COMMITTEE ON CORPORATE GOVERNANCE

1 COMMITTEE ONCORPORATEGOVERNANCEF inal Reportc 1997 The COMMITTEE on CorporateGovernance and Gee Publishing of this publication in whole or in partis unrestricted for interna1 communications within agiven organisation. It is otherwise subject topermission which will not be refused but will attracta reasonable reproduction publishrd January 1998 ISBN 1 86089 034 2 Additional copies of the report, at f per copy,may be obtained from:Gee Publishing Ltd100 Avenue RoadSwiss CottageLondonNW3 3 PGFreephone: 0345 573 1l3 Fax: (0171) 393 7463 Designed b y Gee in Great Britain b y Alresford Press ON CORPORATE COVERNANCE:FINAL REPORTFOREWORD 51.

2 CORPORATE GOVERNANCE12. PRINCIPLES OF CORPORATE GOVERNANCE163. THE ROLE OF DIRECTORS 234. DIRECTORS'REMUNERATION325. THE ROLE OF SHAREHOLDERS406. ACCOUNTABILITY AND AUDlT497. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS57 ANNEX - THE COMMITTEE S MEMBERSHIP AND REMIT 65l3 ForewordFOREWORD1 This COMMITTEE on CORPORATE GOVERNANCE was estah-lished in Novemher 1995 on the initiative of the Chairmanof the Financia1 Reporting Council, Sir Sydncy followcd the recommrndations of the Cadhury andGrcenbury committces that a new COMMITTEE shouldrrview thr implemrntation of their findings.

3 The presentcommittrr s remit and membership appear in the COMMITTEE s sponsors are the London StockExchangr, the Confederation of British Industry, theInstitute of Directors,the Consultative COMMITTEE ofAccountancy Bodies, the National Association of PensionFunds and the Association of British Insurers. We shouldlike to acknowledge their help, without which it would nothave been possible to publish this COMMITTEE has consulted widely. Before the prelimi-nary report the COMMITTEE issued a questionnaire inanswer to which over 140 submissions were received, andmembers of the COMMITTEE took part in over 200 individ-ual and group discussions.

4 We received a further 167written suhmissions on the preliminary report and wehave had a substantial number of further discussions. Intotal 252 organisations or individuals responded in writ-ing to ene or both of these consultations. The breakdownof these rrspondents by category was:Public companies 114 Institutional investors 14 Professional partnerships 12 Rrprescntative hodies 24 Othcr organisations 29 Individuals 59 Thc Committcc: would like to thank al1 those who havetaken thr time and trouble to contribute to its have been encouraged hy the response to the prelimi-nary report.

5 Whilst some comment has been critical,there has been wide support for the general thrust of ourviews and recommendations. This consensos, building onthat of Cadbury and Greenbury, is a welcome feature ofthe developing thinking in this would likc to thank al1 members of the COMMITTEE forthe very considerable effort which they have devoted toour work. Particular thanks are due to the COMMITTEE sSecretary, John Healey, without whose single-mindedcommitment we could not have completed our HAMPELJ anuary 19986I<- CORPORATE GOVERNANCEThe importance of CORPORATE GOVERNANCE lies in its con-tribution both to business prosperity and to accountabil-ity.

6 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.

7 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.

8 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.

9 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.

10 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.