Journal of Financial Regulation and Compliance
Corporate governance: Cadbury, Greenbury
and Hampel — A review
Helen Short
Received: 11th August, 1998
Leeds University Business School, University of Leeds, Leeds, LS2 9JT; tel: 0113 2334463;
fax: 0113 233 4459.
Helen Short is a Senior Lecturer in
Accounting and Finance at Leeds Univer-
sity Business School and senior research
fellow of the International Institute of Bank-
ing and Financial Services at the Univer-
sity of Leeds. She has published
numerous refereed papers and book chap-
ters on corporate governance and is parti-
cularly interested in the role of
insititutional shareholders in the govern-
ance of corporations.
ABSTRACT
Concern over the standards of corporate gov-
ernance in the UK has led to the publication
of three committee reports: Cadbury, Green-
bury and, most recently, Hampel. Following
the publication of the Hampel Report, the
Hampel Committee has produced a document
providing a set of principles and codes to
embrace the Cadbury, Greenbury and Hampel
recommendations — the Combined Code (June
1998). The purpose of this paper is to review
the recommendations of the Cadbury, Green-
bury and Hampel reports and to consider
whether the recommendations of the Combined
Code represent a significant shift in emphasis
from the accountability aspects of corporate
governance to consideration of the need for
governance systems to provide structures and
incentives to allow business enterprise to flour-
ish.
Volume 7 Number 1
INTRODUCTION
Although corporate governance has been a
long-standing issue, the debate was given
fresh impetus, in the UK at least, by a
number of well-publicised corporate pro-
blems in the late 1980s. These involved
creative accounting, spectacular business
failures, the apparent ease with which
unscrupulous directors could expropriate
other stakeholders' funds, the limited role
of auditors, the claimed weak link between
executive compensation and company per-
formance, and the roles played by the
market for corporate control and institu-
tional investors in generating apparently
excessive short-term perspectives to the
detriment of general economic perfor-
mance. In particular, the publication of the
Cadbury Report on the Financial Aspects
of Corporate Governance (the Cadbury
Report) has led to attention being paid to
the governance practices of UK compa-
nies.
The Cadbury Committee's terms of
reference were limited to reviewing 'those
aspects of corporate governance specifically
related to financial reporting and account-
ability (para 1.2), and as a result, the main
thrust of its recommendations were direc-
ted towards issues of control and account- Journal of Financial Regulation
ability. However, since the publication of and Compliance, Vol. 7, No. 1,
1999, pp. 57-67
the Cadbury Report, there has been con- © Henry Stewart Publications,
1358-1988
Page 57
Corporate governance: Cadbury, Greenbury and Hampel — A review
siderable criticism, particularly from indus-
trialists, that the recommendations con-
tained in the Cadbury Report's Code of
Best Practice are too prescriptive, focus too
much on the accountability aspects of gov-
ernance and risk damaging the spirit of
enterprise necessary for commercial and
economic success. The successor body to
the Cadbury Committee, the Hampel
Committee was set up in November 1995
and issued its final report in January 1998.2
The Hampel Report suggested that the
emphasis on accountability had obscured 'a
board's first responsibility — to enhance
the prosperity of the business over time'
(para 1.1). The Hampel Committee's expli-
cit brief was the need to restrict the regula-
tory burden on companies, by 'substituting
principles for detail wherever possible'.
Between the publication of the Cadbury
Report and the Hampel Report, public
and media attention was given to the emo-
tive subject of directors' remuneration. In
response to public disquiet over issues of
high levels and large increases in directors'
remuneration, the Greenbury Committee
was set up in January 1995 by the Confed-
eration of British Industry (CBI) at the
request of the government. Its terms of
reference were to identify good practice in
the determination of directors' remunera-
tion. The Greenbury Report and Code of
Best Practice was issued in July 1995.
Hence, to date, there are three codes of
practice aimed at improving corporate
governance in the UK. Following the pub-
lication of the Hampel Report, the
Hampel Committee has produced a docu-
ment providing a set of principles and
codes to embrace the Cadbury, Greenbury
and Hampel recommendations — the
Combined Code. The purpose of this
paper is to review the recommendations of
the Cadbury, Greenbury and Hampel
reports and to consider whether the recom-
mendations of the Combined Code repre-
sent a significant shift in emphasis from the
Page 58
accountability aspects of corporate govern-
ance to consideration of the need for gov-
ernance systems to provide structures and
incentives to allow business enterprise to
flourish.
CORPORATE GOVERNANCE:
DEFINITIONS AND FRAMEWORK
The corporate governance debate has its
roots in a debate which has continued for
many decades since the publication of
Berle and Means;5 namely, does the
separation of ownership from control,
characterised by highly dispersed and inac-
tive shareholdings, allow directors/man-
agers to pursue their own objectives to
the detriment of the objectives of share-
holders? Despite its long history, the
debate was given fresh impetus in the UK
by a number of well-published corporate
governance problems in the late 1980s. It
was the identification of these apparent
corporate governance failures which led
to the setting up of the Cadbury C o m -
mittee.
Corporate governance is defined by the
Cadbury Report as 'the system by which
companies are directed and controlled'. 6 It
may be argued that this is a rather simplis-
tic definition which makes no distinction
between management and governance sys-
tems. Tricker provides a more comprehen-
sive definition by explaining the corporate
governance process in terms of four princi-
ple activities: direction, executive action,
supervision and accountability. Direction
involves the formulation of strategic direc-
tion for the long-term future of the organi-
sation, while executive action entails
involvement in crucial executive decisions.
These two activities are defined by Tricker
as being management functions. Supervi-
sion is defined as the monitoring and over-
sight of management performance;
accountability as recognising responsibilities
to those making a legitimate demand for
accountability. These activities are defined

as governance functions. Therefore, gov-
ernance is concerned with,
'Giving overall direction to the enter-
prise, with overseeing and controlling
the executive actions of management and
with satisfying legitimate expectations
for accountability and regulation by
interests beyond the corporate bound-
aries'.
The Tricker definition of corporate gov-
ernance emphasises the stewardship and
accountability aspects of governance. Of
equal importance, however, is the issue of
how the structure and process of govern-
ance motivates entrepreneurial activities
which increase the wealth of the business.
Essentially, corporate governance failures
may come about for two broad reasons.
First, management may operate the firm
inefficiently, resulting in an overall decrease
in firm profits compared to the potential
profitability of the firm. Second, while
managers may operate the firm efficiently
and generate 'maximum' profits, they may
divert a proportion of these profits from
shareholders via the consumption of excess
perquisites; for example, through remu-
neration which is not related to perfor-
mance. The inefficient operation of the
firm by managers is clearly as much a cor-
porate governance issue as is the misappro-
priation of profits; and one which
emphasises the need for corporate govern-
ance to concern itself with correctly moti-
vating managerial behaviour towards
increasing the wealth of the business, as
well as directly controlling the behaviour
of managers. Indeed, the Cadbury Report
recognises that a system of good corporate
governance allows boards of directors to be
'free to drive their companies forward, but
exercise that freedom within a framework
of effective accountability. The Hampel
Report, while accepting the Cadbury defi-
nition of corporate governance, also noted
Short
that 'the single overriding objective' of
companies is 'the preservation and greatest
practical enhancement over time of their
shareholders' investment. In a similar vein,
Charkham identifies two basic principles of
corporate governance
(i) That management must be able to
drive the enterprise forward free
from undue constraint caused by
government interference, fear of liti-
gation, or fear of displacement.
(ii) That this freedom — to use manage-
rial power and patronage — must be
exercised within a framework of
effective accountability. Nominal
accountability is not enough'. 10
These principles recognise that while
accountability is essential, it should not be
enforced without recognising the need to
allow an organisation to create wealth for
its stakeholders, however so defined. More-
over, these principles also recognise that
enterprise and the pursuit of wealth crea-
tion should not be allowed to progress in
an unfettered manner, but in recognition
of the fact that effective accountability to
stakeholders is necessary.
THE CADBURY REPORT
The recommendations of the Cadbury
Committee focus primarily on the
accountability aspects of corporate gov-
ernance. Ezzamel and Watson argue that,
partly because of its terms of reference,
the Cadbury Report assumed that
accountability to shareholders was the pri-
mary objective of corporate governance.
Cadbury relied primarily upon improved
information, continued self-regulation,
more independent boards and a strength-
ening of auditor independence to improve
accountability. The main recommenda-
tions of the Cadbury Report, contained
in the Code of Best Practice, were as fol-
lows:
Page 59
Corporate governance: Cadbury, Greenbury and Hampel — A review
— ideally the role of chairman and chief
executive officer should be separated.
However, if both posts are held by one
individual, there should be a strong
independent element on the board (that
is, a strong and independent set of non-
executive directors)
— the majority of non-executive directors
should be independent of management
and free from any business or other
relationships which could materially
interfere with the exercise of their inde-
pendent judgment
— executive directors' contracts should
not exceed three years without share-
holders' approval
— full disclosure of the remuneration of
the chairman and highest paid director
should be provided
— executive directors' remuneration
should be subject to the recommenda-
tions of a remuneration committee
comprised of wholly or mainly non-
executive directors
— boards should establish an audit
committee of at least three non-execu-
tive directors
— directors should report on the effective-
ness of the company's system of
internal control, including mechanisms
for risk assessment and management,
and confirm that the business is a going
concern.
Essentially, the Cadbury Report requires
that a board of directors be comprised of at
least three non-executive directors (NEDs),
of which at least two should be indepen-
dent. In addition, the Report placed great
emphasis on the role of institutional share-
holders in influencing corporate govern-
ance standards at the individual firm level.
The emphasis on the role of non-executive
directors and institutional shareholders
reflects the fact that corporate governance
in the UK at the individual firm level acts
through two bodies: the board of directors
Page 60
and the annual general meeting (AGM).
The system operating in the UK has been
described by Ezzamel and Watson as
'accountability through disclosure',
whereby the board of directors is required
to produce at the AGM externally audited
accounts to enable shareholders to assess the
adequacy of the directors' stewardship.
The Cadbury Code of Best Practice was
not mandatory but listed companies had to
include a statement in their Annual Report
outlining their compliance with the Code.
The compliance statement had to identify
and give reasons for any areas of non-com-
pliance. The Code relies on self-regulation
to ensure compliance. Essentially, non-
compliance (for example, having less than
three NEDs) should cause shareholders,
particularly institutions, to question gov-
ernance practices within the non-comply-
ing company.
The Cadbury Report has been successful
in that its recommendations have generally
been adopted, at least by the larger public
companies. A 1995 survey commissioned
by the Cadbury Committee examining
compliance with the Code reported that 97
per cent of the top 100 quoted companies
by market capitalisation had three or more
NEDs and 82 per cent had a separate chair-
man and Chief Executive Officer (CEO).
In contrast, only 39 per cent of the smallest
quoted companies (with market capitalisa-
tion between £ 1 and £ 1 0 million) had
three or more NEDs. Furthermore, while
90 per cent of the top 100 companies issued
compliance statements claiming full com-
pliance with the Code, only 26 per cent of
the smallest companies could claim full
compliance. However, it is important to
note that, while compliance with the Code
is of obvious interest, the disclosure
requirements of the Code themselves
represented a significant departure from
previous practice. Prior to Cadbury, com-
panies effectively were free to choose
whether to disclose matters such as the

existence of board committees and the exis-
tence and identity of NEDs. 1 4
The recommendations of the Cadbury
Committee have met with criticism from
opposing camps; on the one hand, for fail-
ing to go far enough in setting corporate
governance standards, and on the other
hand, for going too far in prescribing pro-
cedures to improve corporate governance.
While the Report argued that adherence to
the Code would ensure that companies will
strike 'the right balance between meeting
the standards of corporate governance now
expected of them and retaining the essential
spirit of enterprise', 15 a recurrent criticism
is that the recommendations of the Code
merely represent disruptions to the proper
management of a company and, further-
more, they risk damaging the spirit of
enterprise necessary for commercial and
economic success. Lawrence argues that
certain aspects of the Cadbury Report
represent 'a bureaucratic response that may
not actually be effective but will certainly
be costly'.16 In addition, Lord Young
argues that while transparency is necessary,
the 'additional bureaucracy' created by
Cadbury has resulted in boards participat-
ing in an exercise of 'following the form
rather than the substance, often ticking
boxes rather than doing anything meaning-
ful'.17 Such commentators appear to be
suggesting that there is a trade-off between
accountability and enterprise, in that too
much accountability stifles enterprise activ-
ity.
THE GREENBURY REPORT
After the Cadbury Report was published,
attention was given to the supposed short-
comings of its recommendations, particu-
larly with regard to the emotive subject of
directors' remuneration. Concerns were
raised regarding the absolute level of direc-
tors' remuneration; the size of increases in
directors' remuneration, apparently unre-
lated to increases in company performance;
Short
the amount of remuneration awarded in
the form of share options, particularly to
directors of the privatised utility compa-
nies; the length of directors' contracts
which lead to large compensation pay-
ments (golden handshakes) when such
directors are dismissed; and the lack of dis-
closure of directors' remuneration, particu-
larly with regard to share options. The
Cadbury recommendations that companies
should use remuneration committees to
determine directors' remuneration led to
the accusation that remuneration commit-
tees simply acted as a legitimising device to
ratchet up pay. The Greenbury Commit-
tee was set up in January 1995 by the CBI
to identify good practice in the determina-
tion of directors' remuneration, and
reported in July 1995. The main recom-
mendations of the Code of Best Practice
were as follows:
— remuneration committees should consist
exclusively of non-executive directors
with no personal financial interest other
than as shareholders in the matters to
be decided, no potential conflicts of
interest arising from cross-directorships
and no day-to-day involvement in the
running of the business
— the remuneration committee should
report to shareholders annually
— the remuneration committee's report
should include: (i) the company's policy
regarding the setting and awarding of
executive remuneration; (ii) full details
of all elements of the remuneration
package (including share options and
pension entitlements) of each named
individual director; (iii) details and
reasons for directors' contracts with
notice periods in excess of more than
one year
— shareholders' approval is required for
the adoption of long-term incentive
plans
— share options should never be issued at
Page 61
Corporate governance: Cadbury, Greenbury and Hampel — A review
a discount, should be phased in rather
than issued in one large block and
should not be exercisable in under three
years.
Although the Greenbury Report focused
solely on the process of determining direc-
tors' remuneration (indeed, the focus was
on the disclosure aspects of the process,
rather than the process per se), it provided a
number of significant developments in UK
corporate governance structures. In parti-
cular, it re-emphasised the importance of
independent non-executive directors in the
governance process. A major theme run-
ning through the debate on directors'
remuneration was the perceived lack of jus-
tification given to shareholders for pay
levels and increases, and the suspicion that
directors were free to set their own pay
awards without reference to shareholders.
The Cadbury Committee attempted to
take control of remuneration issues from
executive directors by recommending that
all companies should have remuneration
committees, comprised wholly or mainly
of NEDs, which would advise the board
on remuneration. The Greenbury Com-
mittee went further and recommended that
remuneration committees should consist
entirely of 'independent' NEDs. While the
definition and issue of independence of
NEDs is a much debated area, the effect of
the Greenbury Code was to prescribe the
inclusion of three independent NEDs on
the board (as opposed to a minimum of
two independent NEDs recommended by
Cadbury).
In addition to the issue of the number of
independent NEDs, the effect of the Green-
bury Report was to significantly increase
the amount of disclosure of remuneration
required. Prior to the Cadbury Report,
companies had to disclose the salary and
bonus of the chairman and the highest paid
director (if not the same person), the
aggregate of directors' remuneration
Page 62
(including pension contributions) and the
remuneration of directors analysed in
£5,000 bands.19 Importantly, there was no
requirement to provide the remuneration
of individual named directors and informa-
tion necessary to place a value on executive
share options. The Greenbury Report pro-
vided for comprehensive disclosure of all
components of remuneration of individual
named directors (including share options,
pension rights, etc) and a policy statement
on the setting of directors' remuneration.
The huge increase in the amount of remu-
neration-related disclosure (Ernst and
Young suggest that average disclosure
takes up six to seven pages in the annual
report) has led to accusations that the
volume of information has become 'a bar-
rier to effective communication', 20 and has
provided fuel for those who argue that the
Cadbury and Greenbury Codes have led to
increased bureaucracy and burdens on
companies without providing real benefits
to shareholders.
THE HAMPEL REPORT
The Hampel Committee responded to the
criticisms made of the Cadbury and Green-
bury Reports regarding the perceived (by
some) burdens made on companies by
stressing the need to restrict the regulatory
burden on companies, by 'substituting
principles for detail wherever possible'.
The Hampel Report argues that the inten-
tions of the Cadbury and Greenbury Com-
mittees were that their associated codes of
best practice should be applied flexibly.
Both committees, argues Hampel, recog-
nised that there are no universal answers to
questions of best practice; while guidelines
may provide solutions which will be
appropriate in the majority of cases, there
will be situations when it is valid for a
company to depart from these guidelines.
The Hampel Report recognised that some
shareholders and their representatives have
adopted a 'box-ticking' approach to adher-

ence to recommended practice and consid-
ered such an approach to be 'neither fair to
companies nor likely to be efficient in pre-
venting abuse'.21
The Hampel Report argues that while
accountability by public companies was
essential, the emphasis on accountability
had obscured business prosperity, 'the most
important aspect of corporate perfor-
mance'. It suggested that Cadbury and
Greenbury had made important contribu-
tions to enhancing the accountability of
UK companies, but the box-ticking
approach to those respective Codes
adopted by many companies and their
shareholders has led to the belief that
accountability itself could deliver success.
The Report explicitly states that, based on
the notion that the public debate on corpo-
rate governance had been dominated by
issues of accountability, it wishes to sec the
balance between business prosperity and
accountability corrected. In the Report's
view, accountability requires rules and reg-
ulations about structure, but,
'Good corporate governance is not just a
matter of prescribing particular
corporate structures and complying with
a number of hard and fast rules. There is
a need for broad principles. All
concerned should then apply these
flexibly and with common sense to the
varying circumstances of individual
companies'. 22
The overriding emphasis of the Hampel
Report is the need for good corporate
governance to be based on principles rather
than on prescription. The Hampel Report
laid out 17 'principles of corporate govern-
ance' organised into four distinctive cate-
gories — directors, directors'
remuneration, shareholders, and account-
ability and audit. The principles are repro-
duced in the Appendix.
Short
THE COMBINED CODE
Following the publication of the Hampel
Report, the Hampel Committee produced
the Combined Code, a set of principles and
code embracing the Cadbury, Greenbury
and Hampel recommendations. The Com-
bined Code consists of 18 principles and 48
code provisions. Stock Exchange listed
companies will have to make a two-part
disclosure statement on their adherence to
the Combined Code. The first part of the
disclosure statement requires a company to
report on how it applies the principles of
corporate governance; the second part
requires a company to confirm it complies
with the individual code provisions or pro-
vide explanations where those provisions
are not adhered to. The principles are
essentially those contained in the Hampel
Report. The Combined Code is set out in
two sections. Section 1 contains principles
and code provisions pertaining to compa-
nies and Section 2 contains principles and
code provisions relating to institutional
shareholders (adherence to section 2 is not
subject to the disclosure requirement). 24 In
substance, the code provisions do not vary
from those of the Cadbury and Greenbury
codes, with the following exceptions:
— Cadbury recommended that boards
should be composed of at least three
NEDs. The Combined Code states that
NEDs should comprise not less than
one third of the board (code provision
A.3.1) and audit committees should
comprise at least three NEDs (code
provision D.3.1). Hence three NEDs
has become a minimum requirement.
Larger boards (those of more than nine
members) will have to comprise more
than three NEDs in order to comply
with the Combined Code
— the Combined Code requires the
company to identify those NEDs
considered to be independent. The defi-
nition of independence is that of
Page 63
Corporate governance: Cadbury, Greenbury and Hampel — A review
Cadbury, that is, 'independent of
management and free from any busi-
ness or other relationship'
— Cadbury recommended that where the
role of CEO and chair was combined,
there should be a strong and indepen-
dent element on the board, with a
recognised senior member. The
Combined Code goes further and
requires companies to publicly justify
the combination of the posts of CEO
and chair, and to identify a senior inde-
pendent NED in the annual report
(regardless of whether the posts of
CEO and chair are combined)
— Cadbury suggests (rather than recom-
mends) that nomination committees
should be set up, comprising a majority
of NEDs and chaired by cither the
chairman of the board or a NED. The
Combined Code makes this a recom-
mendation (unless the board is 'small')
and requires that the members of the
nomination committee are identified in
the annual report
— the Combined Code requires that all
directors submit themselves for re-elec-
tion at least every three years
— the Combined Code states that the
board (rather than the remuneration
committee, as recommended by Green-
bury) should report to shareholders on
remuneration policy
— the Combined Code makes specific
recommendations regarding relations
with shareholders and the use of the
AGM. In particular, companies should
indicate the level of proxy votes lodged
on each resolution proposed at the
AGM and the balance for and against
each resolution. Each substantially sepa-
rate issue should have a separate resolu-
tion and should propose a resolution
relating to the report and accounts. The
chairs of the audit, remuneration and
nomination committees should be
available at the AGM to answer ques-
Page 64
tions. Finally, the Notice of the AGM
and related papers should be sent to
shareholders at least 20 working days
before the meeting
— the audit committee should consist of at
least three NEDs, the majority of
whom should be independent and all
members are to be named in the annual
report.
The Combined Code, therefore, increases
the amount of disclosure required by com-
panies, by requiring disclosure of adherence
to the codes contained in Cadbury and
Greenbury, with additional disclosure as
outlined above. In terms of governance
structures, the main substantive change is
the requirement that NEDs make up a
third of the board, subject to a minimum
of three. However, in line with the
Hampel Report's contention that the
broad principles of corporate governance
should be applied flexibly to the varying
circumstances of individual companies, the
Combined Code does stress that share-
holders (institutional investors in particular)
should take into consideration the compa-
ny's explanations for non-adherence to the
code provisions. Essentially, the approach
of the Combined Code is to insist on dis-
closure of all important aspects of corpo-
rate governance structures and practice, but
to stress that shareholders need to recognise
that there will be instances where depar-
tures from the code provisions are justifi-
able. Whether the inclusion of a statement
on the company's application of the broad
principles on corporate governance will
cause both shareholders and directors to
move away from a 'box-ticking' approach
to the code provisions remains to be seen.
CONCLUSION
Since the corporate governance failures of
the 1980s and the publication of the Cad-
bury Report, the policy debate on corpo-
rate governance in the U K has been

dominated by the need to ensure companies
and their boards of directors are accounta-
ble to shareholders. Due to the reliance on
self-regulation, rather than legislation,
accountability has, in general, been seen to
be best improved by increasing the amount
of disclosure on corporate governance by
companies. Although the Codes of Best
Practice recommend a minimum number
of NEDs and the setting up of board com-
mittees, the emphasis in all reports is that
companies disclose and explain departures
from the guidelines. However, in order
that the recommendations are applied flex-
ibly to suit individual circumstances, it is
essential that shareholders do not adopt a
'box ticking' approach and are willing to
judge each situation on its merits.
The Hampel Report represents a signif-
icant departure from the previous reports
by stressing that the emphasis on account-
ability has obscured the need for compa-
nies to maintain and enhance business
prosperity. It argues that adherence to the
letter of the code provisions does not
necessary lead to 'good' governance, and
that adherence to broad principles is of
more importance. There is a danger that
the important broadening out of the gov-
ernance debate beyond the narrow Cad-
bury perspective may be (mis)construed as
a reaction to pressure from industrialists to
reduce the regulatory burden on compa-
nies and to provide them with opportu-
nities to reduce the level of accountability.
While the inclusion of 48 code provisions
in the Combined Code may act to calm
fears of reduced accountability, those code
provisions do provide a set of 'rules'
against which some shareholders may con-
tinue to adopt the 'box-ticking' approach.
Clearly, there is a need to maintain a bal-
ance between accountability and flexibility
to ensure that companies are not forced to
adopt structures which are inappropriate
to their specific circumstances. It is up to
both companies and shareholders to
Short
develop a more open system of govern-
ance so that the goals of accountability
and enterprise can be achieved to the ben-
efit of all.
REFERENCES
(1) Cadbury, A. (1992) 'Report of the Com-
mittee on the Financial Aspects of Corpo-
rate Governance', Gee Publishing,
London.
(2) Hampel, R. (1998) 'Committee on Cor-
porate Governance: Final Report', Gee
Publishing, London.
(3) Greenbury, R. (1995) 'Directors' Remu-
neration: Report of a Study Group
Chaired by Sir Richard Greenbury', Gee
Publishing, London.
(4) Committee on Corporate Governance
(1998) 'The Combined Code', London
Stock Exchange Limited, Gee Publishing,
London.
(5) Berle, A. and Means, G. (1932) 'The
Modern Corporation and Private Prop-
erty', MacMillan, New York.
(6) Cadbury Report, para. 2.5.
(7) Tricker, R.I. (1984) 'Corporate Govern-
ance', Gower, Vermont, p. 7.
(8) Cadbury Report, para. 1.1.
(9) Hampel Report, para. 1.16.
(10) Charkham, J. (1994) 'Keeping Good
Company', Oxford University Press,
Oxford, p. 325.
(11) Ezzamel, M. and Watson, R. (1997)
'Wearing Two Hats: The Conflicting
Control and Management Roles of Non-
Executive Directors', in Keasey, K.,
Thompson, S. and Wright, M. (eds) 'Cor-
porate Governance: Economic and Finan-
cial Issues', Oxford University Press, pp.
54-79.
(12) Ibid.
(13) Cadbury, A. (1995) 'Report of the Com-
mittee on the Financial Aspects of Corpo-
rate Governance: Compliance with the
Code of Best Practice', Gee Publishing,
London.
(14) Prior to Cadbury, listed companies had to
provide biographical details of NED, but
if details of all directors were given, com-
panies could meet those requirements
Page 65
Corporate governance: Cadbury, Greenbury and Hampel — A review
without actually identifying which direc-
tors were non-executives.
(15) Cadbury Report, para. 1.5.
(16) Lawrence, M. (1994) 'Corporate Govern-
ance', Coopers and Lybrand Accounting
Lecture, 1993-94, Aberystwyth, Univer-
sity of Wales.
(17) Young, Lord, of Graffham (1995) 'The
Spirit of Enterprise', in 'Enterprise and
Governance', the proceedings of a confer-
ence held at the Institute of Directors,
Institute of Directors, London.
(18) See, for example, Ezzamel and Watson
(1997), op. cit.
(19) Companies Act (1985).
(20) Ernst and Young (1996) 'Corporate Gov-
ernance: Greenbury Implementation',
Ernst and Young, London.
(21) Hampel Report, p. 57.
(22) Hampel Report, para. 1.11.
(23) 14 principles and 45 code provisions are
relevant to companies, three principles
and three code provisions are relevant to
institutional shareholders.
(24) There are some changes in wording
compared to the original Hampel princi-
ples. Furthermore, principle D.IV relat-
ing to external auditors (see Appendix 1)
has been deleted. In addition, the princi-
ples contained in Hampel section C
entitled 'shareholders' have been divided
between Section 1 (pertaining to compa-
nies) and Section 2 (pertaining to institu-
tional shareholders) of the Combined
Code.
APPENDIX
Committee on Corporate Governance
(The Hampel Committee): Principles of
Corporate Governance
A Directors
I The Board: Every listed company should
be headed by an effective board which
should lead and control the company.
II Chairman and Chief Executive Officer:
There are two key tasks at the top of
every public company — the running
of the board and the executive responsi-
Page 66
bility for the running of the company's
business. A decision to combine these
roles in one individual should be pub-
licly explained.
III Board Balance: The board should
include a balance of executive directors
and non-executive directors (including
independent non-executives) such that
no individual or small group of indivi-
duals can dominate the board's decision
taking.
IV Supply of Information: The board
should be supplied in a timely fashion
with information in a form and of a
quality appropriate to enable it to dis-
charge its duties.
V Appointments to the Board: There
should be a formal and transparent pro-
cedure for the appointment of new
directors to the board.
VI Re-election: All directors should be
required to submit themselves for re-
election at regular intervals and at least
every three years.
B Directors' Remuneration
I The Level and Make-up of Remunera-
tion: Levels of remuneration should be
sufficient to attract and retain the direc-
tors needed to run the company suc-
cessfully. The component parts of
remuneration should be structured so as
to link rewards to corporate and indivi-
dual performance.
II Procedure: Companies should establish
a formal and transparent procedure for
developing policy on executive remu-
neration and for fixing the remunera-
tion packages of individual executive
directors.
III Disclosure: The company's annual
report should contain a statement of
remuneration policy and details of the
remuneration of each director.
C Shareholders
I Shareholder Voting: Institutional share-

holders have a responsibility to make
considered use of their votes.
II Dialogue between Companies and
Investors: Companies and institutional
shareholders should each be ready,
where practicable, to enter into a dialo-
gue based on the mutual understanding
of objectives.
III Evaluation of Governance Disclosures:
When evaluating companies' govern-
ance arrangements, particularly those
relating to board structure and composi-
tion, institutional investors and their
advisers should give due weight to all
relevant factors drawn to their attention.
IV The AGM: Companies should use the
AGM to communicate with private inves-
tors and encourage their participation.
D Accountability and Audit
I Financial Reporting: The board should
Short
present a balanced and understandable
assessment of the company's position
and prospects.
II Internal Control: The board should
maintain a sound system of internal
control to safeguard shareholders'
investment and the company's assets.
III Relationship with the Auditors: The
board should establish formal and trans-
parent arrangements for maintaining an
appropriate relationship with the com-
pany's auditors.
IV External Auditors: The external audi-
tors should independently report to
shareholders in accordance with stat-
utory and professional requirements
and independently assure the board
on the discharge of its responsibil-
ities under D.I and D.II above in
accordance with professional gui-
dance.
Page 67