opinion: best governance comes down to people

The real test is whether the code can alert shareholders when serious problems are emerging

Cadbury, Greenbury ... human nature being what it is, most of us prefer to focus on personalities rather than policies. Many more are aware of the existence of Cedric the pig than of the broader corporate governance policies of the company to whose AGM he was brought along. As the business community waits to hear who will assume the corporate governance mantle being laid down by Sir Adrian Cadbury, the time has come to begin discussion in earnest of the key issues to be addressed in the forthcoming review of the Code of Best Practice on corporate governance.

To ensure the durability and standing of the code, companies should only be able to declare full compliance with it when they have adopted the principles laid down as well as the formal requirements. Most boards wish to have an effective system of corporate governance; the real test is whether the code can quickly bring to the attention of shareholders the few situations in which serious problems are emerging. To achieve this goal, the new committee will need to strike a careful balance between strengthening the code in a few places and avoiding any drift towards a rule book approach.

On audit committees, for example, the code currently just requires that "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". It would be helpful if the Cadbury Report's statement on the normal scope of the audit committee's work were additionally incorporated within the code.

If every listed company's non-executive directors (NEDs) are to be capable of bringing independent judgement to issues of strategy, performance and resources, a clearer distinction needs to be drawn between independent and other NEDs. Independent directors are independent of management and free from any business or other relationship that could interfere with their independent judgement.

The current requirement in the code that the board should include non- executive directors of sufficient calibre and number for their views to carry significant weight in the board's decisions would be buttressed if reference were made instead to its containing the appropriate number of independent NEDs. It would also make more sense for the audit committee to consist wholly of a given number of independent directors rather than, as at present, to have only three non-executives as a required minimum. Furthermore, listed companies should disclose which non-executive directors are considered independent, the definition of independence adopted and, in cases where the roles of chairman and chief executive remain combined, the identity of the senior independent director. Now that more than 80 per cent of the top 500 companies have split these roles, those continuing to combine them should set out their reasons. Larger companies should perhaps also be required to establish nomination committees for making board appointments.

Smaller listed companies, meanwhile, many with a capitalisation well below pounds 50m, must feel unfairly burdened by the Cadbury recommendations. To be in full compliance with the code, these companies must satisfy exactly the same requirements as top 100 companies with a market capitalisation of at least pounds 1.4bn. Given that their boards are usually small, serious thought should be given to recommending that they should be called on to have, as a minimum, only two independent NEDs in place of the present requirement for three, a majority of whom must be independent. This change would significantly increase compliance in this area. Of listed companies capitalised at between pounds 1m and pounds 10m, 47 per cent would then comply with the code, compared with 23 per cent at present. For those with a market value of pounds 10m to pounds 25m, the respective figures would be 71 per cent compared with 39 per cent.

Possible modifications to the Cadbury Code have been outlined. Ultimately, however, the effectiveness of every corporate governance system rests with the people involved - directors, shareholders and others - and their willingness and ability to discharge their responsibilities.

The author is secretary of the Corporate Governance Group of the Institute of Chartered Accountants in England and Wales. Views expressed are the author's own.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Massage Therapist / Sports Therapist / Physio / Osteopath

£12000 - £24000 per annum: Recruitment Genius: An opportunity has arisen for o...

Recruitment Genius: Account Manager / Sales Executive - Contract Hire

£35000 - £60000 per annum: Recruitment Genius: This industry leader provides c...

Recruitment Genius: Project Coordinator

£28000 - £30000 per annum: Recruitment Genius: A Project Coordinator is requir...

Recruitment Genius: Area Sales Manager - Midlands

£20000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most