Cadbury Committee on Financial Aspects of Corporate Governance
The Cadbury Committee report came in 1992. The Committee was constituted to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. The Cadbury Committee made 19 recommendations, which are set out as code of best practices:
The Board of Directors
The Board shall meet regularly, retain full and effective control over the company and monitor the executive management
There should be a clearly accepted division of responsibilities at the apex level to ensure a balance of power and authority so that no one has unfettered power of decision-making. Where the Chairman is also the Chief Executive, it is essential that there should be a strong and independent element on the Board with a recognized senior member
The Board should include non-executive directors of sufficient caliber and number of their views to carry significant weight in the board’s decisions
The Board should have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the company is firmly in its hands
There should be an agreed procedure for directors in furtherance of their duties to take independent professional advice, if necessary at the company’s expense.
All directors should have access to advice and services of the company secretary who is responsible to the Board for ensuring that the Board procedures are followed and that the applicable rules and regulations are complied with. Any question of the removal of company secretary should be a matter for the Board as a whole.
Non-executive Directors
Non-executive Directors should bring an independent judgment to bear issues of strategy, performance, resources, including key appointments and standards of conduct.
The majority should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgment apart from their fee and shareholding
Non-executive director should be appointed for specified terms and reappointment should not be automatic
Non-executive directors should be selected through a formal process and both this process and their appointment should be a matter of approval for the Board as a whole
Executive Directors
Director’s service contract should not exceed three years without shareholders approval
There should be full and clear disclosure of directors’ total emoluments and those of the chairman and highest paid director, including pension contributions and stock options. Separate figures should be given for salary and performance related elements and the basis on which performance is measured should be explained
Executive Director’s pay should be subject to the recommendation of a Remuneration Committee comprising of non-executive directors.
Reporting and Control
It is the Board’s duty to present a balanced and understandable assessment of company’s position
The Board should ensure that an objective and professional relationship is maintained with the auditors
The Board should establish an audit committee of at least three non-executive directors with written terms of reference which deal clearly with its authority and duties
The directors should explain their responsibility for preparing accounts next to a statement by the auditors about their reporting responsibilities
The directors should report on the effectiveness of company’s system of internal control
The directors should report that the business is a going concern with supporting assumptions or qualifications as necessary.
Greenbury Committee Recommendations
CODE OF BEST PRACTICE
THE CODE
The remuneration committee
To avoid potential conflicts of interest, Boards of Directors should set up
remuneration committees of Non-Executive Directors to determine on their
behalf, and on behalf of thc shareholders, within agreed terms of reference the
company's policy on executive remuneration and specific remuneration packages for each of the Executive Directors, including pension rights and any
compensation
Remuneration committee Chairmen should account directly to the shareholders
through the means specified in this Code for the decisions their
committees reach
Where necessary, companies’ Articles of Association should be amended to
enable remuneration committees to discharge these functions on behalf of the
Remuneration committees should consist exclusively of Non-Executive
Directors with no personal financia1 interest other than as shareholders in
the matters to be decided, no potential conflicts of interest arising from crossdirectorships
and no day-to-day involvement in running the business.
The members of the remuneration committee should be listed each year in the
committee’s report to shareholders. When they stand for re-election,
the proxy cards should indicate their membership of the committee .
The Board itself should determine the remuneration of the Non-Executive
Directors, including members of the remuneration committee, within the limits
set in the Articles of Association .
Remuneration committees should consult the company Chairman and/or Chief
Executive about their proposals and have access to professional advice inside
and outside the company.
.
The remuneration committee Chairman should attend the company’s Annual
General Meeting (AGM) to answer shareholders’ questions about Directors’
remuneration and should ensure that the company maintains contact as
required with ils principal shareholders about remuneration in the same way as
for other matters.
The committee’s annual report to shareholders should not be a
standard item of agenda for AGMs. But the committee should consider each
year whcrhcr the circumstances are such that the AGM should be invited to
approve the policy set out in their report and should minute their conclusions
Disclosure and approval provisions
The remuneration committee should make a report each year to the
shareholders on behalf of the Board. The report should form part of, or be
annexed to, the company’s Annual Reporl and Accountr. It should be the main
vehicle through which the cornpany accounts to shareholders for Directors’
remuneration.
The report should set out the Company’s policy on executive remuneration,
including levels, comparator groups of companies. individual components,
performance criteria and measurement, pension provision, contracts of service
and compensation commitments on early termination
The report should state that, in framing its remuneration policy, the committee
has given full consideration to the best practice provisions set in following paragraphs
The report should also include full details of all elements in the remuneration
package of each individual Director by name, such as basic salary, benefits in
kind, annual bonuses and long-term incentive schemes including share options
Information on share options, including SAYE options, should he given for
each Director in accordance with the recommendations of the Accounting
Standards Board’s Urgent Issues Task Force Abstract 10 and its successors.
If grants under executive share option or othcr long-term incentive schemes are
awardcd in one large block rather than phased, thc report should cxplain and
justify.
Also included in the report sbould be pension entitlements earned by each
individual Director during the year, calculated on a basis fo be recommended
by the Faculty of Actuaries and the Institute of Actuaries
If annual bonuses or benefits in kind are pensionable the report should explain
and justify
Any service contracts which provide for, or imply. notice periods in excess of
one year (or any provisions for predetermined compensation on termination
which exceed one year’s salary and benefits) should be disclosed and the
reasons for the longer notice periods explained.
BII Shareholdings and other relevant business interests and activities of the
Directors should continue to be disclosed as required in the Companies Acts
and London Stock Exchange Listing Rules.
BI2 Shareholders should be invited specitically to approve all new long-term
incentive schemes (including share option schemes) whether payable in cash or
shares in which Directors or senior cxecutivcs will participase which potentially
commit shareholders’ funds over more than one year or dilute the equity.
Remuneration policy
Remuneration committees must provide the packages needed to attract, retain
and motivate Directors of the quality required but should avoid paying more
than is necessary for this purpose
Remuneration committees should judge where to position their company
relative to other companies. They should be aware what other comparable
companies are paying and should take account of relative performance
Remuneration committees should be sensitive to the wider scene, including pay
and employment conditions elsewhere in the company, especially when
determining annual salary increases
The performance-related elements of remuneration should be designed to align
the interests of Directors and shareholders and to give Directors keen incentives
to perform at the highest levels
Remuneration committees should consider whether their Directors should be
eligible for annual bonuses. If so, performance conditions should be relevant,
stretching and designed to enhance the business. Upper limits should always be
considered. There may be a case for part-payment in shares 10 be held for a
significant period
Remuneration committees should consider whether their Directors should be
eligible for benefits under long-term incentive schemes. Traditional share
-, option schemes should be weighed against other kinds of long-tenn incentive
scheme. In normal circumstances, shares granted should not vest, and options
should not be exercisable, in under three years. Directors should be encouraged
to hold their shares for a further period after vesting or excrcise subject to the
need to finance any costs of acquisition and associated tax liability :’
Any new long-term incentive schemes which are proposed should preferably
replace existing schemes or at least form part of a well-considered overall plan,
incorporating existing schemes. which should be approved as a whole by
shareholders. The totall rewards polentially available should no, be excessive
Grants under incentive schemes, including new grants under existing share
option schemes, should be subject to challenging performance criteria reflecting
the company’s objectives. Consideration should be given fo criteria which
rellect the company’s performance relative to a group of comparator
companies in some key variables such as total shareholder return
Grants under executive share option and other long-term incentive schemes
should normally be phased rather than awarded in one large block Cl0 Executive share options should never be issued at a discount
Remuneration committees should consider the pension consequences and
associated costs to the company of basic salary increases, especially for
Directors close fo retirement
In general, neither annual bonuses nor benefits in kind should be pensionable
Service contracts and compensation
Remuneration committees should consider what compensation commitments
their Directors’ contracts of service, if any, would entail in the event of early
termination, particularly for unsatisfaciory performance
There is a strong case for setting notice or contract periods at, or reducing them
to, ene year or lcss. Remuneration committees should, howcver, be
sensitive and flexible, especially over timing. In some cases notice or contract
periods of up to two years may be acceptable. Longer periods should be
avoided wherever pasible
D3 If it is necessary to offer longer notice or contract periods, such as three years,
to new Directors recruited from outside, such periods should reduce after the
initial period
Within the legal constraints, remuneration committees should tailor their
approach in individual early termination cases to thc wide variety of
circumstances. Thc broad aim should be to avoid rewarding poor performance
while dealing fairly with cases where departure is not due to poa performance
R e m u n e r a t i o n committees should take a robust line on payment of
compensation where performance has been unsatisfactory and on reducing
compensation to reflect departing Directors’ obligations to mitigale damages
by earning money elsewhere
D6 Where appropriate, and in particular where notice or contract periods exceed
one year, companies should consider paying all or part of compensation in
instalments rather than ene lump sum and reducing or stopping payment when
the former Director takes on new
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