CORPORATE GOVERNANCE IN CORPORATE GOVERNANCE IN THE UKTHE UK

GROUP 2GROUP 2

MICHAEL BENNISONMICHAEL BENNISONMICHAEL KLEOPFERMICHAEL KLEOPFER

ZINIA MORENOZINIA MORENOMUSTAFA SHAHMUSTAFA SHAH

THE COMBINED CODETHE COMBINED CODE

A set of principles for corporate governanceA set of principles for corporate governance The Combined Code is a consolidation of several The Combined Code is a consolidation of several

different reports different reports – Cadbury ReportCadbury Report– Greenbury ReportGreenbury Report– Hampel ReportHampel Report– Turnbull ReportTurnbull Report– Higgs ReportHiggs Report– Smith ReportSmith Report

THE COMBINED CODETHE COMBINED CODE

A response to the BCCI and Robert Maxwell A response to the BCCI and Robert Maxwell corporate scandals in 1991corporate scandals in 1991

Fourteen governance principles with supporting Fourteen governance principles with supporting principles and provisionsprinciples and provisions

Five sub-sections and three schedulesFive sub-sections and three schedules Code of Best Practices for the BoardCode of Best Practices for the Board New recommendations are added annuallyNew recommendations are added annually

THE CADBURY REPORTTHE CADBURY REPORT

The Cadbury ReportThe Cadbury Report

A. Code of Best PracticesA. Code of Best PracticesB. The BoardB. The BoardC. AuditingC. AuditingD. Shareholders D. Shareholders

Sir Adrian Cadbury said, “The effectiveness with which boards discharge their responsibilitiesdetermines Britain's competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance."

HAMPEL REPORTHAMPEL REPORT

Purpose – Give Updates / Opinions since the Purpose – Give Updates / Opinions since the Cadbury and Greenbury ReportsCadbury and Greenbury Reports

Recommendations :Recommendations :1.1. Corporate Governance is an ongoing process and Corporate Governance is an ongoing process and

should evolve based upon principles and argues should evolve based upon principles and argues against “box ticking” or a standard of yes / no against “box ticking” or a standard of yes / no questions.questions.

2.2. All directors should be up for election at least every All directors should be up for election at least every three years and non- directors should make up at three years and non- directors should make up at least a third of the boardleast a third of the board

HAMPEL REPORTHAMPEL REPORT

3.3. Separation of chairman and chief executive posts Separation of chairman and chief executive posts preferredpreferred

4.4. Promotes the Annual General Meeting as an Promotes the Annual General Meeting as an opportunity for shareholders to ask questions to opportunity for shareholders to ask questions to the board the board

5.5. Proxy votes should be counted ahead of Proxy votes should be counted ahead of shareholder vote at the annual general meetingshareholder vote at the annual general meeting

TURNBULL REPORTTURNBULL REPORT

Purpose – Expand on the Combined Code of 1998Purpose – Expand on the Combined Code of 1998

Recommendations:Recommendations:1.1. internal control should be embedded in its business internal control should be embedded in its business

processes, remain relevant over time by continually processes, remain relevant over time by continually changing, and enable each company to apply it in changing, and enable each company to apply it in manner where it takes its own circumstances and manner where it takes its own circumstances and operation in to accountoperation in to account

2.2. The board should continually evaluate a company’s The board should continually evaluate a company’s internal control and seek continuous improvementinternal control and seek continuous improvement

TURNBULL REPORTTURNBULL REPORT

3.3. In the board’s statement of internal control, the board In the board’s statement of internal control, the board annually should describe that the board regular reviews the annually should describe that the board regular reviews the system of internal control and have identified, evaluated, system of internal control and have identified, evaluated, and managed significant risks faced by the company up to and managed significant risks faced by the company up to the date of approval of the annual report. the date of approval of the annual report.

4.4. Listing Rules of the London Stock Exchange require the Listing Rules of the London Stock Exchange require the board to disclose if it has failed to conduct a review of the board to disclose if it has failed to conduct a review of the effectiveness of the company’s system of internal controleffectiveness of the company’s system of internal control

5.5. Although having an internal audit function is not required, Although having an internal audit function is not required, Turnbull suggests the need for companies to review the need Turnbull suggests the need for companies to review the need if one is necessaryif one is necessary

GREENBURY REPORTGREENBURY REPORT

Purpose- Identify good practice in Purpose- Identify good practice in determining directors’ remuneration.determining directors’ remuneration.

Recommendations:Recommendations: 1.1. Remuneration committee- determine Remuneration committee- determine

remuneration package for directors, report to remuneration package for directors, report to shareholders etc.shareholders etc.

2.2. Disclosure and approval provision- disclose terms Disclosure and approval provision- disclose terms of contract and explain every item of of contract and explain every item of remuneration package.remuneration package.

GREENBURY REPORTGREENBURY REPORT

3.3. Remuneration policy- remuneration package Remuneration policy- remuneration package must be encouraging and motivating, include must be encouraging and motivating, include share options if appropriate.share options if appropriate.

4.4. Service contracts and Compensation.- 1 year Service contracts and Compensation.- 1 year period, extension or termination can be done period, extension or termination can be done considering reasonable situation. considering reasonable situation.

HIGGS REPORTHIGGS REPORT

Purpose- Study role and effectiveness of non Purpose- Study role and effectiveness of non executive directors.executive directors.

Recommendations: Recommendations: 1.1. Role of Chairman- construct effective board, Role of Chairman- construct effective board,

communication with members and shareholders.communication with members and shareholders.

2.2. Role of non executive director (must be independent) - Role of non executive director (must be independent) - examine performance of management. Contribute to examine performance of management. Contribute to improvement of strategy of the company.improvement of strategy of the company.

3.3. Role of board- set up goal and standard, supervise Role of board- set up goal and standard, supervise associations of the company.associations of the company.

HIGGS REPORTHIGGS REPORT

4.4. Role of Senior Director- lead meeting of non Role of Senior Director- lead meeting of non executive director, communicate with executive director, communicate with shareholders.shareholders.

5.5. training and development- enhance skills of training and development- enhance skills of directors.directors.

6.6. Nomination committee- appoint non executive Nomination committee- appoint non executive directors, review board structure, review time directors, review board structure, review time commitment required for NEDs. commitment required for NEDs.

THE SMITH REPORTTHE SMITH REPORT

Published under the auspices of Sir Robert SmithPublished under the auspices of Sir Robert Smith Issued after the Enron and Arthur Andersen Issued after the Enron and Arthur Andersen

corporate scandalscorporate scandals Now known as the Guidance on Audit CommitteesNow known as the Guidance on Audit Committees Established the role of the Audit Committee Established the role of the Audit Committee Issued guidance on:Issued guidance on:

– Financial reportingFinancial reporting– Internal AuditInternal Audit– Whistle blowing programsWhistle blowing programs– External Audit functionExternal Audit function

Sir Robert Smith said, “The effectiveness of Sir Robert Smith said, “The effectiveness of internal audit is, to me, the basis and bedrock internal audit is, to me, the basis and bedrock of the audit committee process.” of the audit committee process.”

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