How the Codes have Developed- Student Spotlight

Posted By: Admin, 25 Oct, 2013 - 02:05 pm

An important part of understanding corporate governance comes from having a knowledge of the various codes that seek to provide guidance on good governance practice. These codes have developed over the last twenty-five years.

In 1992 Cadbury Report was developed in response to a number of scandals that highlighted lack of confidence in financial reporting. It introduced the concept of “comply or explain” and promoted the role of non-executive directors on the audit committee.

Three years later, in 1995, the Greenbury Report recommended the establishment of the remuneration committee to oversee the remuneration packages of directors (and senior management) and to promote the adoption of performance measures linking reward to achievement. This followed concern about incomplete disclosure of board remuneration packages.

In 1998 the Hempel Report set out the basis of the stakeholder relationship. It said that directors are responsible for maintaining the stakeholder relationship (see student note in the April Governance Now) but that they are responsible to the shareholders. The Combined Code was published later in the same year and had two sections one aimed at companies and one at institutional investors. It also required (listed) companies to have a nomination committee and to separate the role of the chairman and chief executive. It also requires a board to maintain a “sound system of control” and a process to review these controls.

The following year (1999) the Turnbull Report provided guidance on how this system of control should operate and how risk should be managed. In the last student note (June 2013) we saw how governance is best viewed as a relationship between those who direct the organisation and those on whose behalf it is governed. This idea was effectively introduced in the Combined Code but in 2001 (and again in 2008) the Myners Committee formally reviewed the role of the institutional investor. It set out the argument shareholder activism.

Board committees comprise mainly (or entirely) non-executive directors. In 2003 Derek Higgs reviewed the role of the non-executive director and how the whole governance system was working. He also made recommendations for the further development of the Combined Code. Following the publication of his report Laura Tyson (then at London Business School) looked at how companies might utilise a broader pool of talent from which board members might be drawn. This initiated the debate about board diversity.

A period of review and development then ensued. The work of audit committees was reviewed in the Smith Report (2003 and again in 2008), the Combined Code was reviewed in 2003, 2006 and again in 2008 and the Turnbull report in 2005.

Following the financial crash, in 2009 the Walker Review made thirty-nine recommendations on the governance of banks.

In 2010 the UK Corporate Governance Code was published (and amended in 2012) drawing together all the work that had been previously undertaken. It is supplemented by Guidance Notes from the Financial Reporting Council (FRC). It was in the same year that the Stewardship Code was published. This is seen as complementary to the UK Corporate Governance Code and covers the work of institutional investors.

Finally, the Davies Report (2011 and 2012) specifically examined the issue of women on UK Boards. Strictly speaking, although it’s taken as indicators of good practice, all this is related to listed companies. The Institute of Directors (IoD) has released ‘Corporate Governance Guidance and Principles for Unlisted Companies in the UK’.

Other sectors have been developing systems of governance too. In 2008 the Charities Commission set out Hallmarks of an Effective Charity and Good Governance and in 2010 the NCVO set out a second edition of a Code for the Voluntary and Community Sector. The National Housing Federation (NHF) has an Excellence in Governance: Code for Members and Good Practice (2010), specifically for housing associations. In health there is The Healthy NHS Board: Principles for Good Governance and the Code of Governance for Foundations Trusts (both 2010). Most sectors now have some guidelines set out in an appropriate code.

It should be noted that it has spread abroad too. But that would require a whole student note to review!

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