Accountability and the Corporate Governance Framework: From Cadbury to the UK Corporate Governance Code

Abstract

At the heart of the UK’s corporate governance framework for listed companies is the UK Corporate Governance Code, which is a voluntary code. The Code has developed over many years and its genesis can be found in the legendary Cadbury Report that was published in 1992. The Code very much depends on the comply or explain principle, namely a company must comply with the Code or explain why it does not do so. Arguably it was the need for the accountability of boards of directors that was a major factor that contributed to the development of the whole code movement in the UK. It is clear that generally speaking the accountability of boards has become an increasingly critical element in any assessment of corporate governance. But it has been asserted that one of the features of self-regulatory structures such as the Code is that they are low on accountability. This paper seeks to ascertain whether this is in fact correct as far as the code system in the UK is concerned, and particularly in the way that it has developed over the years. Allied to this the paper also seeks to assess whether the system has adequately provided for accountability of boards in the UK. To this end the paper examines the reports of the corporate governance committees of the 1990s and 2000s, the various iterations of the Combined Code, and the UK Corporate Governance Code concerning what provision is in fact made for accountability of boards. The paper concludes that while the various reports and codes that have been published in the UK from 1992 onwards say the right things and this appears to enhance accountability, the Codes have been relatively weak on accountability. Further, even though the comply or explain principle purports to foster accountability, it can prevent accountability as the decision whether to comply or how to explain is completely within the discretion of the board of directors. Hence, the board that is to be accountable is in fact the arbiter of what is accounted for and how.

Keywords: accountability, corporate governance, directors, codes

JEL Classification: G30, K20, K22, L20