THE COMBINED CODE ON CORPORATE GOVERNANCE

The Combined Code on Corporate Governance

The Combined Code on Corporate Governance

Introduction

Good corporate governance should contribute to better company performance by helping a board discharge its duties in the best interests of shareholders; if it is ignored, the consequence may well be vulnerability or poor performance. Good governance should facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term. The Combined Code on Corporate Governance ('the Code') is published by the FRC to support these outcomes and promote confidence in corporate reporting and governance.

The Code is not a rigid set of rules. Rather, it is a guide to the components of good board practice distilled from consultation and widespread experience over many years. While it is expected that companies will comply wholly or substantially with its provisions, it is recognised that noncompliance may be justified in particular circumstances if good governance can be achieved by other means. A condition of noncompliance is that the reasons for it should be explained to shareholders, who may wish to discuss the position with the company and whose voting intentions may be influenced as a result. This 'comply or explain' approach has been in operation since the Code's beginnings in 1992 and the flexibility it offers is valued by company boards and by investors in pursuing better corporate governance. There was an understandable concern about the quality of corporate governance in the U.K after the Maxwell scandal in 1991. A report (Orr, 1992) suggested, "Britain's auditors and corporate chiefs faced a collapse of Enronian proportions" a similar argument was made by Peter Waterhouse Coopers (1999, p.32001) claims, "Business failures heightened concerns about effective governance". Following this came the "worlds most coherent systems of corporate governance" (Orr, 1992) the Cadbury Report.

The Financial Reporting Council, the London Stock Exchange and the accountancy profession, set up the committee of the report in May 1991. The Cadbury Report was published on 1st December 1992. The Cadbury Code was then to become the world leader on corporate governance issues. It set a "common code for the conduct of board members and auditors" (Orr, 1992). There is a general support and compliance with the core recommendations of the report, despite this several committees and reports have commented on the quality of corporate governance in the U.K. (Greenbury Report 1995, Hampel Committee 1998 and the Turnbull Report 1999).

Discussion

The Listing Rules require UK companies listed on the Main Market of the London Stock Exchange to describe in the annual report and accounts their corporate governance from two points of view, the first dealing generally with their adherence to the Code's main principles, and the second dealing specifically with non-compliance with any of the Code's provisions. The descriptions together should give shareholders a clear and comprehensive picture of a company's governance arrangements in relation to the Code as a criterion of good practice.

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