The Corporate Governance Structures - Literature review Example

Critically review the evidence that the corporate governance structures and reporting requirements required in the UK by the Cadbury Committee and its successor. In the late 1980's in the United Kingdom, as in many other counties, a mood of general disquiet arose, as result of the actions of a number of bodies, in both the public and private sectors. In the public sector there appeared to be a growing trend for officials and elected representatives to pay little regard to either the consequences of their actions, or the public's reactions to them. In the private sector there was a perception that the directors of companies were acting solely in their own interests, rather than in the interests of their shareholders, let alone their employees or the general public. Needless to say, such apparent disregard for the opinions of others gave rise to a growing discontent, expressed in the media as revulsion for the actions of "fat cat" industrialists and corrupt politicians. In response to this public pressure, in 1991 the then Conservative government under Prime Minister John Major established the Cadbury Committee and its successors. The remit of these bodies was to establish guidelines under which companies and public bodies should operate. These guidelines were not to be enshrined in law (especially for companies), but rather to be promulgated as "best practice" under which industries would regulate themselves. Before proceeding further it is best to cite some examples of the issues which had ignited public opinion in the first place. Perhaps the most telling case was that of the Mirror Group Newspapers pension fund. Over a period of time the company's pension fund had been plundered of some 400,000,000. The money was used for a variety of purposes, including the enhancement of the MGN's share value, and the personal use of the Chairman, Robert Maxwell. Of great concern also were the performances of directors of newly privatized utilities. In many cases those same individuals who had been at the helm of state owned bodies now came to have their salaries massively increased, (in some cases three or four-fold) simply because, in the eyes of the public, their enterprise was now privately rather than publicly owned. As a result of these and other instances of perceived corporate malfeasance, the Government acted to establish the Cadbury Committee. The committee and its successors produced guidance and codes of practice, aimed at reducing or eliminating such malpractice. The Cadbury Code is the unofficial name for the first Code of Best Practice on corporate governance, published in 1992. The other codes were produced by the Greenbury and Hampel Committees, and together they form what is known as the Combined Code on Good Governance. The codes lay down rules which the London Stock Exchange requires companies to follow, relating to the conduct of directors, directors' remuneration, relations with shareholders, and accountability and audit. They also recommend that boards of U.K. corporations include at least three outside directors and that the positions of chairman and CEO be held by different individuals. The underlying presumption was that these recommendations would lead to improved board oversight. Essentially, they are designed to make sure that companies are run in an honest and competent way, and to ensure that shareholders are given reliable and adequate information. In the years since the publication of their reports and recommendations there have been a number of studies published to establish the efficacy of the work of these committees. Most notably in the Journal of management and Governance in 2000, Charlie Weir and David Lang published "The performance-governance relationship: the effects of Cadbury compliance on UK quoted companies" and also in 2000 Jay Dalaya, John J McConnell and Nickolaos G Travlos published "The Cadbury Committee, corporate performance and top management turnover" While there is no longer the degree of public outrage at the performance at the activities of UK corporate management that led to the creation of the Cadbury Committee, it is clear that there remains a level of concern about managerial ethics. In 2003 writing in "The Guardian" Polly Toynbee noted: "The median salary of FTSE-100 top bananas has grown by 92% in the last 10 years to 579,000, while inflation rose only by 25%. But it was the recent bear market that tore away the fig leaf from executive pay and got Patricia Hewitt at the DTI protesting. In 2001, when the value of top companies fell by 16%, top executives gave themselves a 12% increase in pay, with bonuses up by 34%." Her article went on to explore "and at least partly demolish" the oft-quoted rationalizations of such practices. Such levels of salary and salary increases are often "justified" by statements such as that Directors are paid the "market rate" for their work, that they tend to have a short tenure in such positions, and that the rewards of the job are commensurate with their managerial and leadership qualities. Ms Toynbee's (and others) responses to these assertions are that there is NO market for these executives - their skills are seldom if ever tested outside of the UK (86% of FTSE quoted companies Chief Executives come from the UK, 6% from the EU and the remainder from the USA or other countries) - their tenure is no briefer than that of any other worker in the UK, and that their rewards are dictated not by the performance of the companies which they oversee, but by their peers within those same companies. In May 2003 the pharmaceutical multinational GlaxoSmithKline GSK, became the first ever UK "blue chip" company to have its pay and remunerations package rejected by shareholders at its AGM. The shareholders, while agreeing to re-elect the existing board of directors, seemed to take exception to the proposed severance payment on offer to GSK's chief executive, Jean Pierre Garnier, in the event of his departure from the company. The proposed "Golden Parachute" was said to have been in excess of $37,000,000, although GKN disputed this figure, saying that it included some $12,000,000 of existing share options. In 2002 a survey by the Monks Partnership of the FTSE 100 companies found that UK corporate chiefs were still enjoying pay rises way over the rate of inflation. The survey found also found that their base salaries increased on average by 9.3% over the past year to 574,000. And when cash bonuses were included, their income jumped by an average of 11.1% to 869,000. In 2003 consultancy firm Incomes Data Services found that Britain's leading bosses had enjoyed pay rises six times as great as those of the average employee over the past decade. They also showed that in the previous year the salaries and bonuses of chief executives in the top 100 UK companies went up by nearly 17%. Over the previous 10 years the chief executives of leading firms had seen pay rises of an average 288%. In comparison the average earnings of British workers have grown by 45%. Another survey by the same firm in 2005 shoed that total remuneration of NHS chief executives had risen by more than 70% in the previous decade. Over the same period nurses' earning had risen by about 50%. One of the authors of the report, Steve Tatton, stated: "It seems that pay movements in the NHS invite comparisons with the private sector, especially the widening gap between board and employee remuneration. As in the private sector, it seems earnings of NHS directors have outpaced the rest of the health workforce." In 2003 leading bank HSBC came under attention from the TUC. It wanted pension fund trustees to vote against the pay policy at the HSBC bank because, it said, one of the bank's board directors stood to make 20m if he was dismissed. HSBC dismissed the criticism, saying the pay package for director William Aldinger represented good value for money. Mr Aldinger, who works in Chicago and who joined the bank's board after the takeover of the US lending company he ran, would also receive free dental and medical treatment for life. From these and other anecdotal sources it is safe to say that, even after the publication and implementation of the Cadbury Committee's reports and recommendations, there remains in the UK a level of unease and distrust of the directors of large companies. However, this is not to say that the committees work has been totally ineffectual. In order to evaluate this, I have examined the work of Weir and Lang, as well as that of Dahla, McConnel and Davlos. In the year 2000 Weir and Lang published the results of their studies. The conclusions of their report showed that, to a large extent, companies had complied with the requirements of the Committees recommendations. Their study also showed that the performance of those companies which had complied most fully with the Codes had not differed significantly from the performance of other, less compliant, companies. The study by Dahla, McConnel and Davlos in the year 2000 concluded that one of the main effects of the Cadbury Code was that in those companies which had now come into compliance, the turnover of executives had risen significantly, while in those companies which had pre-Cadbury operated in a manner deemed to be already compliant with the Code prior to its publication, turnover had remained at a fairly constant level. From this we can say that, at the very least, the Cadbury Committee and its Code had at least partially succeeded, insofar as making directors more accountable for their actions. The question remains - has the Cadbury Committee and its report succeeded The answer would seem to depend on exactly what the Committee was established to do. From the research papers cited above, the answers appears to be "yes". Most companies do now adhere to the guidance laid down (although there is some evidence to suggest that some companies approach the issue from a "check list" point of view, ticking off appropriate boxes as they meet the criteria, rather than demonstrating genuine deep-seated shifts in their management cultures). Interestingly though, while there do appear to have been changes in corporate management, it appears, from media coverage at least that the public's perception of the issue has not been so much affected, resulting in a lingering suspicion that the days of the corporate "fat cat" are not yet over. Bibliography: BBC News, 2005, viewed 22 February, 2007, Charlie Weir & David Lang, 2000, 'The performance-governance relationship: the effects of Cadbury compliance on UK quoted companies" Journal of Management and Governance, vol.4, no.4, pp. 265-281. Jay Dahya, John J McConnel & Nickolaos G Travlos, c 2000, The Cadbury Committee, Corporate Performance and Top Management Turnover. Toynbee. P. 2003, 'Fat cats' pay is the result of greed, not competition'. The guardian, 24 December. Read More