The approach taken in the ASX listing rule can be contrasted with that in the
United Kingdom where the London Stock Exchange listing rules require listed
companies to make a statement in their annual report about compliance withthe Code of Best Practice (the Code). The Code was incorporated into the
final report of the Committee on the Financial Aspects of Corporate
Governance (the Cadbury Committee).
The Cadbury Committee report made recommendations concerning board
functions and structure. In terms of functions, the Code requires the board to
have a formal schedule of matters specifically reserved to it for decision, to
ensure that the direction and control of the company is firmly in its hands. A
central recommendation of the Cadbury Committee was that public
companies have at least three independent directors and that the boards of
companies appoint an audit committee of independent directors.
The Code
also provides that a board should:
- provide a balanced and understandable assessment of the company’s
position;
- ensure that an objective and professional relationship is maintained with
the auditors of the company; and
- make clear to shareholders their responsibility for the preparation of the
financial accounts of the company.
In relation to board structure, the Code also requires that:
- the board should include a sufficient number of non-executive directors to
carry significant weight in the board’s decisions;
- the majority of non-executive directors should be independent of
management and free from any business or other relationship which could
materially interfere with the exercise of their independent judgement;
- the independent element of the board should have a recognised senior
member if the chairman of the board is also the chief executive;
- non-executive directors should be appointed for specified terms and be
selected through a formal process and both the process and appointment
should be a matter for the board as a whole;
- there should be an agreed procedure enabling directors, in the
performance of their duties, to take independent professional advice at the
company’s expense;
- all directors should have access to the advice and services of the company
secretary; and· the pay of executive directors should be subject to the recommendations of
a remuneration committee made up wholly or mainly of non-executive
directors.
The rules of the London Stock Exchange require listed companies to make a
statement in their annual report about compliance with the Code.
In
particular, the company statement must:
- state whether the company has complied with the Code and should
identify and give reasons for any areas of non-compliance; and
- be reviewed by its external auditors before publication.
In November 1995 a Committee on Corporate Governance chaired by
Sir Ronald Hampel was established to review the implementation of the
recommendations of the Cadbury and Greenbury (Directors’ Remuneration)
Committees. In particular, the Hampel Committee is reviewing the
implementation of the Cadbury Code to ensure that the original purpose of
promoting openness, integrity and accountability is being achieved. The
Committee released a preliminary report in August this year the broad thrust
of which was that in relation to corporate governance in the United Kingdom,
accountability had been given too much weight at the expense of business
prosperity. The Committee noted that, while the Cadbury Committee had
intended their recommendations to be implemented as broad principles that
could be applied flexibly, in practice, the Code has been treated as a
prescriptive set of rules.
The Hampel Committee recommended that companies should include in their
annual reports a narrative account of how they have applied a broad set of
corporate governance principles which the Committee outlined in its report,
but that this should not be an additional regulatory requirement. Companies,
and those concerned with their governance, should apply the principles
flexibly, with common sense, and with due regard to companies’ individual
circumstances. Following a period of public consultation the Committee is
expected to release its final report in December this year.
The New York Stock Exchange (NYSE) does not have a disclosure based rule
for corporate governance but rather has two fundamental requirements:
- domestic companies must have an audit committee comprising only
directors independent of management and free from any relationship that,
in the opinion of their board of directors, would interfere with the exercise
of independent judgement as a committee member; and
- domestic companies must have at least two outside directors on their board.
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