Cadbury Committee Recommendations In A Nutshell

ROLE OF CHAIRMAN

The chairman's role in securing good corporate governance is crucial. Chairmen are primarily responsible for the working of the board, for its balance of membership subject to board and shareholders' approval, for ensuring that all relevant issues are on the agenda, and for ensuring that directors, executive and non-executive alike, are enabled and encouraged to play their part in its activities. Chairmen should be able to stand sufficiently back from the day-to-day running of the business to ensure that their boards are in full control of the company's affairs and alert to the obligations to their shareholders.

It is for chairmen to make certain that their non-executive directors receive timely, relevant information tailored to their needs, and that they are briefed well enough on the issues arising at meetings for them to be effective board members.

Given the importance and particular nature of the chairman's role, it should in principle be separate from that of the chief executive.

If the two roles are combined in one person, it represents a considerable concentration of power. We recommend, therefore, that there should be clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision.

THE GENESIS

The Cadbury Committee was set up in May 1991 by the Financial Reporting Council, the London Stock Exchange and the accountancy profession to address the financial aspects of corporate governance.

Its chairman was Sir Adrian Cadbury. The sponsors were concerned at the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected.

The underlying factors were seen as the absence of a clear framework for ensuring that directors kept under review the controls in their business, together with the looseness of accounting standards and competitive pressures, both on companies and on auditors, which made it difficult for auditors to stand up to demanding boards. These concerns about the working of the corporate system were heightened by some unexpected failures of major companies and by criticisms of the lack of effective board accountability for such matters as directors' pay.

Further evidence of the breadth of feeling that action had to be taken to clarify responsibilities and to raise standards came from a number of reports on different aspects of corporate governance which had either been published or were in preparation at that time.

SUMMARY OF RECOMMENDATIONS

The boards of all listed companies should comply with the code of best practice set out by the committee.

As many companies as possible should aim at meeting its requirements.

The listed companies reporting in respect of years ending on or after 31 December, 1992, should make a statement about their compliance with the code in the report and accounts and give reasons for any areas of non-compliance.

Companies should publish their statement of compliance only after they have been the subject of review by the auditors.

The Auditing Practices Board should consider the extent and form that an endorsement by the auditors could take.

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