The Cadbury Report 1992: Shared Vision and Beyond

Neeta Shah
University of Westminster, London, England, United Kingdom
shahn@westminster.ac.uk

Christopher J. Napier
Royal Holloway University of London, England, United Kingdom
Christopher.Napier@rhul.ac.uk

ABSTRACT

This paper explores the shift from the Cadbury Report (1992) norms and rules to the current
UK Corporate Governance Code (2014) focusing upon the reasoning, the influences and the
implications thereof. The Cadbury Report (1992) has provided us with the legacy of
definition of the corporate governance as the “system by which companies are directed and
controlled”, voluntary adoption of the governance best practices and the “comply or explain”
principle.

The adoption of good governance practices is especially significant for the relationship
between managers and shareholders in achieving high standards of corporate behaviour.
Issues relating to managerial accountability, transparency, and regulation have been complex
and still require further evaluation. The publication of the Cadbury Report (1992) has proven
to be an influential in the development of a number of corporate governance codes
worldwide. The greatest achievement of the Cadbury Report (1992) is the voluntary adoption
of the corporate governance recommendations and use of the comply or explain principle.

We believe that the flexibility provided by the adoption of the voluntary code of best
practice is the strength of corporate governance in the UK, yet the constantly evolving UK
corporate governance code may be an indication of a deeper problem. An important part of
the corporate governance is the prioritisation of the shareholder value, and although this is
still the case, the UK Corporate Governance Code 2014 has veered for behavioural change.
and requiring further confirmation by directors on several matters such as risk management,
internal control, and going concern suggesting greater accountability, with further changes to
disclosure and confirmation by the directors. This reaffirms that the corporate governance is
changing, and is expected to change in the future.

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 The Cadbury Report 1992: Shared Vision and Beyond

INTRODUCTION

Corporate governance in United Kingdom has changed since the Cadbury Report (1992) was
first produced by the Committee on the Financial Aspects of Corporate Governance (Cadbury
Committee), is changing, and is expected to change in the future, which is evident from the
number of corporate governance codes at national levels and the need for greater
accountability and corporate transparency. We begin with the Cadbury Report, which
correctly has been universally received and that it might almost be considered a truism for
corporate governance. Over the twenty-five years since this report, the growth of interest in
corporate governance, worldwide, has been dramatic. We note three major themes that the
Cadbury Report has significantly contributed to corporate governance practices: the
definition of corporate governance, voluntary adoption of the code and the “comply or
explain” approach. The advancement of the Cadbury Report was enhanced by the London
Stock Exchange (LSE) requirement for all listed companies in the UK as a continuing
obligation of listing to state whether they are complying with the code and to give reasons for
non-compliance (Cheffins, 1997, 76-77). Currently the corporate governance code is non-
statutory, which only applies to companies listed on the London Stock Exchange. This paper
explores the shift from the Cadbury Report (1992) to the current UK Corporate Governance
Code (2014)1 focusing upon the reasoning, the influences and the implications thereof.

In the early1990s, the reputation of the London as a financial centre would have
dramatically suffered because of the failures of some major companies due to heightened
attention of the following: corporate fraud, director malfeasance and the extent of these
problems were not revealed by the published accounting report (Cadbury, 2000). Hence, a
private sector initiative made up of the Financial Reporting Council (FRC), the London Stock
Exchange (LSE) and the accounting profession set up a committee to review the Financial
Aspects of Corporate Governance. The aim was to establish a code of best practice, whilst
avoiding an inflexible one size fits all approach. The Cadbury Report identifies three themes
to strengthen the unitary board system of all listed companies and summarise their
recommendations in a code of best practice: the structure and responsibilities of boards of
directors; the role of auditors and recommendations to the accountancy profession; and the
rights and responsibilities of shareholders.

Comparative study of different corporate governance regimes recognises that corporate

governance systems typically evolve in the context of the legal, political and institutional
infrastructure in each of the jurisdictions. These corporate governance systems can be broadly
categorised into two types. First, the strong equity-outsider system often known as the
market-based system (Yonekura, Gallhofer and Haslam, 2012, 316) characterising more
developed markets such as the United States and the United Kingdom. Both countries are
characterised as conventional Liberal Market Economies (LMEs) within the comparative
capitalisms literature (for example, Hall and Soskice, 2001). An important part of the
corporate governance is the prioritisation of the shareholder value and strong protection of
shareholder rights in both the UK and US economies, despite the major differences between

1
https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2014/September/FRC-updates-UK-Corporate-
Governance-Code.aspx Accessed 15 February 2016.

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corporate governance in the two countries (Siepel and Nightingale, 2014),which are often
overlooked. As such, corporate governance in these two countries is based essentially on
agency theory (see Jensen and Meckling, 1976; Eisenhardt, 1989; Fama and Jensen, 1983), in
contrast to a wider stakeholder perspective, (Turnbull, 1997, 190), associated with corporate
governance in Coordinated Market Economies (CMEs), (Hall and Soskice, 2001) as in
Germany.

The second characterisation of corporate governance systems is the weak equity-outsider

system (also known as bank-based system or insider) observed in East Asian countries,
France, Germany and Italy. There are important differences in corporate governance systems
across the two groups of countries, which relate to ownership and control. The contrasting
corporate governance ownership and control systems are often known as either insider or
outsider systems (Franks and Mayer, 1997; Mayer, 1997; Nestor and Thompson, 2001; Short
and Keasey, 1999). For the outsider system of corporate governance (observed in the US and
UK) the critical conflict of interest is between strong managers and widely dispersed weak
shareholders. On the other hand, for the insider systems (Germany and Japan), where
“ownership and control are relatively closely held by identifiable and cohesive insiders”
(Nestor and Thompson, 2001) and the critical conflict is between controlling shareholders (or
blockholders) and weak minority shareholders (Maher and Andersson, 2000; Yonekura et al.,
2012). Likewise, categorisation as the strong and weak equity outsider systems, are not only
used for corporate governance analysis, but have been used in other disciplines such as
accounting, for example, that used by Nobes (1998, 180-181) for classifying the reasons for
international differences in financial reporting.

Durisin and Puzone (2009, 281) analysis of corporate governance articles show that
Jensen and Meckling (1976) and Fama and Jensen (1983) are the most widely cited papers in
corporate governance research. Both papers are main contributors to the understanding of
agency theory problem, where ownership and control are often separated in corporations.
Although these papers considered the key issues around the governance of corporations,
however they did not overtly refer to the term “corporate governance”. We know of very few
academic literatures that have studied post Cadbury 1992 in the UK, for example, Haxhi and
Aguilera (2014); Jones and Pollitt (2004); Mallin, Mullineux and Wihlborg (2005); Nordberg
and McNulty (2013).

In this paper, we review articles that have reproduced the Cadbury definition in
accounting, finance, management and business journals. We briefly analyse how the
definition has endured since its first publication to the current UK Corporate Governance
Code 2014. We first, consider the journal, Corporate Governance: an International Review
(CGIR) and other journals ranked by ABS 2015.

The structure of the paper is as follows: an overview of Cadbury definition, the

development of the corporate governance within the UK context and an appreciation of the
voluntary adoption of the code and comply or explain principle discourse revealing issues
and controversies surrounding the UK’s corporate governance system; discuss the changes to
the UK Corporate Governance Code 2014 and finally concluding comments.

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CADBURY DEFINITION OF CORPORATE GOVERNANCE

Many academic articles do not define corporate governance. It may be that these authors
believe corporate governance to be a well-defined concept understood by potential readers.
First, a commonly cited definition of Corporate Governance is that provided by the Cadbury
Committee, the “system by which companies are directed and controlled”,2 (Cadbury Report
1992, Introduction s2.5) (hereafter Cadbury definition) is a central company level definition
of several codes of corporate governance. Originally, put forward by the Committee of the
Financial Aspects of Corporate Governance in the UK, (the London Stock Exchange, the
Financial Reporting Council and the accountancy profession). The paragraph 2.5 is still the
classic definition of the context of the Code within UK’s subsequent corporate governance
codes consisting of the Combined Codes (1998, 2003, 2006) and the UK Corporate
Governance Codes (2010, 2012, 2014).

The Organisation for Economic Cooperation and Development (2004) takes a wider
position in describing corporate governance:

Procedures and processes according to which an organisation is directed and

controlled. The corporate governance structure specifies the distribution of
rights and responsibilities among the different participants in the organisation
– such as the board, managers, shareholders and other stakeholders – and lays
down the rules and procedures for decision-making.3

The Cadbury definition is used to describe corporate governance by various academic

authors (for a list see Table 1), international institutions (for example, European Central
Bank)4 , within the corporate governance codes of countries (for examples, Armenia,
Lebanon, South Africa)5 and the EU corporate governance framework6. However, on
searching for the term “directed and controlled” in different country codes, we find that the
Cadbury definition is often subsumed within the Organisation for Economic Cooperation and
Development (OECD) definition. An alternative term “managed and controlled” is also used,
for example Luxembourg7. Several authors use the Cadbury definition, but without referring
to the original source and often using only the term “directed and controlled” (Fuenzalida,
Mongrut, Arteaga and Erausquin, 2013; Haxhi, van Ees and Sorge, 2013; Larkin, Bernardi
and Bosco, 2013; Millet-Reyes and Zhao, 2010; Okaro, Okafor, Ogbodo and Nkamnebe,

2
“Directed and controlled” has been used by Hume (1970) in terms of describing a financial system that was
“directed and controlled” by a central finance ministry. The original work was directed towards the significance
of Jeremy Bentham’s writings on bookkeeping and accounting.
3
https://stats.oecd.org/glossary/detail.asp?ID=6778; see European Central Bank, 2004, Annual Report: 2004,
ECB, Frankfurt, Glossary. Accessed 18 April 2016.
4
European Central Bank (2005). Annual report: 2004. Frankfurt ECB. . Accessed 18 April 2016.
5
Code of Corporate Governance of the Republic of Armenia, 30 December 2010; The Lebanese Corporate
Governance Code 13 June 2006. Accessed 18 April 2016. King Review (South Africa), 1994.
6
See GREEN PAPER The EU corporate governance framework /* COM(2011) 164 final */available http://eur-
lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52011DC0164&from=EN . Accessed 18 April 2016.
7
The Ten Principles of Corporate Governance of the Luxembourg Stock Exchange April 2006. Accessed 18
April 2016.

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2015; Smith, 2015). Other authors cite the Cadbury definition of corporate governance using
Cadbury (2000) , Cadbury (2002) (for example, Rodriguez-Fernandez, 2015; Spitzeck, 2009;
Talaulicar and v. Werder, 2008), European Central Bank (Fuenzalida et al., 2013) or the
OECD (1999) as the origin of this definition.

Pro Cadbury definition authors such as Lannoo (1999, 271); Mallin et al. (2005, 532)
suggest that the Cadbury definition has a duality role as it considers both internal and external
perspectives of corporate governance. Internally it recognises internal controls and board
structure and externally with the shareholder relationship. This was undoubtedly important in
the context of privately owned companies in which the agents (managers) and principals
(shareholders) were usually the same persons. Hence, one anticipates no conflict between the
persons managing or controlling the company and the ultimate beneficiaries, unlike the
companies where there is separation of ownership and control.

Overall, the Cadbury Report has had significant influence in the development of the
international codes on corporate governance, such as OECD and other countries, for example,
Malaysia, Sweden8.

A search on the Google scholar for the Cadbury definition gave 1,720 results and for the
term “directed and controlled” gave 12,000 results. Hence, the search was narrowed down to
include the following journals: Corporate Governance: International Review (CGIR) A
search using the phrase “Cadbury Report 1992”, in the journal CGIR showed 122 articles
from 1998 to April 2016. We then narrowed the search for the phrase “directed and
controlled” as this would allow for any articles that paraphrased the definition. For the period,
1993(when the first issue of the journal was published) to April 2016, using the search engine
for “directed and controlled” gave 24 full-text articles in CGIR. Of these, two were book
reviews and one Corporate Governance Report: Modern Company Law, which are not cited
in Table 1. A similar search was conducted using the “Business Source Premier” (36articles
of which 14 were from CGIR). We use articles from journals that are ranked by the
Association of Business Schools’ Academic Journal Guide 2015 (ABS 2015) and ignore
those that are not ranked.

The papers identified in Table 1, from the journal CGIR, shows that corporate governance
is not characterised by a single unifying theory but there exists a wide range of theoretical
perspectives covering from agency theory, institutional theory, stakeholder theory,
shareholder value, management hegemony, path dependency and resource dependency. This
reflects a wide perspective that academic researchers take in formulating the research
questions, and the context in which corporate governance is set and the different disciplines
in which corporate governance is viewed. The Cadbury definition is not confined to profit
making companies, but also non profit making organisation such as the NHS in the UK (see
Deffenbaugh, 1996; Prowle and Harradine, 2014). Within the finance literature the
commonly cited definition is that by Shleifer and Vishny (1997, 737) who describe corporate
governance as “… ways to which suppliers of finance to corporations assure themselves of
getting a return on their investment”. Just like the Cadbury definition, this is considered to
have a dual purpose. The articles distinguish across two paradigms, internal and external
governance characteristics. The internal governance characteristics discuss different
corporate governance structures and processes that can be controlled by the board and

8
Malaysian Code on Corporate Governance March 2000; Corporate Governance Policy 26 October 2001.
Accessed 18 April 2016.

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shareholders, whereas the external characteristics relate to rules and norms of the market for
corporate control, legal system, accounting standards and the stock exchange. However, it is
recognised that in reality corporate governance is far more complex and will be blended
between the two paradigms. Often the corporate governance purpose is descriptive as to
whether corporate governance is a system or structure or processes or has a normative
function as ideal corporate governance recommendations that should be adopted.

It is difficult to find a unitary approach to corporate governance research and should be

viewed as a loose collection of different research questions and issues within different
national contexts. Although the papers exhibit substantial geographical spread, academic
writers focus more on the LME countries such as UK and the CME countries such as
Germany. Most papers address corporate governance post Cadbury Report, except, for
example, Holm and Laursen (2007, 323) is one of the few papers that mentions corporate
governance pre-Cadbury 1992.

“Internal controls” has been central in the debate on regulating financial

reporting and corporate governance since the Cohen report on the auditors
responsibilities (1978) and especially the Treadway report on fraudulent
reporting (1987).

The use of the Cadbury definition to describe corporate governance, should be associated
more to the UK, yet the papers have exhibited a greater dispersion addressing countries such
as Australia (Turnbull 2007), Bahrain (Hussain and Mallin, 2002), Iceland (Jonsson, 2005),
India (Jackling and Johl, 2009), Lebanon (Jamali, Safieddine and Rabbath, 2008), Nigeria
(Akinkoye and Olasanmi, 2014; Okaro et al., 2015), Peru (Fuenzalida et al. 2013), Russia
(Roberts, 2004), South Africa (Smith, 2015) , South Korea (Solomon, Solomon and Chang-
Young, 2002) and Turkey (Mugaloglu and Erdag, 2013) as well as the more traditional
Anglo-Saxon countries. Majority of the research, however, is discussed for single countries
and there has been some comparative international analysis but greater focus on the more
advanced economies such as UK, US and Germany, for example, Mintz (2005); the UK and
Netherlands (Hooghiemstra and Van Manen, 2004). Often the differences lie in the following
areas: legal system, existence of a unitary board or two-tier board structure and ownership
structures.

Sternberg (2000) refutes the definition provided by the Cadbury report for reasons of its
simplicity and corporate governance is more than just control and offer her own definition.
Many other academic authors also provide their own definition, these definition play a
substantial role in shaping corporate governance. One could categorise them broadly into
either shareholder orientation or extending the governance boundary to include a stakeholder
orientation. Indeed, in recognition of the various corporate governance definitions raises the
question how nuanced are the definitions that the authors try to provide. For example,
whether the legitimate stakeholder groups are a homogenous group, all with the same
interests, or are they seen as heterogeneous. The examples for the latter would include
majority versus minority shareholders, block versus dispersed shareholders, executive versus
non-executive director and salaried managers versus managers with equity stakes. capturing a
nuanced approach ranging from broadly divided.

Similarities with Cadbury definition

Although some authors do not cite the exact Cadbury definition, but we find similarities in
the use of the term “direct and control” as shown below:

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 Corporate governance of a firm operating at the BOP [bottom of the economic
pyramid] can be viewed as “the system, or the set of mechanisms” that
internally “direct and control” the firm in the prevalent social and economic
context (Chakrabarty and Bass, 2014).

The role of the board is instrumental in good corporate governance. The task is
characterised by the pressure of responsibility, limited time and distance from
operations of the company which the board is set to direct and control
(Sponbergs, 2007).

Table 2 shows various journals, ranked by ABS 2015, in areas of accounting, economics,
finance, law, management, public sector, corporate social responsibilities that cover various
corporate governance themes. This also suggests the range of disciplines in the area of
corporate governance.

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Table 1: List of journal articles in Corporate Governance: An International Review.
Authors using, “directed
and controlled”, to describe
Corporate Governance
Short, Keasey, Hull and
Wright (1998)
Mallin (1999)
Solomon and Solomon
(1999)
Cadbury (2000)
Geographical Location Theory/ Subject of Analysis
UK Insider and outsider systems
Governance mechanisms
UK Analysis of financial
institutions corporate
governance activities using
interviews and analysis of
corporate governance policies
UK Agency Theory
Shareholder Activism
UK, Australia, Canada, US,
Netherlands, Japan, Belgian
Evidence
Secondary literature
Contemporary
documentation, secondary
literature
Postal questionnaire of 198
unit trust mangers
Contemporary documentation
Summary of Findings/Conclusions
Reviews the relationship between
corporate governance mechanisms such
as the market for corporate control and
concludes that the policy debate and
research has been directed towards
accountability.
Concludes that increasing influence of
IK institutional investors in corporate
governance, for example, 1:1 dialogue,
increasing shareholder focus; continuing
pressure to vote.
Empirical evidence suggests that
institutional investors are supportive of
the UK CG reforms. They are
embracing higher activism, developing
voting policies; encouraging relationship
investing and more supportive of the
long termism in the financial market.
Concludes that institutions investors
focus is now increasing more than
boards.
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Authors using, “directed Geographical Location Theory/ Subject of Analysis Evidence Summary of Findings/Conclusions
and controlled”, to describe
Corporate Governance

Ow-Yong and Kooi Guan Malaysia and the UK Malaysian Code and contrast Contemporary Compares the UK and the Malaysian
(2000) them with UK Corporate documentation, secondary corporate governance. Concludes
Governance literature requirement of sound CG principles,
different patterns of ownership structure
Codes (Cadbury, Greenbury, between the two countries and historical
Hampel and Combined). factors and cultural characteristics
influence board behaviour.
Examine the related parts of
the results published from the
Kuala Lampur Stock
Exchange and the
PriceWaterhouseCoopers.

Mallin (2001) UK, US, Australia, and Fiduciary duty Contemporary Examines voting system across different
Germany documentation, secondary countries. Concludes that institutional
literature investors should take on the
responsibility to exercise their votes and
the concept of voting as a fiduciary duty
is varied across different countries.

Hussain and Mallin (2002) Bahrain n/a Survey questionnaire to 38 Analyse responses to determine the CG
Bahrain Stock Exchange structures of Bahrainian companies .
companies with 21
companies responding.

Solomon et al. (2002) South Korea Conceptual framework Contemporary Outline the traditional system of
methodology documentation, secondary corporate governance and review
literature reforms taking place to build a
conceptual framework.

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Authors using, “directed
and controlled”, to describe
Corporate Governance
Jonsson (2005)
Long, Dulewicz and Gay
(2005)
Mallin et al. (2005)
Mintz (2005)
Nestor (2005)
Geographical Location Theory/ Subject of Analysis
Iceland Concentrated ownership
UK Institutional, agency and
management hegemony
UK
Germany, UK, US Various including
shareholder model;
stakeholder model
European telecom industry Privatisation
Evidence
Directors of 9 listed
companies and 2 non listed
companies; using
questionnaire and follow up
interview.
74 listed companies and 86
unlisted companies
CG reports
Literature review and
corporate governance reports
Contemporary
documentation, secondary
literature
Summary of Findings/Conclusions
Builds a framework for the leading roles
of the board.
For listed companies non executive
directors are more concerned with
protecting long term interests of
shareholders compared to that of
executive interests; whereas for the
unlisted boards the non executive
directors are more involved with
strategic and financial operations.
Reviews post Cadbury 1992
development in UK corporate
governance; focuses on institutional
investors and the financial sector
Examines factors underpinning the
development of corporate governance
systems. Sceptical with regard to
achieving convergence in corporate
governance systems given the
underlying differences in financing and
culture within the different countries.
Discusses four central objectives of
privatisation from a company’s view:
depoliticisation, commercial incentives,
financial flexibility and valuation. In
addition, it examines elements of
corporate governance, adapting the
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Authors using, “directed Geographical Location Theory/ Subject of Analysis Evidence Summary of Findings/Conclusions
and controlled”, to describe
Corporate Governance

OECD Principles priorities an individual

firm – instead of that of investors or
policy makers.

Edwards and Wolfe (2007) UK Ethical approach; compliance Skandia, a UK life assurance Uses a template analysis to assess the
- competence Company. ethical compliance – competence as a
communication tool for both managers
and external stakeholders.

Holm and Laursen (2007) Europe Understanding internal Corporate governance reports Examines the role of the external
control and risk management and auditing reports. auditor, They analyse changing
perceptions of the audit process and
regulatory demands for transparency.

Turnbull (2007)9 Australia Network governance; self Australian public assets. Provides a framework contrasting 4
regulation groups of public assets owned by
government, state-owned, private sector
and network of constituents.

Jamali et al. (2008) Lebanon CG; Corporate Social In-depth interviews with top Suggestion of increasing convergence
Responsibility (CSR); Path managers of eight between CG and CSR. Strong CG
dependence corporations. frameworks acts as a driver for long
term sustainable CSR.

Talaulicar and v. Werder Germany Code Compliance Kodex Report 2006 and 671 Look at classification of compliance
(2008) companies listed on the patterns among German listed firms,
Cluster analysis Frankfurt Stock Exchange.. which declare conformity with the
German Corporate Governance Code.
Use seven measures of code compliance
and eight groups of companies based on

9
Uses the term “directed and controlled” as a key feature of network governance.

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Authors using, “directed
and controlled”, to describe
Corporate Governance
Jackling and Johl (2009)
Mande, Park and Son (2012)
Haxhi et al. (2013)
Geographical Location Theory/ Subject of Analysis Evidence
India Agency theory; Resource 180 observations from a
dependency sample of top listed Indian
companies.
US Agency Theory 2,049 observations consisting
of 288 observations with
equity issuances and
1,761observations with debt
issuances.
UK Comply or Explain Development of UK
corporate governance codes.
Summary of Findings/Conclusions
distinct code conformity. They find that
different companies share common
patterns of code observations. This
allows for identifying distinct groups of
companies.
Find positive and significant association
between the following variables:
proportion of outside directors, board
size and company performance. Find
negative association between leadership
structures and company performance’
They find that firms whose outside
directors have many directorships
reduces the effectiveness of their role as
corporate monitors.
Examines the role of CG on a
company’s choice of financing policy.
They find that with stronger CG,
companies prefer equity finance over
debt finance. This is more pronounced
in smaller companies.
Links institutional actors and business
elites in the development of the UK
corporate governance(CG) codes
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Table 2 –ABS ranked journals using the Cadbury definition “system by which companies are directed and controlled"

Journal – if on the ABS Authors Geographical Location Theory/ Subject of Evidence Summary of Findings/Conclusions
2015 ranking Analysis
International Review of Diacon and O'Sullivan UK Governance Postal questionnaires of Identified 18 governanc measures and
Law and Economics (1995) characteristics 129 U.K. life and uses factor analysis to reduce these to
general insurance five. Evidence suggests that some
companies governance instruments are more
effective in influencing company
performance.

Journal of Common Lannoo (1999) European Stock CG Convergence Data on European Examine CG in Europe and conclude
Market Studies Markets Stock Markets that the European countries still show
variations in the functioning of CG
mechanisms. They reason that these
variations are due to different
shareholding structures and social and
economic behaviour. However, the
national CG codes do show
convergence in their recommendations
such as self-regulation.

European Accounting Olivier (2000) Main focus on Reiterates the Secondary literature Consider s the influence of technology
Review European Union broadening of the role and institutional reports and regulatory framework framework
of the accounting and the needs of accounting
profession from the profession to adapt.
traditional
bookkeeping.

Australian Journal of (Ryan and Ng, 2000) Australia Corporate governance Annual reports; Explores the possibility of generic
Public Administration analysis via: board, Contemporary corporate governance framework
actors and across all public sector bodies.

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Journal – if on the ABS Authors Geographical Location Theory/ Subject of Evidence Summary of Findings/Conclusions
2015 ranking Analysis
documents, secondary
literature

Business Ethics: A Kaler (2002) Business ethics Secondary literature Discusses coupling of governance in
European Review and institutional reports terms of corporate and responsibility
and accountability.

International Journal of Paape, Scheffe and European Union Survey questionnaire; Sketches the relationship between
Auditing Snoep (2003) 50 Largest companies internal audit function and corporate
in EU in 2001 governance seen as an important and
an integral part of CG.

Accounting & Business Hooghiemstra and Van Netherlands Qualitative research Reports expectation gap for non
Research Manen (2004) using survey executive directors in areas of non
questionnaire on the executives; shareholder influence and
role of non executive directors’ remuneration.
directors.

Europe-Asia Studies Roberts (2004) Russia Corporate govemance Secondary literature Questions the extension of Anglo-
code in Russia Saxon hegemony of shareholder
capitalism to Russia with different
cultural values and legal system.

California Mangement Elkington, Emerson Sustainable Interviews and case Suggest the use of a “value palette” to
Review and Beloe (2006) development; Triple studies benefit both profit making and non
Bottom Line profit making organisations

South African Journal Kyereboah‐Coleman Kenya Comply or explain 47 companies listed on Empirical evidence suggests that
of Economics and Biekpe (2006) concept the Nairobi Stock governance structure affects the
Exchange for the financing choice.
period 1999-2003

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Journal – if on the ABS Authors Geographical Location Theory/ Subject of Evidence Summary of Findings/Conclusions
2015 ranking Analysis
Australian Accounting Cortese (2009) Australia Non executive 50 largest Australian Assess the extent to which companies
Review directors companies, reviews adhere to the Australian Stock
438 board members; Exchange’s Principles of good
corporate governance.

Managerial Auditing Porter (2009) Audit function Secondary literature Corporate accountability is not
Journal and institutional reports confined to the financial reporting but
includes the tripartite relationship
among external auditors, internal
auditors and the audit committee.

Corporate Governance: Spitzeck (2009) UK Stakeholder Business in the Corporate responsibility is now
The international perspective to Community (BITC) integrated with corporate governance
journal of business in corporate governance Corporate and it is common to have a separate
society Responsibility Index corporate responsibility committee.

Corporate Governance: Apostolides (2010) UK Annual general 40 AGMs Advocates three areas from his
The international meeting (AGM) observations at AGM, which are
journal of business in corporate social responsibility,
society directors’ remuneration and board to
characterised as well balanced and
independent range of skills.

Corporate Social Kolk and Pinkse (2010) Global 250 Fortune 500 firms Considers the integration of the
Responsibility and in 2004 corporate social responsibility and
Environmental corporate governance as disclosure
Management practices.

Journal of International Millet-Reyes and Zhao France Agency theory; one- 174 French companies Provides empirical evidence that there
Financial Management (2010) tier and two-tier board from 28 industries over is agency conflict among providers of
& Accounting types the period 2000–2004; finance
secondary literature

Corporate Governance: Lenssen et al. (2010): n/a Stakeholder theory Qualitative research Find stakeholder participation varies
The international onstakeholder from low to strong regarding

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Journal – if on the ABS Authors Geographical Location Theory/ Subject of Evidence Summary of Findings/Conclusions
2015 ranking Analysis
journal of business in governance practices of operational, managerial and strategic
society 46 companies using decisionmaking.
publicly available
sources

Accounting & Finance Bliss (2011) Australia Audit fee pricing 799 Australian Find evidence that higher proportion
of independent directors without CEO
publicly listed duality is associated with higher audit
companies in 2003 fee pricing.

Accounting & Finance Brown, Beekes and Global Review of corporate governance
Verhoeven (2011)

Corporate Governance: Van den Berghe, UK 51 companies from the Identifies firms involving stakeholders
The international Spitzeck, Hansen and Business in the in their governance arrangements.
journal of business in Grayson (2011) Community's
society Corporate
Responsibility Index in
the UK

Business Strategy and Tang, Lai and Cheng US Stakeholder 500 US enterprises Find evidence that improved
the Environment (2012) engagement according to environmental governance enhances
Newsweek and corporate reputation and economic
secondary data performance.

Auditing: A Journal of Bierstaker, Cohen, US Audit committee Experiment basd using Find audit committee supports auditor
Practice and Theory Todd DeZoort and compensation 56 audit committee in an accounting disagreement under
Hermanson (2012) member of publicly the following circumstances: audit
listed companies committee compensation includes
long-term stock options and when
viewed that failure to change is seen
as unfair to shareholders

16 | P a g e
Journal – if on the ABS Authors Geographical Location Theory/ Subject of Evidence Summary of Findings/Conclusions
2015 ranking Analysis
Business Horizons Wiid, Pitt and Mills US Theory of cartooning Suggest that cartoons reflect public
(2012) used to tell a story. sentiment towards corporate
governance issues.

Journal of Business Fuenzalida et al. Peru Corporate Social 8 companies on the Find that investors positively value
Research (2013), Responsibility Lima Stock Exchange adoption of good corporate
governance.

Accounting & the Larkin et al. (2013) US Proportion of women Fortune 500 (2010); Find higher percentages of women on
Public Interest. on Fortune 500 boards Corporate the boards of the companies if the
Responsibility Fortune 500 companies are listed on
Magazine’s (2011); the Corporate Responsibility
Ethisphere Magazine’s Magazine’s (2011); Ethisphere
(2011) Magazine’s (2011)

Business History Nordberg and McNulty UK Institutional theory Current documentation; Finds that codes define and then
(2013) secondary literature redefine the terms. The redefinitions
integrates the learning from the
practice of directors. The evolution of
the codes is strongly embedded in the
communication and use of persuasive
rhetoric .It allows for flexibility that
change will recur.

Journal of Law and Magnier (2014) European Union Stakeholder Current documentation, Argues that the comply or explain
Society secondary literature principle adoption in the European
Union will enhance the harmonisation
process of the adoption of best
practices in corporate governance.

Corporate Governance: Mouselli and UK Agency theory 1,514 UK firms listed Finds a positive association between
The international Hussainey (2014) in the London Stock corporate governance and analyst
journal of business in Exchange following
society

17 | P a g e
 Journal – if on the ABS Authors Geographical Location Theory/ Subject of Evidence Summary of Findings/Conclusions
2015 ranking Analysis
International Journal of Prowle and Harradine UK Questionnaire to all Focuses on financial aspects of
Public Sector (2014) finance directors in corporate governance within the UK
Management NHSTs in England NHS.
supported by semi-
structured interviews

British Accounting Liao, Luo and Tang UK Gender diversity FTSE350 Finds significantly positive
Review (2015) association between gender diversity
and the disclosure of greenhouse gas

Academy of Tihanyi, Graffin and Evolving practices in Secondary literature Provides an overview of corporate
Management Journal George (2015)10 corporate governance governance by management scholars
practices

10
The same article had a different reference as follows: Tihanyi, Graffin and George (2014)

18 | P a g e
BACKGROUND TO THE CADBURY REPORT

The Cadbury Report 1992, first produced by the Committee on the Financial Aspects of
Corporate Governance (Cadbury Committee), which was set up in May 1991to address the
concerns raised about financial reporting and accounting of the publicly listed companies in
United Kingdom (see preface in Cadbury Report 1992).The report was first published in
December 1992. It is without doubt, that the Cadbury Report 1992 has legitimately provided
a framework for the corporate governance rhetoric underpinning the governance evolution. In
their book Spira and Slinn ( 2013), state that the Cadbury committee’s primary aim was to
restore confidence in the UK’s capital markets in light of the many ethical failures (see also
(Dewing and Russell, 2004; Jones and Pollitt, 2004). In addition, the Cadbury report was
concerned with improving the way corporations are run and thus “contribute positively to the
promotion of good corporate governance” (p.10). The UK’s Financial Reporting Council, the
London Stock Exchange and the accounting profession were the main supporters of the
Cadbury committee (Cadbury, 1992; Mees, 2015, 200). 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.

The Cadbury Report is the first in a series of important guidelines that would come to be
published for the institutionalisation of the European Union members’ corporate governance
and adopted as an outline of best practice in the EU (Keay, 2014).

The Cadbury Report may therefore be regarded as the cornerstone of the

comply-or-explain framework in Europe, long before this system was
introduced in European law (RiskMetrics Group, 2009)11

With its popularisation, the Cadbury Report and its framework soon began appearing in more
corporate governance narratives and the OECD 1999 Corporate Governance further
established the wider use of this framework. Since the Cadbury Report, over 90 countries
have instated national codes of corporate governance (see http://www.ecgi.org/codes/all
codes). The two main goals of every code suggests convergence in areas of improving the
quality of companies’ governance and raising the accountability of companies to shareholders
while maximizing shareholder value (Aguilera and Jackson, 2010) . However, Lazonick and
O'Sullivan (2000) argue that there is significant limitation of the shareholder maximisation
concept of corporate governance, and doubts whether this in fact develops the long-term
sustainable performance of companies. Within corporate governance, a key debate that
continues today is to regard managers whose primary duty is to shareholders rather than of
wider responsibility to other stakeholders (Walker Review.2009, 137)12. This debate goes
back to the writings of Berle (1931) who interpreted that corporate powers are entrusted to
shareholders and nobody else. However, Dodd (1932, 1162) differs from Berle (1931)’s
suggestion and makes the following statement:

11
‘Study on monitoring and enforcement practices in corporate governance in the Member States’ conducted by
RiskMetrics Group for the EU (23 September 2009) at 22, available at
http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-090923_en.pdf
(accessed 1 April 2016)
12
http://www.icaew.com/en/library/subject-gateways/corporate-governance/codes-and-reports/walker-report

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 Business - which is the economic organization of society - is private property
only in the qualified sense, and society may properly demand that it be carried
on in such a way as to safeguard the interests of those who deal with it either
as employees or consumers even if the proprietary rights of its owners are
thereby curtailed.

Berle (1932) takes a pragmatic view and infers that responsibility to multiple parties
would exacerbate the separation of ownership and control issue and make management even
less accountable to shareholders.. The Walker Review, 2009, 137), mainly directed to the
banks and other financial institutions (BOFI), is of the same view and states that:

To dilute the primacy of the duty of the BOFI director to shareholders to

accommodate a new accountability to other stakeholders would risk changing
fundamentally the contractual and legal basis on which the UK market
economy operates. It would introduce potentially new uncertainty for
shareholders …

Within the capitalism literature, corporate governance systems are converging and
positioning towards the Anglo-Saxon model of corporate governance or the shareholder value
(Hall and Soskice, 2001). This aligns, with agency theory, where corporations’ role is to
create wealth for their shareholders. The latter are also at higher risk than other stakeholders,
further suggesting that corporate directors are singularly accountable to shareholders.

Aguilera and Jackson (2010, 381) suggest that the polarisation of the Anglo-Saxon model
is observed in the development of corporate governance codes across different countries.
Although we may see corporate governance changing, in the CME countries, with some
elements of the Anglos Saxon model such as shareholder value and share based
remuneration, nevertheless characteristics associated with, for example, German corporate
governance are still in place Goergen, Manjon and Renneboog (2008).

Cadbury Report formed the framework for the development of international corporate
governance provided by the international institutions, for example, OECD, the
Commonwealth and California Public Employees' Retirement System (CalPERS) (Demirag
and Solomon, 2003), International Corporate Governance Network (ICGN); and European
Fund and Asset Management Association. In 1999, the OECD issued a document, The OECD
Principles of Corporate Governance, that emphasises that corporations should be run, in the
interests of shareholders (OECD 1999)13. Notably the change reflects from competitiveness
and access to capital to high standards of corporate behaviour and accountability of the
Cadbury Report. Interestingly, the OECD committee included representatives from leading
countries with strong financial markets, such as France, Germany, Japan, the UK and the US.
Sir Adrian Cadbury was one of the key member of this committee. The OECD Principles of
Corporate Governance (1999) assists member and non-member countries in evaluating and
enhancing their legal, institutional and regulatory framework for improved corporate
governance. The OECD code followed the Anglo-American model of widely dispersed

13
available at http://www. OECD-ilibrary.org/industry-and-services/corporate-governance-improving-
competitiveness-and-access-to-capital-in-global-markets_9789264162709-en (presenting report regarding
corporate governance to contribute positively to economic performance of corporations in OECD countries).
Accessed 16 April 2016.

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shareholders, agency problem, unitary board structure and only a small focus on the
stakeholders.

The OECD report provides member countries a framework when considering statutory or
voluntary adoption of corporate governance recommendations. The report advocates, that the
corporate governance framework should ensure, for example, fairness, transparency,
accountability and responsibility, and reduced regulatory intervention (Cadbury, 2000, 13).

In addition to the OECD Principles 1999, the literature on legal origins became accepted
with the work of La Porta studies (La Porta, Lopez-de-Silanes, Shleifer and Vishny, 1997;
1998). This literature looked at two main legal traditions in developed countries, which
comprised of the Anglo American common law tradition and the civil law or the Romano-
Germanic legal tradition. The English common law system has a long tradition of self-
regulation and is open to industry specific initiatives, which do not take legislative form. Both
the US and UK are characterised as common law countries, yet the US legal system is
different as it has both written law as well as “judicially crafted common law”(Jordan, 2013).
Within the common law system, legislation has been usually seen as a last resort. However,
in continental European legal systems, written legislation dominates, which may take various
forms such as constitution, civil and commercial codes. According to Jordan (2013) the
concept of a voluntary nature of code is countries with a civil law is seen as an oxymoron,
since codes are seen as a form of formal written legal rule, which avoid conflicts. Perhaps in
the modern financial markets categorically needs both forms of regulation i.e. self-regulation
or rule based corporate governance mechanisms..

The Cadbury Report has contributed to the “strong governance culture” among the listed
companies on the London Stock Exchange, thus assuring investors on the information they
receive from the board being “fair, balanced and understandable” (FRC 2014)14

VOLUNTARY ADOPTION OF THE CODE

Soft law vs hard law

The UK Corporate Governance Code 201415 reflects the Cadbury Report, by reiterating the
Cadbury definition; however, this document is significantly different from the Cadbury
Report (1992). The two pages “Code of Best Practice” is replaced by a detailed and
differentiated approach to corporate governance structured along the lines of the OECD
Principles 2004 (Jordan, 2013).The Cadbury Report (1992) and the UK’s subsequent reports
on corporate governance have kept within the soft law area. So far, we have seen little
regulation and the FRC has adopted a precautionary position with continuous reviews and
revisions of the corporate governance codes to address new developments and not requiring
regulation of the UK corporate governance by use of hard law. Although there may be
similarities to that of hard law, however the recommendation of the corporate governance
codes and the use of soft law allows for greater flexibility compared to legislation. The
regulation by hard law provides for a minimum standard that outlines the framework for

14
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Developments-in-Corporate-
Governance-and-Stewardsh.pdf; see (UK Corporate Governance Code 2014, main principle C.1, p.15)
15
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-
2014.pdf

21 | P a g e
company conduct, whereas soft law illustrates best practice. In addition, soft law is
exemplified by a high degree of voluntarism, which provides the recommendations with the
flexibility necessary for companies to adjust the principles on corporate governance in
relation to the individual company’s circumstances. The advantage of flexibility provided by
soft law is that no one size fits all solution for all companies when it comes to corporate
governance. Thus, the recommendation is that companies optimally organise their
governance within a loose framework. Since the Cadbury Report, the UK corporate
governance code continues to uphold the voluntary nature of governance, thus relying on
self-regulation. The soft law commitment in the UK highlights that shareholders will exercise
their influence, in particular, we now have the additional requirement for institutional
investors to publish their policy on shareholder engagement (Institutional Shareholders
Committee Principles 2002)16. This reference was endorsed by reference in the Combined
Code 2003, and endorses comply or explain approach since the introduction of the
Institutional Shareholders Committee Principles 2002, which was then developed into the
Stewardship Code 2010.

One would expect that the unexpected collapse of Enron in 2002 should have changed the
way, we think about corporate governance. The Enron’s collapse caused a major impact on
the financial markets as it was closely followed by the bankruptcy of other large companies
in the US such as WorldCom. Carnegie and Napier (2010) suggest “Enronitis” a term derived
from the scandals of Enron, is now a label used to describe blame, alluding to the alleged
highly suspicious accounting, and auditing practices. Although these practices were strongly
criticised, they undermined confidence in corporate reporting and auditing and the corporate
regulation. According to Bratton (2001) the self-regulatory system of corporate governance is
highly implicated in Enron’s failure. Thus requiring the legislators and the financial
community to replace the current soft law regime to be substituted by a hard law regime with
greater enforcement powers in order to enhance “transparency and accountability” (Cuomo,
Mallin and Zattoni, 2015). Following the debacles of Enron’s collapse and Arthur Andersen’s
role as the external auditors a large scale federal regulation of independent, public accountant
was initiated, with the enactment of the Sarbanes Oxley Act 2002 17(SOX) (Riotto, 2008;
Romano, 2009). SOX followed the hard law regime, which required all listed companies on
the US stock markets to adopt fully the provisions of the SOX. In contrast, rather than
intervene in the governance of companies, the UK government commissioned the Higg’s
Report (2003) and the Smith Report (2003) to report on the non-executive directors and the
audit committee, respectively. Both of these reports were addressed in the Combined Code
2003. This is different from the original Combined Code 1998 since it now places greater
emphasis on the independent non-executive directors in a company’s governance structure
and decision-making processes (Pass, 2006).

Post SOX, the empirical research shows a decline in the new foreign listings in the US.
One of the reasons for the decrease in the US IPOs is the change in the geographical
distribution of IPOs with London as the more attractive choice to cross list (Zingales, 2007).
Doidge, Andrew Karolyi and Stulz (2009); Piotroski and Srinivasan (2008) find adverse
effects of SOX on foreign listing and the relative attractiveness of the UK over the US stock
exchanges due to the growth in the LSE’s Alternative Investment Market. However, the

16
Cited in the UK Stewardship Code 2012, available https://www.frc.org.uk/getattachment/e2db042e-120b-
4e4e-bdc7-d540923533a6/UK-Stewardship-Code-September-2012.aspx Accessed 17 May 2016.
17
Sarbanes-Oxley Act, https://www.sec.gov/about/laws/soa2002.pdf .Accessed 8 April 2016..

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adoption of the full corporate governance code may be burdensome for the smaller
companies.

Since the Cadbury report 1992, several countries have issued corporate governance codes
to which corporations can adhere voluntarily (Claessens and Yurtoglu, 2013). Several
empirical studies show strong links in adoption of voluntary corporate governance
mechanisms of companies to higher market valuation and reduced cost of capital (Black,
Jang and Kim, 2006; Gompers, Ishii and Metrick, 2003; Joh, 2003).

Durnev and Kim (2005); Klapper and Love (2004) provide evidence that improved
voluntary company governance practices matter more in countries with poor shareholder
protection rights. However, their analysis is taken with caution since in countries with weak
governance practices, voluntary adoption of corporate governance mechanisms may not fully
have the desired effect.

COMPLY OR EXPLAIN

The UK’s principle based approach to corporate governance is underpinned by the comply or
explain principle of accountability. This requires a listed company choosing to depart from a
national corporate governance code to provide details of sections of the corporate governance
code it has deviated from and the reasons for doing so. The Combined Code (Pass, 2006) and
the UK corporate governance codes continues the Cadbury Report’s (1992) norms and rules
of conforming to good governance practices without the backing of legal endorsements i.e.
based on soft law approach (Haxhi et al., 2013), more specifically, using the comply or
explain principle. This important aspect, the comply or explain approach of the Cadbury
report has had a major impact on corporate governance codes, globally (Keay, 2014;
Magnier, 2014). Underpinning this is that the UK corporate governance relies on self-
regulation (Roach, 2011, 465), a voluntary code of best practice, and transparency. However,
the failure to comply with the recommendations is not a violation of rules, or delisting from
the stock exchange, but implies that the board of directors of the company have chosen an
alternative approach, that is more sustainable over the longer term. Although the comply or
explain principle is strongly associated with that of the Cadbury report (1992), however, this
exact label was not written in the report. What the Cadbury report (1992 s1.3) suggests to
ensure that investors are aware of any non-compliance with the code is:

The London Stock Exchange intend to require all listed companies registered
in the United Kingdom, as a continuing obligation of listing, to state whether
they are complying with the Code and to give reasons for any areas of non-
compliance.

The comply-or-explain principle requires companies to explain their reasons for not
adopting the recommendations of good corporate governance proposed in the governance
code (Magnier, 2014). According to FRC in the UK Corporate Governance Code 201218 the
responsibility lies with both companies and shareholders for ensuring that comply or explain
principle remains a valuable option compared to a rules-based system. This approach has now
gone global and been promoted by national/supranational organisations and adopted by
European Union through the Directive 2006/46/EC (Nerantzidis, 2015; Seidl, Sanderson and

18
https://www.frc.org.uk/getattachment/a7f0aa3a-57dd-4341-b3e8-ffa99899e154/UK-Corporate-Governance-
Code-September-2012.aspx. Accessed 15May 2016.

23 | P a g e
Roberts, 2013).The Directive 2006/46/EC of the European Parliament and of the Council
states:

To the extent to which a company, in accordance with national law, departs

from a corporate governance code … an explanation by the company as to
which parts of the corporate governance code it departs from and the reasons
for doing so. Where the company has decided not to apply any provisions of a
corporate governance code … it shall explain its reasons for doing so
(Directive 2006/46/EC, s.7b)19.

A disadvantage of the corporate governance codes is that the adoption of the soft law may
diminish governance structure overall as they do not belong to hard-law regulation. Magnier
(2014) refutes the rhetoric that codes recommendations contain nothing as they are not
binding, “because a rule that has a weak normative value, which is simply `recommendatory',
may have an extremely strong normative effect, in so far as it is seen as binding by those it
targets”. Nordberg and McNulty (2013) suggests that the Higgs Report (2003) reiterates the
content of Cadbury’s provision, using different words but in a compelling statement that:
“companies should have a free hand to explain their governance policies” suggests an
availability of an alternative. the next statement suggests that compliance takes precedence:
“it is expected that listed companies will comply with the Code’s provisions most of the
time”.

Sergakis (2013) argues that within the European context we see diversity in ownership
structures. He advocates that within the national contexts with concentrated share ownership,
the use of soft law measures may not be suitable in promoting good corporate governance
structures. In contrast, in countries such as the UK with dispersed ownership, soft law
measures may be appropriate, thus avoiding formal regulators to perform supervisory
function.

Within UK – the Cadbury report was followed by further reports to the current UK
Corporate Governance Code 2014 and the UK Stewardship Code (2010, 2014).

Board Committees

The UK corporate governance since the Cadbury Report (1992) has place great emphasis on
the continuation of the UK unitary board structure (Spira and Bender, 2004). This contrasts
the German system where we see a two-tier system consisting of both a supervisory board
and a management board. .The board reform has been one of the major corporate governance
issues. The Accountants International Study Group (AISG, 1977, p.1) indicated that audit
committees were not very frequently observed in the UK, but the concept was not unknown.
In the UK, The Cadbury Committee (1992, p.28) recommendation of all listed companies to
establish an audit committee (Collier and Gregory, 1999) to date remains embedded in the
voluntary codes of Cadbury and the current UK CG2014. Audit committees and non-
executive directors were not new, the Cadbury Report itself was picking up the provisions
from the New York Stock Exchange listing rules, however the difference is that in the US it
is a mandatory requirement for all NYSE listed companies, unlike the comply or explain

19
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32006L0046&from=EN. Accessed 12 May
2016.

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approach in the UK. Since, 2002 SOX the audit committee requirement20 is now statute an
applicable to all publicly listed companies.

Hopt (2011) emphasises that the law reforms, which include codifications aim to
minimise the inherent principal-agent conflict between the shareholders and the managers.
Following the seminar work of Berle and Means (1932) on the “separation of ownership and
control”, where they argue that the dispersed share ownership within corporation meant that it
was managers rather than the shareholders who controlled the companies. However,
difficulty with the principal-agent relationship exists between various parties, for example,
controlling shareholders and the minority shareholders, and, between the shareholder and
other stakeholders, such as creditors and bondholders. Examples of codification include the
UK companies Act 2006, Australian Corporation Act 2001 and the Switzerland plans of the “
grosse Aktienrechtare form”.

Shift to independent directors

Within the UK unitary board model, executive directors influencing the board may seem to
be problematic (Tricker, 1984).Cadbury Report suggested that the number of NED’s on the
board should be increased to balance the influence of the executive directors. The current
corporate governance achieves this by going beyond what the Cadbury Report (1992)
recommended:

An essential quality which non-executive directors should bring to the board’s

deliberations is that of independence of judgement. We recommend that the
majority of nonexecutives on a board should be independent of the company.
This means that apart from their directors’ fees and shareholdings they should
be independent of management and free from any business or other
relationship, which could materially interfere with the exercise of their
independent judgement. It is up to the board to decide in particular cases
whether this definition is met…(Cadbury 1992, s.4.12)

This is in contrast to those countries that have a dual board structure, such as Germany
and Sweden. The origins of this are from legal requirements and traditionally have boards
composed of mainly NEDs.

Shareholder activism

Many concerned about UK corporate governance have urged equity owners in listed
companies to quit the common favouritism of passivity and act as responsible, engaged
owners. The financial crisis 2007-2009 has given added drive to such calls, with the notion of
‘stewardship’ dominating and resulting in the launch of a Stewardship Code. The
Stewardship code is a set of best principles focusing on the encouragement of the
institutional investors to engage in stewardship of their investee companies and is enforced
on a c comply or explain basis (Roberts, 2015). The Stewardship Code originated from the
code entitled “Responsibilities of Institutional Investors,” issued in 2009 by the UK’s
Institutional Shareholders’ Committee (Heineman, 2010). The OECD in their report suggests
that institutional investors have not been effective as corporate governance intermediaries,
and hence the outcome of the adoption of the entire Stewardship Code, is unlikely to result in

20
See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

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corporate accountability. The European Commission’s Green Paper on Corporate
Governance (2011) defines shareholder engagement as actively monitoring companies,
engaging in a dialogue with its management and using shareholder rights, including voting
and co-operation with other shareholders, to improve the governance of the investee
companies in the interest of long-term value creation. This approach provides a broad
spectrum of shareholder means, from selling and buying shares to expressing their views on a
large number of issues from board composition to major transactions and takeover bids
(Gillan and Starks, 2007)

By contrast, a UK government initiative, the Walker Report (July 2009)21 was published
on the corporate governance in the UK banks. The Walker Report produced 39
recommendations, several of which concerned the chairman and non executive directors. At
this time, the Combined Code on Corporate Governance was still in existence. However, the
Walker Report (2009) recommended that the Combined Code should be separated into two:
UK Corporate Governance and the “Principles of Stewardship”. 22

Table 3 Development of Corporate Governance Codes in the UK

21
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-
treasury.gov.uk/d/walker_review_consultation_160709.pdf (accessed 4 April 2016).
22
See Recommendations 16 and 17, Walker Report (2009, 73)

26 | P a g e
Year Name of the Report Issuer Comment

1992 Cadbury Report LSE, FRC, First version of the UK Corporate Governance
accountancy Code looked at Financial Aspects of Corporate
profession Governance; for all listed companies, but
recommended for small companies to adopt.

Post Cadbury and its successors

1995 Greenbury Report CBI In response to concerns over the directors’

compensation packages.

1998 Hampel Report LSE, CBI, IOD, Review and revise the findings of the Cadbury
NAPF, CCAB, and Greenbury report and recommends
procedures to deal with institutional investors..
ABI

1998 Combined Code LSE, FRC, CBI Drawing on the work of the Cadbury, Greenbury
and Hampel committees, the original Combined
Code.

1999 Turnbull Report ICAEW Best practice and principles-based approach to

the implementation of a sound system of internal
control and reporting to shareholders on internal
control.

2000 Combined Code LSE, FRC, CBI

2001 Myners Report UK Treasury Institutional Shareholders in UK; focus on UK

pensions industry.

Enron and the financial crisis

2003 Higgs Report DTI Role and Effectiveness of NEDs; many

recommendations of the Higgs report were
included in the Combined Code.

2003 Smith Report FRC Recommendations in relation to the audit

committee and the role of directors serving on
the audit committee.

2003 Tyson Report DTI, LBS Review of the recruitment and development of
non-executive directors.

2003 Combined Code FRC Revisions to the Code.

2004/ Review of the Report by Paul Myners allow greater audit trail
2005 Impediments to Voting of vote instructions and increased transparency
UK Shares between issue and beneficial owner.

2006 Combined Code FRC .

Revised

2008 Higgs Report Revised DTI

27 | P a g e
 Year Name of the Report Issuer Comment

2008 Combined Code FRC

Revised

Banking and the financial crisis

2009 The Walker Review23 HM Treasury Review of corporate governance in UK banks

and other financial industry entities

2010 Stewardship Code FRC To improver the quality of engagenent beween

asset managers and companies to help improve
long term risk addjusted returns to shareholders.

2010 UK Corporate FRC Standards of good practice in relation to board

Governance Code leadership and effectiveness, compensation,
(Combined Code accountability and relations with shareholders.
dropped and renamed)

2012 UK Corporate FRC The changes to the UK Corporate Governance

Governance Code Code are designed to give investors greater
insight into what company boards and audit
committees are doing to promote their interests,
and to provide them with a better basis for
engagement”24. The Code revision in 2012 added
a recommendation that FTSE 350 companies
should put their external audit contract out to
tender at least every ten years.

2012 Stewardship Code FRC Changes to 2010 Code relate to definition of

revised stewardship, clarification of the role of asset
owner.

2014 UK Corporate FRC

Governance Code

2014 Stewardship Code FRC The UK Stewardship Code, which provides

revised25 guidance on good practice for investors, should
be seen as a companion piece to the UK
corporate governance code.

23
http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-
Code.aspx
24
http://www.frc.org.uk/News-and-Events/FRC-Press/Press/2012/September/FRC-publishes-updates-to-UK-
Corporate-Governance-C.aspx, comment by FRC Chairman Baroness Hogg, accessed 28 August 2013

25
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Developments-in-Corporate-
Governance-and-Stewardsh.pdf (accessed 15 May 2016).

28 | P a g e
DISCUSSION

Table 3 shows that the Cadbury report has been a catalyst for bringing out a quasi-law in
response to corporate failures and legitimating the principle-based over the rule based forms
of regulation in order to maximise compliance. Importantly, market based mechanisms are
less prescriptive and adoption of the self-regulation helps to minimise direct interventions in
the markets by the government or the Central Bank. Although the focus of the Cadbury
Report can be considered too narrow, for example focusing on the control and reporting
functions of the board, the role of auditors and shareholders, nevertheless it has positively
contributed to good corporate governance. The Cadbury Report has spent considerable effort
within its main provisions of the Code of Best Practice (see p.58-59) to outline the
relationship between the directors, shareholders and the auditors - which arguably was a key
part of making this report prominent (Dewing and Russell, 2004; Jordan, 2013)

The four main provisions within the Code of Best Practice are:

The board should meet regularly; retain full and effective control over the
company and monitor the executive (s1.1)

Non-executive directors should bring an independent judgement 10 bear on

issues of strategy, performance, resources, including key appointments, and
standards of conduct. (s2.1)

Directors’ service contracts should not exceed three years without

shareholders’ approval. (3.1)

It is the board’s duty to present a balanced and understandable assessment of

the company’s position. (4.1)

The Code of Best Practice recommended the roles of the CEO and chairman to be
separate, (s1.2), inclusion of independent non-executive directors (s1.3; s2.1) and
recommending that the audit committee should have at “least three non-executive
directors”(s4.3) and the remuneration committees to be made up “wholly or mainly” of non-
executive directors s3.3). Evidence suggests that the separation of the CEO and Chairman of
the board was more common in the European countries i.e. the German system where a dual
board structure exists with the supervisory board and the management board. However, the
corporate governance literature is still dominated by US-based research where the roles of
chairman and CEO are mostly entrusted within the same person. Despite the recommendation
by the US Sarbanes-Oxley Act (2002) minimal attention is given to addressing the separation
of the two roles.

Since the Cadbury Report we have seen proliferation of codes (Aguilera and Cuervo‐
Cazurra, 2009) issued mainly by institutions (such as Pan European, Commonwealth, OECD
and international Corporate Governance Network) and at the national level. However, we are
also seeing codes issued by individual firms, for example, General Motors (Cuomo et al.,
2015). Though the OECD principles does not recognise that one size should fit all,
nevertheless, the over rational and framework for corporate governance has been derived
from assumptions of “liberal market economies” (Hall and Soskice, 2001) and the primacy of
shareholders. Typical examples of liberal market economies are the US and the UK,
characterised as having strong market institutions, which coordinate the economic actors
(Akkermans, Castaldi and Los, 2009)

29 | P a g e
 At the EU level voluntary codes have been more popular, The mandatory adoption of the
SOX had mixed outcomes such as the mandatory audit committees were defeated at the
European parliament (Jordan, 2013). According to the comparison of the Cadbury, Vienot
and Peter reports show similarities in recommendations such as truly independent directors,
separation of chairman and CEO roles and self-regulation. An important legacy of the
Cadbury report is the widespread acceptance of the division of the roles of Chief Executive
and Chairman Sir Stuart Rose at Marks and Spencers is one of the few prominent people to
have recently combined the two roles. M&S shareholders voted against him continuing in
both jobs by margin of almost 38 per cent at the 2009 AGM.

Compliance requirements differ across countries

The compliance with corporate governance codes required by stock exchanges has varied. To
date, most governance codes introduced in the OECD member countries employ the comply
or explain approach according to which listed companies may disregard aspects of the code,
but in that case should disclose this fact as well as their motives. The alternative is mostly to
require full disclosure of companies’ corporate governance arrangements relative to the topic
comply or explain was facilitated by the adoption of the EU Directive 46 (2006), which has
been integrated into the national regulatory frameworks of member states. In market places
operating by “comply or explain”, a primary role for stock exchanges has been to ensure that
company disclosures remain meaningful and are not reduced to a box-ticking exercise

The “comply or explain” approach permits variations for the managers in terms of the
level of disclosure and enforcement. For example, a listed company may be requested to
disclose whether it complies with individual recommendations of the code or merely with the
code globally. In terms of the enforcement, the ability of exchanges or other regulators to
pursue companies, which do not provide adequate levels of disclosure, also varies. In most
cases, codes are subject to some form of regulatory enforcement, but they may also be subject
to enforcement largely by shareholders. For example, in Netherlands shareholders of the
company are responsible to put in force adherence to material rules. In addition, shareholders
decide whether boards have provided sufficient information in case of non-compliance. In
contrast, in France, the question of enforcement may be more or less left to market forces. .In
most instances, stock exchanges are in some way involved in monitoring the compliance
status – although, again, their ability to take enforcement action differs based on the legal
basis of the code and the national securities regulation frameworks.

The different corporate governance systems may be useful and form the point of debate
for academics, however they tend to emphasise overly broad distinctions that are blurring as
the governance systems are converging.

Should the corporate governance code be given full statutory backing – since the
corporate governance code without statutory backing does not have the force of law. While
the Code allows listed companies to deviate from its provisions, listed companies must
provide considered reasons within their Corporate Governance Report in their annual reports
for any deviation

The UK Corporate Governance Code does not apply to Alternative Investment Market
(AIM) companies. AIM is LSE’s international market for smaller growth companies. Hence,
AIM is a less regulated market, attracting companies from around the world by its ‘light
touch’ regime. The company’s nominated adviser or ‘nomad’ oversees and supports the AIM
company, given the absence of regulation. The Quoted Companies Alliance has developed a

30 | P a g e
corporate governance code for the smaller companies, which are a set of minimum standards
to be followed in their entirety, however most companies describe their governance systems
in their annual reports.

UK Corporate Governance Code 2014

The FRC’s 2014 UK Corporate Governance Code goes beyond the traditional Cadbury
report, although maintaining most of the content and the norms and rules of the report, but
focusing on behavioural change among directors rather than introducing new technical
requirements.(PwC)26. Hence, as the preface to UK Corporate Governance Code 2014 states:

One of the key roles for the board includes establishing the culture, values and
ethics of the company. It is important that the board sets the correct ‘tone from
the top’. The directors should lead by example and ensure that good standards
of behaviour permeate throughout all levels of the organisation. This will help
prevent misconduct, unethical practices and support the delivery of long-term
success (UK Corporate Governance Code 2014, Preface p. 2).

The other key change from the Cadbury Report is that companies need to augment their
governance practices in areas of setting risk appetite, risk management and internal control
and how they manage going concern assessment and reporting. The pervasiveness of this
change is emphasised in the press release as Stephen Hadrill, CEO of the FRC puts it:

The changes to the Code are designed to strengthen the focus of companies
and investors on the longer term and the sustainability of value creation. The
changes on going concern implement the reforms proposed by Lord Sharman
whose work has stimulated a sea change in thinking about the assessment and
reporting of risk and business prospects

The revised UK Corporate Governance Code 2014, changes in relation to the going
concern requiring new formal statements or confirmations by the directors, thus bringing it in
line with accounting and auditing standards. This change was not taken lightly and provoked
strong argument over the consultation period. The directors now need to confirm regarding
the going concern as follows:

In annual and half-yearly financial statements, the directors should state

whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and identify any material uncertainties to the
company’s ability to continue to do so over a period of at least twelve months
from the date of approval of the financial statements. (2014 Code provision
C.1.3).

In addition, to the above there is now requirement for two other statements. First, in
relation to the “robust assessment of principal risks” requiring the directors to confirm,
reflecting the view of the FRC regarding solvency and liquidity risk been formally integrated
into the main risk and internal control framework within the companies, thus requiring a
description of the way the risks are being mitigated:

26
http://www.pwc.co.uk/finance/corporate-governance/the-2014-uk-corporate-governance-code-time-to-act-
now.html

31 | P a g e
 Confirm in the annual report that they have carried out a robust assessment of
the principal risks facing the company, including those that would threaten its
business model, future performance, solvency or liquidity. The directors
should describe those risks and explain how they are being managed or
mitigated (2014 Code provision C.2.1).

Second, requires a “viability statement”, where directors will explain in the annual report
their assessment of the company as follows:

Over what period they have done so and why they consider that period to be
appropriate. The directors should state whether they have a reasonable
expectation that the company will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment, drawing
attention to any qualifications or assumptions as necessary. (2014 Code
provision C.2.2),

This is perhaps the most contentious issue as the period covered needs to be significantly
longer than twelve months, Over time, the market will eventually decide the period and the
value added.

As well as the changes to risk and internal control that relate directly to going concern, the
Code provision (2014 Code provision C.2.3) sets out the Board’s role in the. ongoing
monitoring as is the case under the Turnbull Guidance. Other changes relate to auditor report,
remuneration and investor relations.

The role of the Institutional investors in Corporate Governance

The Financial Reporting Council has made additions and adjustments to the UK Corporate
Governance Code, in particular to the information disclosure. The annual report should
contain a description of the policy of the board of directors on diversity, measurable
objectives that the board has set in the implementation of the policy and progress in achieving
these objectives.

There are two key tasks at the top of every public company – the running of
the board and the executive responsibility for the running of the company’s
business. There should be a clear division of responsibilities at the head of the
company which will ensure a balance of power and authority, such that no one
individual has unfettered powers of decision.

On the surface, this principle appears to forbid combining the roles of CEO and chairman.
However, the code provisions suggest that the roles may be combined as long as the rationale
for such a decision is disclosed. Regardless of whether the roles are combined or not, there is
a requirement for a strong independent non-executive element on the board, including an
identified senior independent director (sometimes referred to as a lead director), through
whom concerns may be relayed to the board.

CONCLUSIONS

Durisin and Puzone (2009); Gay (2001) acknowledge the Cadbury Report as the “seminal
event in the history of corporate governance in the UK”. Further, no one would question that
the development of the Cadbury Report in 1992 has directed attention in initiating worldwide

32 | P a g e
awareness in corporate governance and its commitment to the development of governance
mechanisms to endorse it. The most significant feature of the UK Corporate Governance
Code is that it is not written law by legislatures, but a voluntary code. In the Continental
European legal system, a voluntary code is an oxymoron (Jordan, 2013). The Cadbury Report
lives on in the UK and the adoption of its voluntary nature and “comply or explain” approach
to corporate governance, both seen as the strengths of the UK corporate governance. The
numerous academic articles have not changed their attitudes toward corporate governance

We believe that our approach, based on compliance with a voluntary code

coupled with disclosure, wiII prove more effective than a statutory code. ”
(s1.10)

A significant concern is whether the UK corporate governance code will become a

rulebook, main conviction is given the increasing use of EU driven regulations, which tend to
be mandatory. Nevertheless, it is important that the UK corporate governance remains
voluntary in nature and provide the flexibility for companies to be able to deviate from the
Code, but when they do the boards should provide a detailed explanation, thus maintain the
comply or explain approach. We conclude that 25 years on the flexibility of the Cadbury
Report is still evident in the UK corporate governance and under the current politics we do
not expect to see any reduction in the use of a voluntary code of best practice and the comply
or explain approach.

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 paper 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. More research is
needed to assess the impact of Anglo-Saxon model of corporate governance and convergence
of other national codes towards this system.

33 | P a g e
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