Corporate Governance and Business Ethics

BMS0020

Corporate Governance Codes

Dr Olu Aluko
Learning Objectives

• To understand the key factors affecting the

development of corporate governance codes

• To be aware of the main developments in corporate

governance codes
Codes of governance? What are
they?

Codes of good governance can be considered as a set

of best practices regarding the board of directors
and other governance mechanisms (Zattoni and
Cuomo, 2008)
Codes of good governance have no specific legal
basis, and are not legally binding (Wymeersch,
2006).

Enforcement is generally left to the effectiveness of

internal corporate bodies, that is - the board of
directors and of external market forces.
Governance codes encourage the board of directors
to play an active and independent role in controlling
the behaviour of top management.
Scope of corporate governance

• Shareholders rights – treatment of shareholders. E.g. one

share, one vote; general meeting participation
• Board meeting and agenda – frequency of board
meetings/year
• Separation of Chairman/CEO
• Board composition & Independence – size, execs Vs. non-
execs, qualification/experience
• Directors’ remuneration -
The UK scene
• Cadbury (1992) – duties of boards
• Greenbury (1995) – directors remuneration
• Hampel (1998) – implementation of corporate governance
• Combined Code (1998) – overall structure
• Turnbull (1999) – internal control
• Myners (2001) – institutional investment
• Higgs (2003) – role & effectiveness of non-execs
• Smith (2003) – audit committees
• Revised Combined Code (2003) – incorporating Higgs and Smith
• Revised Turnbull Guidance (2005) – internal control
• OPM/CIPFA 2005 – governance standard for public services
• Revised Combined Code (2006) – internal control & combined code
• Revised Combined Code (2008)
• The Walker Report (2009)
 Codes of Good Practice

Greenbury Cadbury
Myners (1995) (1992)
Higgs
(2001)
(2003)

Turnbull
(2005) The Combined Code Smith
on Corporate (2003)
Governance
New
Companies
Act 2006 NAPF/ABI
Individual
FSA USA institutional
EU investors
Reviews Sarbanes-
Company
Law Oxley
Corporate Governance in the UK

• In addition:
 the Companies Act 2006;
 FSA Reviews 2005 and 2009
 (Turner); FRC Reviews (2006, 2008, 2009);
 HM Treasury 2009 (Walker Review);
 EU Directives;
 US Sarbanes-Oxley; and the impact of institutional investors and their
representative groups all have influence on UK corporate governance
 International Corporate Governance
Influences

• OECD Principles of Corporate Governance (1999)

as revised (2004)

• Covers effective corporate governance frameworks,

rights of shareholders, equitable treatment of
shareholders, role of stakeholders, disclosure and
transparency, and responsibilities of the board.
International Corporate Governance Influences

• World Bank

• Global Corporate Governance Forum

• International Corporate Governance Network

• Commonwealth Association for Corporate Governance

 US Corporate Governance

• Delaware General Corporation Law

• Employee Retirement Income Security Act (ERISA)
(1974)
• Sarbanes-Oxley Act (2002)
• Commission on Public Trust and Private Enterprise
(2003)
• NYSE Corporate Governance Rules (2003, 2010)
 Sarbanes-Oxley Act (SOX) (2002)

SOX requires:

Certification of internal auditing

Increased financial disclosure
 the application of criminal and civil penalties on
directors for non-compliance
 NYSE Corporate Governance Rules
(2003, 2010)

• The board’s fundamental objective should be build long-

term sustainable growth in shareholder value for the
corporation
• Shareholders have a responsibility and long term economic
interest to vote their shares in a reasoned and responsible
manner, and should engage in a dialogue with companies in
a thoughtful manner
• Good corporate governance should be integrated with the
company’s strategy and not viewed as simply as compliance
obligation
 NGOs, Public Sector, Non-profit
Organizations and Charities

• Independent Commission for Good Governance in

Public Services - ‘Good Governance Standard for
Public Services’ 2005 (Langlands Report)

• NCVO - ‘Good Governance: A Code for the

Voluntary and Community Sector’ (2005, 2010)
UK Combined Code
Section A – Leadership The code stipulates that ‘every company should be headed by an effective
board which is collectively responsible for the long-term success of the company’.

Section B – Effectiveness: The code stipulates that ‘the board and its committees should have the
appropriate balance of skills, experience, independence and knowledge of the company to
enable them to discharge their respective duties and responsibilities effectively

Section C – Accountability: The board should present a fair, balanced and understandable assessment
of the company’s position and prospects.

Section D – Remuneration: Levels of remuneration should be sufficient to attract, retain and

motivate directors of the quality required to run the company successfully, but a company
should avoid paying more than is necessary for this purpose.

Section E – Relations with Shareholders: There should be a dialogue with shareholders based on the
mutual understanding of objectives.
Combined Code on Corporate
Governance
Combined Code Section 1 : Companies

The Combined Code

on Corporate
Governance

Board of Executive Accountability Shareholders

Directors Pay and Audit
 The Combined Code
on Corporate
Governance

Board of Executive Accountability Shareholders

Directors Pay and Audit
The board: every company should be headed by
an effective board

Chairman and Chief Executive separate

Non executive Directors to provide

monitoring & controlling
Source: Sealy, Vinnicombe & Doldor (2009)
 The Combined Code
on Corporate
Governance

Board of Executive Accountability Shareholders

Directors Pay and Audit
Topical Issue

Executive pay is a hot topic because:

– high visibility
– perceived unfairness
– can either be a motivational tool encouraging executives
to pursue strategic decisions that are in the best interest
of shareholders or it can be designed to reinforce the
wrong strategic choices
Components of the pay package

• Fixed pay – salary and benefits

– Typically smaller than variable pay
– Firms can only write off one million dollars in fixed pay
– Most companies top off salaries at about one million dollars
• Variable pay – bonuses and share options
– Draw the boards attention to performance results and can serve to
align the goals of the company and its shareholders with the
personal goals of the executive
How do we pay executives?
 The Combined Code
on Corporate
Governance

Board of Executive Accountability Shareholders

Directors Pay and Audit
Audit and accountability

The board has collective responsibility

Must have sound system of internal control to safeguard

shareholders’ investment and the company’s assets

Must have a committee to view these and appropriate

auditors
 The Combined Code
on Corporate
Governance

Board of Executive Accountability Shareholders

Directors Pay and Audit
 Shareholders

Want a return on
their investment
Want reports to know
how the company is
doing.
The opportunity to
have their say via the
Annual General
Meeting
‘Comply or Explain’

• The “comply or explain” approach is the trademark of

corporate governance in the UK.

• The Code is not a rigid set of rules.

• The rules require companies to apply the Main Principles

and report to shareholders on how they have done so.
Cadbury, A. (1992). Report of the committee on financial aspects of corporate governance (Cadbury Committee
Report). London: Gee Publishing.
Company Law Reform. (2005). London: TSO.
Department of Trade and Industry. (2004). Building Better Boards. London: HMSO.
Financial Reporting Council. (2006). The Combined Code on Corporate Governance. London: Financial Reporting
Council.
Greenbury, S. R. (1995). Director's remuneration report of a study group chaired by Sir Richard Greenbury
(Greenbury Report). London: Gee Publishing Ltd.
Hampel, R. (1998a). Committee on corporate governance: final report (Hampel Committee Report). London: Gee
Publishing.
Hampel, R. (1998b). Committee on corporate governance: the combined code. London: Gee Publishing.
Higgs, D. (2003). Review of the role and effectiveness of non-executive directors. London: HMSO.
London Stock Exchange. (2003). The Combined Code on Corporate Governance. London: Financial Services Authority.
Morris, R. (1995). Cracking the Cadbury code. Management Today: 48.
Myners, P. (2001). Institutional investment in the United Kingdom: A Review (Myners Review).
PWC. (2008). Executive compensation review of the year 2008. London: PricewaterhouseCoopers LLP.
Sealey, R. Vinnicimbe S. & Doldor, E. (2009). The Female FTSE Report 2009. Cranfield, Cranfield University
Smith, R. (2003). Audit Committees Combined Code Guidance (Smith Report). London: Financial Reporting Council.
The Directors' Remuneration Report Regulations. (2002). SI 2002/1986: 1-27. London: HMSO.
Turnbull, N. (1999). Internal control: Guidance for directors on the combined code (The Turnbull Guidance).
London: The Institute of Chartered Accountants in England and Wales.
Turnbull, N. (2005). Internal control: Revised guidance for directors on the combined code (Turnbull Guidance).
London: The Financial Reporting Council.