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ETHICS & CORPORATE GOVERNANCE

BM055-3-2

Cadbury Committee

Learning Outcomes
1. Appreciate the relevance and practical application of business and professional ethics in the working world; 2. Explain how corporate social responsibility and corporate governance relate to ethics; 3. Highlight the main ethical issues relating to the natural environment.
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4. Recognise ethical issues and propose solutions to these issues. 5. Convey an enhanced awareness of the role of business and professional ethics in financial reporting;

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Cadbury Report
The Cadbury Committee issued a range of recommendations for good corporate governance in a Code of Best Practice. Many of these recommendations applied to UK listed companies were aimed at improving financial reporting, the effectiveness of the board, the rights of directors in getting information & their accessibility to information particularly to the services of the company secretary
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The Code should be voluntary but companies would be required to explian in their annual reports and accounts the extent to which they had complied with the Code and the reasons for any noncompliance. It was also suggested that external auditors should be asked to review this statement of compliance as part of their annual report to shareholders

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London Stock Exchange introduced a requirement into its listing rules that listed companies should include such as statement of compliance or noncompliance in their annual report and accounts. Institutional investors and investment banks also brought pressure on companies to adopt the Cadbury Code recommendations and many London Stock Exchange companies changed their conduct in compliance.
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Major provisions of the Cadbury Code


BOD-that the control over the company should be exercised collectively by the board of directors as a whole. There should be no domination of the board by any single individual, such as the chief executive officer, chairman or by a small group of executive directors. It would be necessary for the board to meet regularly

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The Chief Executive and the Chairman - separating the powers of the CEO & the chairman of the board, the Code argued the importance of separation of such positions so that the same person did not carry out the functions of chief executive who is in charge of the executive mngt & bus. operational matters. The chairman of the board is responsible for leading the board of directors in decision and policy making.
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Independent Director
The Code made specific recommendations that non-executive directors should bring independent judgment and experience to the deliberation of the board that executive directors on their own may lack. Executive directors service contracts and remuneration, the Code recommended that this be disclosed in the annual reports and accounts
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Enhancement of Audit Committee


communicate with both the internal audit department and the external auditors on issues pertaining to the review of the interim and annual financial statements before submission to the board for their approval and tabling before shareholders at the annual general meeting. The audit committee should include at least three non-executive directors and should have written terms of reference and their functions explicitly expressed.
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the Cadbury Committee viewed that audit committee is the key board committee that should review Financial Reporting and Audit

The financial reports and statement of accounts should be reviewed by the audit committee which has the task of communicating with both the internal and external auditors

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The board is to be responsible to present a balanced and understandable assessment of the companys financial position to the shareholders. And also to include in the annual accounts and report a statement about the companys ability to continue as a going concern.

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The Cadbury Committee also expressed the view that the board should be responsible for the entire system of internal control in the company and therefore accountable to the shareholders for risk management generally, not just the quality of financial reporting and financial controls.

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