By Abdur Rashid Mirza University of Lahore School
By Abdur Rashid Mirza University of Lahore School of Accountancy and Finance Corporate Governance in UK
Corporate governance and development 1991 - Collapse of firms declared healthy in audited returns, the Financial Reporting Council, the London Stock Exchange and the UK accountancy profession established the Cadbury Committee to inquire into financial aspects of corporate governance.
Cadbury Report Recommended Conformity with its Code of Best Practice. This was voluntary. More clear and detailed financial reporting in order to: ▪ Inspire public confidence in corporations ▪ Enable directors to advance the best interests of the company and to avoid concentrations of power. The clear separation of the responsibilities of CEO and chair of the board.
Non-executive directors should (A non-executive director (NED, also NXD) or outside director is a member of the board of directors of a company who does not form part of the executive management team. ) Have a stronger role on boards.
Non Executive Directors � Strategy: Contribute to the development of strategy. � Performance: Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives. � Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are defensible. � People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors.
Cadbury also recommended The Establishment of Audit Committee The establishment of an Audit Committee with at least 3 non-executive directors and access to independent audit advice.
Implementation Since 1993, the London Stock Exchange has, required listed companies to include in annual reports statements of compliance with the Code of Best Practice or, give reasons for not doing so. In December 1994, Guidance to the interpretation of the Cadbury Code was issued.
Implementation 2 The Code had called upon the directors to report on the effectiveness of the company’s system of internal control, the Guidance requires only that directors state : ▪ that directors are responsible for the company’s system of internal financial control ▪ that such a system is only relatively secure, not absolutely so ▪ the most important procedures for internal financial control ▪ that directors have reviewed the system of control
Principle 1: Lay solid foundations for management and oversight Formalize and disclose the functions reserved to the board and those delegated to management. Adopt a formal board charter that details the functions and responsibilities of the board or a formal statement of delegated authority to management.
Principle 2: Structure the board to add value A majority of the board should be independent directors. An independent director is independent of management
Principle 3: Promote ethical and responsible decision-making • Clarify the standards of ethical behavior required of company directors and key executives. • Establish a code of conduct • Promote Honesty.
Principle 4: Safeguard integrity in financial reporting Require written statements from the CEO and the CFO to the board that the company’s financial reports present a true and fair view of its financial condition in accordance with relevant accounting standards. Establish an audit committee of at least 3 non-executive directors, not chaired by chair of board.
Principle 4: Safeguard integrity in financial reporting Establish an audit committee of at least 3 non-executive directors, not chaired by chair of board.
Principle 5: Make timely and balanced disclosure Develop continuous disclosure policies and procedures.
Principle 6: Respect the rights of shareholders Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings.
Principle 7: Recognize and manage risk Establish a system to identify, assess, monitor and manage risk. The CEO and CFO should certify to the board that the company’s risk management and compliance systems are operating effectively.
Principle 8: Encourage enhanced performance Disclosure of performance evaluation of the board. Induction program for new directors. All board members to have direct access to company secretary. Board members to have access to independent advice at company expense.
Principle 9: Remunerate fairly and responsibly Disclose company’s remuneration policies including cash, fees and other benefits. The board should establish a remuneration committee