Table of Contents
1.1Developments since 19796
2.evolution of corporate governance8
2.1Cadbury Report (1992)8
2.2Greenbury Report (1995)9
2.3Hampel Report (1998)9
2.4Combined Code (1998)10
2.5Turnbull Report (1999)11
2.6Myners: Review of Institutional Investment (2001)11
2.7Higgs Report (2003)12
2.8Smith Report (2003)12
2.9Revised Combined Code (2003)13
2.10Myners Report (2004)14
2.11Financial Reporting Council14
3.Corporate Governance in UK TODAY15
3.1The rationale behind the UK approach15
3.2The UK regulatory framework15
3.3The essential features of UK corporate governance16
4.The Combined Code18
4.3Accountability and Audit22
4.4Relations with Shareholders23
4.5Responsibilities of Institutional Investors24
The structure of the British financial system was shaped by the form which industrialization took in the 18th and 19th centuries. The industries which led the industrial revolution, principally cotton textiles, were characterized by numerous small firms which did not need access to large amounts of capital. Initial finance came from family and friends, supplemented after 1750 by country banks, mostly set up by local merchants and manufacturers. These banks acted as a conduit between local savings and local investment, and provided manufacturers with working capital on a short-term basis.
During the second half of the 19th century, as new industries emerged and the size of companies increased, the risks involved in short-term lending became more serious. This prompted a wave of amalgamations among the country banks, leading to a concentration of the English banking industry in the hands of a small number of London-based joint stock banks; a similar process of concentration took place in Scotland.
Following legislative changes in mid-century, principally the Joint Stock Companies Act of 1844 and the Limited Liability Act of 1855, a growing number of industrial firms converted themselves from partnerships into limited companies. Some of them remained private, while others chose to have their shares listed, either on one of the provincial stock exchanges or in London. In some cases flotation was used as a way of raising new capital to be invested in the business. More commonly, it was a means whereby the owners could convert their stake in the company into marketable securities.
At this stage there were few institutional investors in industrial companies, apart from the investment trusts which had made their appearance in the 1880s. The biggest potential investors were the insurance companies, but their premium income was invested mostly in government stock and other fixed-interest securities.
Up to the turn of the century the bulk of trading in domestic industrial securities took place on the provincial exchanges. The London Stock Exchange was primarily geared to the flotation of debt for the British government, and the raising of funds for overseas borrowers; the City of London supplied the investment capital which was needed for infrastructure development throughout the world, including railways, ports and mining. The merchant banks which handled this business, led by Barings and Rothschilds, had little involvement with domestic industry. In the last few years of the 19th century some large British companies, such as Guinness, used the services of the merchant banks to issue shares in London, but these domestic flotation’s represented a small part of the merchant banks’ business; their expertise, and their main source of profits, lay outside Britain.
In the period between 1870 and 1914 neither the joint stock banks (later known as clearing banks) nor the merchant banks developed as close a linkage with domestic industry as, say, Deutsche Bank in Germany. The boards of...