INTRODUCTION The UK has a highly liquid listed company sector with dispersed ownership and a system of corporate governance that has developed significantly over the last two decades. Prior to 1992, the corporate governance of UK companies was regulated by customs and practice. According to Mullerat and Brennan (2010, p. 51), company law together with some stock requirements laid down only basic rules concerning boards of directors, financial reporting and audit. The Cadbury review was established in 1991 in response to a series of financial scandals. The Cadbury Report which was released in 1992 began the process of greater codification of corporate governance norms and as Mallin (2007, p.
22) points out, the report was the first to set out recommendations regarding the structure of boards of directors and companies’ accounting systems in the UK. Following on from the Cadbury Report, there have been a number of subsequent reviews to the corporate code made by committees led by Sir Richard Greenbury (1995), Sir Ronnie Hampel (1998), Nigel Turnbull (1999), Sir Derek Higgs and Sir Robert Smith (2003), and Sir David Walker (2009) (Bain & Barker, 2010, p.
267; Blowfield & Murray, 2008, p. 216; Brown & Snyder, 2012, p. 299). The reviews covered various aspects of corporate governance including executive remuneration, internal control, non-executive directors (NEDs) and audit committees. The recommendations made in all these reviews are incorporated in the UK Corporate Governance Code 2010. The standards laid out in this code are not legally enforceable and thus, it is a voluntary code for the directors of UK companies. However, companies with a premium listing on the London Stock Exchange (LSE) are required to apply the code on a ‘comply and explain’ basis.
According to Mallin (2007, p. 22), the code has relevance to most companies and organisations irrespective of their size and whether they are quoted or not and in many instances, the code has been a source of deterrence to financial irregularities. This report reviews the development of the UK corporate development code from 1992, explaining its effectiveness as a source of deterrence to financial irregularities. 2.0 THE REVOLUTION OF THE CORPORATE GOVERNANCE IN THE UK SINCE 19922.1 The Cadbury ReviewAs noted earlier, the review on corporate governance practice in UK was initially sparked by the prevalence of financial scandals and corporate collapses as in the cases of Coloroll and Polly Peck (Solomon, 2007, p.
152). As well, the move was driven by lack of credibility in the contents of financial reports of most UK companies. In response, the LSE, the UK Financial Reporting Council (FRC), and the organisation of accountancy professionals formed a committee on the Financial Aspects of Corporate Governance led by Sir Adrian Cadbury in 1991.
The Cadbury committee issued its report in December 1992 (Mallin, 2007, p. 22). The recommendations of this review covered various areas such as boards’ operations, effective procedures for the establishment of board committees, and composition and operations of the key committees (Mallin, 2007, p. 30-31). It also reviewed the importance of independent NEDs in a company’s board as well the efficient reporting and control mechanisms of a business. Listed companies in the LSE are required to comply with the code (Davidson, 2010, p. 57).