Codes of CG

MAJOR CODES
ON
CORPORATE
GOVERNANCE
1

INTRODUCTION
 Corporate governance broadly refers to the mechanisms,
processes and relations by which corporations are controlled
and directed.
 Codes on Corporate Governance sets out standards of good
practice in relation to board leadership and effectiveness,
remuneration, accountability and relations with shareholders.
2

SIR ADRIAN CADBURY COMMITTEE
UK (1992)
 Commissioned by Bank of England and Finance Reporting
Council, London Stock Exchange after the failure of Maxwell
Publishing Group, BCCI and Polly Pack in May 1991.
 Chaired by Sir Adrian Cadbury to look into the various aspects of
corporate governance.
 Submitted its draft in May 1992.
3

CADBURY REPORT
The report was mainly divided into three parts :
I. Reviewing the structure and responsibilities of Boards of
Directors and recommending a Code of Best Practice.
II. Considering the role of Auditors and addressing a number
of recommendations to the Accountancy Profession .
III. Dealing with the Rights and Responsibilities of
Shareholders.
4

THE CODE OF BEST PRACTICE
1. Board of Directors
 The board should meet regularly, retain full and effective control over
the company and monitor the executive management.
 There should be a clearly accepted division of responsibilities, which
will ensure a balance of power and authority, such that no one
individual has unfettered powers of decision.
 Where the chairman is also the chief executive, it is essential that there
should be a strong and independent element on the board, with a
recognised senior member.
 All directors should have access to the services of the company
secretary, who is responsible for ensuring that board procedures are
followed and that applicable rules and regulations are complied with. 5

2. Non-Executive Directors
 The non-executive directors should bring an independent judgement to
bear on issues of strategy, performance, resources, including key
appointments, and standards of conduct.
 The majority of non-executive directors should be independent of
management or any other relationship which could materially interfere
with the exercise of their independent judgment.
3. Executive Directors
 There should be full and clear disclosure of directors’ total
emoluments and those of the chairman and highest-paid directors,
including pension contributions and stock options, in the company's
annual report, including separate figures for salary and performance-
related pay.
6

4. Financial Reporting and Controls
 It is the duty of the board to present a balanced and understandable
assessment of their company’s position, in reporting of financial
statements, for providing true and fair picture of financial reporting.
 The directors should report that the business is a going concern, with
supporting assumptions or qualifications as necessary.
 The board should ensure that an objective and professional relationship
is maintained with the auditors.
The Code of Best Practice was later incorporated into the Listing Rules of
England LSE, i.e. companies quoted on LSE are required to report to
shareholders annually on conformity with the Code and explain the
deviations from the practices laid down in the Code.
7

AUDIT RECOMMENDATIONS
The Cadbury Committee addressed the following recommendations
to the Directors and Auditors :
 Maintaining a professional and objective relationship between the
board of directors and auditors to provide to all a true and fair
view of company's financial statements.
 Developing more effective accounting standards and forming an
audit committee
 Rotating audit partners to prevent unhealthy relationship between
auditors and the management.
 Disclosing payments to the auditors for non-audit services to the
company. 8

RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS
 The Committee's report places particular emphasis on the need
for fair and accurate reporting of a company's progress to its
shareholders, which is the responsibility of the board.
 It is encouraged that the institutional investors/shareholders to
make greater use of their voting rights and take positive interest
in the board functioning.
 Both shareholders and boards of directors should consider how
the effectiveness of general meetings could be increased as well
as how to strengthen the accountability of boards of directors to
shareholders. 9

OTHER CODES IN UK
 THE GREENBURY CODE (1995) Directors remuneration
 THE HAMPEL REPORT (1998) Best practices
 THE TURNBULL REPORT (1999) Risk management &
Internal Controls
 THE HIGGS REPORT (2003) Non-Executive Directors
 THE SMITH REPORT (2003) Audit committee
 THE REVISED COMBINED CODE (2003) UK (LSE)
10

THE OECD PRINCIPLES
1999 (REVISED IN 2004)
 The OECD stands for Organization for Economic Co-
operation and Development.
 Members of the OECD are governments of 30 economically-
developed countries.
 They were formulated in 1997 and adopted in 1999.
 They are a benchmark for policymakers, investors, companies
and other stakeholders.
11

PRINCIPLES
1. Ensuring the basis for an effective corporate government framework
2. Rights of the shareholders
 Right to transfer the ownership of their shares
 Right to receive regular and relevant information about the company
 Right to vote at general meetings
 Right to receive share in the company’s profits
 Right to remove the directors from the board.
12

3. Equitable treatment of shareholders
 Equitable treatment of all shareholders, including minority
and foreign shareholders
 Within the same class of shares, all shares should carry the
same rights
 Minority shareholders should be protected against unfair
actions taken by majority shareholders
 Insider trading should be illegal
 Restrictions on cross-border voting should be eliminated
 Directors should disclose their personal interests in the
transactions with company.
13

4. Rights of the stakeholders
 Shareholders interest should be protected and they should have
right to access relevant information.
 There should be co-operation between companies and their
stakeholders ‘in creating wealth, jobs and the sustainability of the
financially sound enterprise’.
5. Disclosures and transparency
 Disclosing all material facts that could influence decision making
of any stakeholder.
 Financial, non-financial, relevant and material information should
properly be disclosed (voluntary or mandatory) in the annual
report.
14

6. Responsibilities of the board
 To take the strategic decisions, direction of the company (to set the
vision) and making policies
 To protect the rights of shareholders and other stakeholders
 To provide relevant information to shareholders and stakeholders.
OECD is the one of the pillars of the corporate governance. Other
International codes of corporate governance include The ICGN
(International Corporate Governance Network, 1995) Statement
of Global Corporate Governance Principles.
15

SARBANES-OXLEY ACT (2002)
 The Public Accounting Reform and Investor Protection Act is
popularly known as Sarbanes-Oxley (SOX) Act, 2002.
 It aims at increasing confidence of investors by preventing
frauds and ensuring transparency in disclosures.
16

PROVISIONS
 PCAOB (Public Company Accounting Oversight Board)
 The role of this regulator is to inspect and monitor the
accounting firms. It can take disciplinary action against the
accounting firms.
 CEO/CFO certification (Sec 302 of the Act)
 All listed companies in the US are required to include in their
annual and quarterly accounts a certificate to SEC. This
certificate should be signed by CEO and CFO.
 CEO and CFO should certify the appropriateness of the FS. In
case of material misstatements (inaccuracy) all the bonuses
awarded to CEO/CFO will be forfeited. 17

 Assessment of Internal Controls (Sec 404 of the Act)
 Management and directors are responsible for establishing and
maintaining adequate internal controls.
 Auditors are required to prepare an ‘attestation report’ on the
company’s assessment of its internal control system.
 Companies must disclose any material weakness in their
internal control system. If more than one material weakness
exists, a company is not allowed to conclude that its internal
control system is adequate.
 A report on internal control must be included in the company’s
annual report to shareholder.
18

 Loans to Executives
 The Act prohibits companies (other than banks) from lending money to
any directors or senior executives.
 Very strict on insider dealing.
 Directors or senior executives are not allowed to trade in shares of their
company during any ‘black-out period’.
 Audit Committees
 Listed companies must have an audit committee, consisting entirely of
independent NEDs.
 Non-audit work by Auditors
 Non audit services are prohibited.
19

 Protection For Whistleblowers
 A whistle blower is an employee of the company who reports,
through a channel of communication other than his direct
supervising manager, suspected fraud or illegal activities in
the company.
 The Act provides protection for that employee preventing
company from taking action against employee, such as
terminating his employment.
 Rotation of partners (audit firm) at least 5 years. Firm should
ensure quality of audit (quality control procedures).
20

Codes of CG

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Codes of CG