1 CORPORATE GOVERNANCE

1 <- CORPORATE GOVERNANCEThe importance of CORPORATE GOVERNANCE lies in its con-tribution both to business prosperity and to accountabil-ity. In the UK the latter has preoccupied much publicdebate over the past fcw years. We would wish to ser thebalance companies are now among the most accountableorganisations in society. Thry publish trading results andaudited accounts; and they are required to disclose muchinformation about their operations, relationships, remu-neration and GOVERNANCE arrangements. We stronglyendorse this accountability and we recognise the contri-bution to it made by the Cadbury and greenbury com-mittees. But the emphasis on accountability has tended toobscure a board s first responsibility - to enhance theprosperity of the business over prosperity cannot be commanded.

2 People,teamwork, leadership, enterprise, experience and skillsare what really produce prosperity. There is no singleformula to weld these together, and it is dangerous toencourage the belief that rules and regulations aboutstructure will deliver success. Accountability by contrastdoes require appropriate rules and regulations, in whichdisclosure is the most important GOVERNANCE ensures that constituencies (stakehold-ers) with a relevant interest in the company s business arefully takon into addition, good GOVERNANCE can make a significant con-tribution to the prevention of malpractice and fraud,although it cannot prevent them structures and GOVERNANCE arrangements varywidely from country to country.

3 They are a product ofthe local economic and social environmcnt. We have hadl7 CORPORATE Governancethe benefit of expert advice on how corporatc governanceworks in practice in the United States and in have found no support for the import into the UK ofa whole system developed elsewhere. But the underlyingissues of management accountability are the same every-where. There are signs that market developments maylead to convergence, with greater emphasis than before incontinental Europe on shareholder value . US andBritish pension funds and other institutional investorsare increasingly investing outside their home territories,and are beginning to exercise their rights as shareholdersabroad as they would at Cadbury committee - a private sector initiative -was a landmark in thinking on CORPORATE s recommendations were publicly endorsed inthe UK and incorporated in the Listing Rules.

4 The reportalso struck a chord in many overseas countries; it hasprovided a yardstick against which standards of corpo-rate GOVERNANCE in other markets are being remit requires us to review the Cadbury code and itsimplementation to ensure that the original purpose isbeing achieved. We are also asked to pursue any relevantmatters arising from the greenbury report. But we havean additional task, to look afresh at the roles of direc-tors, shareholders and auditors in CORPORATE made it clear at the outset that we would keep in mindthe need to restrict the regulatory burden on companies,and to substitute principles for detail wherever endorse the overwhelming majority of the findings ofthe two earlier committees.

5 In this report we comment onmatters where we take a different view, or which Cadburyand greenbury did not deal with at all. We do not attemptto record every point of agreement. For example, wedo not deal in detail with the role of the company secre-tary in CORPORATE GOVERNANCE , because that role was fullyrecognised by the Cadbury committee and we have noth-8 ICorporate to add. But we do approach CORPORATE governancefrom a somewhat different perspective. Both the Cadhuryand greenbury reports wcre responses to things whichwerc perceived to have gone wrong - CORPORATE failuresin the first case, unjustified compensation packages in theprivatised utilities in the second.

6 Understandably, bothconcentrated largely on the prevention of abuse. We areequally concerned with the positive contribution whichgood CORPORATE GOVERNANCE can is too soon to reach a considered assessment of thelong-term impact of the Cadbury code, but it is generallyaccepted that implementation of the code s provisions hasled to higher standards of GOVERNANCE and greater aware-ness of their is even more difficult to reach a definitive conclusionon greenbury as only one set of annual reports has beenproduced under its guidelines. Despite the belief in somequarters to the contrary, greenbury was not about con-trolling board remuneration, nor can that ever be done ina free market economy.

7 But it is already clear thatGreenbury s primary aim - full disclosure - is beingachieved. Indeed, the new CORPORATE GOVERNANCE require-ments for the full disclosure of directors emoluments andfor a remuneration committee report have led to a dis-proportionate part of annual reports being devoted tothese the most part,the larger listed companies haveimplemented both codes fully. Smaller companies havealso implemented most provisions, but there are someaspects with which they find it harder to comply. We con-sidered carefully whether we should distinguish betweenthe GOVERNANCE standards expected of larger and smallcrcompanies. We concluded that this would be a distinction by size would be arbitrary; more impor-tantly, we consider that high standards of GOVERNANCE areas important for smaller listed companies as for largerl9 CORPORATE Governanceones.

8 But we would urge those considering thr gover-nance arrangements of smaller listed companies to do sowith flrxibility and a proper regard to Good CORPORATE GOVERNANCE is not just a matter of pre-scribing particular CORPORATE structures and complyingwith a number of hard and fast rules. There is a need forbroad principles. Al1 concerned should then apply theseflexibly and with common sensc to the varying circum-stancrs of individual companies. This is how thr Cadburyand greenbury committees intrnded their recommenda-tions to be implemented. It implies on the one hand thatcompanies should be prepared to review and explaintheir GOVERNANCE policies,including any special circum-stances which in their view justify departure from gener-ally accepted best practice,and on the other hand thatshareholders and others should show flexibility in theinterpretation of the code and should listen to directors explanations and judge them on their Companies experience of the Cadbury and Greenburycodes has been rather different.

9 Too often they believethat the codes have been treated as sets of prescriptiverules. Thr shareholders or their advisers would be inter-ested only in whether the letter of the rule had been com-plied with - yes or no. A yes would receive a tick,hence thr expression box ticking for this Box ticking takes no account of the diversity of circum-stances and experience among companies, and within thesame company over assumes, for example, thatthe roles of chairman and chief executive officer shouldnever be combined; and that there is an ideal minimumnumbcr of non-executive directors, and an ideal maxi-mum notice period for an executive director. We do notthink that there are universally valid answcrs on suchpoints.

10 We believe, as did the Cadbury committee, thatthere can be guidelines which will he appropriate in rnostCorporate ; but that there will be valid reasons for practices are approved by the board after dueconsideration, it is not conducive to good CORPORATE gov-ernance for the company s explanations to be rejectedout of hand and for its reputation to suffer as a is another problem with box ticking. It can heseized on as an easier option than thr diligent pursuit ofcorporatr GOVERNANCE objectives. It would then not bedifficult for lazy or unscrupulous directors - or share-holders - to arrange matters so that the Ietter of everygovernance rule was complied with but not the might even be possible for the next disaster to emergein a company with, on paper, a 100% record of compli-ance.