21-12-2012, 03:16 PM
ADRIAN CADBURY REPORT
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The origin of the report
The Committee on the Financial Aspects of Corporate Governance, forever after known as the Cadbury Committee, was established in May 1991 byte Financial Reporting Council, the London Stock Exchange, and the accountancy profession. The spur for the Committee's creation was an increasing lack of investor confidence in the honesty and accountability of listed companies, occasioned in particular by the sudden financial collapses of two companies, wallpaper group Chloral and Asil Nadir's Polly Peck consortium: neither of these sudden failures was at all foreshadowed in their apparently healthy published accounts. Even as the Committee was getting down to business, two further scandals shook the financial world: the collapse of the Bank of Credit and Commerce International and exposure of its widespread criminal practices, and the posthumous discovery of Robert Maxwell's appropriation of £440m from his companies' pension funds as the Maxwell Group filed for bankruptcy in 1992. The shockwaves from these two incidents only heightened the sense of urgency behind the Committee's work, and ensured that all eyes would be on its eventual report. The effect of these multiple blows to the perceived probity and integrity of UK financial institutions was such that many feared an overly heavy-handed response, perhaps even legislation mandating certain boardroom practices. This was not the strategy the Committee ultimately suggested, but even so the publication of their draft report in May 1992 met with a degree of criticism and hostility by institution which believed themselves to be under attack. Peter Morgan, Director General of the Institute of Directors, described their proposals as’ divisive', particularly language favoring a two-tier board structure, of executive directors on the one hand and of non-executives on the other.
The contents of the Report
The suggestions which met with such disfavor were considerably toned down come the publication of the final Report in December 1992, as were proposals that shareholders have the right to directly question the Chairs of audit and remuneration committees at AGMs, and that there be a Senior Non-Executive Director to represent shareholders' interests in the event that the positions of CEO and Chairman are combined. Nevertheless the broad substance of the Report remained intact, principally its belief that an approach 'based on compliance with a voluntary code coupled with disclosure, will prove more effective than a statutorycode'.
The recommendations in the Cadbury code of best practices are:-
1. Directors service contracts should not exceed three years without shareholders approval.
2. There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-paid Directors, including pension contributions and stock options. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained.
3. Executive Directors\ pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of Non-Executive Directors.
4. It is the Board’s duty to present a balanced and understandable assessment of the company’s position.
5. The Board should establish an Audit Committee of at least three Non-Executive Directors with written terms of reference, which deal clearly with its authority and duties.
6. The Directors should explain their responsibility for preparing the accounts nextto a statement by the Auditors about their reporting responsibilities.
7. The Directors should report on the effectiveness of the companys system of internal control.
The Directors should report that the business is a going concern, withsupporting assumptions or qualifications as necessary.The report created mixed feelings and with some more frauds emergingin UK, Governance came to mean the extension of Directors responsibility toall relevant control objectives including business risk assessment andminimizing the risk of fraud. The shareholders are surely entitled to ask, if all the significant risks had been reviewed and appropriate actions taken to mitigate them and why a wealth destroying event could not be anticipated and acted upon.
The report created mixed feelings and with some more frauds emerging in UK, Governance came to mean the extension of Directors responsibility tall relevant control objectives including business risk assessment and minimizing the risk of fraud. The shareholders are surely entitled to ask, if all the significant risks had been reviewed and appropriate actions taken to mitigate them and why a wealth destroying event could not be anticipated and acted upon.