The simplest and most concise definition of corporate governance
was provided by the Cadbury Report in 1992, which stated: “Corporate governance is the system by which
companies are directed and controlled.”
This definition explains
the nature of corporate governance and the important role that organisational
leaders must play for implementing effective practices. These leaders are the
directors, who decide the long term strategy of the business to achieve the
interests of the owners(shareholders) and in broader sense, stakeholders, such
as suppliers, customers, creditors, the society and regulators. Hence, boar of
directors are responsible for the gover
The effectiveness of corporate
governance can be assessed through compliance of UK corporate governance code
and practices by a company. However, being fully compliant does not necessarily
guarantee that company is following sound core governance practices. This can
be found through scandal of Bernie Madoff- Ponzie Investment schemes, Enron
scandal and UK Cadbury report. Such fraud takes place because of concentration
of power in one person and improper board structure which leads to problems of
conflict of interest and information asymmetry.
The Uk corporate
governance code says that; “The board and its committees should consist of
directors with the appropriate balance of skills, knowledge, independence and
experience of the company to enable it to discharge its duties and responsibilities
In context of this, the
provision states that the board should be formed of both executive and
non-executive directors so that no individual or small group can dominate its
decision-taking. At least half of the borax excluding the chairman should be
independent non-executive directors.
For example, a board of
nine, should have at least four independent non-executive directors to balance
four executives, with the ninth director being chairman.
However, for smaller
companies ( a company outside the FTSE 350) are recommended to have at least
two independent non-executive directors.
But, these provisions and
principles are only for guidance; a company requires to provide explanation if
they want to exclude non-executive directors from their board of directors
committee, as per the UK code. Moreover, executive and non-executive and
chairman are all members of the single decision making board of a UK company.
The UK corporate governance code still follows the unitary board.
Conflict of Interest: