The Cadbury Report 1992: Shared Vision and Beyond

Neeta Shah & Christopher J. Napier

Governance – not a new problem

• The Cadbury Report is nearly 25 years old• As an expression, “corporate governance”

seems to emerge in legal writings in 1930s• Important contribution of Bob Tricker’s book

Corporate Governance (1984)• Problems of governance are recurring,

particularly role of company directors

Victorian non-executive directors

Marquess of Tweeddale

Earl of Donoughmore

Good chaps and bad eggs

Gerard Lee Bevan

Clarence Hatry

Lord Kylsant

How was Cadbury different?

• Previous UK financial scandals usually led to legislative changes:• City of Glasgow Bank failure led to Banking Act of

1878• London & General Bank frauds (Jabez Balfour) led

to Companies Act 1900• City Equitable Life Insurance fraud (Gerard Lee

Bevan) led to Companies Act 1929• Royal Mail Steam Packet Co. (Lord Kylsant) led

(eventually) to Companies Act 1948• Fire, Auto & Marine (Emil Savundra) led to

Companies Act 1967

How was Cadbury different?

• Cadbury Report offered a code of best practice• Based on belief that “one size fits all” solutions

are not appropriate• Key concept of comply or explain• Report emerges against an interesting

background:• “Big Bang” a relatively recent event – many traditional

informal mechanisms overthrown• Financial Reporting Council recently established –

looking to expand remit beyond accounting standards• Cadbury’s own background and personality

Defining corporate governance

• Cadbury’s definition is “the system by which companies are directed and controlled”

• Emphasis on role of directors, both individually and collectively as the board.

• Assumption of unitary board model• As “first mover”, Cadbury’s definition was

echoed by many subsequent governance codes, including the OECD Principles of Corporate Governance

Different notions of the “company”

• The “company” is the shareholders collectively, with the board as their representatives controlling management (who are employees carrying on the company’s business):• This is usually associated with a philosophy of

shareholder primacy• The “company” is the business itself, and the

directors are the “governors” of the business:• This may be associated with a philosophy that

other stakeholders are also important

Other definitions of governance

• “Giving overall direction to the enterprise, overseeing and controlling the executive actions of management and satisfying legitimate expectations of accountability and regulation by interests beyond the corporate boundary.”

[Robert Tricker, Corporate Governance, 1984]

• “The process of supervision and control intended to ensure that the company’s management acts in accordance with the interests of shareholders.”

[John Parkinson, Corporate Power & Responsibility, 1994]

Other definitions of governance

• “Ways to which suppliers of finance to corporations assure themselves of getting a return on their investment”.

[Shleifer & Vishny, “A survey of corporate governance”, Journal of Finance, 1997]

• This definition emphasises the financial aspects of corporate governance, which is what Cadbury was commissioned to review back in 1991

A window into governance research

• Search of key journals to identify articles that draw on Cadbury definition

• Many papers do not provide a definition of corporate governance (though they may refer to Cadbury, OECD or a subsequent national governance code)

• Research is diverse in terms of theoretical frameworks used

• Much research is quantitative, but increasing use of qualitative methods:• Some studies are explicitly “mixed-methods”

A window into governance research

• Geographical dispersion:• Many studies in “Anglophone” countries• Developed economies with active stock markets• Emerging/developing economies with smaller stock

markets• Some comparative studies, often regional

A window into governance research

• Common research topics:• Attitudes of stakeholders to governance• Disclosed governance practices and their

“determinants”• Influence of governance practices on firm-specific

variables, e.g.:• “Firm performance”• Financial structure• Analyst following/ratings by external agencies• Social and environmental practices

Challenges in governance research

• Statistical significance prized over “real” significance

• Effect size often not examined• Decline in variation of key governance “variables”

over time• Governance variables may not change over period

of investigation for specific companies• Is “good performance” the same as “higher

returns”?• How long does it take for governance changes to

have an impact?

Codes as starting points, not ends

• Many subsequent reports and reviews subsequent to Cadbury

• UK Corporate Governance Code and OECD Principles never a final version, always subject to updating

• Recurrent themes:• Shareholder focus – other stakeholders still largely

overlooked• Financial focus• Still largely reliant on “good chaps” – role of board in

setting the “tone at the top”

Future challenges

• Does increasing use of “Executive Committees” in large companies make the Board of Directors even more distant from day-to-day operations?

• Are modern corporations increasingly “unaccountable” and “ungovernable”?• The information gap – how can directors “direct and

control” what they don’t know about?• Can risk management systems address these concerns, or

do they just lead to “boilerplate”?• Is the introduction of “Anglo-Saxon” governance in

emerging economies achieving anything more than “ceremonial compliance”?

• The “bad eggs” are still out there!