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Do the UK Combined Code on Corporate Governance and the legislative framework regulating Listed PLC's in the UK effectively address the problems revealed by the corporate scandals of recent times?

Introduction>
In UK there are the sole trader, the partnerships, the companies and the joint venture, structure businesses. For the sole trader and the partnerships because the businesses are controlled by the owners and they work for the benefit of the owners, it has not been necessary to have increased measures for the protection of the owners benefit. In the companies though that it is a different legal entity, not related to the persons that initially established it, there is a need for human representatives that would manage the company in benefit for the shareholders and stakeholders. The management of the company is on the hands of the board of directors and the general meeting. The problem is thought that the directors have extensive powers and they might use them in their benefit. Therefore rules are constructed by the companies themselves to control a wrongful use of the directors' powers.

Corporate Governance and the Combined Code
Corporate governance is “a set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled”. In corporate governance there are the shareholders, the management, the board of directors and the stakeholders that take part. Among these actors, as seen above, it is more important how to control the directors from getting advantage of their position ¹. For that reason there is the Combined Code that was initially created after the reports of ‘Gadbury ², Greenbury ³ and Hampel ⁴ Committees or Reports’.

The Combined Code is guidelines setting out corporate governance principles for UK listed companies and it is the most important self- regulation regime.  It is not a legislation, is not created by the Parliament but from the committees that represent the business and financial interests and it applies only to listed companies and only in the basis of 'comply or explain'. This means that the companies have to either comply with the provisions of the companies or give explanations on why they do not comply.

History of the Combined Code and Scandals that lead to the creation of it
After the Cadbury Committee, which was created as a result of the Maxwell scandal, there have been a series of other Committees, as the Greenbury Report and the Hampel Report, before the creation of the Combined Code in 1998. The Greebury Report was a result of the political concern about the executive remuneration and the Hampel reviewed and updated the codes of the previous Committees. After that there were the Higgs and Smith ⁵ report that lead to the Combined Code and the review of it in 2006 ⁶.

The ‘Cadbury Committee’ ⁷; was composed of the Stock Exchange, the Financial Reporting Council and the accountancy profession. The Maxwell Scandal ⁸ was one of the scandals that initiated the creation of this committee.

The director, Mr. Maxwell, of the Maxwell companies had been found unfit to be a director. Unfortunately in 1971 that this characterisation was assigned to him there was no legislation that could have disqualified him from director. As a result of this 550 million pounds went missing due to terrible management. 

In Polly Peck scandal, the fruit to electronics multinational company founded by Nadir, collapsed with £1 billion of previously undeclared debts. Asid Nadir, the Chief Director of the company, faced 66 charges of theft amounting to £34 million.

These scandals made the Cadbury Committee to recommend the inclusion of at least three non - executive directors and that the positions of Chairman of the Board and Chief Executive Officer (CEO) of these companies are held by two different individuals ⁹.

In the next most important reports, the Greenbury Report ¹⁰ and the Hampel Report ¹¹, the issue of remuneration was dealt with and a revise of the previous recommendations took place with result of having principles of good governance rather than explicit rules.

The Combined Code ¹² consolidated the principles and recommendations of the Cadbury, Greenbury and Hampel reports. It was formulated in 1998 and revised in 2003 following the publication of the Higgs report ¹³. The Code is divided into two sections. The first outlines principles of best practice and their supporting provisions for companies, while the second does the same for shareholders. This Combined Code was reviewed again in 2006.

The Combined Code (2006)
The Combined Code was another effort to improve the already existent system of guarding the benefits of the actors involved in a company and it is a combination of all the previous efforts. It addresses different aspects of the board structure, the internal management and a series of the best possible ways to improve corporate governance for listed PLC's.

Separation of the chairman and the managing director
According to the Combined Code the places of the Chairman and the managing director has to be held by different people, with clearly distinguished roles between them so that there can be a better control of their actions. Of course these two places can be hold by the same person but the reasons why have to be explained. In addition it is easier to have abuse of power if these two important places are held by the same person, as in the case of Polly Peck. Asid Nadir had all the power on his hands, as a result no one could check him and he easily abused it, creating the ‘Polly Peck scandal’.

Remuneration
In the Combined Code the issue of remuneration is also dealt with. There has to be a transparent and formal policy for the remuneration of the directors and also there has to be a remuneration committee consisted from non – executive directors that will fix the remuneration of each individual director. The annual report as well of the company has to include the remuneration policy. In the ‘Tyco Scandal’ ¹⁴ the Chairman of the company was found to be involved in using lots of company’s money to buy homes and rare artworks for the executives. "At least for the last five years, Mr Kozlowski, the chief director, has systematically abused his position and caused Tyco to expend funds for his personal benefit" it was stated in the report that was composed after the revealing of the scandal.

Appropriate experience needed
In the Combined Code there is no clear statement for the need of a director that has the appropriate experience, like the London Stock Exchange does. It does, though, mention that the board of directors has to be of a sufficient for the company size and the skills and the experience for the management of the company have to be adequate. If there is any change at the board, states the Code, that should happen without causing any problem to the running of the company ¹⁵. Furthermore it suggests the existence of a Nomination Committee that would help in the choosing of new board members. It recommends that the director has to be provided with the appropriate training, when he is initially appointed, according to the needs of the company. The use of non- executive directors is again mentioned as a way of improving the internal management by providing new ideas and giving more effective advices, making sure that the appropriate procedures are followed and that the executives are effectively prepared, as they will have independent board members who will criticise their effort and abilities to run effectively the company.  The board has to be with at least two non- executives, if it is a small company or up to half the board of directors for the bigger companies.

These are and can be regarded as good recommendations as in the Maxwell scandal, as seen before, if the director was disqualified because he was unfit there would not have been a scandal, as in the Wyevale company, where an inappropriate director and two non- executive directors were removed by the non- executive directors. In Frison company, the non- executives helped in the taking of a better financial judgement ¹⁶.

Audit Reports
The Combined Code requires that the listed company should have an audit committee that is going to be composed from at least three non- executive directors that would review the reasons and the results of the directors’ actions and make sure for the independence and objectivity of its auditors. That is an effort to prevent auditing frauds, as the one in ‘Enron’ scandal, where a seemingly successful company found to be sustained mostly by institutionalized, methodical, and creatively planned accounting fraud. In the Worldcom scandal, it was found that many of the board members and auditors were involved in the creation of non accurate audit reports that were not showing properly the internal audit transfers ¹⁷.

Are the non- executives a good solution?
The non- executive directors are directors without additional managerial positions in the company. They were first regarded as a solution to the corporate governance problems and to the continuing scandals by the ‘Cadbury Committee’ and they continue to be used as a solution from the Combined Code.

Thought there has been a criticism on if actually the non - executives are a good solution. The non- executives have to be independent but there is always a question on whether they can be independent. The appointment of the non- executives is usually done by the executives and the shareholders, from a ‘pool’ of non- executive directors that are recommended by other fellow executive directors; they are from the same educational, social and business environment as the executives and they sometimes have been already executive directors previously. That will obviously make it difficult for them to scrutinise the decisions of the executives and challenge them, as they already have a ‘friendly’ relationship with the executives.

Furthermore the non- executives are dependent on the information that they are provided by the executives and with not challenging or asking questions , because of the relationship they have it will be difficult, if not impossible to reveal a scandal that may be taking place. Even if they want though they cannot scrutinise in detail the information as the non- executives have places in many companies and to be able to examine the affairs of a company needs lots of time and ability to check the course of the company daily. That makes them ineffective as without the appropriate and detailed information and the time to deal with each company, it is reasonable that they are not able to conduct adequate control over the company’s business.

Their liability as well, even if in the Company Act 1985 has regarded it as the same with the executives, in the Combined Code it is not regarded the same in comparison with the workload, the time and the information they actually have access to. That makes the non – executive directors to be more lenient towards their obligations regarding and the remuneration they get. Their payment is not in the same level as this of the executives. Moreover they have little accountability towards the shareholders.

General Review of the Combined Code
It seems that according to companies and investors the code has a broadly beneficial impact ¹⁸. It proved better standards of governance in general, the 'comply or explain' approach is working fairly well, as the companies can be judged by the quality of the explanations they give. Furthermore it is necessary to continue to have under review the correctness of the 'comply or explain' work, which seems to be dealt this the according necessity. There is, as well, a positive difference in the quality of disclosure by companies, even if there is still space for improvement as is commented by investors and observers. Generally the Combined Code has been very well accepted.

Though it has to be argued that the Combined Code is too detailed and it needs to become more flexible as flexibility is essential for corporate governance. Also flexibility will give the chance to other companies that do not have for example non- executive directors or employees to apply the Code. At the moment it seems to be irrelevant for these companies. It has to be argued as well that non- executive directors might not be that useful, as seen above, and therefore more different ways have to be examined and applied for the prevention of scandals. On the other hand, even if the Code is very detailed, it still does not cover some important parts that interest the investors. Additionally the Combined Code as it is not legally binding it cannot be so easily enforced if the company does not want to comply.  In the case that a company decides instead of complying to explain, the mechanism is not working that perfectly and it has to be more properly observed and maybe there have to be measures where if the companies are not complying and the explanations are not  good enough, to make them comply ¹⁹.

Thought there has been a criticism on if actually the non - executives are a good solution. The non- executives have to be independent but there is always a question on whether they can be independent. The appointment of the non- executives is usually done by the executives and the shareholders, from a ‘pool’ of non- executive directors that are recommended by other fellow executive directors;  they are from the same educational, social and business environment as the executives and they sometimes have been already executive directors previously. That will obviously make it difficult for them to scrutinise the decisions of the executives and challenge them, as they already have a ‘friendly’ relationship with the executives.

Conclusion
According to the companies and the people involved the Code seems to be effective and if not extinguished the possibilities of scandals it has at least minimized them. The revised Code has been improved significantly but still has to cover some issues and to solve the problems that seem to exist. Even if it is not legally binding it still has been adopted by most of the companies and with the help of the London Stock Exchange it is not easy to avoid these principles. Of course the ‘comply or explain’ principle gives the chance to the companies to avoid the Combined Code but still they are judged by their explanations, from the investors and all the official bodies. Therefore if their explanations are not adequate enough a company will not be able attract investors and would be under the continuing control of the London Stock Exchange and all the other bodies involved in business.

Bibliography
J. Dine & M. Koutsias (2007), Company Law, 6th edition, Palgrave Macmillan, United Kingdom

J.H. Farrar & B.M Hannigan (2002), Farrar’s Company Law, 4th edition, Butterworths Publications, United Kingdom.

Hannigan Brenda M, Company Law, 5th edition, Butterworths Publications, United Kingdom.

Andrew Hicks, S.H. Goo (2004), Cases and materials on company law, 5th edition, Oxford University Press, Great Britain

L. Sealy and Sarah Worthington (2007), Cases and materials in company law, 8th edition, Oxford University Press, Great Britain

Articles
Alistair Alcock(2007), The Rise and Fall of UK Quoted Company Regulation, JBL Oct, 733-758

Stephen Copp(2003), Corporate Governance: change, consistency and evolution: Part 1&2, 14 International Company and Commercial Law Review 65-74 & 14 ICCLR 115-128.

Dedman, Elisabeth B.(2002), The Cadbury Committee Recommendations on Corporate Governance - A Review of Compliance and Performance Impacts, International Journal of Management Reviews, 4, p.p 335-352

Alan Dignam(2000), Exporting Corporate Governance: UK. Regulatory Systems in a Global Economy, 21 Company Lawyer 70-76

Simon English (18/09/2002), Tyco Chiefs ‘revelled in corporate greed’, Telegraph Newspaper, New York

Simon English (09/07/2002), WorldCom scandal ‘uncovered a year ago’, Telegraph Newspaper, New York

J. Hughes(1996), The Greenbury Report on directors’ remuneration, I. J. of Manpower, 17( 1) p4 – 9

Erik Ipsen, December 10th 1991, How to Account for Maxwell Scandal , Herald Tribute International Business

Andrew Keay(2007), Company Directors Behaving Poorly: Disciplinary Options For Shareholders, JBL, Sep, 656-682

Sarah Kiarie(2007), Non-executive directors in UK listed companies: Are they effective?, International Company and Commercial Law Review, 18(1), 17-23

J. Parkinson & Gavin Kelly (1999), The Combined Code on Corporate Governance, The Political Quarterly, 70 (1), 101–107

Sophia Wesley-Key(2007), Companies Act 2006: Are Cracks Showing in The Glass Ceiling?, ICCLR 18(12) 422-429

WebPages
http://www.frc.org.uk/ , Financial Reporting Council's

http://www.ecgi.org/codes/documents/hampel_index.htm, European Corporate Governance Institute

http://www.fsa.gov.uk/, The Revised Combined Code (2003)& (2006)

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¹ J. Parkinson & Gavin Kelly (1999), The Combined Code on Corporate Governance, The Political Quarterly, 70 (1), 101–107
² 1992
³ 1995
⁴ 1998
⁵ 2003
⁶ http://www.frc.org.uk/documents/pagemanager/frc/Combined%20Code%20June%202006.pdf
⁷ 1992
⁸ Erik Ipsen, December 10th 1991, How to Account for Maxwell Scandal , Herald Tribute International Business
⁹ Dedman, Elisabeth B.(2002), The Cadbury Committee Recommendations on Corporate Governance - A Review of Compliance and Performance Impacts, International Journal of Management Reviews, 4, p.p 335-352
¹⁰ J. Hughes(1996), The Greenbury Report on directors’ remuneration, I. J. of Manpower, 17( 1) p4 - 9
¹¹  http://www.ecgi.org/codes/documents/hampel_index.htm , European Corporate Governance Institute
¹² The Revised Combined Code (2003) http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf
¹³ Paul Burke (2003), The Higgs Review, Company Lawyer , 24(6), 162
¹⁴ Simon English (18/09/2002), Tyco Chiefs ‘revelled in corporate greed’, Telegraph Newspaper, New York
¹⁵ principle A3
¹⁶ Sarah Kiarie(2007), Non-executive directors in UK listed companies: Are they effective?, International Company and Commercial Law Review, 18(1), 17-23
¹⁷ Simon English (09/07/2002), WorldCom scandal ‘uncovered a year ago’, Telegraph Newspaper, New York
¹⁸ http://www.frc.org.uk/ , Financial Reporting Council's 2007
¹⁹ Association of investment Companies Submission