THE UK APPROACH TO CORPORATE GOVERNANCE

1 FINANCIALREPORTINGCOUNCILTHEUK APPROACH TOCORPORATEGOVERNANCENOVEMBER2006 Cover UK APPROACH to 7/11/06 2:57 pm Page 1 The key aspects of CORPORATE GOVERNANCE in the UKA single board collectively responsible for the success of the and balances: Separate Chief Executive and Chairman. A balance of executive and independent non-executive directors. Strong, independent audit and remuneration committees. Annual evaluation by the board of its on objectivity of directors in the interests of the on appointments and rights for Code of good practice based on extensive consultation withpractitioners, and operating on the basis of the 'comply or explain' UK APPROACH to 7/11/06 2.

2 57 pm Page 2 Financial Reporting Council 1 ForewordGood CORPORATE GOVERNANCE is essential to the effective operation of a freemarket, which enables wealth creation and freedom from City of London has a history of encouraging free trade and goodcorporate GOVERNANCE , based on the application of simple principles to theindividual and distinct circumstances of each more ingrained the system of CORPORATE GOVERNANCE in a businesscommunity, the less the need for detailed regulation to ensure effectivecompliance with good standards of business UK's system of business regulation, which is principles rather thanrules based, reduces the cost to global businesses of introducingprocedures to comply with detailed regulations, many of whichunnecessarily constrain business practice and publication has been produced by the Financial Reporting Council,which is responsible for CORPORATE GOVERNANCE in the UK, as part of the"City of London - City of Learning" APPROACH to 7/11/06 2.

3 12 pm Page 1We welcome this publication which describes the system of corporategovernance which we have found to be very SSttuuttttaarrdd,, TThhee RRtt HHoonn TThhee LLoorrdd MMaayyoorr ooff tthhee CCiittyy ooff LLoonnddoonnSSiirr PPaauull JJuuddggee,, CChhaaiirrmmaann,, CCiittyy ooff LLoonnddoonn -- CCiittyy ooff LLeeaarrnniinnggGGoorrddoonn SSllaavveenn,, DDeeppuuttyy DDiirreeccttoorr,, EEdduuccaattiioonn TTrraaiinniinngg GGrroouupp,, BBrriittiisshh CCoouunncciillPPrrooffeessssoorr DDaavviidd RRhhiinndd,, VViiccee CChhaanncceelllloorr,, TThhee CCiittyy UUnniivveerrssiittyy LLoonnddoonnPPrrooffeessssoorr SSiirr RRooddeerriicckk FFlloouudd,, EEmmeerriittuuss PPrreessiiddeenntt,, LLoonnddoonn MMeettrrooppoolliittaann UUnniivveerrssiittyy2 The UK APPROACH to CORPORATE GovernanceUK APPROACH to 7/11/06 2:12 pm Page 2 Financial Reporting Council 3 The advantages of the UK APPROACH The UK APPROACH combines high standards of CORPORATE GOVERNANCE withrelatively low associated costs.

4 Comparative studies consistently show thatthe UK outperforms other countries in terms of GOVERNANCE standards,while compliance costs are estimated to be lower than in other countrieswith comparable is proportionate and capable of dealing with a wide variety ofcircumstances. There is a relative lack of prescription as to how thecompany's board organises itself and exercises its responsibilities. TheCombined Code on CORPORATE GOVERNANCE identifies good governancepractices, but companies can choose to adopt a different APPROACH if that ismore appropriate to their key relationship is between the company and its shareholders, notbetween the company and the regulator.

5 Boards and shareholders areencouraged to engage in dialogue on CORPORATE GOVERNANCE have voting rights and rights to information, set out incompany law and the Listing Rules, which enable them to hold the boardto development of CORPORATE GOVERNANCE in the UKThe development of CORPORATE GOVERNANCE in the UK has its roots in aseries of CORPORATE collapses and scandals in the late 1980s and early 1990s,including the collapse of the BCCI bank and the Robert Maxwell pensionfunds scandal, both in APPROACH to 7/11/06 2:12 pm Page 3 The UK business community recognised the need to put its house inorder.

6 This led to the setting up in 1991 of the Committee on the FinancialAspects of CORPORATE GOVERNANCE , chaired by Sir Adrian Cadbury, whichissued a series of recommendations - known as the Cadbury Report - in1992. The Cadbury Report addressed issues such as the relationshipbetween the chairman and chief executive, the role of non-executivedirectors and reporting on internal control and on the company's requirement was added to the Listing Rules of the London StockExchange that companies should report whether they had followed therecommendations or, if not, explain why they had not done so (this isknown as 'comply or explain').

7 The recommendations in the Cadbury Report have been added to atregular intervals since 1992. In 1995 the Greenbury Report set outrecommendations on the remuneration of directors. In 1998 the Cadburyand Greenbury reports were brought together and updated in theCombined Code, and in 1999 the Turnbull guidance was issued to providedirectors with guidance on how to develop a sound system of the Enron and WorldCom scandals in the US, the CombinedCode was updated in 2003 to incorporate recommendations from reportson the role of non-executive directors (the Higgs Report) and the role ofthe audit committee (the Smith Report).

8 At this time the UK Governmentconfirmed that the Financial Reporting Council (FRC) was to have theresponsibility for publishing and maintaining the Code. The FRC madefurther, limited, changes to the Code in 2006. Throughout all of thesechanges, the 'comply or explain' APPROACH first set out in the CadburyReport has been The UK APPROACH to CORPORATE GovernanceUK APPROACH to 7/11/06 2:12 pm Page 4 The rationale behind the UK approachThe UK APPROACH starts from the position that good GOVERNANCE is a toolthat can improve the board's ability to manage the company effectively aswell as provide accountability to shareholders.

9 To quote from the CadburyReport: "The effectiveness with which boards discharge their responsibilitiesdetermines Britain's competitive position. They must be free to drive theircompanies forward, but exercise that freedom within a framework ofeffective accountability. This is the essence of any system of goodcorporate GOVERNANCE ."A regulatory framework that aims to improve standards of corporategovernance is more likely to succeed, and be accepted by those that itregulates, if it recognises that GOVERNANCE should support, not constrain,the entrepreneurial leadership of the company, while ensuring risk isproperly managed.

10 GOVERNANCE must also work to the benefit of theshareholders by improving the long-term value of the requires a degree of flexibility in the way companies adopt and adaptgovernance practices. To be effective good GOVERNANCE needs to beimplemented in a way that fits the culture and organisation of theindividual company. This can vary enormously from company to companydepending on factors such as size, ownership structure and the complexityof the business assessment of whether the company's GOVERNANCE practices areeffective should be made by the intended beneficiaries - Reporting Council 5UK APPROACH to 7/11/06 2:12 pm Page 5 Investors can take a pragmatic APPROACH about how to apply best practicein a way that is in the best interests of the company.