Company Law - Management & Corporate Governance (Part 3)

The Greenbury Committee report

This report stemmed from criticism of the high levels of directors’ remuneration, published in 1995. It contained a new code of best practice and was aimed at directors of listed companies. This included, for example:

- The interests of both shareholders and directors should be considered by the remuneration committee when determining the level of directors’ remuneration;

- Shareholders should approve long-term incentive schemes.

The recommendations were incorporated into the London Stock Exchange’s listing rules in 1995.

The Hampel Committee report

This committee was established to build upon the Cadbury and Greenbury reports, reviewing the role of both executive and non-executive directors.

It recommended a set of principles and code of good practice embracing its own work as well as that of the Cadbury and Greenbury committees. The London Stock Exchange adopted this ‘Combined Code’ in 1998.

The Turnbull report 

The publication of this report in 1999 sought to ensure that directors of a listed company had a system of risk management for identifying and managing key business risks. Directors should consider the following:

- Board evaluation of the likelihood of risk and the categories of risk facing the company;

- Effective safeguards and internal controls to prevent or control risks;

- Transparency of internal controls, incorporating an annual assessment of risk.

The Higgs report

Following the Enron scandal in the US, the UK reviewed its corporate governance practice in an attempt to maintain a competitive edge in retaining confidence in its markets.

The Higgs report wanted to ensure that UK boards have an overriding responsibility to set the company’s standards, values and obligations. The report suggested that non-executive directors, as independent guardians of the interests of investors, should challenge and contribute to the development of corporate strategy by scrutinising the performance of executive directors and management. It recommended that 50% of the board should be made up of independent non-executive directors.

The Revised Combined Code on Corporate Governance 2003 

This adopted the recommendations of the Higgs report, as well as adding to the previous Combined Code and Turnbull report.

Companies Act 2006 

Section 172 Companies Act 2006 has introduced, as one of the directors’ duties, a requirement to promote the success of the company:

s.172: Duty to promote the success of the company

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

It is as yet unclear as to whether this will be effective in practice, and there remain questions as to how a stakeholder other than shareholder can enforce such a duty. 

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