507AF: Session 4 – Financial Education In The UK

Cadbury, Greenbury and Hampel Reports

Session Learning Outcomes

After this session, you should be able to evaluate the followings reports:

Cadbury Report
Greenbury Report
Hampel Report

Overview of Three Reports

The focus of three reports (Kaplan.co.uk)

Cadbury Report

Intro

Activity 1

4 Main Sections

Recommendations

Published in December 1992.
Committee was chaired by Sir Adrian Cadbury.
Sir Adrian Cadbury was told to review aspects of corporate governance relating to financial reporting and accountability.
His report contained a number of recommendations. Many of which, still apply today.

Share your understanding of Cadbury Report

The recommendations were split into four main sections:

Role & duties of board of directors & its compositions

Role of Non- Executive Directors

Dealing with remunerations

Addressing questions of financial report and controls

The Cadbury report recommend the following:

The board should meet regularly, retain full and effective control over the company and monitor the executive management.
The board should include non- executive directors of sufficient calibre and number for their views to carry significant weight in the board’s decisions.
All directors should have access to the advice and services of the company secretary, which is responsible to the board of directors for ensuring that procedures and regulations are followed.
Any matters relating to the removal of the company secretary should be a matter for the board as a whole

Read more:

10 big corporate scandals of 2018

Sir Adrian Cadbury

The Cadbury report recommend the following:

NEDs should bring an independent judgement for strategic, performance, resources including key appointments.
NEDs directors should be appointed for specified terms and appointment should not be automatic.
NEDs should be selected though a formal process.

EB_Autumn2018_CharlesMayo_Singles.pdf

Case study:

Lord Saatchi, non-executive directors resign from M&C Saatchi board amid scandal (2019)

M&C Saatchi’s board has announced the immediate resignation of Non-Executive Directors Lord Dobbs, Sir Michael Peat and Lorna Tilbian, as well as Executive Director Lord Saatchi.

The departures follow on the heels of M&C Saatchi’s U.K. arm grappling with an accounting scandal that led to an adjustment of £11.6m ($15.3 million) to its results.

Lord Saatchi, non-executive directors resign from M&C Saatchi board amid scandal

Read more:

The Role of the Non-Executive Director: Making Corporate Governance Work: https://www.cimaglobal.com/Documents/ImportedDocuments/NEDSmakingcorpgovwork_techguide_2003.pdf

The Cadbury report recommend the following:

Service contracts should not exceed three years without shareholders approval and that the Companies Act should be in line with this recommendation.
Shareholders require that the remuneration of directors should be fair and competitive.
Annual General Meetings provide the opportunity for shareholders to make their views.

Case Studies

• Persimmon Homes paying its CEO a £100m bonus, later reduced.

• The now-collapsed construction giant Carillion: Richard Howson, Carillion’s former chief executive from 2012 earned £1.5m in 2016, including £591,000 in bonuses. He continued to work for the firm until last autumn after stepping down as chief executive and is due to stay on the payroll, receiving his £660,000 salary and £28,000 benefits for another year, until October 2018.

The Cadbury report recommend the following:

It is the board’s duty to present a balanced and understandable assessment of the company’s position.
The board should ensure that an objective and professional relationship is maintained with auditors.
The board should establish an audit committee of at least 3 NEDs

Case study:

Tesco is to pay out £235m to settle investigations by the Serious Fraud Office and Financial Conduct Authority into the 2014 accounting scandal

Read the report here: https://ecgi.global/sites/default/files//codes/documents/cadbury.pdf

A single person should not be vested with the decision- making power.
The roles of the CEO and Chairman should be separated.
The majority of directors should be independent NEDs. They should have no financial interests in the company.

Greenbury Report

Intro

Activity 2

Recommendations

Set up in January 1995.
This Greenbury committee was led by Sir Richard Greenbury.
The objective of the committee was to identify good practice in determining director’s remuneration.

Share your understanding of Greenbury Report

Overview

Remuneration Committee

Disclosure & Approval Provision

Remuneration Policy

Service contracts & Compensations

Listed companies should establish a Remuneration Committee
→ Independent directors should determine executive pay to avoid conflicts of interest.
Clear remuneration policies should be in place
→ Executive rewards should be linked to performance and company objectives.
Pay arrangements should be disclosed and approved
→ Shareholders should receive clear information about executive remuneration and have a say on key decisions.
Service contracts and compensation arrangements should be formalised
→ Employment terms, notice periods, and severance payments should be clearly defined and transparent.

Overall Aim: Ensure executive remuneration is fair, transparent, and accountable to shareholders.

Set remuneration committee of NEDs
Articles of association should be amended
NEDs should have no personal financial interest in the company.
The board should determine the remuneration of NEDs.
Chairman should attend the Annual General Meetings (AGM)

The Remuneration Committee should publish an annual report

→ Explains how executive pay decisions were made and promotes transparency.

The report should explain the company’s remuneration policy

→ Includes performance criteria and measurement, pension provision, contracts of service, and compensation for early termination.

The report should disclose each executive’s remuneration package

→ Provides details of salary, bonuses, share options, pensions, and other benefits for individual directors.

Overall Aim: Improve transparency, accountability, and shareholder confidence in executive remuneration.‌

Remuneration committees should determine executive pay packages
→ Independent directors should decide salaries, bonuses and benefits to avoid conflicts of interest.
Remuneration committees should be sensitive
→ Pay decisions should reflect company performance, employee pay levels and shareholder expectations.
Executive share options should not be issued at a discount
→ Executives should buy shares at the market price, ensuring rewards depend on improving company performance.
Overall Aim: Ensure executive remuneration is fair, transparent and linked to performance.

Review compensation commitments carefully
→ Ensure severance payments are reasonable and do not reward poor performance.
Apply flexibility when determining rewards
→ Consider company performance and circumstances rather than following rigid pay arrangements.
Link rewards to long-term performance
→ Bonuses and incentives may be deferred to encourage sustainable success.
Reduce contract periods after the initial appointment
→ New directors may receive longer contracts initially, but notice periods should later be reduced (ideally to one year or less).
- Initial period: When a director first joins a company, it’s reasonable to offer them a slightly longer contract or notice period (e.g., 2 years), as a form of security.
- Reduced afterwards: After that initial period, the Greenbury Report recommended shortening these periods—ideally to one year or less.
Take a robust approach to compensation payments
→ Avoid excessive “golden parachutes” when directors leave the company.
Compensation should be fair and justifiable
→ Early termination payments should reflect contractual obligations and actual performance.
Avoid rewarding failure
→ Poorly performing executives should not receive generous departure packages.
Overall Aim: Ensure executive contracts, rewards, and compensation are fair, performance-related, and aligned with shareholders’ interests.

Read the report here:

https://ecgi.global/sites/default/files//codes/documents/greenbury.pdf

Hampel Report

Intro

Activity 4

Recommendations

The Committee on Corporate Governance (the Hampel Committee) was established in November 1995 to review the Cadbury Committee’s recommendations on corporate governance.
The Hampel Committee released a preliminary report in August 1997, followed by a final report in January 1998.
It relied on broad principles and a ‘common sense’ approach, which was necessary to apply to different situations, rather than Cadbury and Greenbury’s perceived ‘box-ticking’ approach
Corporate Governance is an ongoing process and should evolve based on principles and values.
- There should be no box ticking rules (e.g. yes/ no questions).
All directors should be up for elections for at least every three years and NEDs should make up at least 1/3.
Separation of chairman and CEO posts preferred.

Share your understanding of Hampel Report

Promote the AGM as a forum for shareholder engagement
→ Encourage shareholders to attend, ask questions, and hold the board accountable.
Count proxy votes before votes at the AGM
→ Ensure shareholders who cannot attend still have their votes included and represented.
Overall Aim: Strengthen shareholder involvement, transparency, and board accountability.

Read the report here:

https://ecgi.global/sites/default/files/codes/documents/hampel.pdf

https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/corporate-governance-overview/#:~:text=The%20Hampel%20Report%20aimed%20to,’box%2Dticking’%20approach.

Summary

History of the Corporate Governance Code & Next Session

1992

Cadbury Report

– The Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury, developed a set of principles of good corporate governance.

– These principles were incorporated into the London Stock Exchange’s Listing Rules and introduced the principle of ‘comply or explain’.

– The Cadbury Code was the first Corporate Governance Code in the world. The recommendations focused on the control and reporting functions of boards, and the role of auditors.

Cadbury Report (1992)

1995

Greenbury Report

– The Greenbury Report was published in response to public and shareholder concerns about Directors’ remuneration.

– The Report was published by the Study Group on Directors’ remuneration under the chairmanship of Sir Richard Greenbury.

– It included Principles of best practice, which encouraged greater visibility of remuneration structures and attached KPIs and the time horizons over which pay is released.

Greenbury Report (1995)

1998

Hampel Report

– The Hampel Committee, chaired by Sir Ronnie Hampel, was set up to review the implementation of the Cadbury and Greenbury reports.

– The Hampel Report aimed to harmonise, clarify and combine the two sets of recommendations into one Code.

-It relied on broad principles and a ‘common sense’ approach, which was necessary to apply to different situations, rather than Cadbury and Greenbury’s perceived ‘box-ticking’ approach.

Hampel Report (1998)

1999

Turnbull Report

– The report, written by the committee chaired by Nigel Turnbull, set out obligations for directors under the Combined Code.

– The guidance on good practices for listed companies included keeping good internal controls or having good audits and checks to ensure the quality of financial reporting and catch any fraud before it becomes a problem.

Turnbull Report (1999)

2003

Higgs Review (This part onwards will be covered in Friday’s session)

– The Higgs review, conducted by Derek Higgs, was an independent review of the role and effectiveness of non-executive directors and the audit committee.

– It aimed to improve and strengthen the Combined Code.

– While the review backed the existing non-prescriptive approach to corporate governance ( ‘comply or explain’) it also advocated for more provisions with set criteria for the board composition and evaluation of independent directors.

– This guidance has now been replaced by the Guidance on Board Effectiveness.

Higgs Review (2003)

2003

Smith Report

– The FRC Group on Audit Committees, chaired by Sir Robert Smith, was tasked with developing the guidance on audit committees in the Combined Code.

– The group’s report codified the role of audit committees.

– It was subsequently revised and is now known as the Guidance on Audit Committees.

2005

Revised Turnbull Guidance

– The Turnbull Review Group concluded that the original Turnbull Guidance contributed to an overall improvement to the standard of risk management and internal control, and therefore no significant edits were required.

– A small number of amendments were proposed, among them requiring the inclusion in annual reports of information to allow shareholders to understand the principal features of a company’s internal control procedures and risk management system.

Revised Turnbull Guidance (2005)

2010

The UK Corporate Governance Code

– The 2003 update to the Combined Code to include the recommendations of the Higgs Report and the Smith Report was followed by the 2010 review.

– In the wake of financial crises that came to a head in 2008-09, the FRC (The Financial Reporting Council) decided to bring forward the review and the Code was renamed the UK Corporate Governance Code.

– The review concluded, among other things, that more attention needed to be paid to following the spirit of the Code as well as its letter.

2014

Risk & Viability

– The Guidance on Risk Management, Internal Control and Related Financial and Business Reporting was primarily directed at companies subject to the UK Corporate Governance Code.

– The purpose of the guidance was to bring together elements of best practice for risk management; prompt boards to consider how to discharge their responsibilities in relation to the existing and emerging principal risks; and highlight related reporting responsibilities.

Risk & Viability (2014)

2016

Audit Updates

– Following the introduction of the EU Audit Directive and the Regulation, the Code was amended to ensure that it worked alongside the new legislation.

2018

Comprehensive Code Review

– The revision of the Code took account of work done by the FRC on corporate culture and succession planning, and the issues raised in the Government’s Green Paper and the BEIS Select Committee inquiry.

– Apart from giving centre stage to corporate culture and purpose, the 2018 Code Review broadened the definition of governance and emphasised the importance of positive relationships between Shareholders and Stakeholders.

– It also stressed the significance of independence and constructive challenge in the boardroom.

2023

Corporate Governance Consultation

– Following the consultation on Restoring Trust in Audit and Corporate Governance, in 2022, the government invited the FRC to strengthen the UK Corporate Governance Code in specific areas.

– The key objectives were to improve the quality of companies’ risk management and internal controls, and the board’s consideration of corporate governance activity to achieve their company’s strategic objectives.

– We consulted on several other changes to the Code aimed at removing duplication and strengthening or streamlining reporting.

– For more information review our Corporate Governance Consultation

2024

UK Corporate Governance Code 2024

– The revised UK Corporate Governance Code was published on 22 January 2024 and will apply to financial years beginning on or after 1 January 2025, other than provision 29 which will apply to financial years beginning on or after 1 January 2026.

– Revised guidance to accompany the Code was published on 29 January 2024 in a new digital format.

https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/corporate-governance-overview/#:~:text=The%20Hampel%20Report%20aimed%20to,’box%2Dticking’%20approach.

Activity

Activities – Questions Download

Bibliography

Ali, R (2015) Corporate Governance in the UK available at <https://www.slideshare.net/ranafaysalali/corporategovernaneintheuk> 23/09/2018

Armour, J., Awrey, D., Enriques, L., Gordon, J., Mayer, C and Payne, J. (2016) Principles of Financial Regulation Oxford: Oxford University press

ICAEW (2018) The Cadbury Report available from <https://www.icaew.com/library/subject-gateways/corporate-governance/codes-and-reports/cadbury-report> 19/08/2018

Nickhil, B. (2014) Cadbury report on corporate governance. Available at <https://www.slideshare.net/BandriNikhil/cadbury-report-on-corporate-governance> 20/09/2018

Jain, S. (2016) Corporate governance committees available at <https://www.slideshare.net/Sumanrajjain/corporate-governance-committees> 23/09/2018

Pierce, C.(2010) Corporate Governance in the European Union London: Global Governance Services

https://www.icaew.com/technical/corporate-governance/codes-and-reports/hampel-report#articles