Cadbury Committee On Corporate Governance

Shakti Awasthi Asst Professor Oriental Institute of Management

Introduction
The Committee on the Financial Aspects of Corporate Governance, forever after known as the Cadbury Committee, was established in May 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy professional. The spur for the Committee's creation was an increasing lack of investor confidence in the honesty and accountability of listed companies, occasioned in particular by the sudden financial collapses of two companies, wallpaper group Coloroll and Asil Nadir's Polly Peck consortium

 two further scandals shook the financial world: the collapse of the Bank of Credit and Commerce International and exposure of its widespread criminal practices, and the posthumous discovery of Robert Maxwell's appropriation of 440m from his companies' pension funds as the Maxwell Group filed for bankruptcy in 1992. Committee ultimately suggested, their draft report in May 1992.

Major Contents of Cadbury Report

The central components of this voluntary code, the Cadbury Code, are: that there be a clear division of responsibilities at the top, primarily that the position of Chairman of the Board be separated from that of Chief Executive, or that there be a strong independent element on the board; that the majority of the Board be comprised of outside directors; that remuneration committees for Board members be made up in the majority of non-executive directors; and that the Board should appoint an Audit Committee including at least three non-executive directors.

 The provisions of the Code were given statutory authority to the extent that the London Stock Exchange required listed companies to 'comply or explain'; i.e. to enumerate to what extent they conform to the Code and, where they do not, state exactly to what degree and why. The detail of this explanation, and the level of implied censure on companies which do not adhere to the Code, have both varied over time, but the basic 'comply or explain' principle has endured over the intervening years and become the cornerstone of UK corporate governance practice.

Reactions to the Cadbury Report

1. 2.

Initial Criticism
Much of the initially adverse reaction to the draft of the Cadbury Report published in May 1992 was mollified by the mellowing of the language in the final report that December. The Reports fits firmly into the Anglo-American corporate tradition of favouring checks and balances to the potentially heavy hand of regulation, and thus while its recommendations were widely welcomed, there was doubt as to how effective these provisions would prove when companies were under no obligation to enforce them . Sir Adrian Cadbury had two responses to these concerns. i. Firstly he declared that it was up to shareholders, as the owners of these companies, to exert the pressure toward compliance. j. the recommendation for a follow-up committee to evaluate implementation of the Report's findings, with the suggestion that if companies were not found to complying, "it is probable that legislation and external regulation will be sought". be

3.

. 1.

Long-term Effects widespread acceptance of the division of the roles of Chief Executive and Chairman: almost 90% of listed UK companies had separate individuals fulfilling these positions in 2007, while just over 50% of US companies did so according to a 2008 survey by the National Association of Corporate Directors

This has diminished the cult of personality surrounding such figures, and avoided the domination of boards and companies by individuals whose agendas all too easily went unchecked. Sir Stuart Rose at Marks and Spencers is one of the few prominent people to have recently combined the two, and despite his stellar performance M&S shareholders voted against him continuing in both jobs by margin of almost 38% at the 2009 AGM. Another observation made about the Cadbury Report, and indeed many of its successors, was that it placed a lot of faith in the scrutinizing powers of non-executive directors. These individuals, who often only have very limited engagement with the boards on which they sit (the average UK board meets five-six times a year), are relied upon to prevent potentially damaging or self-interested activities by their executive counterparts