THE F INANCIAL A SPECTS - Corporate governance

1 0 0 report OF THE COMMITTEE ON 0 0 THEFINANCIAL ASPECTSOFCORPORATE GOVERNANCE1 DECEMBER 19920 0 report OF THE COMMITTEE ON 0 0 THEFINANCIAL ASPECTSOFCORPORATE GOVERNANCE0 1992 The Committee on the Financial Aspects ofCorporate governance and Gee and Co. of this publication in whole or in part isunrestricted for internal communications within a givenorganisation. It is otherwise subject to permission whichwill not be refused but will attract a reasonablereproduction charge. A leaflet is available from thePublishers setting out full details of the level of the chargeand when it is published December 1992 ISBN0852589131( report )ISBN0852589158(Rep ortwithCodeofBestPractice)Gee (a division of Professional Publishing Ltd)South Quay Plaza183 Marsh WallLondon El4 9 FSFreephone: (0800) 289520 Fax: (071) 537-2557 Printed in Great Britain by Burgess Science and correspondence relating to the report should beaddressed to:The SecretaryCommittee on the Financial Aspects of CorporateGovernanceUp to 31 Decemher~ Box 433 Moorgate PlaceLondon EC2P 2 BJTel: (07 I) 628-7060.

2 (071) 6281874 From 1 Ja/rrrar~y 1993c/o The London Stock ExchangeLondon EC2N IHPTel: (071) 797-4575 Fax: (071) ~0:6822 Additional copies of the report may be obtainedfrom:Gee (a division of Professional Publishing Ltd)South Quay Plaza183 Marsh WallLondon El4 9 FSFreephone: (0800) 289520 Fax: (071) 537-2557 Price: & per copy, including a copy of the Code ofBest Code of Best Practice may also be purchased as aseparate publication, price per pack of D llc1 10 NTHETHEREASONS FOR SETTING UP THECORPORATE GOVERNANCEREPORT CONTENTCODE OF BEST PRACTICECOMMITTEECOMPANIES TO WHOM DIRECTEDCODE PRINCIPLESCiLSTATEMENT OF COMPLIANCEKEEPING THE CODE UP TO DATEAi__COMPLIANCEBOARDBOARD EFFECTIVENESSTHE CHAIRMANNON-EXECUTIVE DIRECTORSPROFESSIONAL ADVICEDIKECTORS' TRAININGBOARD STRUCTURES AND PROCEDURES,~~~THE COMPANY SECRETARYDIRECTORS' RESPONSIBILITIESSTANDARDS 01.

3 CONDUCTNOMINATION COMMITTEESINTEKNAL CoNTRoLsAUDIT COMMITTEESINTEKNAL AUDITBOARD REPORTSREPORTING PRACTICEPENSIONS GOVERNANCETHEIMPORTANCE OF AUDITPROFESSIONAL OBJECTIVITY QUARANTINING AUDIT FROM OTHERROTATION OF AUDITORS36 SERVICESWAYS TO INCREASE EFFECTIVENESS AND VALUE OF THE AUDITTHE EXPECTATIONS GAP _INTERNAL CONTROL~~~~__~GOING CONCERNFRAUDOTHER ILLEGAL ACTSAUDITORS LIABILITYAUDIT CONFIDENCESHAREHOLDERS48 ACCOUNTABILITY OF BOARDS TO SHAREHOLDERSINSTITUTIONAL SHAREHOLDERS _SHAREHOLDERSHAREHOLDERc 0 NC I, US I 0 NCOMMUNICATIONSINFLUENCE53 SUMMAKY OI ~~liCOMMENl)A1 OFITHE COMMITTEE S MEMBERSHIP ANDREFERENCE2 THE ROLE OF BODIES REFERRED TO IN THE REPORT3 DIRECTORS RESPONSIBILITY STATEMENT4 AUDIT COMMITTEES5 CURRENT STATUTORY AND OTHER REQUIREMENTS6 AUDITORS LIABILITY: THE CAPARO CASEICONTRIBUTORS AND RELEVANT PUBLISHED STATEMENTSCONTENTSPAGE61 When our Committee was formed just over eighteen months ago,neither our title nor our work programme seemed framed to catchthe headlines.

4 In the event, the Committee has become the focusof far more attention than I ever envisaged when I accepted theinvitation to become its chairman. The harsh economic climate ispartly responsible, since it has exposed company reports andaccounts to unusually close scrutiny. It is, however, thecontinuing concern about standards of financial reporting andaccountability, heightened by BCCI, Maxwell and the controversyover directors pay, which has kept Corporate governance in thepublic though this attention may have been, it reflects aclimate of opinion which accepts that changes are needed and itpresents an opportunity to raise standards of which we should takefull advantage.

5 Our draft proposals have been thoroughly airedand have attracted a considerable weight of informed commentfrom a wide range of individuals and bodies with an interest inmatters of Corporate governance . While it has not been uncritical,the great majority of our respondents have supported theCommittee s approach and it is this consensus which gives us amandate to proceed. The Committee is being looked to for a lead,which we have a duty to wish to thank the members of the Committee for their diligenceand above all our Secretary,whose single-minded commitment tothe Committee s progress has enabled us to complete the task wewere set in May of last year.

6 The report represents a shared viewof the action which needs to be taken in the field of financialreporting and accountability and it is one to which every memberof the Committee has contributed. The Committee has benefitedfrom the breadth of its representation, which has includedmembersof those bodies best placed to support theimplementation of its would also like on behalf of the Committee to express ourgratitude to everyone who has contributed to our work either bysubmitting evidence 10 us directly, or through the press or byproviding platforms for debates on governance of the report s findings will mark an importantadvance in the process of establishing Corporate standards.

7 Ourrecommendations will, however,have to be reviewedas circumstances change and as the broader debate on governancedevelops. We will continue in existence as a Committee until asuccessor body -is appointed, to act as a source of authority on ourrecommendations and to review their CadburyChairman1 December country s economy depends on the drive and efficiencyof its companies. Thus the effectiveness with which theirboards discharge their responsibilities determines Britain scompetitive position. They must be free to drive theircompanies forward, but exercise that freedom within aframework of effective accountability. This is the essenceof any system of good Corporate Committee s recommendations are focused on thecontrol and reporting functions of boards, and on the roleof auditors.

8 This reflects the Committee s purpose, whichwas to review those aspects of Corporate governancespecificallyrelated tofinancialreportingandaccountability. Our proposals do, however, seek tocontribute positively to the promotion of good corporategovernance as a the heart of the Committee s recommendations is a Codeof Best Practice designed to achieve the necessary highstandards of Corporate behaviour. The London StockExchange intend to require all listed companies registeredin the United Kingdom, as a continuing obligation oflisting, to state whether they are complying with the Codeand to give reasons for any areas of non-compliance. Thisrequirement will enable shareholders to know where thecompanies in which they have invested stand in relation tothe Code.

9 The obligation will be enforced in the same wayas all other listing obligations. This may include, inappropriate cases, the publication of a formal statement Committee will remain responsible for reviewing theimplementation of its proposals until a successor body isappointed in two years time, to examine progress and tocontinue the ongoing governance review. It will be for oursponsors to agree the remit of the new body and toestablish the basis of its support. In the meantime. aprogramme of research will be undertaken to assist thefuture monitoring of the adhering to the Code, listed companies will strengthenboth their control over their businesses and their publicaccountability.

10 In so doing. they will be striking the rightbalance between meeting the standards of corporategovernance now expected of them and retaining theessential spirit of SETTINGFOR THE clarity to the respective responsibilities ofdirectors, shareholders and auditors will also strengthentrust in the Corporate system. Companies whose standardsof Corporate governance are high are the more likely togain the confidence of investors and support for thedevelopment of their basic system of Corporate governance in Britain issound. The principles are well known and widely the Code closely reflects existing best sets the standard which all listed companies need proposals aim to strengthen the unitary board systemand increase its effectiveness, not to replace it.