corporate governance

Examination of the control of a company as exercised by its directors. In theory, the directors of public companies are held to account for their actions by the shareholders. In practice, the power of the shareholders to affect the behaviour of the directors is limited and is rarely exercised. As a result, directors have considerable scope to act as they see fit, unlike a government that is restrained from certain actions by the people it governs.

In the light of a series of corporate scandals during the 1980s and 1990s, including the Mirror Group pensions scandal, the issue of corporate governance was put under the spotlight in the UK. The Cadbury Report (1992) set out a Code of Practice for companies, an important element of which was the separation of power between the CEO and the chairperson. This was followed by the Greenbury Report (1995) on directors' pay, the Hampel Report (1998) covering implementation of the Cadbury and Greenbury reports, and the Combined Code on Corporate Governance (1998) from the London Stock Exchange. In January 2003 an independent review by Sir Derek Higgs of the role and effectiveness of non-executive directors recommended changes to the Combined Code to require a greater proportion of independent, better-informed individuals on a company's board. The new Code, which came into effect after 1 November 2003, requires greater transparency and accountability in the boardroom, formal performance appraisal, and closer relationships between non-executive directors and shareholders.