Chapter 4 Governance Context Corporate governance CG z

Chapter 4 Governance Context

Corporate governance (CG) z “Way businesses are structured and controlled” z CG varies across national boundaries: ycultural reasons ysocial contexts yhistorical reasons ycommercial focus z CG regime impacts nature of accounting y. Strong shareholding culture will require strong reporting culture z Importance reasserted by recent frauds etc. Chapter 4 © Philip O’Regan 2016 2

Corporate governance in UK z Anglo-American CG model common to Englishspeaking world z Characterized by: ygulf between owners and managers yboard of directors y. Stock Exchange as major source of finance z Financial accounts seen as one means of bridging gulf between directors and owners Chapter 4 © Philip O’Regan 2016 3

Best practice z Frauds and Financial Crisis have led to model being questioned z Flaws: ytoo rigid yopen to abuse ytoo focused on rights of investors z Accounting bodies, government proactive z Various reports address different aspects z Best practice reports and codes Chapter 4 © Philip O’Regan 2016 4

Cadbury Report z Commissioned by FRC, Stock Exchange, etc. z Chaired by Sir Adrian Cadbury z Reviewed CG with specific reference to: yresponsibilities of directors ynature of accounting information required yaudit committees yrelationship between owners, boards and auditors, etc. z Championed “comply or explain” culture Chapter 4 © Philip O’Regan 2016 5

Cadbury recommendations z Board yimportance of efficient, diverse board yseparate CEO and Chairman z Executive Directors yservice contracts to be limited to 3 years ydisclosure of remuneration z Non-Executive Directors ygreater role yindependence important Chapter 4 © Philip O’Regan 2016 6

Cadbury recommendations ctd. z Reporting and controls yresponsibility of board in relation to accounts yimportance of supplementary narrative information z Audit Committee ycritical role in liaising with auditor yshould comprise of three non-executive directors yhas emerged as critical element of CG regime Chapter 4 © Philip O’Regan 2016 7

Greenbury Code z CBI formed group to produce code in relation to directors’ remuneration z Chaired by Sir Richard Greenbury z Recommendations in respect of: yremuneration committee ydisclosure provisions yremuneration policy yservice contracts and compensation z Directors’ remuneration still source of controversy Chapter 4 © Philip O’Regan 2016 8

Hampel Report z Group formed to continue work of Cadbury z Chaired by Sir Ronald Hampel z Reiterated much of Cadbury and Greenbury z Important in maintaining momentum z Recommendations include: y. Different individuals as Chairman and CEO y. Directors’ contracts not to exceed one year y. Non-executives on remuneration committee y. Training of directors Chapter 4 © Philip O’Regan 2016 9

Turnbull Report z ICAEW set up group to pursue Cadbury ideas on internal control and risk z Chaired by Sir Nigel Turnbull z Assigns a strategic importance to control and risk in context of CG z Shows directors how these areas are to be integrated into CG model z In future may be seen as seminal report Chapter 4 © Philip O’Regan 2016 10

Turnbull Report ctd. z Focus on principles rather than rules z Emphasis on: ysuccessful risk management adding value yinternal control only possible if embedded in internal processes yrole of board in reviewing and implementing ykey risks to be identified and managed Chapter 4 © Philip O’Regan 2016 11

Higgs z Focus on Non-Executive Directors (NEDs) z Reflects increasingly important role: yindependent ydiverse ystrategy, control and governance roles z Higgs Report (2003) recommended: y. NEDs to comprise at least 50% of board y. Separation of CEO and Chairman roles y. Ideally NEDs might serve two three-year terms z Commended for avoiding excesses of SOX Chapter 4 © Philip O’Regan 2016 12

Smith z Reflected increased importance of Audit Committee y. Now seen as vital element of CG architecture z Recommended that Audit Committee: y. Be comprised of at least three independent NEDs y. One member to have significant, recent and relevant financial experience y. Monitor and review integrity of financial statements, controls, etc. Chapter 4 © Philip O’Regan 2016 13

Combined code z Cadbury, Greenbury and Hampel formed basis of original Combined Code adopted by LSE z Supplemented by Turnbull, Higgs and Smith z Code based on “comply or explain” approach ydifferent from US yessentially “principles-based” z Significantly impacts company disclosure, e. g. in Annual Report z FRC issues CG code Chapter 4 © Philip O’Regan 2016 14

Total Shareholder Value (TSV) z Prioritizes shareholder agenda z Emphasis on shareholder wealth (share price + dividends) z Criticised as: y. Limited in perspective y. Short-term focus y. Open to abuse z Key player in Global Financial Crisis Chapter 4 © Philip O’Regan 2016 15

Stakeholder theory z Looks beyond investors and their needs z Recognizes a broader constituency, e. g. : yemployees yenvironmentalists yothers z Challenges primacy of financial markets z Champions greater transparency and accountability z Potential for radical reform of CG model Chapter 4 © Philip O’Regan 2016 16

Summary z CG a critical influence on nature, content and focus of the accounting process z CG regime in UK part of Anglo-American scheme z Characterized by investor emphasis z Frauds, scandals were catalysts for change z Cadbury, Greenbury, Hampel, Turnbull, Higgs and Smith z “Comply or explain” z UK now world-leader in “best practice” Chapter 4 © Philip O’Regan 2016 17