Landmarks in the Emergence of Corporate Governance

The article titled 'Landmarks in the Emergence of Corporate Governance' illuminates the origins and evolution of corporate governance. It highlights the influential role of committees and legislative acts implemented in different countries, which have played a crucial part in shaping and advancing the concept of corporate governance

Introduction

The concept of Corporate Governance plays a significant role in ensuring the smooth functioning and administration of a company. It is a much broader phenomenon than it sounds due to which various definitions have been given to this principle from time to time. In simple terms, corporate governance can be defined as the relationship between the management of the company, the board, shareholders, stakeholders etc.

Cadbury Committee, 1992 

After a series of severe collapses in the field of corporate governance in the UK, this committee came into the picture in 1991. The committee was headed by Sir Adrian Cadbury and addressed several prominent issues such as the roles and responsibilities of the board of directors, roles of non-executive directors, remuneration committee’s duties etc. The main reason behind the formation of the Cadbury committee was that investors faced several problems and encountered trust issues because of the manner the companies addressed their financial reports. To resolve these issues, the committee came up with a report on December 1992 comprising certain guidelines and recommendations that need to be taken into consideration. They are mentioned below:

Separation of Chairman & Chief Executive Officer (CEO)

To sort out the issue of concentration of power, the committee laid down that there should be demarcation concerning power and authority to ensure that no one is vested with excess powers. Although the chairman is also considered the chief executive, the presence of an independent element on the board along with a senior member was mandatory.

It was also mentioned that the board of directors must also have control over the company and every important decision must be taken after discussion between the executives and board of directors. Also, the executive shall be appointed for 3 years and this can be extended further only with the approval of shareholders.

Establishment of Audit Committees

The report also focused on the need and importance behind the establishment of an audit committee. It said that the board must form an audit committee comprising a minimum of 3 non-executive directors. The roles and responsibilities of the members must be established.

Roles and Responsibilities of the Non-Executive Directors

It’s a known fact that the non-executive directors are not a part of the board of directors. The committee stressed the importance and role of the non-executive directors and mandated their inclusion in the board of directors in a way that their voices have importance in the decision-making. It laid down that there should be the inclusion of a minimum of 3 non-executive directors on the board.

Financial Reporting & Control

The report insisted on the disclosure of balance reports by the company to the shareholders and prohibited the use of technical terms in the report as it may cause difficulty on the part of shareholders to understand them.

Paul Ruthman Committee 

• This committee was formulated to address the controversies and issues left out by the Cadbury committee. It was headed by Ron Hampel.
• It mentioned that the reporting requirements shall be confined to internal financial control provided that the effectiveness of the company’s internal control is in question.
• The report underlined that the directors' responsibilities should be extended. It also aimed at reducing the danger of fraud.

Greenbury Committee, 1995

The Greenbury Committee was established by the Confederation of British Industry to resolve the issues about the director’s remuneration and to ensure that the director’s reporting to shareholders is conducted in a fair & transparent manner.

The committee formulated “a code of best practice” which was further divided into 4 sub-divisions:

1. Remuneration policy

2. Remuneration committee

3. Disclosures

4. Service Contracts & Compensation

The committee also went on to give suggestions that the investor institutions must play their role to ensure that the best practice is carried out.

The Hampel Committee, 1998

• This Committee was established to focus on the advancement of the Cadbury report. The key suggestion it laid down was about the duty of an auditor concerning internal control.
• The Committee proposed that the auditors should be able to inform directors in private about the internal control. In addition, it went on to formulate a code based on the recommendations of the Cadbury Committee & Greenbury Committee.

Combined Code, 1998 

• A Combined Code was introduced by the London Stock Exchange which enacted certain listing rules. It mandated that it is the responsibility of the company to disclose the annual report in which it has to specify whether the principles of combined code are applied or not with appropriate justifications.

The Turnbull Committee, 1999

• To assist companies in their development this committee has formulated the guidelines of combined control.
• It laid down certain directions & recommendations by mentioning that if a company doesn’t have an internal audit function by default, then the board must conduct an internal audit periodically.
• Also, the board of directors must acknowledge the presence of necessary measures to address risk management.

Corporate Governance & Sarbanes-Oxley Act, 2002 

• This Act was enacted aftermath of breakdowns that occurred in the USA in 2002. It is known as SOX and laid down certain standards to ensure good corporate governance.
• It insisted upon the need to set up a Public Company Accounting Oversight Board to monitor and regulate the conduct of auditors.
• It also enacted CEO/CFO certification requirements, Whistle-blower protection, Prohibition of non-audit services and Penalties for document destruction for accountability and transparency.
• To attain quality governance and regain investor confidence, this acted as a genuine effort for dealing with all the issues associated with company failures.

Organisation For Economic Co-operation and Development (OECD Principles) 

The OECD principles were introduced in the year 1948 aftermath of WW-II with the aim of reformation. This led to the formation of a new convention as countries like the US joined the OECD members after understanding their interdependence. Thus, to announce and make it a global platform this was recognized officially on 30 September 1961. Currently, around 34 countries are parties to these principles as they cooperate intending to resolve numerous issues. Several guidelines have been laid down by the OECD and they primarily focus on the following things:

• It mainly focuses on safeguarding and protecting the shareholder’s rights. It lays down the importance of giving voting rights, widespread vital information etc.
• Focuses upon providing and ensuring equal treatment of shareholders by building a mechanism in a way that the temporary management doesn’t exercise or unfairly misuse their power.
• Enhancement of fairness and transparency by the enactment of various provisions concerning disclosure and communication of vital information about the board and auditors.
• Insisted upon the pivotal role played by the stakeholders in a company to ensure corporate governance. All members such as creditors, and suppliers had to play their part to ensure the effective and smooth functioning of the company.
• The board serves as a platform between the shareholders and the corporate. A wide range of functions were prescribed so that the board acts in the best interest of both the shareholders and the company.

It is important to note that the codes and regulations laid down by the OECD have been amended from time to time to ensure the betterment of corporate governance.

Conclusion

Thus, as mentioned earlier the concept of corporate governance has served as an imperative factor in ensuring the effective operation of corporate bodies. Over the years, the need for corporate governance has evolved so much that it is essential to understand the history and reason behind this principle. Depending upon the nature and need of the companies, different countries implement acts that may favour them. Therefore, every country has adopted corporate governance with reforms that suit their economic and political structure.

References

[1] Business Ethics and Corporate Governance, Available Here

[2] The Cadbury Committee, Corporate Performance, and Top Management Turnover, Available Here

[3] The Cadbury Committee Recommendations on Corporate Governance - A Review of Compliance and Performance Impacts, Available Here

[4] Cadbury Rules - Explained, Available Here

[5] Financial Aspects of Corporate Governance, Available Here

[6]  Evolution of Corporate Governance In India, Available Here

Important Links