The Cadbury Committee

Submitted to: Anindita Chakraborty Mam

Subject: Principles of Corporate Governance

Submitted By: Garry Khanna (R.no. 5)

Kunwar Ketan Singh (R.no. 8)
Mayank Sharma (R.no. 27)

Class: P.G. Diploma in Corporate Governance

 Contents
Introduction

Reasons for setting up the Committee

Objectives

Code of Best Practice

Recommendations to the Accountancy Profession and Auditors

Dealing with the Rights and Responsibilities of Shareholders

Summary
 Introduction
 The Cadbury Committee was set-up by the Financial Reporting Council of
the London Stock Exchange, with the main aim of addressing the financial
aspects of Corporate Governance.

 Was set up in May 1991 with a view to overcome the huge problems of
scams and failures occurring in the corporate sector worldwide in the late
1980s and the early 1990s.

 Adrian Cadbury the chairman of the Cadbury committee.

 The Committee made it its purpose to address the financial aspects of

corporate governance and out of this produced a Code of Best Practice.
 Reasons for setting up the Committee
Corporate systemwere heightened by some unexpected failures of major
companies.

Low level of confidenceboth in financial reporting and in the ability of

auditors.

Looseness of accounting standards.

Absence of a clear framework for ensuring that directors kept under

review the controls in their business.

Action had to be taken to clarify responsibilities and to raise standards.

 Objectives

Uplift the low level of confidence both in financial reporting and in the
ability of auditors to provide the safeguards which the users of company's
reports sought and expected.

Review the structure, rights and roles of board of directors, shareholders

and auditors by making them more effective and accountable.

Address various aspects of accountancy profession and make

appropriate recommendations, wherever necessary.

CONT..
Raise the standard of corporate governance; etc. Keeping this in view, the
Committee published its final report on 1st December 1992.

The Committee’s recommendations are focused on the control and

reporting functions of boards, and on the role of auditors.

At the heart of the Committee’s recommendations is a Code of Best

Practice designed to achieve the necessary high standards of corporate
behaviour.

Bringing greater clarity to the respective responsibilities of directors,

shareholders and auditors will also strengthen trust in the corporate
system.
The report was mainly divided into three
parts:-
Reviewing the structure and responsibilities of Boards of Directors and
recommending a Code of Best Practice.

Considering the role of Auditors and addressing a number of

recommendations to the Accountancy Profession.

Dealing with the Rights and Responsibilities of Shareholders.

 Code of Best Practice
The boards of all listed companies should comply with the Code of Best
Practice.

All listed companies should make a statement about their compliance with
the Code in their report and accounts as well as give reasons for any
areas of non-compliance.

The Code of Best Practice is segregated into four sections which are as
follows:
 1) Board of Directors
The board should meet regularly.

There should be a clearly accepted division of responsibilities

All directors should have access to the advice and services of the
company secretary.

The board should include non-executive directors of sufficient caliber.

2) Non-Executive Directors

Non-executive directors should bring an independent judgment.

Non-executive directors should be appointed for specified terms.

Non-executive directors should be selected through a formal process.

Majority of non-executive directors should be independent of

management.
 3) Executive Directors

There should be full and clear disclosure of directors',

Total emoluments and those of the chairman and highest-paid directors,

Pension contributions and stock options, In the company's annual report,

including separate figures for salary and performance-related pay.
4) Financial Reporting and Controls

Present a balanced and understandable assessment.

The directors should report that the business is a going concern

Ensure that an objective and professional relationship is maintained with

the auditors.
 Recommendations to the Accountancy
Profession and Auditors
Recommendatons to Auditors:
Professional and objective relationship between the board of directors and
auditors should be maintained.

Auditors' role is to give assurance that the financial statements are free of
material misstatements.

Every listed company should form an audit committee.

Regular rotation of audit partners.

Recommendations to the Accountancy Profession:

Accountancy Profession in conjunction with representatives

of preparers of accounts, should take the lead in:

Developing a set of criteria for assessing effectiveness;

Developing guidance for companies on the form in which directors should

report;

Developing guidance for auditors on relevant audit procedures and the

form in which auditors should report.
 Dealing with the Rights and
Responsibilities of Shareholders
Elect the directors to run the business.

Appoint the auditors

It is encouraged to make greater use of their voting rights

Both shareholders and boards of directors should consider how the

effectiveness of general meetings could be increased.
 Summary
The boards of all listed companies should comply with the code of best
practice set out by the committee.

He listed companies should make a statement about their compliance

with the code in the report and accounts and give reasons for any areas
of non-compliance.

Companies should publish their statement of compliance only after they

have been the subject of review by the auditors.

The board should meet regularly, retain full and effectivecontrol over the
company and monitor the executivemanagement.