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Cadbury Committee on

Corporate Governance

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Cadbury Committee & its Report
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 Set up in May 1991 by Financial Reporting Council of


London Stock Exchange
 Committee published its final report in December 1992.
 The Cadbury Report, titled Financial Aspects of
Corporate Governance, is a report issued by the
Committee on “the Financial Aspects of Corporate
Governance”
 Adrian Cadbury was the Chairman of the Committee.
 The report gave recommendations on the arrangement of
company boards and accounting systems to mitigate
Corporate Governance risks and failures.
3 Code of Best Business Practices
Divided in four sections
1. Role of board of Directors, Duties of the
Board and its Constitution / Composition
2. Role of Non Executive Directors
3. Dealing with their remuneration
4. Addressing queries on Financial Reporting
and Financial Controls
Role of board of Directors, Duties of
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the Board and its Composition
 The Board should meet regularly, retain full and effective
control of the company and monitor its executive management.
 The Board should have sufficient number of non-executive
directors and they should have sufficient caliber to be able to
carry sufficient weight in their views on Board’s Decisions.
 All non executive directors should have access to the advice
and services of the Company Secretary, who is responsible to
the Board for ensuring that the Board procedures are followed
and that the applicable rules and regulations are complied with.
 Any question of the removal of the Company Secretary should
be a matter of the Board as a whole.
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Role of Non Executive Directors
 Independent Directors should bring in independent
judgment on the issues of strategy, performance, resources
including key / important appointments (e.g. CEO / COO)
and standards / Code of conduct.
 They should be appointed on specified terms (usually for
three years) and their reappointment should not be
automatic (it has to be approved by the shareholders of the
company)
 They should be selected through a formal process. Both i.e.
this process and appointments should be a matter to be
decided by the Board as a whole. It has to be transparent.
Remuneration of
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Non Executive Directors
Services should be for a period of maximum
three years. Any extension / reappointment has
to be with the permission of the shareholders.
Companies Act to be amended accordingly.
Remuneration has to be both fair and
competitive
Annual General Meeting (AGM) provides the
right forum and opportunity for seeking the
approval of the shareholders on such matters as
The Directors’ remuneration and benefits.
Board’s responsibilities on
7 Financial Reporting and Controls
 It is Board’s duty to present balanced and understandable assessment of
the Company’s financial position
 The Board should ensure that an objective and professional relationship
is maintained with the Company’s Auditors
 The Board should establish a Audit Committee comprising of at least
three non executive directors with written terms of reference defining
clearly their duties and authority.
 The Directors should explain their responsibility for preparation of the
accounts next to the statement of auditors about their reporting
responsibilities
 The Directors should report on the effectiveness of the Company’s system
of internal controls
 The Directors should report that the company is a going concern, with
supporting assumptions and qualifications as necessary
SUMMARY
OF
THE CADBURY
COMMITTEE REPORT
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© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Major Recommendations of the
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Cadbury Committee
 A single person should not be vested with the decision
making power e.g. the roles of Chairman or CMD should be
separated from that of CEO.
 Non executive directors should act independently and give
their frank / unbiased opinions / judgments on all matters of
strategy, performance, resources including key / important
appointments (e.g. CEO / COO) and standards / Code of
conduct.
 A majority of the directors should be independent, non
executive directors i.e. they should not have any financial
interests in the Company.
Major Recommendations of the
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Cadbury Committee….contd….
 The term of the directors can be extended beyond three
years only with the approval of the shareholders.
 A remuneration Committee with majority of its members
as non-executive directors should decide about the
remuneration of executive directors.
 Interim report of the financial performance of the
company should give its balance sheet information and
review of Auditors.
 Information about the appointment and fees of the
Auditors should be made public and there should be
regular rotation of the auditors.
11 Major Recommendations of the
Cadbury Committee….contd….
 An objective and professional relationship should
be maintained with the Auditors of the firm.
 It must be reported that the firm is a going
concern.
Corporate Governance
In
India

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Concern for CG in India
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 The concerns about good Corporate Governance have


increased suddenly and phenomenally of late, since India
has witnessed many corporate frauds in the recent past:
 Kingfisher Airlines Ltd. / United Breweries (parent company),
 Satyam Computer Services Limited, India's biggest-ever corporate
fraud and governance failure was unearthed. (Amount involved US
$ 1.47 Billion i.e. over Rs. 7000 Crore)
 Punjab National Bank (Amount involved over Rs. 13,000 crores)
 Rotomac Pens / Rotomac Global Pvt Ltd (Amount involved over
Rs. 3000 crore) The Kanpur-based group is being probed by the
CBI and the Enforcement Directorate (ED) in connection with the
alleged swindling of Rs 3,695 crore loan funds advanced by a
consortium of seven banks.
 Other scams: Ketan Parekh, Harshad Mehta, etc.
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Increasing importance of CG
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Loss of faith in Auditing Profession


Lack of understanding about the auditing
process and hence the resulting assurances
Conflicting interests
Considerable expectations from Stakeholders
Corporate Liabilities and transparency
Public disclosure requirements on all risks.
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SOME
EXAMPLES

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
17 ENRON CASE
 Senior Executives permitted and in fact encouraged
misrepresenting of accounting data / misleading of
accounting treatment.
 Accounting and Audit Committee also signed the
misleading accounts
 Board was ineffective in supervising the actions of
managers
 Whistleblowers complaints/actions were ignored or
whitewashed.
 Transactions enriched individuals at the cost of the
organization that employed them
18 Why is Governance so important?
 PNB lost almost 25% of its share value once the Bank
accepted that the total money at stake was Rs. 11,300
crore (Initial Estimate)
 Satyam lost its share value much more..almost 30%.
 Worldcom lost 75% of its share value when its top
executives resigned after accepting that the accounts
they had signed were misrepresented. WorldCom's
chief executive, John Sidgmore, blamed the
company's former chief financial officer, Scott
Sullivan, and the former controller, David Myers. The
two were fired for claiming $3.8bn in regular
expenses as capital investment in 2001.
19 REVIEW QUESTIONS
What is the role of Independent Directors? How
are they appointed? Who decides about their
remuneration? Give your answers in the light of
the recommendations of Cadbury Committee
Report.
Give in summary form the major
recommendations of Cadbury Committee.
What are the responsibilities of the Board of
Directors on financial reporting and controls?