Evolution of Corporate Governance standards in the United Kingdom
As the timeline below demonstrates, a number of advances in Corporate Governance thinking and new requirements have arisen through the work and recommendations of Commissions that were set up in the wake of accounting and other scandals that led to high profile corporate collapses that resulted in significant financial losses for investors.
Why is the evolution of UK’s standards relevant beyond UK ?
The evolution of Corporate Governance standards in the United Kingdom is significant in that many countries follow the UK’s example of voluntary adherence to Codes of Corporate Governance which are periodically reviewed and updated in light of experience, rather than seeking to uphold standards via prescriptive legislation and regulation. Moreover, in recent years increasing numbers of US listed companies have began to follow the UK’s practice of splitting the roles of Chairman and CEO to two different individuals, rather than combining these in the hands of one all powerful individual. In addition, where most Codes of Corporate Governance focus on listed companies, the UK’s Institute of Directors has become globally influential with their Guidance on Corporate Governance for unlisted companies. Hence, the evolution of UK’s standards is quite informative not only for the UK itself but also for other jurisdictions.
Timeline of events and reports influencing UK standards on Corporate Governance
1990-1991 Bank of Credit and Commerce International (“BCCI”) controversy and collapse
In 1990, PWC audit of Bank of Credit and Commerce International (“BCCI”) unearths major unaccountable loss and questionable lending practices. Bank eventually collapses in 1991
1990 – Polly Peck plc Serious Fraud Office investigations and collapse
During 1990, accounting investigators at Polly Peck plc, a FTSE 100, find that material amounts of capital had been transferred outside the company at the behest of the Chairman and CEO. He then defies the Board’s request to bring the capital back. Trading in the company’s shares get suspended after a Serious Fraud Office raid of the headquarters of the company and the company goes into voluntary administration in October 1990 after a creditor’s ex parte application to the High Court for provisional liquidation is successful.
1991 The Financial Reporting Council (“FRC”) appoints the Cadbury Commission
In the wake of the BCCI and Polly Peck collapses and the perceived link of the collapses with accounting irregularities and corporate governance failure, the UK’s Financial Reporting Council, the regulator of the accounting profession, appointed a Commission headed by Sir Adrian Cadbury to look into and make recommendations on Corporate Governance Arrangements for listed companies
1992 Maxwell Group collapse
The collapse of the Maxwell Group in 1992 confirms the need for stricter and more prescriptive governance arrangements.
December 1992 – Cadbury Commission publishes the Cadbury Report
Cadbury Commission publishes the Cadbury Report aimed at raising standards in corporate governance with key recommendations being
- separating the roles of CEO and chairman of the Board of Directors
- having a minimum of three non-executive directors on the board
- having a Board Audit Committee of non-executive directors with direct access to the external auditors and the internal audit function without screening by executive management
Importantly, a key and defining recommendation from Cadbury was to leave the adoption and implementation of the Commission’s Cadbury’s to the companies themselves on a voluntary basis. This reflected Cadbury’s view that the onus should be on shareholders to exert appropriate pressure for improvements in corporate governance rather than relying on prescriptive regulation and legislation.
You can download a copy of the Cadbury Report here.
1995 – Greenbury Report released
In January 1995 the Confederation of British Industry (CBI) established the Study Group on Directors’ Remuneration under the chairmanship of Sir Richard Greenbury with a remit to identify good practice in determining directors’ remuneration and to prepare a code of practice for UK PLCs. The study group published its report, the “Greenbury Report” in July 1995 and its main recommendations included
- having a Board Remuneration Committee of non-executive directors deal with setting remuneration
- full disclosure on remuneration including reporting annually to shareholders on remuneration matters
You can download a copy of the Greenbury Report here.
1995-1998 Review of Cadbury by Hampel Committee – Hampel Report
In November 1995, the Financial Reporting Council, established a Committee on Corporate Governance, headed by Ronnie Hampel, (Hampel Committee) to review the Cadbury Committee’s recommendations on corporate governance. The Hampel Committee released a preliminary report in August 1997, followed by a final report in January 1998. Hampel found that there was no need for a revolution in the UK Corporate Governance system. The report aimed to combine, harmonise and clarify the Cadbury and Greenbury recommendations.
On the question of in whose interests companies should be run, the Hampel Committee recognized the single overriding objective shared by all listed companies, whatever their size or type of business, is the preservation and the greatest practical enhancement over time of their shareholders’ investment.
The Hampel Report relied more on broad principles and a “common sense” approach which is necessary to apply to different situations.
You can download a copy of the Hampel Report here.
1999 Turnbull Report for listed companies
In September 1999, a committee chaired by Nigel Turnbull, of the Rank Group plc was published by the Institute of Chartered Accountants in England and Wales for companies listed on the London Stock Exchange. The report informed directors of their obligations under the Combined Code with regard to keeping good “internal controls” in their companies or having good audits and checks to ensure the quality of financial reporting and catch any fraud before it becomes a problem.
You can download a copy of the Turnbull Report here.
Revised guidance was issued in 2005. The report was superseded by a further FRC guidance issued in September 2014.
You can download a copy of the revised Turnbull Report of 2005 here and a copy of the FRC Guidance of 2014 here.
2003 Higgs Review of the role and effectiveness of non-executive director by Derek Higgs
In January 2003, a committee chaired by Derek Higgs published its report on the corporate governance commissioned by the UK government. It reviewed the role and effectiveness of non-executive directors and of the Board audit committee, aiming at improving and strengthening the existing Combined Code of Corporate Governance. The review was carried out after a number of scandals in the US, involving Enron, WorldCom and Tyco, had resulted in the Sarbanes-Oxley act as the US opted for legislation.
Higgs strongly backed the existing UK non-prescriptive approach to corporate governance “comply or explain”. At the same time, he advocated more provisions with more stringent criteria for the board composition and evaluation of independent directors and to reduce some of the discretion that the Combined Code allowed. Key Higgs recommendations included :
- at least half of a board (excluding the Chair) to be comprised of non-executive directors
- Non-executives should meet at least once a year on their own to discuss company performance
- A Senior Independent Director (“SID”) be nominated and made available for shareholders to express any concerns to
- The potential non-executive directors should satisfy themselves that they posses the knowledge, skills and time to carry out their duties with due diligence.
The recommendation for a Senior Independent Director (“SID”) was met with some scepticism by some board chairmen as they felt it might undermine their own role. Gradually the concept has been become more mainstream and influential as more boards have introduced a SID.
A copy of the Higgs review can be downloaded here.
2009 Walker Review of Corporate Governance in UK Bank and other financial industry entities (“Walker Report”)
Following the financial crisis of 2008, David Walker undertook a review commissioned by the UK Government to examine examine board practices at UK banks, and later extended to other financial institutions. The necessity for a review was driven at least in part by a perceived imbalance between perceived imbalance between shareholders’ limited liability for institutional debts and the effectively unlimited liability of the taxpayer when obliged to bail them out. ‘Serious deficiencies in prudential oversight’ were noted, along with ‘major governance failures within banks’, but still promotion of best practice rather than formal regulation was identified as the best means to ensure ownership of good corporate governance
The review’s key findings and recommendations included :
- that the prevailing unitary board structure and FRC Combined Code remain ‘fit for purpose’;
- that deficiencies in board practice are predominantly of behavior rather than organization, and that a process of challenging the executive team needs to be embedded, hence a responsibility laid at the door of non-executive directors;
- that greater dedicated non-executive directorial focus on risk management is required, supported by a dedicated Chief Risk Officer;
- that active engagement remains a responsibility of shareholders and, in the case of mutual funds, a commitment to a Stewardship Code; and
- substantial enhancement is necessary of board level oversight of remuneration of all senior employees (not just board level), to be more closely aligned with medium and long-term risk and performance.
A copy of the Walker Report can be downloaded here.
2010 UK Institute of Directors Guidance on Corporate Governance for unlisted companies
As the commissions and their reports on corporate governance had focused primarily on the needs of listed companies, in 2010, the UK Institute of Directors published a guide on Corporate Governance for unlisted companies, thus addressing the needs of such companies. This was considered a major step forward in helping unlisted companies address the issues involved in designing an appropriate corporate governance framework. The guidance sets out practical and pragmatic principles of good governance and makes clear that the manner in which they are to be applied will depend on the circumstances of each company and the judgement of individual boards.
You can download a copy of the IoD Guidance on Corporate Governance for unlisted companies here.