The sweet taste of corporate governance, the Cadbury way

The Cadbury code may be 20 years old, but it is as relevant today as it was in the era of the Maxwell, Polly Peck and BCCI scandals, argues corporate finance lawyer Adam Bogdanor (pictured right).

by Adam Bogdanor
Last Updated: 22 Mar 2016

Two decades have passed since Sir Adrian Cadbury, ex-Olympic rower and member of the world’s most famous chocolate dynasty, published his report on corporate governance.

He recommended a code of best practice in the early 1980s in the wake of major corporate scandals, including BCCI, Maxwell and the controversy over directors’ pay. Initially a radical departure for UK plc, it has grown to become the cornerstone of UK corporate governance and other countries have followed the UK’s lead.

A flexible approach

The Cadbury Code, which has since morphed into the UK Corporate Governance Code, created a principles-based approach and set out standards for companies on a range of topics, including board leadership and effectiveness, remuneration, accountability and relations with shareholders.

While best practice codes cannot replace all regulation, they can reduce the need for it, especially where the objective is cultural and behavioural change over time.

The cornerstone of this approach is 'comply or explain', whereby companies decide either to comply with the Code or explain why they didn’t.

Cultural shift

The Code has been pivotal in effecting a change in practices and, to some extent, culture in boardrooms. For instance, before the Cadbury Code, executive directors set their own pay without any independent oversight and a single all-powerful individual could act as both chairman and chief executive, a la Stuart Rose at M&S back in the day.

The FRC has also developed the Stewardship Code, which focuses on the importance of high quality engagement between Boards and their shareholders. Boosted by related legislation on directors’ remuneration, which is being strengthened, shareholders are now far more likely to express their dissent publicly in AGM votes on directors’ pay in a way that was almost unheard of two decades ago.

Room for improvement

Recent surveys show that only half of all FTSE 350 companies comply with the Code in full. So the FRC is urging companies which choose not to comply to provide fuller explanations as to their reasons.

Challenges remain but overall the Code has proved flexible. After all, the Code has adapted to reflect emerging issues such as boardroom diversity, transparency over remuneration and the current vogue for long-term decision-making.

Britain leading the way

Ultimately, the key to good governance lies in developing a culture of informed decision-making, constructive debate and an on-going dialogue with engaged shareholders, rather than a rigid, tick-box approach, as the Cadbury Report recognised.

The European Commission is currently looking at a range of corporate governance issues so this area is likely to develop further but there is no doubt that Sir Adrian Cadbury led the way.

Adam Bogdanor is a Corporate Finance Partner at law firm Berwin Leighton Paisner

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