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?
ebooksA celebration of British elections
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
Chuck Norris pictured in 1996
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
A voter placing a ballot paper in the box at a polling station
Arts and Entertainment
The Queen (Kristin Scott Thomas) in The Audience
theatreReview: Stephen Daldry's direction is crisp in perfectly-timed revival
  • Get to the point
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

SThree: Trainee Recruitment Consultant - Dublin

£13676.46 - £16411.61 per annum + OTE: SThree: SThree Trainee Recruitment Cons...

Ashdown Group: Marketing or Business Graduate Opportunity - Norwich - £22,000

£18000 - £22000 per annum + training: Ashdown Group: Business and Marketing Gr...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + Commission: SThree: Are you great at building rela...

Ashdown Group: Database Analyst - Birmingham - £22,000 plus benefits

£20000 - £22000 per annum + excellent benefits: Ashdown Group: Application Sup...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power