The Cadbury Committee Report On Corporate Governance

THE CADBURY
COMMITTEE REPORT ON
CORPORATE
GOVERNANCE
- S U B M I TTE D BY
D I K S H A VA S H I S H T H
2 0 1 9 PBA 9 2 1 5
M BA C 4 01
CADBURY COMMITTEE REPORT (1992)
The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a committe
chaired by Sir. George Adrian Cadbury that sets out recommendations on the arrangement of
company boards and accounting systems to mitigate corporate governance risks and failures
Cadbury Committee Report (1992)URY COMMITTEE REPORT
(1992)
• The 'Cadbury Committee' was set up in May 1991
with a view to overcome the huge problems of
scams and failures occurring in the corporate sector
worldwide in the late 1980s and the early 1990s.
• It was formed by the Financial Reporting Council,

the London Stock of Exchange and the
accountancy profession, with the main aim of
addressing the financial aspects of Corporate
Governance
‘CODE OF BEST PRACTICE’
 The committee’s focus was on control and reporting functions of the board of directors.
 Committee published its report in December 1992, which contained a code of corporate governance.
 This code was known as:

THE SETTING
FOR THE
i.
REPORT
The Committee’s recommendations are focused on the
Code Principles
control and reporting functions of boards, and on the role of The principles
auditors.
ii. At the heart of the Committee’s recommendations is a Code • Openness

of Best Practice designed to achieve the necessary high
standards of corporate behavior. • integrity
iii. The Committee will remain responsible for reviewing the
implementation of its proposals. A programme of research • accountability.
will be undertaken to assist the future monitoring of the
Code. • An open approach to the disclosure of information
iv. By adhering to the Code, listed companies will strengthen contributes to the efficient working of the market
both their control over their businesses and their public
accountability.
economy, prompts boards to take effective action and
allows shareholders and others to scrutinize companies
v. Bringing greater clarity to the respective responsibilities of
directors, shareholders and auditors will also strengthen trust more thoroughly.
in the corporate system.
vi. Our proposals aim to strengthen the unitary board system and
increase its effectiveness, not to replace it.
ROLE OF BOARD OF DIRECTORS, DUTIES OF BOARD AND ITS
COMPOSITIONS
Auditing
• The audit provides an external and objective check on the way in which the financial statements have been prepared
and presented
• Audits are a reassurance to all who have a financial interest in companies, quite apart from their value to boards of
directors.
Professional objectivity
• Shareholders require auditors to work with and not against management, while always remaining professionally
objective.
• Accounting standards provide important reference points against which auditors exercise their professional judgment.
• Shareholders look to the audit committee to ensure that the auditors are able to put their views in the event of any
difference of opinion with management.
Ways to increase effectiveness and
value of the audit
1. The ‘Expectations Gap’
There should be an extension of the audit which will add to its value to all users of accounts and bring it closer into line with public
expectations.
2. Internal Control
Directors should report on the effectiveness of their system of internal control, and that developing guidance for auditors on relevant
audit procedures and the form in which auditors should report.
3. Going Concern
Directors should state in the report and accounts that the business is a going concern, with supporting assumptions or qualifications as the
question of Legislation should be decided in the light of experience.
4. Fraud
The auditor’s responsibility is ‘properly to plan, perform and evaluate his audit work so as i;. have a reasonable expectation of detecting
material misstatements in the financial statements’
Accountability of Boards to
Shareholders
1. The formal relationship between the shareholders and the board of directors is that the shareholders elect the directors
2. A number of proposals addressing this issue were put forward by individual shareholders and shareholder organisations
3. On the first proposal, we have not seen evidence explaining how it would be possible to form shareholder committees in such a
way that they would be both truly representative of all the company’s shareholders and able to keep in regular touch with their
changing constituencies
4. The second set of proposals raises such questions as what legislation would be needed to alter the present thresholds for tabling
shareholder resolutions, and where the costs involved in circulating shareholder communications should fall
5. In the meantime, shareholders can make their views known to the boards of the companies in which they have invested by
communicating with them direct and through their attendance at general meetings
6. Shareholders have delegated many of their responsibilities as owners to the directors who act as their stewards. It is for the
shareholders to call the directors to book if they appear to be failing in their stewardship and they should use this power
Shareholder Communications
The Institutional Shareholders’ Committee’s advice to its members to use their voting rights positively is important in the context of
corporate governance
 These conclusions on the role of institutional shareholders raise issues over the lines of communication between boards and their
shareholders. The first issue is one of parity between shareholders.
 A second issue which arises over communications between institutional investors and companies is the danger of imparting inside
information
If long-term relationships are to be developed , it is important that companies should communicate their strategies to their major
shareholders and that their shareholders should understand them.
Shareholder Influence
Because of the importance of their collective stake, we look to the institutions in particular, with the backing of the Institutional
Shareholders’ Committee, to use their influence as owners to ensure that the companies in which they have invested comply with the Code
Conclusion
1. The Committee’s proposals are mutually supportive and should be taken as a whole. The Code reflects existing
best practice and few of our recommendations require legislation
2. No system of corporate governance can be totally proof against fraud or incompetence. The test is how far such
aberrations can be discouraged and how quickly they can be brought to light
3. Although the great majority of companies are both competently run and audited under the present system of
corporate governance, it is widely accepted that standards within the corporate sector have to be raised
4. The way forward is through clear definitions of responsibility and an acceptance by all involved that the highest
standards of efficiency and integrity are expected of them
5. This will involve a sharper sense of accountability and responsibility all round - accountability by boards to
their shareholders, responsibility on the part of all shareholders to the companies they own
Summary of Recommendation
 Single person should not be vested with all the powers
 Majority of non-executive directors should be independent of management i.e. they should not
have any financial interests.
 Non-executive directors should be appointed for specified terms.  Service contracts should
not exceed 3 years.
 A remuneration committee comprising majorly of non- executive directors should decide on

the pay of executive directors.
 The interim company report should give the balance sheet information and reviewed by the
auditor.  Regular rotation of auditors
There was a series of sensational business scandals in the United
Kingdom. There was particular public outrage at the plundering
of pension funds by Robert Maxwell, at the failure of auditors to
expose the impending bankruptcy of the Bank of Credit and
Commerce International, and at the apparently undeserved high
AN EXAMPLE pay raises received by senior business executives.
FOR- The City of London responded by creating a special committee to

examine the financial aspects of corporate governance.
That problem was resolved with the resulting Code of Best

CODE OF Practice produced by the Cadbury Committee. To reduce the
power of executive directors in the boardroom the Code
BEST recommends a greater role for non-executive directors, changes

in board operations, and a more active role for auditors. The
paper reviewed the various published reactions to the Cadbury
PRACTICE Report, and concludes that the Code is unlikely to halt the
incidence of business scandals in the United Kingdom.

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THE CADBURY

• It was formed by the Financial Reporting Council,

 This code was known as:

ii. At the heart of the Committee’s recommendations is a Code • Openness

 A remuneration committee comprising majorly of non- executive directors should decide on

AN EXAMPLE pay raises received by senior business executives.

FOR- The City of London responded by creating a special committee to

That problem was resolved with the resulting Code of Best

BEST recommends a greater role for non-executive directors, changes

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