NAME:- Deepali Nikale

Roll No:- 1435 ‘B’

ADRIAN CADBURY REPORT

 The origin of the report

The Committee on the Financial Aspects of Corporate Governance,

forever after known as the Cadbury Committee, was established in May 1991 by
the Financial Reporting Council, the London Stock Exchange, and the accountancy
profession. The spur for the Committee's creation was an increasing lack of
investor confidence in the honesty and accountability of listed companies,
occasioned in particular by the sudden financial collapses of two companies,
wallpaper group Coloroll and Asil Nadir's Polly Peck consortium: neither of these
sudden failures was at all foreshadowed in their apparently healthy published
accounts.

Even as the Committee was getting down to business, two further

scandals shook the financial world: the collapse of the Bank of Credit and
Commerce International and exposure of its widespread criminal practices, and the
posthumous discovery of Robert Maxwell's appropriation of £440m from his
companies' pension funds as the Maxwell Group filed for bankruptcy in 1992. The
shockwaves from these two incidents only heightened the sense of urgency behind
the Committee's work, and ensured that all eyes would be on its eventual report.

The effect of these multiple blows to the perceived probity and integrity
of UK financial institutions was such that many feared an overly heavy-handed
response, perhaps even legislation mandating certain boardroom practices. This
was not the strategy the Committee ultimately suggested, but even so the
publication of their draft report in May 1992 met with a degree of criticism and
hostility by institution which believed themselves to be under attack. Peter
Morgan, Director General of the Institute of Directors, described their proposals as
'divisive', particularly language favouring a two-tier board structure, of executive
directors on the one hand and of non-executives on the other.
 Features of the report

 Sir Adrian Cadbury was a visionary chairman who energetically

promoted the committee recommendations

 The committee reflected the main shareholders

 The investigation produced the draft report followed by an extensive

process of consultation

 A final report was produced whose recommendations was widely

accepted and adopted

 Objective of the report

 Uplift the low level of confidence

 Review the structure, rights and role

 Address various aspects of accountancy profession

 Raise the standard of corporate governance

 The contents of the Report

The suggestions which met with such disfavour were considerably toned
down come the publication of the final Report in December 1992, as were
proposals that shareholders have the right to directly question the Chairs of audit
and remuneration committees at AGMs, and that there be a Senior Non-Executive
Director to represent shareholders' interests in the event that the positions of CEO
and Chairman are combined. Nevertheless the broad substance of the Report
remained intact, principally its belief that an approach 'based on compliance with a
voluntary code coupled with disclosure, will prove more effective than a statutory
code'.
The central components of this voluntary code, the Cadbury Code, are:

 that there be a clear division of responsibilities at the top, primarily that the
position of Chairman of the Board be separated from that of Chief
Executive, or that there be a strong independent element on the board;
 that the majority of the Board be comprised of outside directors;
 that remuneration committees for Board members be made up in the
majority of non-executive directors; and
 that the Board should appoint an Audit Committee including at least three
non-executive directors.

 The recommendations in the Cadbury code of best practices are:-

 Directors’ service contracts should not exceed three years without shareholders’
approval.
 There should be full and clear disclosure of their total emoluments and those of
the Chairman and the highest-paid Directors, including pension contributions
and stock options.  Separate figures should be given for salary and
performance-related elements and the basis on which performance is measured
should be explained.
 Executive Directors\ pay should be subject to the recommendations of a
Remuneration Committee made up wholly or mainly of Non-Executive
Directors.
 It is the Board’s duty to present a balanced and understandable assessment of
the company’s position.
 The Board should establish an Audit Committee of at least three Non-Executive
Directors with written terms of reference, which deal clearly with its authority
and duties.
 The Directors should explain their responsibility for preparing the accounts next
to a statement by the Auditors about their reporting responsibilities.
 The Directors should report on the effectiveness of the company’s system of
internal control.
 The Directors should report that the business is a going concern, with
supporting assumptions or qualifications as necessary.

The report created mixed feelings and with some more frauds emerging
in UK, Governance came to mean the extension of Directors’ responsibility to
 all relevant control objectives including business risk assessment and
minimizing the risk of fraud.  The shareholders are surely entitled to ask, if all
the significant risks had been reviewed and appropriate actions taken to mitigate
them and why a wealth destroying event could not be anticipated and acted
upon.

The one common denominator behind the corporate failures and frauds
was the lack of effective risk management and the role of the Board of
Directors.  When it became clear that merely reviewing the internal processes of
control were not enough and, therefore, risk management had to be embodied
throughout the organization, an easy solution was found by passing on this
responsibility to the internal audit.

 REACTIONS TO THE CADBURY REPORT

Much of the initially adverse reaction to the draft of the Cadbury
Report published in May 1992 was mollified by the mellowing of the language
in the final report that December. The Reports fits firmly into the Anglo-
American corporate tradition of favouring checks and balances to the
potentially heavy hand of regulation, and thus while its recommendations were
widely welcomed, there was doubt as to how effective these provisions would
prove when companies were under no obligation to enforce them.

Sir Adrian Cadbury had two responses to these concerns. Firstly he

declared that it was up to shareholders, as the owners of these companies, to
exert the necessary pressure toward compliance. Added to this was the
recommendation for a follow-up committee to evaluate implementation of the
Report's findings, with the suggestion that if companies were not found to be
complying, "it is probable that legislation and external regulation will be
sought". This was not a strategy Sir Adrian relished, and he voiced worries that
Adrian Higgs would be unable to resist pressures for legislative solutions in his
2003 report on the role and effectiveness of non-executive directors (worries
that ultimately proved unfounded).

The major legacy of the report is the widespread acceptance of the

division of the roles of Chief Executive and Chairman: almost 90% of listed UK
companies had separate individuals fulfilling these positions in 2007, while just
over 50% of US companies did so according to a 2008 survey by the National
Association of Corporate Directors. This has diminished the cult of personality
 surrounding such figures, and avoided the domination of boards and companies
by individuals whose agendas all too easily went unchecked. Sir Stuart Rose at
Marks and Spencers is one of the few prominent people to have recently
combined the two, and despite his stellar performance M&S shareholders voted
against him continuing in both jobs by margin of almost 38% at the 2009 AGM.

KUMAR MANGALAM REPORT

 The origin of the report

 It is almost a truism that the adequacy and the quality of corporate
governance shape the growth and the future of any capital market and
economy. The concept of corporate governance has been attracting public
attention for quite some time in India. The topic is no longer confined to
the halls of academia and is increasingly finding acceptance for its
relevance and underlying importance in the industry and capital markets.
Progressive firms in India have voluntarily put in place systems of good
corporate governance.

 Studies of firms in India and abroad have shown that markets and
investors take notice of well managed companies, respond positively to
them, and reward such companies.

 Strong corporate governance is thus indispensable to resilient and vibrant

capital markets and is an important instrument of investor protection. It is
the blood that fills the veins of transparent corporate disclosure and high-
quality accounting practices. It is the muscle that moves a viable and
accessible financial reporting structure. Without financial reporting
premised on sound, honest numbers, capital markets will collapse upon
themselves.

 Another important aspect of corporate governance relates to issues of

insider trading. It is important that insiders, which include corporate
insiders also, do not use their position of knowledge and access to inside
information, to take unfair advantage over the uninformed stockholders
and other investors transacting in the stock of the company. To achieve
this, the corporate are expected to disseminate the material price sensitive
 information in a timely and proper manner and also ensure that till such
information is made public, insiders abstain from transacting in the
securities of the company.

 The Committee's recommendations look at corporate governance from

the point of view of the stakeholders and in particular that of the
shareholders, because they are the raison for corporate governance and
also the prime constituency of SEBI. The control and reporting functions
of boards, the roles of the various committees of the board, the role of
management, all assume special significance when viewed from this
perspective. The other way of looking at corporate governance is from
the contribution of corporate governance to the efficiency of a business
enterprise, to the creation of wealth and to the country’s economy.

 The Committee agreed that India had in place a basic system of corporate
governance and SEBI has already taken a number of initiatives towards
raising the existing standards. The Committee also recognised that the
Confederation of Indian Industries had published a Desirable Code of
Corporate Governance and was encouraged to note that some of the
forward looking companies have already reviewed or are in the process
of reviewing their board structures and have also reported in their 1998-
99 annual reports the extent to which they have complied with the Code.
The Committee felt that under the Indian conditions a statutory rather
than a voluntary code would be far more purposive and meaningful.

 At the heart of the Committee's report is the set of recommendations

which distinguishes the responsibilities and obligations of the boards and
the management in instituting the systems for good corporate governance
and restates the rights of shareholders in demanding corporate
governance. A large part of the recommendations are mandatory and are
intended to be the listed companies for initial and continuing disclosures
in a phased manner within specified dates. The companies will be
required to disclose separately in their annual reports, a report on
corporate governance, delineating the steps they have taken to comply
with the recommendations of the Committee. This will enable
shareholders to know where the companies in which they have invested
stand with respect to specific initiatives taken to ensure robust corporate
governance. Companies above a particular size will be required to
comply with the mandatory recommendations of the report by April 2000
 and the remaining companies in the next year. For the non-mandatory
recommendations the Committee felt that it would be desirable for
companies to voluntarily follow these.

 Objectives of the report

 To enhance the shareholders value and keeping in view the interest of

other stakeholders
 To treat the code not as a mere structure but as the way of life
 Proactive initiatives taken by the companies themselves and not in the
external measures

 Relating to the director the recommendations are:-

 The Board should meet regularly, retain full and effective control over the
company and monitor the executive management.
 There should be a clearly accepted division of responsibilities at the head of
a company, which will ensure balance of power and authority, such that no
individual has unfettered powers of decision.  In companies where the
Chairman is also the Chief Executive, it is essential that there should be a
strong and independent element of the Board, with a recognized senior
member.
 The Board should include nonexecutive Directors of sufficient caliber and
number for their views to carry significant weight in the Board’s decisions.
 The Board should have a formal schedule of matters specifically reserved to
it for decisions to ensure that the direction and control of the company is
firmly in its hands.
 There should be an agreed procedure for Directors in the furtherance of their
duties to take independent professional advice if necessary, at the company’s
expense.
 All Directors should have access to the advice and services of the Company
Secretary, who is responsible to the Board for ensuring that Board
procedures are followed and that applicable rules and regulations are
complied with.  Any question of the removal of Company Secretary should
be a matter for the board as a whole.

In India, the CII came out with its own views, but SEBI, as the
custodian of millions of investors came out with its guidelines and Kumar
Mangalam Committee recommendations became mandatory and, therefore, all the
listed companies were obliged to comply in accordance with the listing agreement
with these Stock Exchanges.  The clean up of most companies has begun in a big
way and the Section 49 of the SEBI Act has now almost become the hallmark of
compliance in this country.

The mandatory recommendations of the Kumar Mangalam

Committee include the constitution of Audit Committee and Remuneration
Committee in all listed companies; appointment of one or more independent
Directors; recognition of the leadership role of the Chairman of a company;
enforcement of accounting standards; the obligation to make more disclosures in
annual financial reports; effective use of the power and influence of institutional
shareholders; and so on.

The Committee also recommended a few provisions, which are non-mandatory. 

Some of the mandatory recommendations are;

 The Board of a company should have an optimum combination of executive

and non-executive Directors with not less than 50% of the Board comprising
the nonexecutive Directors.
 The Board of a company should set up a qualified and an independent Audit
Committee.  The Audit Committee should have minimum three members, all
being nonexecutive Directors, with the majority being independent, and with
at least one Director having financial and accounting knowledge.  The
Chairman of the Audit Committee should be an independent Director.  They
are responsible for balance sheet compilation and clarificatory notes
appearing thereto; and to ensure that sensitive information is not tucked
away in small print.

 Apart from these, the Kumar Mangalam Committee also made

some recommendations that are nonmandatory in nature.  Some of
them are:
 The Board should set up a Remuneration Committee to determine the
company’s policy on specific remuneration packages for Executive
Directors.
 Half-yearly declaration of financial performance including summary of the
significant events in the last six months should be sent to each shareholder.
 Non-executive chairman should be entitled to maintain a chairman’s office
at the company’s expense.  This will enable him to discharge the
responsibilities effectively.
 It will be interesting to note that Kumar Mangalam Committee
while drafting its recommendations was faced with the dilemma of statutory v/s
voluntary compliance.  One may also be aware that the desirable code of Corporate
Governance, which was drafted by CII was voluntary in nature and did not produce
the expected improvement in Corporate Governance.  It is in this context that the
Kumar Mangalam Committee felt that under the Indian conditions a statutory
rather than a voluntary code would be far more purposive and meaningful.  This
led the Committee to decide between mandatory and non-mandatory provisions. 
The Committee felt that some of the recommendations are absolutely essential for
the framework of Corporate Governance and virtually from its code, while others
could be considered as desirable.  Besides, some of the recommendations needed
change of statute, such as the Companies Act for their enforcement.  Faced with
this difficulty, the Committee settled for two classes of recommendations.

SEBI  has given effect to the Kumar Managlam Committee’s recommendations by

a direction to all the Stock Exchanges to amend their listing agreement with
various companies in accordance with the ‘mandatory\ part of the
recommendations.

For ensuring good corporate governance in a banking organization

the importance of overseeing the various aspects of the corporate functioning needs
to be properly understood, appreciated and implemented.  There are four important
forms of oversight that should be included in the organizational structure of any
bank in order to ensure the appropriate checks and balances:

 oversight by the board of directors or supervisory board;

 oversight by individuals not involved in the day-today running of the
various business areas;
 direct line supervision of different business areas; and
 independent risk management and audit functions.  In addition to these, it
is important that the key personnel are fit and proper for their jobs (this
criterion also extends to selection of Directors).

 Implementation of the recommendations of Birla committee

By introduction of clause 49 in the listing agreement with stock
exchanges
 Provisions of clause 49
 composition of board - in case of full time chairman, 50% non-executive
directors and 50% executive directors

 constitution of audit committee – with 3 independent directors with

chairman having sound financial background. finance director and internal
audit head to be special invitees and minimum 3 meetings to be convened.

responsible for review of financial performance 0n half

yearly/annually basis; appointment/ removal/remuneration of auditors;
review of internal control systems and its adequacy

Requirements of clause 49

 Remuneration of directors – remuneration of non-executive directors to

be decided by the board. details of remuneration package, stock options,
performance incentives of directors to be disclosed

 Board procedures – atleast 4 meetings in a year. director not to be member

of more than 10 committees and chairman of more than 5 committees across
all companies

 Management discussion & analysis report – should include:

 industry structure & developments
  opportunities & threats
 segment wise or product wise performance

 Outlook
 Risks & concerns
 Internal control systems & its adequacy
 Discussion on financial performance
 Disclosure by directors on material financial and commercial
transactions with the company

 shareholders’/investors grievance committee under the chairmanship of

independent director. minimum 2 meetings in a year

 report on corporate governance and certificate from auditors on

compliance of provisions of corporate governance as per clause 49 in the
listing agreement