Corporate Governance in Uk

CORPORATE GOVERNANCE in UK:
During the late 1980s a number of large UK public companies failed,

some of them as a result of large-scale fraud by their directors
A spate of scandals and financial collapses in the UK in late

1980s and early 1990s led the birth of concept of Corporate
Governance:
 1991- To prevent the recurrence of business failures in UK Cadbury

Committee was set up by the London Stock Exchange to raise standards
of corporate governance Cadbury Report 1992 • Following serious
financial scandals and collapses , and a perceived general lack of
confidence in the financial reporting of many UK companies.
.  1995- Sir Richard Greenbury examine the remuneration of

the directors in his report called The Greenbury Report UK.•
The Greenbury Committee was formed to look into the
directors’ remuneration packages and disclosure about it in the
annual reports.. It followed in the tradition of the Cadbury
Report and addressed a growing concern about the level of
director remuneration.
 1998- Hampel committee was established to review and

revise the earlier recommendations of the Cadbury and
Greenbury Committees. The Committee on Corporate
Governance was established in November 1995 to review the
Cadbury Committee's recommendations on corporate
governance. The Hampel Committee released a preliminary
report in August 1997, followed by a final report in January
1998.
 2001- The Turnbull Report which denoted as original
combined code required to include a narrative statement
in their Annual report of how internal control provisions
had been applied.
�The Turnbull Report was first published in 1999 and
set out best practice on internal control for UK listed
companies.
 2002- Higgs Report for review of the role and
effectiveness of Non-Executive director..it initiated the
Higgs Report on “The Role and Effectiveness of Non-
Executive Directors” does not participate in the day-to-
day management of the firm) which was published in
January 2003. Recommendations from Higgs included a
definition of ‘independence’ and the proportion of
independent non-executive directors on the board and
its committees.
THE UK CORPORATE GOVERNANCE CODE
The purpose of corporate governance is to facilitate
effective entrepreneurial and prudent management that
can deliver long term success of the company
The “ comply or explain “ approach is the trademark of
corporate governance in the uk
MAIN PRINCIPLES ARE :
26
Section A: Leadership Every company should be headed by an
effective board which is responsible for the long-term success
of the companyA clear division of responsibilities between the
running of the board and executive responsibility for running the
business No one individual should have unfettered powers of
decision The chairman is responsible for leadership of the
board and ensuring its effectiveness Non-executive directors
should constructively challenge and help develop proposals on
strategy.
27
Section B: Effectiveness The board and its committees should
have the appropriate balance of skills, experience,
independence and knowledge of the companyA formal,
rigorous and transparent procedure for the appointment of new
directorsAll directors to allocate sufficient time to the
companyAll directors should receive induction on joining the
board and should regularly update and refresh their skills and
knowledge
28
Section C: Accountability The board should present a balanced
and understandable assessment of the company’s position and
prospectsThe board is responsible for determining the nature
and extent of the significant risks it is willing to takeThe board
should maintain sound risk management and internal control
systems
29
Section D: Remuneration Levels of remuneration should be
sufficient to attract, retain and motivate directors of the quality
required to run the company successfullyBut should avoid
paying more than is necessary for this purposeA significant
proportion of executive directors’ remuneration link rewards to
corporate and individual performanceA formal and transparent
policy on executive remuneration and for fixing the
remuneration packages of individual directors
30
Section E: Relations with Shareholders There should be a
dialogue with shareholders based on the mutual understanding
of objectivesThe board as a whole has responsibility for
ensuring that a satisfactory dialogue with shareholders takes
placeThe board should use the AGM to communicate with
investors and to encourage their participation.
Leadership
(1)Every company should be headed by an effective board, which is collectively responsible for the long-term
success of the company.
(2)There should be a clear division of responsibilities at the head of the company between the running of the
board and the executive responsibility for the running of the company's business. No one individual should have
unfettered powers of decision.
The supporting criteria indicate that this main principle should be met by splitting the roles of chairman and chief
executive:
 the chairman should be responsible for the working of the board and the agenda for board meetings
 the chief executive should have full operational control and authority to carry out the policies determined
by the board.
(3)The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its
role.
(4)As part of their role as members of a unitary board, non-executive directors should constructively challenge
and help develop proposals on strategy
Effectiveness
(1)The board and its committees should have the appropriate balance of skills, experience, independence and
knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
The Code provides that the board should include a balance of executive and NEDs (and in particular
independent NEDs), such that no individual or small group of individuals can dominate the board's decision
taking.
(2)There should be a formal, rigorous and transparent procedure for the appointment of new directors to the
board.
(3)All directors should be able to allocate sufficient time to the company to discharge their responsibilities
effectively.
(4)All directors should receive induction on joining the board and should regularly update and refresh their skills
and knowledge.
(5)The board should be supplied in a timely manner with information in a form and of a quality appropriate to
enable it to discharge its duties.
(6)The board should undertake a formal and rigorous annual evaluation of its own performance and that of its
committees and individual directors.
(7)All directors should be submitted for re-election at regular intervals, subject to continued satisfactory
performance.
Accountability
(1)The board should present a balanced and understandable assessment of the company's position and
prospects.
(2)The board is responsible for determining the nature and extent of the significant risks it is willing to take in
achieving its strategic objectives. The board should maintain sound risk management and internal control
systems.
(3)The board should establish formal and transparent arrangements for considering how they should apply the
corporate reporting and risk management and internal control principles and for maintaining an appropriate
relationship with the company's auditor.
The Code provides that the board should establish an audit committee of at least three (or in the case of smaller
companies two) members, who should all be independent non-executive directors. The board should satisfy itself
that at least one member of the audit committee has recent and relevant financial experience.
The main role and responsibilities of the audit committee should be set out in written terms of reference and
should include:
 monitoring the integrity of the financial statements of the company

 reviewing the company's internal financial controls and risk management systems
 monitoring and reviewing the effectiveness of the company's internal audit function
 making recommendations in relation to the appointment, re-appointment and removal of the external
auditor
 reviewing and monitoring the external auditor's independence and objectivity and the effectiveness of
the audit process
 developing and implementing policy on the engagement of the external auditor to supply non-audit
services.
Remuneration
(1)Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to
run the company successfully, but a company should avoid paying more than is necessary for this purpose. A
significant proportion of executive directors' remuneration should be structured so as to link rewards to corporate
and individual performance.
(2)There should be a formal and transparent procedure for developing policy on executive remuneration and for
fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own
remuneration.
The Code provides that service contracts and notice periods should not exceed one year.
Relations with shareholders
(1)There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as
a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
(2)The board should use the annual general meeting (AGM) to communicate with investors and to encourage
their participation.
Rules-based versus principles-based approaches to governance
The UK Corporate Governance Code is a set of principles, rather than a set of rules. It requires directors to
describe in their own words the way in which they have applied the general principles of corporate governance.
A principles-based approach to governance has the following advantages and disadvantages

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CORPORATE GOVERNANCE in UK:

During the late 1980s a number of large UK public companies failed,

A spate of scandals and financial collapses in the UK in late

 1991- To prevent the recurrence of business failures in UK Cadbury

.  1995- Sir Richard Greenbury examine the remuneration of

 1998- Hampel committee was established to review and

 monitoring the integrity of the financial statements of the company

Relations with shareholders

Rules-based versus principles-based approaches to governance

A principles-based approach to governance has the following advantages and disadvantages

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