2.3 Formal Acts and informal Codes

Another element of the corporate culture in the UK is the practice of directing corporate boards by informal codes, beside facilitating company Acts.

The Companies Act of 1985 was quite short and simply provided that managers were accountable to the board and the board was accountable to shareholders. In 1998 the Secretary of State for Trade and Industry, Margaret Beckett, commissioned an independent review of company law which was "fundamental to the national competitiveness". Its aim was to be "primarily enabling and facilitating", leaving a lot of freedom to entrepreneurs to draft their own rules in articles of association. This resulted in the Companies Act 2006, which is more extensive than the Companies Act of 1985.

An overview of the main sections of the Companies Act 2006 is attached as "Annex UK Acts". The sections that will be discussed in detail in this study are "the duties of directors", in sections 170-174, including the important section 172, which so clearly describes the "success of the company" and the "enlightened shareholder value" (see sub-section 2.6.3 hereof), "duty to avoid conflicts of interest" in sections 175-181 (see sub-section 2.6.6 hereof), "limiting directors' liabilities" in sections 232-239 (see sub-section 2.7.6 hereof) and derivative claims (see sub-section 2.7.3 hereof).

Although directors are dealt with there are no sections dealing with the board of directors as such. Under the Companies Act of 2006 default in performing the duties of a director may be a tort.

The position of directors is also regulated in many other laws, mentioned in the Annex UK Acts. Here I mention the Insolvency Act of 1986, the Financial Services and Marketing Act 2000, including market abuse, the Criminal Justice Act 1993, including insider dealing, the Listing Rules, the Takeover Code, the Company Directors Disqualification Act 1986, under which the court can bar a person from being a director for 2 to 15 years; there is extensive case law on this subject, including an order against all the directors of Barings for the failure to control Mr Leeson.

Informal self-regulation is a creative method especially well-suited to the English legal environment. The informal method works: after issuance of the Cadbury Code of 1992, which promoted the separation of the roles of CEO and chairman, there was criticism of the separation of the roles of CEO and chair, but 94% of the FTSE 350 companies have introduced this separation by 2007; the same thing can be said in relation to required evaluations of the board: these were criticised in 2003, but are now to be deemed correct and quite normal as many companies have found that evaluations lead to improvement in board processes and make an important contribution to succession planning. The market-based approach, as exemplified by the drafting of a Code of Best Practices for Corporate Governance under the "comply or explain" method, has many advantages:

The development started in 1992 with the Financial Reporting Council (FRC), the London Stock Exchange and the accountancy profession asking a Committee on the Financial Aspects of Corporate Governance under the chairrnanship of Sir Adrian Cadbury to consider issues in relation to financial reporting and accountability and to make recommendations on good practice in the following areas:

Although its terras of reference concentrated on accountancy matters, the committee extended its remit to include many aspects of the organization of the board of directors and the conduct of directors, despite not having been appointed by and lacking the backing of the Confederation of British Industry (CBI) and the Institute of Directors (I of D). Sir Adrian Cadbury says that although these institutions initially opposed his committee's far-reaching and wide-ranging ideas, "when I explained the ideas to their open meetings they were very good and came to support our ideas."3

As background it is useful to know that Sir Adrian, a Quaker by the way, had a wealth of management experience.4 He had been a Cadbury board member from 1958 and became CEO and later chair of Cadbury PLC, which merged with Schweppes in 1969. He subsequently resumed the position of managing director of Cadbury-Schweppes PLC while Lord Watkinson was chairman until 1975. Sir Adrian then became chairman and remained in that role until 1989. At that time Cadbury-Schweppes was one of the UK's most successful manufacturing companies.

Sir Adrian knew all about the separation of the roles of CEO and chair, the role of outside directors in strategy discussions and the evaluation and succession of boards. He also had experience in the monitoring role of outside directors after 23 years as Director of the Bank of England. Finally, he had been a supervisory director (commissaris) of the Dutch car and truck manufacturer, DAF N.V.

The development of the role of the "independent chairman", separate from the CEO, has meant a vital change as well as an important step forward in corporate governance. This step forward is now increasingly being introduced in the US and has also been included in the Dutch Act on One-Tier Boards (the "Act"). The role of the chairman therefore forms an important part of this study.

It is interesting to note how change in the UK can be promoted quite easily by persons of high quality, who are respected and have support in the City. Adrian Cadbury is an example. Higgs and Walker are other examples.

Attached hereto as "Annex 6.8 Cadbury Code 1992" is a summary of the Cadbury Code of 1992, as drafted by the Committee on the Financial Aspects of Corporate Governance.

The Cadbury Committee later monitored the general compliance and then reported annually.

The Cadbury Committee was followed by:

I have referred to the Codes and therefore also to the Combined Code and UK Corporate Governance Code as "soft law". This is perhaps misleading. At the centre of the CC6, CC8 and CG10 there is a perfectly "hard" obligation.6 The UK Listing Rules require UK-registered companies with a primary listing in the UK to disclose in their annual report the extent to which they have complied with the CC6, CC8 and CG10 and to give reasons for non-compliance (if any). Again the Walker Review reconfirrned the advantages of best practice codes.