The Cadbury Report 1992: Insight on Corporate Governance

The Cadbury Report 1992 was first produced by the Committee on the Financial Aspects of Corporate Governance (Cadbury Committee) to address the concerns raised about financial reporting and accounting of the publicly listed companies in United Kingdom. The Cadbury Committee was set-up in May 1991 by the Financial Reporting Council of the London Stock Exchange. The committee published its report in December 1992. Adrian Cadbury was the chairman of the Cadbury committee. The UK’s Financial Reporting Council, the London Stock Exchange and the accounting profession were the main supporters of the Cadbury committee.

It is without doubt, that the Cadbury Report 1992 has legitimately provided a framework for the corporate governance rhetoric underpinning the governance evolution. The Cadbury report was concerned with improving the way corporations are run and thus “contribute positively to the promotion of good corporate governance”. The Cadbury Report 1992 key objectives represent setting out measures to enhance corporate reliability based on improved information, continued self-regulation, more independent boards and greater auditor independence. Since the Cadbury report 1992, several countries have issued corporate governance codes to which corporations can adhere voluntarily. Several empirical studies show strong links in adoption of voluntary corporate governance mechanisms of companies to higher market valuation and reduced cost of capital.

The code of best practices was divided into Role of Board of Directors, duties of the board and its compositions and Role of Non-Executive Directors. Also, it dealt with their Remunerations Addressing questions of financial reporting and financial controls.

The central components of this voluntary code, the Cadbury Code, are:

  • Clear division of responsibilities at the top;
  • Board formation and Comprising members;
  • Remuneration standard; and
  • Audit Committee

The Recommendation given by Cadbury Committee are as follows:

• The single person should not be vested with the decision making power. i.e., the role of chairman and chief executive should be separated clearly.
• The Non-executive directors should act independently while giving their judgment on issue of strategy, performance, allocation of resources, and designing the code of conduct.
• A majority of directors should be independent non- executive directors, i.e., they should not have any financial interests in the company.
• The term of the Directors can be extended beyond three years only after the prior approval of the shareholders.
• A remuneration committee with majority of non- executive directors should decide on the pay of the executive directors.
• The interim company report should give the balance sheet information and reviewed by the auditor.
• The information regarding the audit fee should be made public and there should be regular rotation of the auditors.
• An objective and professional relationship with the auditors must be ensured.
• It must be reported that a business is a growing concern

Conclusions

Corporate governance is of profound significance where corporate structures still exist if we continue to have strong managers and weak shareholders. While the legal and regulatory environment sets the framework within which choices are made, however, the board makes decisions within companies This report has touched upon an array of important corporate governance attributes within the context of the UK and particular questions raised on whether to continue with the self-regulation or bring in regulatory intervention. No system of corporate governance can be totally proof against fraud or incompetence. The test is how far such aberrations can be discouraged and how quickly they can be brought to light. Although the great majority of companies are both competently run and audited under the present system of corporate governance, it is widely accepted that standards within the corporate sector have to be raised. The way forward is through clear definitions of responsibility and an acceptance by all involved that the highest standards of efficiency and integrity are expected of them. This will involve a sharper sense of accountability and responsibility all round – accountability by boards to their shareholders, responsibility on the part of all shareholders to the companies they own.

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