Welcome! Let's Start with Cadbury

Welcome to my blog on Corporate Governance!  

Simply put, Corporate Governance is defined in Cadbury as: "The system by which companies are directed and controlled...".  The Cadbury Report, published in 1992, formally entitled Financial Aspects of Corporate Governance, sets out guidelines on the arrangement and functioning of corporate boards.  It attempts to tackle the so-called "balance of power" issue between management and owners.  It echoes, at least in my mind, certain agency issues often prevalent in corporate governance matters.

Included in Cadbury are five proposals for AGM conduct upon board members, as a key forum for shareholder communication, including:

1. A change in restrictions regarding resolutions, 
2. Remuneration voting at AGMs with US SEC style disclosure levels,
3. AGM question format and minimum time periods, plus the right to put questions to the Auditor and/or Remuneration Committee Chair, 
4. Two types of NEDs, Leadership NEDs (appointed by the board) and Control NEDs (voted by members), and
5. Compulsory rotation of auditors. 

Cadbury was ultimately incorporated into UK listing rules for LSE firms, having a profound impact upon the transparency of UK reporting. Interestingly (but not surprisingly as corporate governance is a complex area), rigorous academic research has yet to validate all facets of its impact.  

Many lament that agency disclosure issues still carry on post Cadbury, such as when one considers the accuracy of earnings forecasts by market analysts.  For example, analyst's forecasts may be more optimistic but not more accurate for firms with a greater proportion of NEDs (Taylor, 2007).  In this paper, it was demonstrated for a significant UK data set, firms which enjoy a greater portion of NEDs also display greater forecast error and dispersion results relating to earnings forecasts (Taylor, 2007). One may posit, like the author, that Cadbury has not totally been effective at addressing the agency disclosure issue, at least when it applies to forecasts by the City as a proxy for disclosure.

Check out Cadbury, the grandfather of the UK Combined Code and other subsequent governance guidance, at the ECGI (European Corporate Governance Institute) website at www.ecgi.org.  

Reference

Taylor, S., 2007.  The Impact of the Cadbury Committee Recommendations on Analysts's Earnings Forecasts: UK Evidence.  Cardiff Working Papers in Accounting and Finance.