, including the governance report, as a whole and how it can be used to tell a coherent, connected story.

This push for fair, balanced and understandable reports was supported by other best practice developments.

“Since the financial crisis, governance reporting has gained a momentum of its own, with companies going beyond what is strictly required”

From 2012, when the update to the code encouraged more informative reporting by audit committees, more companies began including personal introductions from committee chairmen. In 2011, just 33% of the FTSE included personal letters or quotes from committee chairmen but this figure rose to 77% by 2016.

More recently, culture has become a key focus area, following the introduction of the concept of the board setting the ‘tone from the top’ on culture, value and ethics. This is reflected in the number of companies discussing culture in the chairman’s introduction to governance, which increased from 14% to 46% between 2014 and 2016.

In the last two years, we have seen some real innovations with leading companies using communicative features such as case studies and governance at-a-glance spreads to convey key messages.

In 2016, 41% of companies provided governance case studies, up from just 6% in 2015. More companies are also providing a visual representation of board skillsets, although most still shy away from discussing a board skill-gap analysis, even in retrospect.

A second tipping point

Although much progress has already been made in the 25 years since the Cadbury Report, there are clear signs that we are on the edge of a second tipping point in governance reporting. Thanks to the inquiries into BHS and Sports Direct, and the weight placed on the issue by the prime minister, governance is once again under scrutiny.

Reporting looks set to be a central part of the current reforms. The FRC is updating the code to make it a sleeker, slimmed down document that places greater emphasis on reporting how the code’s top-line principles have been implemented.

This will encourage further organisation-specific insight as companies explain how the principles have been applied specifically to their businesses with less focus on code provisions.

Linkages between the corporate governance statement and the strategic report are also set to increase, as the FRC has indicated that companies will be expected to explain the application of code principles throughout the annual report, not just in a siloed governance section.

Reporting on stakeholders could act as a bridge between annual report sections, as a focus on the directors’ duty to promote the success of the company while having regard for stakeholders is expected to be included in the updated code, with the government also introducing a formal reporting requirement on section 172 in March 2018.

In light of these changes, companies will have to rethink how they report on governance, just as they did with the move towards more personal reporting following the financial crisis.

As the Cadbury Report enters its second quarter century, governance and reporting are converging. This provides an opportunity for boards to use external reporting as an exercise for strengthening their internal processes to promote a culture of transparency and integrity. This will, in turn, help to develop companies’ trust among key stakeholders.

Sallie Pilot is chief engagement and insight officer at Black Sun Plc

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Cadbury Report

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A report on the financial aspects of corporate governance in the UK issued in 1992 by a committee under Sir Adrian Cadbury. The so-called Cadbury Code of best practice recommended that non-executive directors should be appointed for specified terms and reappointment should not be automatic, that such directors should be selected through a formal process, and that both their selection and their appointment should be a matter for the board as a whole. Together with the recommendations of the Greenbury Report and the Hampel Report, the Cadbury Code laid the foundations of the Combined Code on Corporate Governance, first issued in 1998.

From:   Cadbury Report   in  A Dictionary of Accounting »

Subjects: Social sciences — Business and Management

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• Corporate governance: the board of directors and standing committees
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The syllabus for BT/FBT requires candidates to understand the meaning of corporate governance and the role of the board of directors in establishing and maintaining good standards of governance.

Specifically, the Study Guide refers to the separation of ownership and control, the role of non-executive directors and two of the standing committees commonly established by public companies. This article provides an introduction to corporate governance and some of the basic concepts that underpin it, and explains the roles of the board, the different types of company director and standing committees.

What is corporate governance?

The simplest and most concise definition of corporate governance was provided by the Cadbury Report in 1992, which stated: Corporate governance is the system by which companies are directed and controlled.

Though simplistic, this definition provides an understanding of the nature of corporate governance and the vital role that leaders of organisations have to play in establishing effective practices. For most companies, those leaders are the directors, who decide the long-term strategy of the company in order to serve the best interests of the owners (members or shareholders) and, more broadly, stakeholders, such as customers, suppliers, providers of long-term finance, the community and regulators.

It is important to recognise that effective corporate governance relies to some extent on compliance with laws, but being fully compliant does not necessarily mean that a company is adopting sound corporate governance practices. Significantly, the Cadbury Report was published in the UK shortly after the collapse of Maxwell Communications plc, a large publishing company. Many of the actions that brought about the collapse, such as the concentration of power in the hands of one individual and the company borrowing from its pension fund in order to achieve leveraged growth, were legal at the time.

The Organisation for Economic Co-operation and Development published its ‘Principles of Corporate Governance’ in 2004. These are:

• Rights of shareholders : The corporate governance framework should protect shareholders and facilitate their rights in the company. Companies should generate investment returns for the risk capital put up by the shareholders.
• Equitable treatment of shareholders : All shareholders should be treated equitably (fairly), including those who constitute a minority, individuals and foreign shareholders. Shareholders should have redress when their rights are contravened or where an individual shareholder or group of shareholders is oppressed by the majority.
• Stakeholders : The corporate governance framework should recognise the legal rights of stakeholders and facilitate cooperation with them in order to create wealth, employment and sustainable enterprises.
• Disclosure and transparency : Companies should make relevant, timely disclosures on matters affecting financial performance, management and ownership of the business.
• Board of directors : The board of directors should set the direction of the company and monitor management in order that the company will achieve its objectives. The corporate governance framework should underpin the board’s accountability to the company and its members.

To whom is corporate governance relevant?

Corporate governance is important in all but the smallest organisations. Limited companies have a primary duty to their shareholders, but also to other stakeholders as described above. Not-for-profit organisations must also be directed and controlled appropriately, as the decisions and actions of a few individuals can affect many individuals, groups and organisations that have little or no influence over them. Public sector organisations have a duty to serve the State but must act in a manner that treats stakeholders fairly.

Most of the attention given to corporate governance is directed towards public limited companies whose securities are traded in recognised capital markets. The reason for this is that such organisations have hundreds or even thousands of shareholders whose wealth and income can be enhanced or compromised by the decisions of senior management. This is often referred to as the agency problem . Potential and existing shareholders take investment decisions based on information that is historical and subjective, usually with little knowledge of the direction that the company will take in the future. They therefore place trust in those who take decisions to achieve the right balance between return and risk, to put appropriate systems of control in place, to provide timely and accurate information, to manage risk wisely, and to act ethically at all times.

The agency problem becomes most evident when companies fail. In order to make profits, it is necessary to take risks, and sometimes risks that are taken with the best intentions – and are supported by the most robust business plans – result in loss or even the demise of the company. Sometimes corporate failure is brought about by inappropriate behaviours of directors and other senior managers.

As already mentioned, in the UK, corporate governance first came into the spotlight with the publication of the Cadbury Report, shortly after two large companies (Maxwell Communications plc and Polly Peck International plc) collapsed. Ten years later, in the US, the Sarbanes-Oxley Act was passed as a response to the collapse of Enron Corporation and WorldCom. All of these cases involved companies that had been highly successful and run by a few very powerful individuals, and all involved some degree of criminal activity on their part.

The recent credit crisis has brought about renewed concern about corporate governance, specifically in the financial sector. Although the roots of the crisis were mainly financial and originated with adverse conditions in the wholesale money markets, subsequent investigations and reports have called into question the policies, processes and prevailing cultures in many banking and finance-related organisations.

Approaches to corporate governance

Most countries adopt a principles-based approach to corporate governance. This involves establishing a comprehensive set of best practices to which listed companies should adhere. If it is considered to be in the best interests of the company not to follow one or more of these standards, the company should disclose this to its shareholders, along with the reasons for not doing so. This does not necessarily mean that a principles-based approach is a soft option, however, as it may be a condition of membership of the stock exchange that companies strictly follow this ‘comply or explain’ requirement.

Some countries prefer a rules-based approach through which the desired corporate governance standards are enshrined in law and are therefore mandatory. The best example of this is the US, where the Sarbanes-Oxley Act lays down detailed legal requirements.

The role of the board of directors

Nearly all companies are managed by a board of directors, appointed or elected by the shareholders to run the company on their behalf. In most countries, the directors are subject to periodic (often annual) re-election by the shareholders. This would appear to give the shareholders ultimate power, but in most sectors it is recognised that performance can only be judged over the medium to long-term. Shareholders therefore have to place trust in those who act on their behalf. It is rare but not unknown for shareholders to lose patience with the board and remove its members en masse .

The role of the board of directors was summarised by the King Report (a South African report on corporate governance) as:

• to define the purpose of the company
• to define the values by which the company will perform its daily duties
• to identify the stakeholders relevant to the company
• to develop a strategy combining these factors
• to ensure implementation of this strategy.

The purpose and values of a company are often set down in its constitutional documents, reflecting the objectives of its founders. However, it is sometimes appropriate for the board to consider whether it is in the best interests of those served by the company to modify this or even change it completely. For example, NCR Corporation is a US producer of automated teller machines and point-of-sale systems, but its origins lay in mechanical accounting machines (NCR represents National Cash Register). As cash registers would quickly become obsolete with the emergence of microchip technology, the company had to adapt very rapidly. Whitbread plc originated as a brewer in the 18th century in the UK, but in the 1990s redefined its mission and objectives completely. It is now a hospitality and leisure provider (its brands include Premier Inn and Costa coffee) and has abandoned brewing completely.

The directors must take a long-term perspective of the road that the company must travel. Management writer William Ouchi attributes the enduring success of many Japanese companies to their ability to avoid short-term ‘knee-jerk’ reactions to immediate issues in favour of consensus over the best direction to take in the long-term.

Structure of the board of directors

There is no convenient formula for defining how many directors a company should have, though in some jurisdictions company law specifies a minimum and/or maximum number of directors for different types of company. Tesco plc, a large multinational supermarket company, has 13 directors. Swire Pacific Limited, a large Hong Kong conglomerate, has 18 directors. Smaller listed companies generally have fewer directors, typically six to eight persons.

The board of directors is made up of executive directors and non-executive directors .

Executive directors are full-time employees of the company and, therefore, have two relationships and sets of duties. They work for the company in a senior capacity, usually concerned with policy matters or functional business areas of major strategic importance. Large companies tend to have executive directors responsible for finance, IT/IS, marketing and so on.

Executive directors are usually recruited by the board of directors. They are the highest earners in the company, with remuneration packages made up partly of basic pay and fringe benefits and partly performance-related pay. Most large companies now engage their executive directors under fixed term contracts, often rolling over every 12 months.

The chief executive officer (CEO) and the finance director (in the US, chief financial officer) are nearly always executive directors.

Non-executive directors (NEDs) are not employees of the company and are not involved in its day-to-day running. They usually have full-time jobs elsewhere, or may sometimes be prominent individuals from public life. The non-executive directors usually receive a flat fee for their services, and are engaged under a contract for service (civil contract, similar to that used to hire a consultant).

NEDs should provide a balancing influence and help to minimise conflicts of interest. The Higgs Report, published in 2003, summarised their role as:

• to contribute to the strategic plan
• to scrutinise the performance of the executive directors
• to provide an external perspective on risk management
• to deal with people issues, such as the future shape of the board and resolution of conflicts.

The majority of non-executive directors should be independent. Factors to be considered in assessing their independence include their business, financial and other commitments, other shareholdings and directorships and involvement in businesses connected to the company. However, holding shares in the company does not necessarily compromise independence.

Non-executive directors should have high ethical standards and act with integrity and probity. They should support the executive team and monitor its conduct, demonstrating a willingness to listen, question, debate and challenge.

It is now recognised as best practice that a public company should have more non-executive directors than executive directors. In Tesco plc, there are five executive directors and eight independent non-executive directors. Swire Pacific Ltd has eight executive directors and 10 non-executive directors, of which six are independent non-executive directors.

An individual may be accountable in law as a shadow director . A shadow director is a person who controls the activities of a company, or of one or more of its actual directors, indirectly. For example, if a person who is unconnected with a company gives instructions to a person who is a director of the company, then the second person is an actual director while the first person is a shadow director. In some jurisdictions, shadow directors are recognised as being as accountable in law as actual directors.

Unitary v two-tier boards

The unitary board model is adopted by, inter alia , companies in the UK, US, Australia and South Africa. The company’s directors serve together on one board comprising both executive and non-executive directors.

In many countries in continental Europe, companies adopt a two-tier structure. This separates those responsible for supervision from those responsible for operations. The supervisory board generally oversees the operating board.

Paper FAB, Accountant in Business , focuses mainly on the unitary board system, though knowledge of both models is required for subsequent studies for Paper P1, Governance, Risk and Ethics .

Key positions

The chairman of the company is the leader of the board of directors. It is the chairman’s responsibility to ensure that the board operates efficiently and effectively, get the best out of all of its members. The chairman should, for example, promote regular attendance and full involvement in discussions. The chairman decides the scope of each meeting and is responsible for time management of board meetings, ensuring all matters are discussed fully, but without spending limitless time on individual agenda items. In most companies the chairman is a non-executive director.

The chief executive officer (CEO) is the leader of the executive team and is responsible for the day-to-day management of the organisation. As such, this individual is nearly always an executive director. As well as attending board meetings in his or her capacity as a director, the CEO will usually chair the management committee or executive committee. While most companies have monthly board meetings, it is common for management/executive committee meetings to be weekly.

The secretary is the chief administrative officer of the company. The secretary provides the agenda and supporting papers for board meetings, and often for executive committee meetings also. He or she takes minutes of meetings and provides advice on procedural matters, such as terms of reference. The secretary usually has responsibilities for liaison with shareholders and the government registration body. As such, the notice of general meetings will be signed by the secretary on behalf of the board of directors. The secretary may be a member of the board of directors, though some smaller companies use this position as a means of involving a high potential individual at board level prior to being appointed as a director.

Segregation of responsibilities

It is generally recognised that the CEO should not hold the position of chairman, as the activities of each role are quite distinctive from one another. In larger companies, there would be too much work for one individual, though in Marks & Spencer, a large listed UK retail organisation, one person did occupy both positions for several years.

The secretary should not also be the chairman of the company. As the secretary has a key role in liaising with the government registration body, having the same person occupying both roles could compromise the flow of information between this body and the board of directors.

Standing committees

The term ‘standing committee’ refers to any committee that is a permanent feature within the management structure of an organisation. In the context of corporate governance, it refers to committees made up of members of the board with specified sets of duties. The four committees most often appointed by public companies are the audit committee, the remuneration committee, the nominations committee and the risk committee.

The Syllabus and Study Guide for Paper F1/FAB require students to study only two committees. These are the audit committee and the remuneration committee.

Audit committee

This committee should be made up of independent non-executive directors, with at least one individual having expertise in financial management. It is responsible for:

• oversight of internal controls; approval of financial statements and other significant documents prior to agreement by the full board
• liaison with external auditors
• high level compliance matters
• reporting to the shareholders.

Sometimes the committee may carry out investigations and may deal with matters reported by whistleblowers.

Remuneration committee

This committee decides on the remuneration of executive directors, and sometimes other senior executives. It is responsible for formulating a written remuneration policy that should have the aim of attracting and retaining appropriate talent, and for deciding the forms that remuneration should take. This committee should also be made up entirely of independent non-executive directors, consistent with the principle that executives should not be in a position to decide their own remuneration.

It is generally recognised that executive remuneration packages should be structured in a manner that will motivate them to achieve the long-term objectives of the company. Therefore, the remuneration committee has to offer a competitive basic salary and fringe benefits (these attract and retain people of the right calibre), combined with performance-related rewards such as bonuses linked to medium and long-term targets, shares, share options and eventual pension benefits (often subject to minimum length of service requirements).

Public oversight

Public oversight is concerned with ensuring that the confidence of investors and the general public in professional accountancy bodies is maintained. This can be achieved by direct regulation, the imposition of licensing requirements (including, where appropriate, exercising powers of enforcement) or by self-regulation. As the US operates a rules-based system of governance, these responsibilities are discharged by the Public Company Accounting Oversight Board, which has the power to enforce mandatory standards and rules laid down by the Sarbanes-Oxley Act. In the UK, regulation is the responsibility of the Professional Oversight team of the Financial Reporting Council.

Sample questions

Candidates may find it useful to consider questions on this topic identified in examiner’s reports as well as the pilot paper. As past question papers are not made available, the following questions are included in this article as examples of typical requirements. It must be emphasised that these questions are not taken from the actual question bank.

Sample question 1 : LLL Company is listed on its country’s stock exchange. The following individuals serve on the board of directors:

Asif is a non-executive director and is the chairman of the company. Bertrand is the CEO and is responsible for the day-to-day running of the company. Chan is a professional accountant and serves as a non-executive director. Donna is the finance director and is an employee of the company. Esther is a legal advocate and serves as a non-executive director. Frederik is the marketing director of a manufacturing company and serves as a non-executive director.

Which of the following is the most appropriate composition of directors for LLL Company’s audit committee? A    Chan, Donna and Esther B     Asif, Bertrand and Frederik C     Asif, Esther and Frederik D     Chan, Esther and Frederik

The correct answer is D. Executive directors should not serve on the audit committee. This eliminates options A and B. Option D is the best choice, as the audit committee should have at least one director with expertise in finance.

Sample question 2 : Which of the following is a duty of the secretary of a listed public company? A    Maintaining order at board meetings B    Clarifying the terms of reference of the board meeting C    Ensuring that all directors contribute fully to discussions at board meetings D    Reporting to the board on operational performance for the last quarter

The correct answer is B. Options A and C are responsibilities of the chairman, while option D is the responsibility of the CEO.

Sample question 3 : The board of directors of JJJ Company has decided to increase the basic salary of its chief executive officer by 20% in order to bring her pay into line with those occupying similar positions in the industry.

This action will achieve which of the following purposes? A    Improve the prospect of retaining the chief executive officer B    Increase the productivity of the chief executive officer by at least 20% C    Motivate the chief executive officer to achieve long-term targets D    Create greater job satisfaction for the chief executive officer

The correct answer is A.

The basic pay offered by a company serves as a beacon to attract applicants, and can also deter the present incumbent of a position from seeking opportunities elsewhere, especially if they perceive themselves to be underpaid at present.

A substantial pay increase is unlikely to achieve a significant increase in productivity or increase long-term motivation (though pay increases can have a short-term impact on motivation). Job satisfaction is derived from factors other than remuneration, such as challenges inherent in the work and the nature of the tasks performed.

Written by a member of the BT/FBT examining team

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Thirty years of corporate governance

Ever since the Cadbury code, corporate governance has evolved and adapted to our changing times – and the changes keep coming

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Steve Giles is a consultant and lecturer in governance, risk and compliance

December 2022 marks the 30th anniversary of the publication of the Cadbury code.

Contained within the report of the Committee on the Financial Aspects of Corporate Governance, established in 1991 in response to investor concerns at a string of high-profile scandals in listed companies (Polly Peck, BCCI, the Maxwell Group), the Cadbury code is only two pages long. This succinct code of best practice, which was originally controversial, has proved hugely influential not only in the UK but around the world.

Rather than a mandatory framework, it advocated an approach based on compliance with a voluntary code

Most significantly, the report established the direction of travel for the UK’s corporate governance regime right at the start of its journey. Rather than proposing a mandatory framework, with certain boardroom practices set out in law, it advocated an approach based on compliance with a voluntary code, coupled with disclosure to shareholders in the annual report.

The Cadbury code (named after committee chair Sir Adrian Cadbury) became the first ‘comply or explain’ governance code in the world.

The corporate governance landscape has shifted significantly since 1992 – a combination of gradual evolution reflecting societal changes and urgent responses to periodic business scandals. The key milestones along this journey may be traced in the major revisions to the UK codes over time.

Early reports

Three reports laid the foundations, each addressing issues that remain topical today.

In 1992, the Cadbury Report, in addition to introducing the concept of ‘comply or explain’, developed a set of good governance principles that were incorporated in the London Stock Exchange’s listing rules. They included three key recommendations:

• The positions of CEO and chair should be separated.
• Boards should have at least three non-executive directors (NEDs), two of whom should have no financial or personal ties to executives.
• Each board should have an audit committee composed of NEDs.

The global financial crisis led to extensive consultations on whether the Combined Code was fit for purpose

The Greenbury Report in 1995 addressed concerns over senior executive pay. It produced a best practice code for executive remuneration, including establishing a remuneration committee of NEDs to determine executive directors’ compensation, disclosure in the annual report with shareholder approval at the AGM, and remuneration linked more explicitly to performance.

In 1998, the Hampel Report advised against ‘prescriptive box-ticking’. The report reviewed Cadbury and Greenbury, and evaluated implementation of their proposals. It recommended a single code of corporate governance – leading to the Combined Code, applied to all UK listed companies.

Combined Code

The Combined Code on Corporate Governance was issued in 1998. It sets out a series of best practice principles of good governance and addresses directors, directors’ remuneration, relations with shareholders, accountability and audit, and institutional investors. In later versions, the principles were supplemented by more detailed code provisions.

The Combined Code was updated four times and became the responsibility of the Financial Reporting Council (FRC) in 2003. Three reports were key drivers in its development:

• Turnbull (1999), setting out best practice on internal control and providing guidelines for directors on how to meet their obligations in the Combined Code. It was updated in 2005 and was superseded by the FRC’s risk guidance in 2014.
• Smith (2003), published in the aftermath of the Enron scandal and collapse of Arthur Andersen. It addressed auditor independence and clarified the role and responsibilities of audit committees. The committee developed guidance for directors on audit committees, most recently updated in 2016.
• Higgs (2003), reviewed the role and effectiveness of NEDs, highlighting the importance of NED independence. The report influenced the Combined Code, including the provision that at least half of a board (excluding the chair) should comprise independent NEDs, and the introduction of criteria that could impair that independence. The FRC published good practice suggestions from the report in 2006 – since adapted into the Guidance on Board Effectiveness.

Corporate governance code

The global financial crisis (2007-08) led to extensive consultations on the effectiveness of the Combined Code – was it fit for purpose? Among many revisions, the most visible was renaming the Combined Code as the UK Corporate Governance Code (the Code) in 2010.

Responding to the crisis, the Code was strengthened in two significant areas in 2010:

• Board diversity. To encourage boards to be well balanced and avoid ‘group think’, new principles on board composition and selection were added, including the need to appoint directors on merit, against objective criteria and with due regard to the benefits of diversity, including gender.
• Risk. To improve risk governance, the board should be responsible for determining the nature and extent of the significant risks it is willing to take.

After further revisions, the Code was last updated in 2018 when concerns about poor corporate governance at BHS and Carillion triggered a major review. This review aimed to update and improve governance practices, thereby promoting both long-term business success and the attractiveness of UK capital markets.

Further revisions are scheduled for 2024, including stronger provisions relating to internal controls

The Code retains many elements from previous versions, but it has now been adapted to reflect the changing economic and social climate. For example, Principle A states that the role of an effective board is to promote the long-term sustainable success of the company, not only generating value for shareholders but also contributing to wider society.

The changes mean that the Code:

• is shorter, sharper and more accessible
• focuses more on stakeholders – the board should communicate effectively with all stakeholders, especially employees, rather than concentrating on shareholders
• highlights the importance of diversity and succession planning
• acknowledges for the first time that sustainable success depends upon the board establishing the company’s purpose, values and strategy, and aligning these with its culture.

What next for the Code? Further revisions are scheduled for 2024, with stronger provisions relating to internal controls already promised. The UK’s corporate governance journey is set to continue.

Further information

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Evolution of Corporate Governance Reports in the UK and Ireland

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Code of Best Practice ; Corporate Governance ; Good Corporate Practices ; History of Corporate Governance in the UK

Corporate Governance was defined by Sir Adrian Cadbury in 1992 as the “system by which companies are directed and controlled.”

Introduction

Investors, and indeed the public at large, are driving policy change in the wake of the global financial crisis which has revealed far too many shortcomings in corporate governance practice. This entry examines the development of corporate governance policy in the United Kingdom (UK) and Ireland which has, until recently, been closely aligned, and explores the way forward which sees a divergence in approach to ensuring good governance (Hamill et al. 2010 ).

Cadbury ( 1992 ) defined corporate governance as “the system by which companies are directed and controlled.” As such corporate governance is typically found to be wanting when corporations fail. Corporate governance problems are not new; they have been experienced...

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Cotter, J., Shivdasani, A., & Zenner, M. (1997). Do independent directors enhance target shareholder wealth during tender offers? Journal of Financial Economics, 43 , 195–218.

Dahya, J., & McConnell, J. (2007). Board composition, corporate performance and the Cadbury Committee recommendation. Journal of Financial and Quantitative Analysis, 42 , 535–564.

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Grant Thornton, ISEQ Corporate Governance Review 2009.

Greenbury Report. (1995). Director’s remuneration . London: Gee Professional.

Hamill, P. A., Ward, A. M., & Wylie, J. (2010). Corporate governance policy: New Dawn in Ireland and the UK. Accountancy Ireland, 42 (6), 56–59.

Hamill, P. A., Ward, A. M., & Wylie, J. (2011). Corporate governance: Agency and executive compensation. Accountancy Ireland, 43 (2), 68–70.

Hampel, R. (1998). Committee on corporate governance . London: Financial Reporting Council, Gee.

Higgs, D. (2003). Review of the role and effectiveness of non-executive directors (Higgs report) . London: Department of Trade and Industry.

Hwang, B. H., & Kim, S. (2009). It pays to have friends. Journal of Financial Economics, 93 , 138–158.

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OECD. (2009). OCD the corporate governance lessons from the financial crises . Paris: OECD.

Perry, T., & Shivdasani, A. (2005). ‘Do boards affect performance?’ Evidence from corporate restructuring. Journal of Business, 78 (4), 1403–1431.

PIRC. (2010). PIRC shareholder voting guidelines 2010 . www.pirc.co.uk/publications.

Sarbanes-Oxley Act. (2002). http://www.soxlaw.com/ . Accessed May 2012.

Smith, R. (2003). Audit committees: A report and proposed guidance (the Smith report) . London: Financial Reporting Council.

The Combined Code on Corporate Governance. (1999). London: Institute of Chartered Accountants in England and Wales.

Turnbull, N. (1999). Internal control: Guidance for directors on the combined code (the Turnbull report) . London: Institute of Chartered Accountants in England and Wales.

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Walker, D. (2009). A review of corporate governance in UK banks and other financial industry entities (Walker review) . London: The Walker Review Secretariat.

Ward, A. M. (2010). Finance: Theory and practice . Dublin: CAI.

Weisbach, M. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20 , 431–460.

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Department of Accounting, University of Ulster at Jordanstown, Newtownabbey, Antrim, BT37 0QB, UK

Prof. Philip Hamill Ph.D.

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Ward, A.M., Judith, W., Hamill, P. (2013). Evolution of Corporate Governance Reports in the UK and Ireland. In: Idowu, S.O., Capaldi, N., Zu, L., Gupta, A.D. (eds) Encyclopedia of Corporate Social Responsibility. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-28036-8_661

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Journal of Financial Crime

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Article publication date: 31 December 2002

Describes the 19‐point code of corporate governance produced in 1991 by the Cadbury Committee, which was set up by the Stock Exchange, the Financial Reporting Council and the accounting profession; the aim was to improve the standard of corporate governance in Britain. Outlines its narrow terms of reference, which were to spread the boardroom practices of the best run companies to the rest, rather than to reform practice; the main issues covered were board responsibilities, directors’ qualifications, audit rotation, audit committee and auditor liability. Lists the Confederation of British Industry’s reasons for rejecting some of its proposals, proposals rejected by the Committee itself, general criticisms of the report, and Canadian reaction to it as expressed in the Toronto Stock Exchange committee report. Concludes that the Code, though voluntary and lacking enforcement power, is likely to impact on auditors, upon whom it relies as watchdogs to alert the public, especially as it criticises them for charging high consultancy fees.

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• Financial institutions
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Hemraj, M.B. (2002), "Preventing corporate failure: the Cadbury Committee’s corporate governance report", Journal of Financial Crime , Vol. 10 No. 2, pp. 141-145. https://doi.org/10.1108/13590790310808727

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1995 to present day

The Cadbury Report and resulting Code of Best Practice may have succeeded in their aims of providing a model for effective corporate governance and restoring some measure of investor confidence in the running of the UK's public companies, but that was not an end to the matter, rather a beginning.

The Cadbury Committee had proposed the establishment of a successor to monitor levels of compliance with its recommendations (which were, after all, entirely voluntary). In the event this was but one of many that sought to lay down further guidelines for public and private companies, the most significant of which are the following:

Study Group on Directors' Remuneration: Final Report (The Greenbury Report) - 1995

Download the Greenbury Report (PDF)

The Greenbury Committee was established in 1994 by the Confederation of British Industry in response to growing concern at the level of salaries and bonuses being paid to senior executives.

Its key findings were that Remuneration Committees made up of non-executive directors should be responsible for determining the level of executive directors' compensation packages, that there should be full disclosure of each executive's pay package and that shareholders be required to approve them. Remuneration should be linked more explicitly to performance, and set at a level necessary to 'attract, retain and motivate' the top talent without being excessive. It also proposed that more restraint be shown in awarding compensation to outgoing Chief Executives, especially that their performance and reasons for departing be taken into account.

Again this code of conduct was to be voluntary in the hope that self-regulation would be sufficient to correct things. It was judged that shareholders were not so much concerned with exorbitant amounts being paid out to executives than that the payouts be more closely tied to performance.

Committee on Corporate Governance: Final Report (The Hampel Report) - 1998

Download the Hampel Report (PDF)

This Committee was established in November 1995 by the Financial Reporting Council (and sponsored in part by the London Stock Exchange, Confederation of British Industry, and Institute of Directors) to review matters arising from the Cadbury and Greenbury Committees and evaluate implementation of their recommendations.

The Committee declared at the outset that it would remain mindful of 'the need to restrict the regulatory burden on companies and to substitute principles for detail wherever possible', and disdained 'prescriptive box-ticking' in favour of highlighting positive examples of good practice. Finding that the balance between 'business prosperity and accountability' had shifted too far in favour of the latter, they decided that corporate governance was ultimately a matter for the board. If boards felt it was in the interests of enhancing 'prosperity over time' to have a unitary CEO and Chair, or not to put remuneration policy before the AGM for approval then that was their concern. Transparency was more important than adhering to any particular set of guidelines, and any shareholders unhappy with the board's management had the option of using their votes accordingly.

The Combined Code: Principles of Good Governance and Code of Best Practice - 1998

Download the Combined Code Report (1998) (PDF) Download the Combined Code Report (2003 updated version) (PDF) Download the Combined Code Report (2006 updated version) (PDF) Download the Combined Code Report (2008 updated version) (PDF) Download the Combined Code Report (2009 updated version) (PDF)

This code was initially derived from the findings of the Committee on Corporate Governance, and has since been regularly revised. Overseen by the Financial Reporting Council and endowed with statutory authority under the Financial Services and Markets Act of 2000, it adheres to Hampel's preference for principles over 'one size fits all' rules, and the notion that shareholders be the ultimate arbiters of good corporate governance, that such notions are for the market to enforce rather than the law. The language is more one of shared responsibility between board and shareholders than of accountability, and the 1998 version states that "institutional shareholders have a responsibility to make considered use of their votes", while the 2008 iteration declares that "shareholders for their part can still do more to satisfy companies that they devote adequate resources and scrutiny to engagement".

Principles outlined in the Code include the presence of non-executive directors on remuneration and audit committees, performance-related pay and the varying degrees of liability between executive and non-executive directors. The Financial Services and Markets Act (2000) requires that listed companies "comply or explain", but the preambles accept that "departures may be justified in particular circumstances", that such departures are not "automatically treated as breaches" and that companies have a free hand in explaining their decisions.

In 2007 only a third of listed companies were fully compliant with the Code as it then stood, although individual elements saw far higher levels - almost 90 per cent of companies for instance split the roles of Chief Executive and Chair. (Pensions Investment Research Consultants Ltd, 2007, Review of the impact of the combined code, p.2)

http://www.pirc.co.uk/sites/default/files/documents/FRCresponse.pdf (PDF)

Internal Control: Guidance for Directors on the Combined Code (Turnbull Report) - 1999

Download the Turnbull Report (PDF) Download the Turnbull Report (2005 updated version with revised guidance) (PDF)

These guidelines were put together by the Institute of Chartered Accountants at the request of the London Stock Exchange in order to inform directors of their obligations toward internal control as specified in the Combined Code. The Code states that "the board should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets".

Turnbull's recommendations were that directors detail exactly what their internal control system consisted of, regularly review its effectiveness, issue annual statements on the mechanisms in place, and, if there is no internal audit system in place, to at least regularly review the need for one.

Review of the Role and Effectiveness of Non-Executive Directors (Higgs Report) - 2003

Download the Higgs Report (PDF)

It was wondered, in the aftermath of the Cadbury Report, where the abundance of talented and conscientious non-executive directors that the system relied upon might come from, and this was still a subject of concern ten years later.

The Higgs Report, commissioned by the UK Government to review the roles of independent directors and of audit committees, has a slightly different flavour from those preceding it, and while it too rejects "the brittleness and rigidity of legislation" it is certainly more prescriptive and firm in its recommendations, aiming to reinforce the stipulations of the Combined Code.

Specifically the Report proposes that:

• at least half of a board (excluding the Chair) be comprised of non-executive directors;
• that those non-executives should meet at least once a year in isolation to discuss company performance (a move away from the clear preference for unitary board structures displayed elsewhere);
• that a senior independent director be nominated and made available for shareholders to express any concerns to; and
• that potential non-executive directors should satisfy themselves that they possess the knowledge, experience, skills and time to carry out their duties with due diligence.

Elements of these recommendations were duly compiled by the Financial Reporting Council and released as Good Practice Suggestions from the Higgs Report (PDF) in June 2006, but the bulk of the suggestions have not as yet been formally incorporated into the Combined Code (though the suggested proportion of non-executive directors on the board was raised from "not less than a third" to half in the 2003 version). A CBI poll conducted in response to the Reports found that 82 per cent of FTSE 100 Chairmen thought that the role of Senior Independent Director would undermine their own.

A Review of Corporate Governance in UK Banks and Other Financial Industry Entities (Walker Report) - 2009

Download the Walker Report (PDF)

This review was commissioned by the Prime Minister in February 2009 to examine board practices at UK banks, and later extended to other financial institutions, in response to the recent financial crisis and perceived imbalance between shareholders' limited liability for institutional debts and the effectively unlimited liability of the taxpayer when obliged to bail them out. 'Serious deficiencies in prudential oversight' were noted, along with 'major governance failures within banks', but still promotion of best practice rather than formal regulation is identified as the best means to ensure ownership of good corporate governance

The review comprises five key themes:

• that the prevailing unitary board structure and FRC Combined Code remain 'fit for purpose';
• that deficiencies in board practice are predominantly of behavior rather than organization, and that a process of challenging the executive needs to be embedded, a responsibility laid at the door of non-executive directors;
• that greater dedicated non-executive directorial focus on risk management is required, supported by a dedicated Chief Risk Officer;
• that active engagement remains a responsibility of shareholders and, in the case of mutual funds, a commitment to a Stewardship Code; and
• substantial enhancement is necessary of board level oversight of remuneration of all senior employees (not just board level), to be more closely aligned with medium and long-term risk and performance.

The Cadbury Archive at Cambridge Judge Business School consists of papers compiled and preserved by Sir Adrian Cadbury from his time as Chairman of the Committee on the Financial Aspects of Corporate Governance.

For more information about this archive or to enquire about access to original documents, please:

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Comply or explain in corporate governance codes: in need of greater regulatory oversight.

Published online by Cambridge University Press:  02 January 2018

At the heart of the voluntary corporate governance code in the UK and elsewhere is the concept of ‘comply or explain’. It provides that a company is to comply with a code's provision; but if it does not do so, then it is to state that it does not and explain why it does not. There is no provision in the UK for any statements by companies to be assessed by any regulatory body. It is incumbent on the markets generally and the company's shareholders specifically to determine whether the response of the company to code provisions does enough, and then to take some action if they do not. The aim of comply or explain is to empower shareholders to make an informed evaluation as to whether non-compliance is justified, given the company's circumstances. This paper assesses whether the present scheme, which relies on the stewardship of shareholders and the efficiency of the markets, should continue, or whether a regulatory body should be empowered to determine whether companies are in fact complying with code provisions or, if not, whether they are providing adequate explanations for not complying.

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Professor of Corporate and Commercial Law, Centre of Business Law and Practice, School of Law, University of Leeds and Barrister, Kings Chambers and 13 Old Square Chambers. A previous version of this paper was presented at the 4th Cambridge International Regulation and Governance Conference, held at Queen's College, University of Cambridge, on 6 September 2012. I am grateful to the Legal Studies reviewers and for their comments. All errors remain my responsibility.

1. Karlsson-Vinkhuyzen , S and Vihma , A ‘ Comparing the legitimacy and effectiveness of global hard and soft law: an analytical framework ’ ( 2009 ) 3 Reg & Gov 400 . CrossRef Google Scholar ‘Soft law’ is defined by Francis Snyder as ‘rules of conduct which, in principle, have no legally binding force but which nevertheless may have practical effects’: Snyder , F ‘ Soft law and institutional practice in the European Community ’, Law Working Paper 93/5 ( Florence : European University Institute , 1993 ) at 2 . Google Scholar

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8. It must be noted that there have been some interesting developments in other EU Member States. Some of these are discussed later in the paper.

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12. Ibid, at 4.

13. The Cadbury Report has been regarded as ‘the cornerstone of the comply-or-explain framework in Europe, long before this system was introduced in European law’: EU ‘Study on monitoring and enforcement practices in corporate governance in the Member States’ conducted by RiskMetrics Group for the EU (23 September 2009) at 22, available at http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-090923_en.pdf (accessed 27 April 2012).

14. See eg Company Law Review Modern Company Law for a Competitive Economy: Completing the Structure (London: DTI, 2000) para 12.50; Company Law Review Modern Company Law for a Competitive Economy: Final Report (HMSO, London, 2001) para 3.49.

15. EU, above 14, at 11.

16. The Directive has been implemented by the vast majority of Member States.

17. Statement of the European Corporate Governance Forum on the comply-or-explain principle (22 February 2006) para 1, available at http://ec.europa.eu/internal_market/company/docs/ecgforum/ecgf-comply-explain_en.pdf (accessed 19 June 2012).

18. Above 16, pp 12, 167.

19. See eg European Company Law Experts’ Response to the European Commission's Green Paper ‘The EU Corporate Governance Framework’ (22 July 2011) p 22, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1912548 (accessed 12 September 2012).

20. FRC Uk Stewardship Code (July 2010), available at http://www.frc.org.uk/images/uploaded/documents/UK%20Stewardship%20Code%20July%2020103.pdf (accessed 16 April 2012).

21. Cadbury Report para 8 under ‘Preface’ at 3.

22. FRC, above 12, para 8.

23. Easterbrook , F and Fischel , D The Economic Structure of Corporate Law ( Cambridge, MA : Harvard University Press , 1996 ); Google Scholar A Anand ‘Voluntary vs mandatory corporate governance: towards an optimal regulatory framework’ (2005) at 10, available at http://law.bepress.com/15th/baszaar/art44 (accessed 12 September 2012);

24. Gregory , H and Simmelkjaer , R Ii ‘ Comparative study of corporate governance codes relevant to the European Union and its Member States ’, Final Report ( Brussels : European Union – Internal Market Directorate General, Weil, Gotshal and Manges LLP , 2002 ) at 68 – 69 , available at http://ec.europa.eu/internal_market/company/docs/corpgov/corp-gov-codes-rpt-part1_en.pdf (accessed 8 March 2012). Google Scholar

25. SeidlD, SandersonP and RobertsJ ‘Applying the ‘comply-or-explain principle’: discursive legitimacy tactics with regard to codes of corporate governance’, paper presented at the 4th Cambridge International Regulation and Governance Conference, Queen's College, Cambridge, 6 September 2012. Any reduction in the share price of a company is known as an ‘illegitimacy discount’: Zuckerman E. ‘The categorical imperative: securities analysts and the illegitimacy discount’ (1999) 104 Am J Sociol 1398).

26. SeidlD and SandersonP ‘Comply or explain: the flexibility of corporate governance codes in theory and in practice’ (12 September 2007), available at http://www.cbr.cam.ac.uk/pdf/Seidl_Sanderson_Paper.pdf (accessed 5 March 2012).

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30. ThorntonGrant ‘A challenging climate’ at 6, available at http://www.grant-thornton.co.uk/pdf/corporate_governance.pdf (accessed 21 June 2012).

31. Seidl etal, above 24. Interestingly, the study found that only 15% of the 130 largest German companies were fully compliant with the German code (Cromme Code).

32. Above 29, p 491.

33. The Swedish approach is somewhat of an exception, as it provides that if a company does not comply, then it must explain the reasons for not doing so, and describe the solution that has been adopted instead (‘Response to the European Commission Green Paper on the EU Corporate Governance Framework’ (2011) at 6, available at http://www.frc.org.uk/images/uploaded/documents/FRC%20response%20to%20the%20Green%20Paper%20on%20the%20EU%20corporate%20governance%20framework%20July%202011.pdf (accessed 15 March 2012).

34. MacNeil , I and Li , X ‘“ Comply or explain”: market discipline and non-compliance with the Combined Code ’ ( 2006 ) 14 Corp Gov Int'l Rev 486 at 488 ; an earlier version is available at http://ssrn.com/abstract=726664 (accessed 5 March 2012). CrossRef Google Scholar

35. Seidl etal, above 24.

36. Rule 12.43A.

37. ArmourJ ‘Enforcement strategies in Uk corporate governance: a roadmap and empirical assessment’ (April 2008), available at http://ssrn.com/abstract=1133542 (accessed 21 June 2012) at 1; above 16, p 66. This accords with the views expressed by the then Chief Executive of the FSA, SandsH ‘The crisis: the role of investors’, NAPF Conference 2009 (11 March 2009), available at http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0311_hs.shtml (accessed 20 June 2012).

38. Gregory and Simmelkjaer, above 25; Moore, above 10, pp 135–136.

39. FRC ‘Regulatory impact assessment: Combined Code on Corporate Governance’ (July 2003) at 6, available at http://www.ecgi.org/codes/documents/regulatoryimpact.pdf (accessed 29 January 2013).

40. Coombes and Wong, above 6, p 51.

41. Andres , C and Thiessen , E ‘ Setting a fox to keep the geese – Does the company-or-explain principle work? ’ ( 2008 ) 14 J Corp Finance 289 . CrossRef Google Scholar

42. Above 18, para 2.

43. See Keay , A and Adamopoulou , R ‘ Shareholder value and Uk companies: a positivist inquiry ’ ( 2012 ) 13 Eur Bus Org Law Rev 1 . CrossRef Google Scholar

44. Sands, above 38.

45. To improve shareholder engagement, Eva Micheler has suggested that the establishment of an Internet-based review and rating facility would be a way to facilitate shareholder engagement: above 24.

46. International Corporate Governance Network ‘G20 Leaders’ Summit: the role of corporate governance in restoring stability’ (23 March 2009), originally available at http://www.icgn.org/files/icgn_main/pdfs/news/icgn_letter_to_the_ukpm_24_march_09_pdf (accessed 20 June 2009).

47. Sands, above 38. Mr Sands was the Chief Executive of the Financial Services Authority at the time.

48. Above 16, p 17.

49. Ibid, p 71.

50. See http://www.manifest.co.uk/what-we-do/vote-agency/ (accessed 19 June 2012).

51. Statement made at the NAPF Conference 2011, available at http://www.professionalpensions.com/professional-pensions/news/2118871/napf-conference-2011-proxy-voting-agencies-acute-governance-chief (accessed 19 June 2012).

52. Moore, above 10, p 103.

53. Ibid, p 123.

54. MacNeil and Li, above 35, p 492. This view appears to be affirmed by ArcotS and BrunoV ‘In letter but not in spirit: an analysis of corporate governance in the Uk’ (May 2006), available at http://ssrn.com/abstract=819784 (accessed 22 February 2012).

55. FRC ‘Response to the European Commission Green Paper on the Eu Corporate Governance Framework’ (2011) at 28 (Executive Summary), available at http://www.frc.org.uk/images/uploaded/documents/FRC%20response%20to%20the%20Green%20Paper%20on%20the%20EU%20corporate%20governance%20framework%20July%202011.pdf (accessed 15 March 2012).

56. According to the latest available report from the Office for National Statistics in Ownership of Uk Quoted Shares 2010 (28 February 2012) p 3, available at http://www.ons.gov.uk/ons/dcp171778_257476.pdf (accessed 13 April 2012).

57. See Cheffins , B ‘ The stewardship code's Achilles’ heel ’ ( 2010 ) 73 MLR 1004 , 1013, 1016. CrossRef Google Scholar

58. For instance, above 16, pp 47–52. Also, see Goergen M, Renneboog L and Zhang C ‘Do Uk institutional shareholders monitor their investee firms?’ [2008] 8 J Corp Law Stud 39; Santella P etal, ‘Legal obstacles to institutional investor activists in the Eu and in the Us’ [2012] Eur Bus Law Rev 257.

59. Above 16, p 11.

61. Arcot and Bruno, above 55.

62. In fairness, the researchers do recognise these reasons.

63. For greater discussion, see Keay A ‘Company directors behaving poorly: disciplinary options for shareholders’ [2007] JBL 656.

64. This might well be embraced by small investors, but those holding larger volumes might not be able to do so because of specific investment policies, contractual limitations or because disposing of a significant block of shares could lead to a substantial loss that the investor is not willing to sustain. See above 16, p 71.

65. But unless a shareholder is a substantial investor or able to cobble together a coalition of like-minded shareholders, then this is not likely to be very effective.

66. But shareholders might feel that their shareholding is too small to warrant a monitoring strategy to enable them to exercise their voting rights to their advantage.

67. This provision states that directors have a duty to act in accordance with the company's constitution.

68. But to continue a derivative action, shareholders need the permission of the court, and the case-law suggests that obtaining the permission of the court is not an easy task. See Keay A and Loughrey J ‘Derivative proceedings in a brave new world for company management and shareholders’ [2010] JBL 151.

69. Wymeersch , E ‘ Enforcement of corporate governance codes ’ ( 2006 ) 6 JCLS 113 at 118 ; an earlier version of the paper is available at http://ssrn.com/abstract=759364 (accessed 21 June 2012). Google Scholar

70. PIRC Corporate Governance Annual Review (2004).

71. ThorntonGrant Ftse 350 Corporate Governance Review (2003).

72. ThorntonGrant, above 31, at 6.

73. A study of 257 listed UK companies by David Seidl, Paul Sanderson and John Roberts seems to have found something similar: above 26.

75. Arcot and Bruno, above 62.

76. Arcot etal, above 11, p 193.

78. Seidl etal, above 24.

79. Arcot and Bruno, above 62.

83. Seidl etal, above 24. This also seems to be the case in Belgium: De ClynS ‘Compliance of companies with corporate governance codes’ (2008) 3 J Bus Systems, Gov & Ethics 1 at 12–13.

84. ThorntonGrant, above 31, at 6.

85. Above 16, p 13.

86. Ibid. Both the RMG Study and director institute and business associations studies found the UK to be in the top four countries as far as disclosure was concerned.

87. FRC ‘Review of the effectiveness of the Combined Code: summary of the main points raised in responses to the March 2009 Call for Evidence’ (July 2009) at 37, available at http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_2009/Web_changes_to_2009_Review_of_the_Combined_Code_July_2009/FRC%20Summary%20of%20responses%20to%20March%202009%20consultation.pdf (accessed 22 March 2012).

88. Ibid. The respondent was the Investment Management Association.

89. Ibid, p 38. The respondent was Railpen Investments.

90. Moore, above 10, p 103; above 16, p 152.

91. FRC, above 88, p 38.

92. Moore, above 10, p 127.

93. Arcot etal, above 11.

94. FRC, above 88, pp 37, 38.

95. FRC ‘Developments in corporate governance 2011’ (December 2011) at 3, available at http://www.frc.org.uk/images/uploaded/documents/Developments%20in%20Corporate%20Governance%2020116.pdf (accessed 15 March 2012).

96. Above 16, p 181.

97. Ibid, p 83.

98. TaylorP ‘Enlightened shareholder value and the Companies Act 2006’, unpublished PhD thesis, Birkbeck College, University of London (May 2010) at 186; VilliersC ‘Narrative reporting and enlightened shareholder value under the Companies Act 2006’ in LoughreyJ (ed) Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis (Cheltenham: Edward Elgar, 2012) at 118.

99. Taylor, above 99, p 196.

100. Hooghiemstra , R ‘ What determines the informativeness of firms’ explanations for deviations from the Dutch corporate governance code? ’ ( 2012 ) 42 Account & Bus Res 1 at 6 –7. CrossRef Google Scholar

101. Healy , P and Palepu , K ‘ Information asymmetry, corporate disclosure and the capital markets: a review of the empirical disclosure literature ’ ( 2001 ) 31 J Account & Econ 405 . CrossRef Google Scholar

102. MacNeil and Li, above 35, pp 489–490.

103. FRC What Constitutes an Explanation under Comply or Explain? (February 2012), available at http://www.frc.org.uk/images/uploaded/documents/FRC%20explanations%20paper%200301121.pdf (accessed 28 June 2012).

104. Ibid, p 6.

105. Above 16, p 12.

106. Ibid, p 13.

107. Ibid, p 155.

108. Arcot etal, above 11.

110. Seidl etal, above 24.

111. Belcher , A ‘ Regulation by the market: the case of the Cadbury code and compliance statement ’ [ 1995 ] JBL 321 at 331 . Google Scholar

112. FRC ‘Revisions to the Uk Corporate Governance Code and Guidance on Audit Committees’ (April 2012) at 7, available at http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/April_2012/Cons%20Doc%20UK%20Corp%20Gov%20Code%20and%20Guidance%20on%20Audit%20Committees.pdf (accessed 28 June 2012).

113. Draft Plan and Budget 2012/13 (March 2012) p 4, available at http://www.frc.org.uk/images/uploaded/documents/FRC%20draft%20plan%20and%20budget%202012-131.pdf (accessed 28 June 2012).

114. Above 116, p 1.

115. FRC, above 104.

116. Arcot and Bruno, above 62.

117. EC The Eu Corporate Governance Framework , COM(2011) 164 para 3.2, available at http://ec.europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf#page=2 (accessed 16 April 2012).

118. Arcot etal, above 11.

119. ‘Corporate governance in financial institutions and remuneration policies’ COM(2010) 84 at 86, available at http://ec.europa.eu/internal_market/company/docs/modern/com2010_284_en.pdf (accessed 27 April 2012). Also, see the comments of MooreMarc, above 10.

120. Arcot etal, above 11, p 194.

121. Above 16, p 18.

122. FRC ‘Regulatory impact assessment: Combined Code on Corporate Governance’ (July 2003) at 6, available at http://www.ecgi.org/codes/documents/regulatoryimpact.pdf (accessed 9 March 2012).

123. Ibid, p 6.

124. FRC ‘The Combined Code on Corporate Governance’, June 2006, para 4, available at http://www.slc.co.uk/media/78872/combined_20code_20june_202006.pdf (accessed 25 March 2013).

125. For instance, see A Keay ‘Company directors behaving poorly: disciplinary options for shareholders’ [2007] J Bus Law 656.

126. FRC ‘Uk Corporate Governance Code’, September 2012, para 4 at 4, available at http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.aspx (accessed 25 March 2013).

127. Above 16, p 178.

128. ECO 3722/2003 of 26 December. See Spanish Unified Good Corporate Governance Code (2006) at 7, available at http://www.cnmv.es/DocPortal/Publicaciones/CodigoGov/Codigo_unificado_Ing_04en.pdf (accessed 28 January 2013).

129. See http://ec.europa.eu/internal_market/consultations/2011/corporate-governance-framework/individual-replies/spanish-cnmv-advisory-board_en.pdf (accessed 28 January 2013).

130. Above 16, p 179.

131. Ibid, p 166. The regulator acts under the Securities Markets Act, available at http://www.ebrd.com/downloads/legal/securities/slovsm.pdf (accessed 28 January 2013).

132. Abma , R and Olaerts , M ‘ Is the comply or explain principle a suitable mechanism for corporate governance throughout the Eu? the Dutch experience ’ ( 2012 ) 9 Eur Company Law 286 at 298 . Google Scholar

133. Above 88, p 3. The comment was made by Timothy Boatman.

134. EC, above 118.

135. Ibid, para 3.1.

136. Ibid, para 3.2.

139. Department of Business Innovation and Skills ‘Uk government response to European Commission Green Paper: the Eu Corporate Governance Framework’ (July 2011) at 17, available at http://www.bis.gov.uk/assets/biscore/europe/docs/u/11-1097-uk-government-response-eu-corporate-governance-framework (accessed 12 September 2012).

140. FRC ‘Response to the European Commission Green Paper on the Eu Corporate Governance Framework’ (2011), available at http://www.frc.org.uk/images/uploaded/documents/FRC%20response%20to%20the%20Green%20Paper%20on%20the%20EU%20corporate%20governance%20framework%20July%202011.pdf (accessed 15 March 2012). It reiterated its opposition in a later report: FRC, above 104.

141. Ibid, p 5.

142. Ibid, p 3.

143. MacNeil and Li, above 35, p 488.

144. Ibid, p 5.

145. Ibid, p 6.

148. Ibid, p 28 (Annex 1).

149. European Company Law Experts’ Response to the European Commission's Green Paper (DaviesP etal) ‘The Eu Corporate Governance Framework’ (22 July 2011) p 23, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1912548 (accessed 12 September 2012)

150. Ibid, pp 23–24.

151. FRC, above 104.

152. FRC ‘Revisions to the Uk stewardship code’ (April 2012) at 1, available at http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/April_2012/Cons%20Doc%20UK%20Stewardship%20Code.pdf (accessed 27 April 2012).

153. Interim Report (February 2012), available at http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-631-kay-review-of-equity-markets-interim-report (accessed 27 April 2012).

154. These included Grant Thornton and the Chartered Institute of Management Accountants.

155. FRC, above 88, p 39.

156. See Winter , R ‘ State law, shareholder protection, and the theory of the corporation ’ ( 1977 ) 6 J Legal Stud 251 at 258 . CrossRef Google Scholar

157. Above 18.

158. Above 16, p 16.

159. Ibid, p 64.

160. Ibid, p 60.

161. Ibid, p 64.

162. Ibid, p 179.

163. See eg AnandA ‘Voluntary vs mandatory corporate governance: towards an optimal regulatory framework’ (2005) at 10, available at http://law.bepress.com/15th/baszaar/art44 (accessed 12 September 2012).

164. ‘Corporate governance in financial institutions and remuneration policies’ COM(2010) 285 at 286, available at http://ec.europa.eu/internal_market/company/docs/modern/com2010_284_en.pdf (accessed 27 April 2012).

165. Hooghiemstra and H van Ees, above 29, p 481.

166. Above 16, p 62.

167. Ibid, p 64.

168. Armour, above 38. This approach has been successful in Australia: Welsh M ‘New sanctions and increased enforcement activity in Australian corporate law: impact and implications’ (2012) 41 Common Law Wld Rev 134 at 140.

169. For discussion of the pyramid, see AyresJ and BraithwaiteJ Responsive Regulation: Transcending the Deregulation Debate (New York: Oxford University Press, 1992).

170. A measure supported in the European Company Law Experts’ Response to the European Commission's Green Paper: Davies etal, above 150, p 24.

171. Karlsson-Vinkhuyzen and Vihma, above 2, p 406.

172. This is something that was raised in the ‘Study on monitoring and enforcement practices in corporate governance in the member states’: above 16, p 69.

173. ThorntonGrant, above 31, at 6.

174. See the comments of SandsHector in his speech ‘Delivering effective corporate governance: the financial regulators [ sic ] role’, Merchant Taylors’ Hall, London (24 April 2012), available at http://www.fsa.gov.uk/library/communications/speeches/20120424-hs.shtml (accessed 21 June 2012).

175. Welsh, above 173, p 136.

176. Hooghiemstra and van Ees, above 29, pp 481, 493.

177. Above 16, p 16.

178. Above 18.

179. Above 16, p 150.

180. Ibid, p 165.

181. Ibid, p 166.

182. Ibid, p 12.

184. Ibid, p 13.

185. Ibid, p 166.

186. MacNeil and Li, above 35, p 489.

187. EC ‘The Eu: Corporate Governance Framework’ (2010), available at http://ec.europa.eu/internal_market/company/docs/modern/com2010-284_en.pdf# (accessed 16 April 2012).

188. Cadbury , A Corporate Governance and Chairmanship: A Personal View ( Oxford : Oxford University Press , 2008 ) p 28 . Google Scholar

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