Presented by:

Waleed Rehman
Sana Hayyat
Muhammad Ishaq
Kashmala Khan
Asim Hayat

Plan of the presentation

Introduction and Cadbury report will be done by Waleed

Rehman.
Greenbury report, Hampel committee and Turnbull report
by Sana Hayyat.
Higgs Review and Smith Report by Muhammad Ishaq.
Sarbanes-Oxley Act by Kashmala Khan.
Discussion and conclusion by Asim Hayat Khan.
Questions can be asked in the END.

Aim of this chapter

To provide an overview of some codes and regulation

designed to improve corporate governance.

The combine code on corporate

governance
The UKCorporate Governance Code(formerly known as

the Combined Code) sets out standards of good practice

for listed companies on board composition and
development, remuneration, shareholder relations,
accountability and audit. Thecodeis published by the
Financial Reporting Council (FRC)

Some scandals which realize the need for

combine code on corporate governance
The bank of credit and commerce international (BCCI) which was forced

to close by the bank of England in July 1991 ,yet the auditor report
appeared to give little prior indication of banks precarious position
Robert Maxwell who was responsible for theft from employee pension
schemes under his control and whose business empire collapsed in
December 1991

Cadbury report
TheCadbury Report, is a report issued by

"The Committee on the Financial Aspects of

Corporate Governance" whose chairman was
Adrian Cadburythat sets out recommendations
on the arrangement of company boards and
accounting systems to reducecorporate
governancerisks and failures.
The committee was setup in may 1991 and the

report was published in December 1992

Recommendations of Cadbury report

Quoted companies boards have minimum 3 non-executive

directors.
Majority of independent non-executive directors.
At least three non-executives on the audit committee.
(oversee accounting/financial reporting)
Majority of non-executives on the nomination and
remuneration committee.
Non-executives to be selected by the whole board.

The British gas Fat cat

Cedric Brown- chief executive British

Gas.
75% pay rise- 270,000 to 475,000
Share options awarded- 23,000 in

1993 to 268,000 in 1994.

The Greenbury committee

Greenbury Committee- January 1995 by

the Confederation of British Industry

(CBI).
Headed by Sir Richard Greenbury, the

chairman and chief executive of Marks

& Spencer.
Mainly concerned with high

remunerations, large gains from share

options, high compensations to
departing directors.

The Greenbury committee

The Greenbury Committee linked directors remuneration to

company performance in order to align shareholder and

directors interest.
Performance-related & Fixed pay.
Constraints:
There will usually be a level of basic salary below which it will

not be practicable to go.

Requirements and priorities of companies vary. The gearing
which suits one company may be quite unsuitable for another.

The Greenbury Report

Published in July, 1995.
Greenbury Report Recommendations:
The Remuneration Committee: Independent Non-Executive Directors no

personal financial interest and no day-to-day involvement in running the

business.
Establish policy on executive remuneration and to determine specific

packages for individual Executive Directors.

Disclosure and approval provisions: the remuneration committee should

make an annual report to shareholders, including both the remuneration

policy and the detailed remuneration of each executive director.

The Hampel committee

The Hampel Committee was created in 1995

and published report in 1998.

Sir Ronald Hampel- Chief Executive of ICI.
Formed to review implementation of the

findings of the Cadbury and Greenbury

Committees.

Hampel committee recommendations

Companies should have an effective board, leading and

controlling operations.
The appointment of directors needs to be transparent, with pay

and conditions sufficient to attract people of the caliber required.

There should be a balance between executive and non-executive

directors and no single group should dominate.

Boards and companies are expected to comply with the law and

governance codes.

The Turnbull Report

Internal Control: Guidance for Directors on the

Combined Code (1999).

Chaired by Nigel Turnbull- Executive Director

Rank Group Plc.

Provided guidance to directors on the internal

control procedures seen as necessary to

manage risk in organizations.

The Turnbull report

The board of directors is responsible for the companys

system of internal control and ensure that the system is

effective in managing risks in the manner which it has
approved.
Management must implement board policies on risk and

control and identify and evaluate the risks faced by the

company.
Disclose in annual report, the process for identifying,

evaluating and managing the risks faced by the company.

Higgs Report
Chaired byDerek Higgsand report issued on 20

January 2003.
Purpose- Study role and effectiveness of non
executive directors.
Recommendations:
Role of chairman- construct effective board,

communication with members and shareholders.

Role of non executive directors (must be
independent)- examine performance of
management. Contribute to improvement of
strategy of the company.
Role of board- set up goal and standard

Higgs Report
Role of senior independent director- lead meeting of non

executive directors, communicate with shareholders.

Nomination committee- appoint non executive directors

and review time commitment required for NEDs.

The Smith Report

Published under the auspices of Sir Robert

Smith
Issued after the Enron and world com corporate
scandals
Now known as the guidance on audit
committees
Established the role of the audit committee
Issued guidance on:
Financial reporting
Internal audit
External audit

SARBANES-OXLEY ACT
(SOX) 2002
Named after U.S. Senator Paul Sarbanes and U.S. Representative
Michael Oxley.
Federal law that protects investors from fraudulent accounting
practices.
Signed into law on 30 July 2002 by President Bush
The Public Company Accounting Reform and Investor Protection
Act of 2002

Why SOX came?

Enron, WorldCom, Global Crossing scandals.
Close relationship between external

Auditor and company was perceived

Purpose
Reforms Auditing and accounting procedures of publicly traded

companies
Defines Oversight responsibilities of directors and officers
Regulates Conflicts of interests and insider dealings of directors and
officers
Regulates conflicts of interest of stock analysts

Reforms Disclosure requirements of information on anything that may

influence a company's financial health and results

Criminalizes inappropriate conduct regarding document handling,
disclosures and interference with investigations
Requires personal certification of financial results and income tax
documents by the chief executive officer

Section 906
Periodic report must be accompanied by CEO and Chief financial

officer.
Certifying that report complies with security exchange act fairly
presents all materials.
Penalties:
$1 million fine
Imprisonment up to 10 years.

Section 1102
Knowing and willful destruction of documents or impair

Penalties:
Fines
Imprisonment of 20 years.

Section 806
Whistle blower
For publically traded

co-operations

Failure
Burden of compliance in relation to benefits
Spending millions of dollars of revamping
Paying auditors and lawyers and directors.
John Thain additional burden of compliance dissuades foreign

companies from listing on NYSE

UK (Association of Chartered Certified Accountants)

Survey of largest 1000 listed companies in
UK
Three quarters of top directors believed that that corporate
governance compliance was taking up time that could
more usefully be spent improving the company.
The Combined Code on Corporate Governance appeared
to be turning into a box-ticking exercise.
-Head of corporate governance at ACCA

75
%

Response to the survey

30 % = To promote Shareholders
30 % = To optimize long term
wealth
creation

30%
40%

40 % = Two goals equally

30%

Interpretation & suggestion

The goal of optimizing
long-term wealth
creation would

Benefit

All stakeholders,
Not just
shareholders.

Large quoted companies do see shareholders

as an important stakeholder group, and probably
the most important stakeholder group.

UK
government

Proposed
legislatio
n

OFR

which would accompany the annual reports and accounts with the intention of allowing
investors to make more informed judgments about a companys long-term prospects.

Conclusion
No matter which codes and regulations are implemented, it is difficult
to envisage a system which is completely free from the possibility of
corporate governance failure.
Corporate governance regulation can claim to be successful if it
encourages a business environment where warning signals are
picked up early and appropriate action is taken quickly by the
regulators. But in framing corporate governance codes and
regulations, regulators need to strike a balance between too much
regulation (which can inhibit wealth creation) and too little regulation
(which can lead to corporate governance abuses).