Cadbury Rules - Explained
What are the Cadbury Rules?
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What are the Cadbury Rules?
Cadbury Rules are guidelines or recommendations on corporate governance that were specified by the UKs Cadbury Committee. These rules were submitted in 1992 with the aim of raising the standards of corporate governance as well as financial reporting and auditing in organizations. There are standards expected from management bodies in charge of corporation governance and professionals that perform financial reporting and auditing roles. Cadbury rules are recommendations designed to raise the confidence of what is expected from those involved in these duties. Despite that these recommendations are not compulsory, all publicly traded corporations in the UK are expected to adopt them.
When do the Cadbury Rules Apply?
Cadbury rules were submitted as Code of Best Practices' in 1992, it represents the UK Corporate Governance code popularly called the Code. Corporations in the UK are expected to oblige by these set of principles established to raise the level of confidence in financial reporting and auditing, and corporate governance. The Financial Reporting Council oversees this corporate governance code and ensure that publicly listed companies on the London Stock Exchange follow them. According to the Financial Services and Markets Act of 2000, public listed companies are required to report how they comply with the code and in cases on non-compliance, they should also state reasons why this is so. Different reports and opinions on good corporate governance were synthesized, integrated and refined to birth the Cadbury rules known as the code. The publication of the 'Code of Best Practices' by Cadbury Report in 1992 was the first attempt to enact the code as an attempt to raise the level of confidence in financial reporting and auditing. This objective is clearly stated by setting out what is perceived to be the respective responsibilities of those involved in corporate governance, financial reporting and auditing. The report of the UKs Cadbury on Corporate governance bordered on three major recommendations, these are;
- The chairman of a company should be separate from the CEO.
- A minimum number of three non-executive directors should be part of the company's board, two of them should have no ties whatsoever with any executive.
- An audit committee of the board should composed of non-executive directors.
When the Cadbury committee gave these three recommendation, it arose some controversies such that the code did not reflect around contemporary best practices and that the code is only practiced by limited companies. There were further recommendations that the practices should be extended across listed companies but the Cadbury committee emphasized that the code was not meant to serve the purpose "one size fits all". Although, it was stipulated that companies are not mandated to comply with the code or principles, a company that fails to comply is required to explain the reason for non-compliance. These principles on corporate governance were added to the Listing Rules of the London Stock Exchange in 1994. In 1995, further recommendations were added as changes to the existing principles in the cadbury Code. They were given in the Greenbury Report by a study group or committee set up by Richard Greenbury. These further changes are that;
- Long-term performance-related pay should be given to directors and this should reflect in the company's financial statements.
- each board should have a remuneration committee.
These recommendations and changes are to be reviewed in an interval of three years according to Greenbury. In 1998, Ronald Hampel, who chaired a review committee gave a Hampel Report suggesting that Cadbury principles and Grenbury principles should be integrated to form a combined code. Contained in the Hampel report are the following;
- All remunerations including pensions paid to directors and executives should be disclosed in the company's financial statements.
- The chairman of the board should be the "leader" of the non-executive directors.
- Institutional investors should consider voting the shares they held at meetings, though rejected compulsory voting.
Following the Hampel report in 1998, a mini-report was produced by the Turnbull Committee in the following year. The Turnbull report recommended that directors should be responsible for internal financial reporting and auditing controls in an organization. Aside from the report by the Turnbull Committee, there were other reports that rolled out what non-executive directors are expected to do, these reports include the Higgs review and Derek Higgs report. After the 2008 financial crisis, a report was also produced by the Walker Review. This report focused on recommendations for all companies but most especially, the banking industry. The Financial Reporting Council issued a new Stewardship Code in 2010. It also issued a new version of the UK Corporate Governance Code.
- Corporate Governance Law (Intro)
- What is Business Governance?
- Berle-Means Thesis
- Corporate Governance Rating Definition
- Who are the members of a corporation?
- Corporate Charter
- Shareholder Register
- Common Stock
- Preferred Stock
- Par Value
- Authorized Shares
- Issued Shares of Stock
- Unissued Shares of Stock
- Outstanding Shares
- Institutional Shares
- Dual Class Shares
- What is a closely-held corporation?
- Close Corporation Plan Definition
- What is a Private Company vs a Public Company?
- What is the role and purpose of the corporation?
- What is the Agency theory of corporate governance?
- Shareholder-Centric Perspective
- Shareholder Value
What is the Stakeholder theory of corporate governance?
What is the role & rights of Shareholders in the corporation?
- Shareholder Democracy Definition
- Quorum Definition
- Class Voting Shareholders
- Changing the Voting Rules
- Supermajority (Voting)
- Shareholder Sponsored Proposal
- What are the variations on attributes of Ownership structure?
- Stock Split
- What are the fiduciary duties owed by shareholders?
- When is a shareholder personally liable for corporate obligations?
- Appraisal Rights
- Dissenter's Rights
- Say on Pay Rights
- How can shareholder enforce their rights (direct and derivative actions)?
- What is the process for bringing a Derivative action?
- What are corporate vote Proxies?
- Proxy Statement
- Proxy Fight or Contest Definition & Explanation
- What is Shareholder Activism and the significance of Institutional Investors?
- Activist Investor
- Overview of Board of Directors
- Board Decision Making
- Advisory Board (Observer Directors)
- What is the role of the Board of Directors?
- Board of Trustees
- Board of Governors
- Outside Director
- Outside Director or Non-Executive Director Definition
- Independent Outside Director
- Budget Committee
- Audit Committee
- Compensation Committee
- Nomination Committee (Corporate Board)
- What standards govern the actions of the board of directors?
- Duty of Candor Definition
- Board Evaluation Definition
- What is the Business Judgment Rule?
- What is D&O insurance?
- Codetermination (Foreign)
- What is the role of Managers of the corporation?
- What standards govern manager actions?
- Chief Executive Officer (CEO)
- Chief Financial Officer
- Chief Information Officer (CIO)
- Chief Investment Officer (CIO)
- Chief Legal Officer
- Chief Operating Officer
- Chief Risk Officer
- Chief Security Officer
- Chief Technology Officer (CTO)
- What are the primary state and federal corporate governance laws?
- What is the role of the state in corporate governance?
- What is the role of Securities Laws in corporate governance?
- What is the role of the Foreign Corrupt Practices Act in corporate governance?
- What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
- Sarbanes-Oxley Act (SOX)
- What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
- Corporate Monitors
- What industry organization standards affect corporate governance?
- How do proxy advisory firms affect corporate governance?
- What is the role of ethics in corporate governance?
- What are the major causes of corporate governance issues?
- What are the access to information issues?
- What are decision-making structure issues?
- What are the power struggle or competition issues?
- Holding Company
- What are hostile takeovers and defenses to hostile takeovers?
- Williams Act
- Staggered Board
- Delay-Tactic Defenses?
- Legal Lockup Defenses?
- White Knight and Pac Man Defenses?
- Jonestown Defense
- Lady Macbeth Strategy
- Macaroni Defense
- Yellow Knight
- Back-end Plan Definition
- Backflip Takeover Definition
- Dead Hand Provision Definition
- Kamikaze Defense
- Operating Company Property Company Model
- Scorched Earth Policy Definition
- Revlon Rule
- What are benefit-alignment issues?
- Cadbury Rules Definition