Chapter 6 - Corporate Governance

Abstract

This chapter focuses on various corporate governance issues. The first detailed guidance on corporate governance was set out in the Cadbury Code of Best Practice, which defined corporate governance as the system by which companies are directed and controlled. A good corporate governance is based on the principles of openness, integrity and accountability. The Combined Code was revised as part of the UK post-Enron review, and further minor amendments were made in June 2006 and June 2008. According to this Code, listed companies must disclose each year how they have applied the principles set out in the Combined Code and whether they have complied with the best practice provisions, with an explanation for any areas or periods of non-compliance. The Combined Code sets out seven main principles in respect of directors. It calls for a clear division of responsibilities between the chairman and the chief executive, and states that these roles should not be undertaken by the same individual. The board should include an appropriate balance between executive and non-executive directors, and at least half of the board should comprise independent non-executives. The Code also calls for a formal and rigorous procedure for making board appointments and the same process should be followed for both executive and non-executive directors. Section B of the Combined Code sets out that levels of remuneration should be sufficient to attract, retain and motivate directors of the quality needed to run the company successfully, but companies should avoid paying more than is necessary for this purpose. A significant proportion of executive directors' remuneration should be structured to link rewards to corporate and individual performance. There should also be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors.