ADRIAN CADBURY REPORT The origin of the report The Committee on the Financial Aspects of Corporate Governance, forever

after known as the Cadbury Committee, was established in May 1991 byte Financial Reporting Council, the London Stock Exchange, and the accountancy profession. The spur for the Committee's creation was an increasing lack of investor confidence in the honesty and accountability of listed companies, occasioned in particular by the sudden financial collapses of two companies, wallpaper group Chloral and Asil Nadir's Polly Peck consortium: neither of these sudden failures was at all foreshadowed in their apparently healthy published accounts. Even as the Committee was getting down to business, two further scandals shook the financial world: the collapse of the Bank of Credit and Commerce International and exposure of its widespread criminal practices, and the posthumous discovery of Robert Maxwell's appropriation of 440m from his companies' pension funds as the Maxwell Group filed for bankruptcy in 1992. The shockwaves from these two incidents only heightened the sense of urgency behind the Committee's work, and ensured that all eyes would be on its eventual report. The effect of these multiple blows to the perceived probity and integrity of UK financial institutions was such that many feared an overly heavy-handed response, perhaps even legislation mandating certain boardroom practices. This was not the strategy the Committee ultimately suggested, but even so the publication of their draft report in May 1992 met with a degree of criticism and hostility by institution which believed themselves to be under attack. Peter Morgan, Director General of the Institute of Directors, described their proposals as divisive', particularly language favoring a two-tier board structure, of executive directors on the one hand and of non-executives on the other.

Features of the report

Sir Adrian Cadbury was a visionary chairman who energetically promoted the committee recommendations The committee reflected the main shareholders The investigation produced the draft report followed by an extensive process of consultation A final report was produced whose recommendations was widely accepted and adopted Objective of the report Uplift the low level of confidence Review the structure, rights and role Address various aspects of accountancy profession Raise the standard of corporate governance

The contents of the Report The suggestions which met with such disfavor were considerably toned down come the publication of the final Report in December 1992, as were proposals that shareholders have the right to directly question the Chairs of audit and remuneration committees at AGMs, and that there be a Senior Non-Executive Director to represent shareholders' interests in the event that the positions of CEO and Chairman are combined. Nevertheless the broad substance of the Report remained intact, principally its belief that an approach 'based on compliance with a voluntary code coupled with disclosure, will prove more effective than a statutorycode'.The central components of this voluntary code, the Cadbury Code, are: 1. that there be a clear division of responsibilities a The top, primarily that the position of Chairman of the Board be separated from that of Chief Executive, or that there be a strong independent element on the board; 2. that the majority of the Board be comprised of outside directors; 3. that remuneration committees for Board members be made up in the majority of non-executive directors; and 4. that the Board s hould appoint an Audit Committee including atleast threenonexecutive directors. The recommendations in the Cadbury code of best practices are:1. Directors service contracts should not exceed three years without shareholders approval.

2. There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-paid Directors, including pension contributions and stock options. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained. 3. Executive Directors\ pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of Non-Executive Directors. 4. It is the Boards duty to present a balanced and understandable assessment of the companys position. 5. The Board should establish an Audit Committee of at least three Non-Executive Directors with written terms of reference, which deal clearly with its authority and duties. 6. The Directors should explain their responsibility for preparing the accounts nextto a statement by the Auditors about their reporting responsibilities.

7. The Directors should report on the effectiveness of the companys system of internal control.

The Directors should report that the business is a going concern, withsupporting assumptions or qualifications as necessary.The report created mixed feelings and with some more frauds emergingin UK, Governance came to mean the extension of Directors responsibility toall relevant control objectives including business risk assessment andminimizing the risk of fraud. The shareholders are surely entitled to ask, if all the significant risks had been reviewed and appropriate actions taken to mitigate them and why a wealth destroying event could not be anticipated and acted upon. The report created mixed feelings and with some more frauds emerging in UK, Governance came to mean the extension of Directors responsibility tall relevant control objectives including business risk assessment and minimizing the risk of fraud. The shareholders are surely entitled to ask, if all the significant risks had been reviewed and appropriate actions taken to mitigate them and why a wealth destroying event could not be anticipated and acted upon. The one common denominator behind the corporate failures and frauds was the lack of effective risk management and the role of the Board of Directors. When it became clear that merely reviewing the internal processes of control were not enough and, therefore, risk management had to be embodied throughout the organization, an easy solution was found by passing on this responsibility to the internal audit. REACTI ONS T O THE CADBURY REP O RT Much of the initially adverse reaction to the draft of the Cadbury Report published in May 1992 was mollified by the mellowing of the language in the final report that December. The Reports fits firmly into the AngloAmerican corporate tradition of favoring checks and balances to the potentially heavy hand of regulation, and thus while its recommendations were widely welcomed, there was doubt as to how effective these provisions would prove when companies were under no obligation to enforce them. Sir Adrian Cadbury had two responses to these concerns. Firstly he declared that it was up to shareholders, as the owners of these companies, to exert the necessary pressure toward compliance. Added to this was the recommendation for a follow-up committee to evaluate implementation of the Reports findings, with the suggestion that if companies were not found to be complying, "it is probable that legislation and external regulation will be sought". This was not a strategy Sir Adrian relished, and he voiced worries that Adrian Higgs would be unable to resist pressures for legislative solutions in his2003 report on the role and effectiveness of non-executive directors (worries that ultimately proved unfounded).The major legacy of the report is the

widespread acceptance of the division of the roles of Chief Executive and Chairman: almost 90% of listed UK companies had separate individuals fulfilling these positions in 2007, while just over 50% of US companies did so according to a 2008 survey by the National Association of Corporate Directors. This has diminished the cult of personality surrounding such figures, and avoided the domination of boards and companies by individuals whose agendas all too easily went unchecked. Sir Stuart Rose at Marks and Spencers is one of the few prominent people to have recently combined the two, and despite his stellar performance M&S shareholders voted against him continuing in both jobs by margin of almost 38% at the 2009 AGM