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Chapter 4

Chapter 4. Governance Context. Corporate Governance. ‘Way businesses structured and controlled’ CG varies across national boundaries: cultural reasons social contexts historical reasons commercial focus CG regime impacts nature of accounting

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Chapter 4

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  1. Chapter 4 Governance Context

  2. Corporate Governance • ‘Way businesses structured and controlled’ • CG varies across national boundaries: • cultural reasons • social contexts • historical reasons • commercial focus • CG regime impacts nature of accounting • strong shareholding culture will require strong reporting culture • Importance reasserted by recent frauds etc. Financial Information Analysis

  3. Corporate Governance in UK • Anglo/American CG model common to English-speaking world • Characterised by: • gulf between directors and owners • board of directors • stock exchange as major source of finance • Financial accounts seen as one means of bridging gulf between directors and owners Financial Information Analysis

  4. Best Practice • Frauds have led to model being questioned • Flaws: • too rigid • open to abuse • too focused on rights of investors • Accounting bodies, government have been proactive • Various reports address different aspects • Best Practice reports and codes Financial Information Analysis

  5. Cadbury Report • Commissioned by FRC, Stock Exchange etc. • Chaired by Sir Adrian Cadbury • Reviewed CG with specific reference to: • responsibilities of directors • nature of accounting information required • audit committees • relationship between owners, boards and auditors, etc. Financial Information Analysis

  6. Cadbury recommendations • Board: • importance of efficient board emphasised • separate CEO and Chairman • Executive Directors • service contracts to be limited to 3 years • disclosure of remuneration • Non-Executive Directors • greater role • independence important Financial Information Analysis

  7. Cadbury recommendations ctd. • Reporting and Controls: • responsibility of board in relation to accounts • importance of supplementary narrative info. • Audit Committee • critical role in liaising with auditor • should comprise of 3 non-executive directors • has emerged as critical element of CG regime Financial Information Analysis

  8. Greenbury Report • CBI formed group to produce code in relation to directors’ remuneration • Chaired by Sir Richard Greenbury • Recommendations in respect of: • remuneration committee • disclosure provisions • remuneration policy • service contracts and compensation • Directors’ remuneration still source of controversy Financial Information Analysis

  9. Hampel Report • Group formed to continue work of Cadbury • Chaired by Sir Ronald Hampel • Reiterated much of Cadbury & Greenbury • Important in maintaining momentum • Recommendations: • different individuals as Chairman and CEO • directors contracts not to exceed 1 year • non-executives on remuneration committee • training of directors Financial Information Analysis

  10. Turnbull Report • ICAEW set up group to pursue Cadbury ideas on internal control & risk • Chaired by Sir Nigel Turnbull • Assigns a strategic importance to these areas in context of CG • Shows directors how these areas are to be integrated into CG model • In future may be seen as seminal report Financial Information Analysis

  11. Turnbull Report (Continued). • Focus on principles rather than rules • Emphasis on: • successful risk management as means of adding value • internal control only possible if embedded in internal processes • role of board in reviewing and implementing • key risks to be identified and managed Financial Information Analysis

  12. Higgs • Focus on Non-Executive Directors (NEDs) • Reflects increasingly important role: • Independent • Strategy, control and governance roles • Higgs Report (2003) recommended: • NEDs to comprise at least 50% of board • Separation of CEO and Chairman roles • Ideally NEDs might serve two three-year terms • Commended for avoiding perceived excesses of SOX Financial Information Analysis

  13. Smith • Reflected increased importance of Audit Committee • Now seen as vital element of CG architecture • Recommended that Audit Committee: • Be comprised of at least 3 independent NEDs • One member to have financial experience • Monitor and review integrity of financial statements, controls, etc. Financial Information Analysis

  14. Combined Code • Cadbury, Greenbury and Hampel formed basis of original Combined Code adopted by SE • Supplemented by Turnbull, Higgs and Smith • Code based on “Comply or Explain” approach • Different to US • Essentially ‘principles-based’ • Significantly impacts company disclosure, e.g. in Annual Report Financial Information Analysis

  15. Stakeholder theory • Looks beyond investors and their needs • Recognises a broader constituency, e.g.: • employees • environmentalists • others • Challenges primacy of financial markets • Champions greater transparency and accountability • Potential for radical reform of CG model Financial Information Analysis

  16. Summary • CG a critical influence on nature, content and focus of the accounting process • CG regime in UK part of Anglo-American scheme • Characterised by investor emphasis • Frauds, scandals were catalysts for change • Cadbury, Greenbury, Hampel, Turnbull, Higgs & Smith • “Comply or Explain” • UK now world-leader in ‘best practice’ Financial Information Analysis

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