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 practised 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.