Cadbury Rules – Definition

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Cadbury Rules Definition

Cadbury Rules are guidelines or recommendations on corporate governance that were specified by the UK’s Cadbury Committee. These rules were submitted in 1992 with the aim of raising the standards of corporate governance as well as financial reporting and auditing in organizations.  There are standards expected from management bodies in charge of corporation governance and professionals that perform financial reporting and auditing roles.

Cadbury rules are recommendations designed to raise the confidence of what is expected from those involved in these duties. Despite that these recommendations are not compulsory, all publicly traded corporations in the UK are expected to adopt them.

A Little More on What are the Cadbury Rules

Cadbury rules were submitted as ‘Code of Best Practices’ in 1992, it represents the UK Corporate Governance code popularly called “the Code.” Corporations in the UK are expected to oblige by these set of principles established to raise the level of confidence in financial reporting and auditing, and corporate governance.

The Financial Reporting Council oversees this corporate governance code and ensure that publicly listed companies on the London Stock Exchange follow them. According to the Financial Services and Markets Act of 2000, public listed companies are required to report how they comply with the code and in cases on non-compliance, they should also state reasons why this is so.

Different reports and opinions on good corporate governance were synthesized, integrated and refined to birth the Cadbury rules known as ‘the code.’ The publication of the ‘Code of Best Practices’ by cadbury Report in 1992 was the first attempt to enact the code as an attempt to raise the level of confidence in financial reporting and auditing. This objective is clearly stated by setting out what is perceived to be the respective responsibilities of those involved in corporate governance, financial reporting and auditing.

The report of the UK’s Cadbury on Corporate governance bordered on three major recommendations, these are;

  • The chairman of a company should be separate from the CEO.
  • A minimum number of three non-executive directors should be part of the company’s board, two of them should have no ties whatsoever with any executive.
  • An audit committee of the board should composed of non-executive directors.

When the Cadbury committee gave these three recommendation, it arose some controversies such that the code did not reflect around ‘contemporary best practices’ and that the code is only practised by limited companies. There were further recommendations that the practices should be extended across listed companies but the Cadbury committee emphasized that the code was not meant to serve the purpose “one size fits all”.

Although, it was stipulated that companies are not mandated to comply with the code or principles, a company that fails to comply is required to explain the reason for non-compliance. These principles on corporate governance were added to the Listing Rules of the London Stock Exchange in 1994.

In 1995, further recommendations were added as changes to the existing principles in the cadbury Code. They were given in the Greenbury Report by a study group or committee set up by Richard Greenbury. These further changes are that;

  • Long-term performance-related pay should be given to directors and this should reflect in the company’s financial statements.
  • each board should have a remuneration committee.

These recommendations and changes are to be reviewed in an interval of three years according to Greenbury. In 1998, Ronald Hampel, who chaired a review committee gave a Hampel Report suggesting that Cadbury principles and Grenbury principles should be integrated to form a ‘combined code.’ Contained in the Hampel report are the following;

  • All rumerations including pensions paid to directors and executives should be disclosed in the company’s financial statements.
  • The chairman of the board should be the “leader” of the non-executive directors.
  • Institutional investors should consider voting the shares they held at meetings, though rejected compulsory voting.

Following the Hampel report in 1998, a mini-report was produced by the Turnbull Committee in the following year. The Turnbull report recommended that directors should be responsible for internal financial reporting and auditing controls in an organization.

Aside from the report by the Turnbull Committee, there were other reports that rolled out what non-executive directors are expected to do, these reports include the Higgs review and Derek Higgs report.

After the 2008 financial crisis, a report was also produced by the Walker Review. This report focused on recommendations for all companies but most especially, the banking industry. The Financial Reporting Council issued a new Stewardship Code in 2010. It also issued a new version of the UK Corporate Governance Code.

References for Cadbury Rules

Academic Research

  • The future for governance: the rules of the game, Cadbury, S. A. (1998). Journal of General Management, 24(1), 1-14. This paper explains the rules of the game and that what can be the future for governance. The United Kingdom leading corporate governance reflects on current developments. There is just one responsibility of business organizations to utilize their resources and perform those activities which increase the profits as long as they remain in the rules of the game. The author developed his report on this domain and presented it to corporate governance.
  • Cadbury Schweppes: the ECJ significantly limits the application of CFC rules in the member states, Meussen, G. (2007). European taxation, 47(1), 13-18. This paper makes an analysis of the vital judgment of the ECJ (European Court of Justice) in the latest Cadbury Schweppes case about the CFC (Controlled Foreign Company) legislation compatibility with EC law. Particularly, the author highlights the related law in the United Kingdom, the facts of the case and the decision of ECJ. Finally, he comments on the implications and impacts of the judgment of the ECJ. The ECJ considerably limits the CFG rules application in the member states.
  • CFC legislation, passive assets and the impact of the ECJ’s Cadbury-Schweppes decision, Ruf, M., & Weichenrieder, A. (2013). In the decision of Cadbury Schweppes on 12th Sep 2006, the European Union Court of Justice (ECJ) decided that the United Kingdom’s CFC (Controlled Foreign Corporation) rules applied to subject low-taxed passive earnings of foreign affiliates to United Kingdom Corporate Tax (UKCT) implied an infringement of the establishment’s freedom. As a result, several European Union countries, including Germany, modified their legislation. This article makes a discussion on the impacts of the ECJ ruling on the passive assets allocation in German multinationals. The authors use firm-level data to find evidence for a great preference for low-tax EU countries than non-EU countries.
  • The new agenda for ICGN, Cadbury, A., & Millstein, I. M. (2005). International Corporate Governance Network Discussion Paper, (1). This paper evaluates the new agenda for the International Corporate Governance Networks (ICGN). It throws light on how much we have promoted the performance of corporate governance and how successful we are in setting an agenda for its reform programs moving forward. After ten years of debate, it was found that governance matters are interconnected. Most of the problems addressed in this debate imply a broader constituency as compared to only corporates and their investors.
  • Director Remuneration: a gap in the disclosure rules, Ward, M. (1998). Corporate Governance: An International Review, 6(1), 48-51. The listed firms of the United Kingdom should reveal information now in the accounts and yearly report as an addition to the requirement of the legislation. This has been recommended on Directors remuneration by the Greenbury Committee. This article discusses that a loophole is still present in the disclosure of certain remuneration packages for every executive director. The remuneration for external directorships can directly be paid to the concerned director or to the releasing firm. A number of yearly reports are silent on this but there is no listing or legal obligation for the disclosure by the firm going to release them where the director gets the payment.
  • Norwegian CFC Rules after the Cadbury Schweppes Case, The, Passalacqua, A. B. (2008). Intertax, 36, 379. This paper highlights the Norwegian CFC (Controlled Foreign Corporation) rules developed after the case of the Cadbury Schweppes. The objective of this study is to analyze the response of the Norwegian government to the ECJ (European Court of Justice) decision. The decision of Cadbury Schweppes is analyzed to provide the main guideline under the legal background. It is not just Norway that amends its legislation of CFC in response to the Cadbury Schweppes case. The author presents a comparative review to show the implementation of wholly artificial criterion by some of the member states of the EEA.
  • Audit Committees: practice, rules and enforcement in the UK and China, Chambers, A. D. (2005). Corporate Governance: an international review, 13(1), 92-100. It is the market (not the regulator) which tries to enforce the principles of the United Kingdom Combined Code on listed companies. Though audit committees feature in the United Kingdom Code only at the discretionary provisions’ level, nearly all listed firms have audit committees. The audit committees responsibilities in China and the UK are, to a greater extent, the same, although United Kingdom guidance gives a major role to their audit committees w.r.t operational control and risk management. The regulator and the market, in China, are aligned with the state more closely that is more effective in determining compliance with their CGC (Corporate Governance Code).
  • Principles, not rules: thanks to codes drafted under Mervyn King, South Africa has taken the lead in defining corporate governance in broadly inclusive terms, Barrier, M. (2003). Internal Auditor, 60(4), 68-72. This paper considers certain circumstances in the country and investigates how corporate governance can be approached in the new South Africa. Instead of stressing on only the financial prospects of governance, like the 1992 Cadbury Code of the US, the author develops an integrated approach which takes the stakeholders as a whole who are connected to the company, and how the board will deal with them. Corporate governance has a dynamic nature. It does not remain still. There are many international developments from the time of this publication. The firms, throughout the world, have learnt how to report on the basis of integration and address the economic as well as social problems.
  • Disclosure and civil penalty rules in the US legal response to corporate tax shelters, Shaviro, D. (2008). In Tax and corporate governance (pp. 229-255). Springer, Berlin, Heidelberg. This research examines 2 aspects of the legal response by the United States to corporate tax shelters: the disclosure rules and the rules of the civil penalty. While the former does not impose unfair burdens, their benefits to the IRS are limited by the steering difficulty in the twin dangers of over-disclosure (creating data overload for the Internal Revenue Services) and under-disclosure (allowing taxpayers to hide reportable transactions, close cousins). The main flaw in the rules is excessive trust in the good faith of taxpayers. The author argues for civil penalties of ‘no-fault’ with penalty insurance acting to address any issues about the sanctions’ proportionality levied on risk-averse taxpayers.
  • Corporate governance: some theory and implications, Hart, O. (1995). The economic journal, 105(430), 678-689. This paper suggests a theoretical framework for the debate of corporate governance and some implications useful to the policy as a guideline. The author goes through the conditions under which the problems of corporate governance are relevant. Then, he applies the analytical framework to the case of a public firm. These issues create in a company when there are 2 conditions there. The first is that there exists a conflict of interest or an agency issue which involves the organization members. These members may be owners, employees, managers or consumers. The second is that the agency issue cannot be handled through a contract due to the transaction costs.

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