1. Chapter 4
Governance Context

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

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

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

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

6. Cadbury recommendations
Board
importance of efficient, diverse board
separate CEO and Chairman
Executive Directors
service contracts to be limited to 3 years
disclosure of remuneration
Non-Executive Directors
greater role
independence important
Chapter 4
© Philip O’Regan 2016

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

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

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

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

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

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

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

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

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

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

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