Corporate Governance

Task 1

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

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

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

In 1996, the Hampell committee set out to look into the extent to which the Cadbury and Greenbury Reports had been put into practice and whether the objectives of the reports had been met. It led to the Combined Code of Corporate Governance (1998) which covered the following areas: accountability and audit; director’s remuneration; structure and practices of the boards; responsibilities of institutional shareholders and relations with those shareholders. The Hampell Report