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Overview of Cadbury committee recommendations

 In December 1992, the Cadbury Committee published their Code of Best Practice. The recommendations, which largely reflected perceived best practice at the time, included separating the roles of CEO and chairman, having a minimum of three non‐executive directors on the board and the formulation of audit committees. The Code also advocated that a more active role be taken by institutional investors in the promotion of good practice in corporate governance. This paper discusses how agency problems may be (partially) resolved by corporate governance, reviews the evidence on compliance with the Cadbury Code and examines the relationship between board structure and firm performance, looking for evidence that the Code has enhanced board performance. While there is no empirical evidence of an association between board structure and firm value, there is some evidence that compliance with the Cadbury recommendations enhances board oversight with respect to the manipulation of accounting numbers and the discipline of the top executive.

The Cadbury Committee was set up in May 1991 by the Financial Reporting Council, the London Stock Exchange and the accountancy profession to address the financial aspects of corporate governance.

Its chairman was Sir Adrian Cadbury. The sponsors were concerned at the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected.

The underlying factors were seen as the absence of a clear framework for ensuring that directors kept under review the controls in their business, together with the looseness of accounting standards and competitive pressures, both on companies and on auditors, which made it difficult for auditors to stand up to demanding boards. These concerns about the working of the corporate system were heightened by some unexpected failures of major companies and by criticisms of the lack of effective board accountability for such matters as directors' pay.

Further evidence of the breadth of feeling that action had to be taken to clarify responsibilities and to raise standards came from a number of reports on different aspects of corporate governance which had either been published or were in preparation at that time.

MAJOR RECOMMENDATION --- https://www.slideshare.net/BandriNikhil/cadbury-report-on-corporate-governance

 

SUMMARY OF RECOMMENDATIONS

  1. The boards of all listed companies should comply with the code of best practice set out by the committee.

  2. As many companies as possible should aim at meeting its requirements.

  3. The listed companies reporting in respect of years ending on or after 31 December, 1992, should make a statement about their compliance with the code in the report and accounts and give reasons for any areas of non-compliance.

  4. Companies should publish their statement of compliance only after they have been the subject of review by the auditors.

  5. The Auditing Practices Board should consider the extent and form that an endorsement by the auditors could take.





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