good governance in UK

Corporate governance developments in the UK
Initial corporate governance developments in the UK began in the late 1980s and early 1990s in the wake of corporate scandals such as Polly Peck and Maxwell. Financial reporting irregularities led to the establishment of the ‘Financial Aspects of Corporate Governance Committee’ led by Sir Adrian Cadbury.
The resulting Cadbury Report published in 1992 outlined a number of recommendations around the separation of the role of the chief executive and chairman, balanced composition of the board, selection processes for non-executive directors, transparency of financial reporting and the need for good internal controls.
The Cadbury Report included a Code of Best Practice and its recommendations were incorporated into the Listing Rules of the London Stock Exchange.
Following Cadbury, a ‘Working Group on Internal Control’ was established to provide guidance to companies on how to comply with Principle 4.5 of the Cadbury Code ‘reporting on the effectiveness of the company’s system of internal control’. This led to the publication of the Rutteman Report in 1994 on ‘Internal Control and Financial Reporting’.
In 1995, following concerns about directors’ pay and share options, the Greenbury Report recommended extensive disclosure in annual reports on remuneration and recommended the establishment of a remuneration committee comprised of non-executive directors. Again, the majority of the recommendations were endorsed by the Listing Rules.
In January 1996, the Hampel Committee was established to review the extent to which the Cadbury and Greenbury Reports had been implemented and whether the objectives had been met.
The Hampel Report led to the publication of the Combined Code of Corporate Governance (1998) covering areas relating to structure and operations of the board, directors’ remuneration, accountability and audit, relations with institutional shareholders, and the responsibilities of institutional shareholders.
The 1998 Combined Code applied to all listed companies from 31 December 1998 until reporting years commencing on or after 1 November 2003 until it was superseded by the revised Code in 2003.
It was appended to Listing Rule 12.43A requiring companies to provide in their annual reports a narrative statement of how they have applied the Code principles and state that they have complied with the Code provisions or, if not, why not and for what period.
Part of the 1998 and 2003 Combined Codes requires companies to provide a statement in their annual report on how they have applied the Code Principle and Code Provisions relating to internal control.
Guidance for companies on how this should be approached was needed. This led to the establishment of the Turnbull Committee in 1998 by the Institute of Chartered Accountants in England & Wales (ICAEW) which then resulted in the Turnbull Guidance , Internal Control: Guidance for Directorson the Combined Code published in September 1999.
The Guidance is a Securities & Exchange Commission (SEC) approved framework for management to show that they have adequate internal control structures and financial reporting procedures in place in order to comply with section 404 of the Sarbanes-Oxley Act.
In 2001, the relationship between institutional investors and companies was addressed with the Government commissioned Myners Review , ‘Institutional Investment in the UK’. The objective of the review was ‘to consider whether there were factors distorting the investment decision-making of institutions’.
It included suggestions for the improvement of communication between investors and companies and encouraged institutional investors to consider their responsibilities as owners and how they should exercise their rights on behalf of beneficiaries.
In 2002 the Directors’ Remuneration Report Regulations were introduced to further strengthen the powers of shareholders in relation to directors’ pay. The regulations increase the amount of information shareholders are given on directors’ remuneration, certain disclosures, as well as performance graphs. Shareholder may vote in an advisory capacity to approve the directors’ remuneration report.
In July 2002 the Department of Trade and Industry (DTI) and HM Treasury instigated a review of the Combined Code following a review of company law.It initiated the Higgs Report on The Role and Effectiveness of Non-Executive Directors which was published in January 2003.
Recommendations from Higgs included a definition of ‘independence’ and the proportion of independent non-executive directors on the board and its committees; an expansion on the role of the senior independent director to provide an alternative channel to shareholders and lead evaluations on the chairman’s performance; added emphasis on the process of nominations to the board through a transparent and rigorous process and evaluation of the performance of the board, its committees and individual directors.
Around the same time the Financial Reporting Council published the Smith Report , Guidance on Audit Committees. Both the Higgs and Smith Reports were published in January 2003 followed by the Tyson Report on the recruitment and development of non-executive directors commissioned by the DTI.
The recommendations from the Higgs and Smith Reports led to changes in the Combined Code of Corporate Governance published in July 2003. It applies to all companies listed on the primary market of the London Stock Exchange for reporting years commencing on or after 1 November 2003.
In 2004, the Financial Reporting Council established the Turnbull Review Group to consider the impact of ‘Internal control: Guidance for Directors on the Combined Code’ and to determine whether the guidance needed to be updated. Accordingly, Internal Control: Revised Guidance for Directors on the Combined Code was published by the Financial Reporting Council in October 2005.
In 1998 the UK Government instigated a Company Law Review and produced a White Paper in 2002. A number of proposals in the White Paper relate to company reporting and a significant development is the requirement for companies to provide a mandatory Operating and Financial Review to provide information on the company’s current and prospective performance and strategy. This will come into effect from financial years beginning on or after 1 April 2005.
The European Union also significantly influences corporate governance in the UK. The European Commission’s Corporate Governance and Company Law Action Plan (May 2003) proposes a mix of legislative and regulatory measures which will affect all member States relating to:
disclosure requirements
exercise of voting rights
cross- border voting
disclosure by institutional investors
responsibilities of board me