In a speech marking 25 years since the Cadbury report, which ushered in a new era of corporate governance in the UK and introduced the concept of ‘comply or explain’ Sir Win Bischoff, chair of the Financial Reporting Council (FRC) has called for wider powers for the regulator so it can hold company directors to account for corporate failures and impose sanctions
The Cadbury report, titled Financial Aspects of Corporate Governance, was issued by the committee on the financial aspects of corporate governance, chaired by Adrian Cadbury in 1992. The report sets out recommendations on the arrangement of company borads and accounting systems to avoid corporate governance risks and failures. Recommendations set out in the report have since been used to establish other codes in the European Union, the United States, world banks etc.
In his speech, Bischoff said: ‘The law holds all directors equally responsible for the decisions of the board. But their responsibility now needs to be more closely aligned to the broader factors in section 172 of the Companies Act, and should be reported on and effectively monitored.’
He argued that the regulatory framework is fragmented and said enforcement is not fully effective at present, with the FRC keen to play a wider role.
‘In the FRC’s own area of financial reporting for instance, we have powers to sanction accountants, but not directors – who may be just as culpable when companies fail but happen not to be members of the profession. The gaps need to be closed,’ Bischoff said.
While he welcomed the current focus on improving corporate governance, which includes a green paper on the issues, Bischoff said the FRC did not support suggestions for the creation of a separate body to devise and oversee corporate governance in the UK.
‘We question the merit in establishing yet another body with the potential to add to the complexity and burdens already faced by business and investors,’ he said.
In his assessment of the quarter century since the introduction of the UK corporate governance code following publication of the Cadbury report, Bischoff said compliance with the code’s provisions is high, but the FRC’s monitoring suggested that too many explanations when boards choose not to follow provisions are of poor quality. The FRC is calling for more oversight powers to address this.
On the topic of executive remuneration, Bischoff said that ‘those who do well deserve reward, while those who perform poorly but benefit from rising markets do not.’
‘Boards must exercise judgement and use the discretion they have, and take greater responsibility for employee matters across the organisation. They should more clearly explain what they have done and why,’ he said.
Sir Win Bischoff’s speech on 25 years since Cadbury is here.
