Corporate governance developments in the UK
Corporate governance developments in the UK are summarised as follows: Initial corporate governance developments in the UK began in the late 1980s and early 1990s in the wake of corporate scandals such as Polly Peck and Maxwell. Financial reporting irregularities led to the establishment of the ‘Financial Aspects of Corporate Governance Committee’ led by Sir Adrian Cadbury. The resulting Cadbury Report published in 1992 outlined a number of recommendations around the separation of the role of an organisation’s chief executive and chairman, balanced composition of the board, selection processes for non-executive directors, transparency of financial reporting and the need for good internal controls. The Cadbury Report included a Code of Best Practice and its recommendations were incorporated into the Listing Rules of the London Stock Exchange. Following Cadbury, a ‘Working Group on Internal Control’ was established to provide guidance to companies on how to comply with Principle 4.5 of the Cadbury Code ‘reporting on the effectiveness of the company’s system of internal control’. This led to the publication of the Rutteman Report in 1994 on ‘Internal Control and Financial Reporting’. In 1995, following concerns about directors’ pay and share options, the Greenbury Report recommended extensive disclosure in annual reports on remuneration and recommended the establishment of a remuneration committee comprised of non-executive directors. Again, the majority of the recommendations were endorsed by the Listing Rules. In January 1996, the Hampel Committee was established to review the extent to which the Cadbury and Greenbury Reports had been implemented and whether the objectives had been met. The Hampel Report led to the publication of the Combined Code of Corporate Governance (1998) covering areas relating to structure and operations of the board, directors’ remuneration, accountability and audit, relations with institutional shareholders, and the responsibilities of institutional shareholders. The 1998 Combined Code applied to all listed companies from 31 December 1998 until reporting years commencing on or after 1 November 2003 until it was superseded by the revised Code in 2003. It was appended to Listing Rule 12.43A requiring companies to provide in their annual reports a narrative statement of how they have applied the Code principles and state that they have complied with the Code provisions or, if not, why not and for what period. Part of the 1998 and 2003 Combined Codes required companies to provide a statement in their annual report on how they have applied the Code Principle and Code Provisions relating to internal control. Guidance for companies on how this should be approached was needed. This led to the establishment of the Turnbull Committee in 1998 by the Institute of Chartered Accountants in England & Wales (ICAEW) which then resulted in the Turnbull Guidance, “Internal Control: Guidance for Directors on the Combined Code” published in September 1999. The Guidance is a Securities & Exchange Commission (SEC) approved framework for management to show that they have adequate internal control structures and financial reporting procedures in place in order to comply with section 404 of the Sarbanes-Oxley Act. In 2001, the relationship between institutional investors and companies was addressed with the Government commissioned Myners Review, ‘Institutional Investment in the UK’. The objective of the review was ‘to consider whether there were factors distorting the investment decision-making of institutions’. It included suggestions for the improvement of communication between investors and companies and encouraged institutional investors to consider their responsibilities as owners and how they should exercise their rights on behalf of beneficiaries. In 2002, the Directors’ Remuneration Report Regulations were introduced to further strengthen the powers of...
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