1. Chapter 4
Governance Context

2. Financial Information Analysis
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.
Copyright 2006 John Wiley & Sons Ltd
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

4. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

5. Financial Information Analysis
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.
Copyright 2006 John Wiley & Sons Ltd
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
Copyright 2006 John Wiley & Sons Ltd
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

8. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

9. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

10. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

12. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

13. Financial Information Analysis
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.
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

14. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

15. Financial Information Analysis
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
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis

16. Financial Information Analysis
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’
Copyright 2006 John Wiley & Sons Ltd
Financial Information Analysis