08 December 2017 by Peter Swabey
Celebrating the silver anniversary of the original report
The final report of the Committee on the Financial Aspects of Corporate Governance – the Cadbury Committee – was launched on 1 December 1992.
Sir Adrian Cadbury noted in his preface: ‘When our Committee was formed just over eighteen months ago, neither our title nor our work programme seemed framed to catch the headlines. In the event, the Committee has become the focus of far more attention than I ever envisaged when I accepted the invitation to become its chairman.
‘The harsh economic climate is partly responsible, since it has exposed company reports and accounts to unusually close scrutiny. It is, however, the continuing concern about standards of financial reporting and accountability, heightened by BCCI, Maxwell and the controversy over directors’ pay, which has kept corporate governance in the public eye.
‘Unexpected though this attention may have been, it reflects a climate of opinion which accepts that changes are needed and it presents an opportunity to raise standards of which we should take full advantage.’
A quarter-century later, it could be argued that little has changed.
We have had a further period of ‘harsh economic climate’, once again exposing ‘company reports and accounts to unusually close scrutiny’; there are continuing concerns about ‘standards of financial reporting and accountability, heightened’, this time around by HBOS and Tesco, among others; and ‘the controversy over directors’ pay’ has not gone away either.
So what difference did the Cadbury report make and why is it appropriate – as I believe – to celebrate its silver jubilee?
“In other fields of endeavour, the Cadbury Report might have earned a Queen’s Award for Enterprise”
In the past 25 years, the Cadbury Code, later the Combined Code and now the UK Corporate Governance Code, has become one of the UK’s major exports.
In other fields of endeavour, it might have earned a Queen’s Award for Enterprise and it was certainly no less than his due when Sir Adrian Cadbury was made a Companion of Honour shortly before his death in 2015.
The ‘comply or explain’ model that the committee developed has attracted considerable support as a mechanism for encouraging compliance with a code of conduct, while providing flexibility for a company to recognise its own individual circumstances and do something different where it can be justified.
As the original report noted, greater rigidity ‘would impose a minimum standard and there would be a greater risk of boards complying with the letter, rather than with the spirit, of their requirements’.
It also means that smaller companies can, and do, explain more divergences from the code requirements than their larger brethren, where necessary and appropriate for their circumstances.
At ICSA: The Governance Institute, we see governance as a key business enabler.
The report’s original definition of governance was simply ‘the system by which companies are directed and controlled’ although it went on to clarify the respective roles of directors and shareholders, with the role of the former to be ‘responsible for the governance of their companies’ and that of the latter ‘to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place’.
However, that remit has widened. As ICSA policy advisor Chris Hodge commented in his paper ‘Untangling corporate governance’ earlier this year: ‘The term “corporate governance”, as it is generally used now, encompasses a much broader range of issues and purposes than when the regulatory framework for corporate governance in the listed sector was established 25 years ago.’
Likewise, the prime minister introduced the government’s green paper on corporate governance by saying: ‘Both the government and big business must rise to the challenge of restoring faith in what they do, and in the power of the market economy to deliver growth, opportunity and choice for all.’
In the 25 years since the Cadbury Committee reported, our expectation of corporate governance has gone from ‘improving control and accountability’ to ‘restoring faith in capitalism’.
But as our definition of corporate governance has broadened, so too has the breadth of organisations to which it applies.
For example, ‘restoring faith in what they do’ is not just an issue for companies, but also for charities, sports organisations, academies and NHS bodies. Our newspapers are regularly supplied with ‘governance scandals’, many of which may not have met the original Cadbury Committee definition, in a wide variety of organisations.
“Publication of the report led to a paradigm shift in our approach to governance across many countries and sectors”
The concept of the code has been picked up, not just in a variety of other countries to apply to their companies, but in other sectors in the UK – suitably tweaked to their own circumstances. One example is July’s new Charity Governance Code, which followed a consultation exercise, overseen by a steering group of which ICSA is a member, that received over 200 responses.
Elsewhere the UK Code for Sports Governance became effective in April, setting ‘the levels of transparency, accountability and financial integrity that will be required from those who ask for government and National Lottery funding’.
The 1992 publication of the Cadbury Report led to a paradigm shift in our approach to governance across many countries and sectors. The fact that there are still governance issues coming to light does not mean the code has failed; this was not the original report’s intention.
It is the nature or entrepreneurial businesses that some will fail, while business leaders are as liable as any other to suffer from greed, incompetence, misplaced ambition and criminal tendencies.
If part of the role of good governance can be said to be to prod recalcitrant directors towards the light of compliance, then the role of a governance code is to set parameters of normality against which board behaviours can be compared.
As Nell Minow, the US corporate governance commentator noted: ‘Boards of directors are like sub-atomic particles. They behave differently when they are observed.’
I will leave the final word to Sir Adrian Cadbury: ‘Had a code such as ours been in existence in the past, we believe that a number of the recent examples of unexpected company failures and cases of fraud would have received attention earlier.
‘It must, however, be recognised that no system of control can eliminate the risk of fraud without so shackling companies as to impede their ability to compete in the market place.’