7.1.2 Hampel Committee

In November 1995, the Hampel Committee was set up by the Financial Reporting Council and was asked to review the implementation of the Cadbury Report and in addition the Greenbury Report (Hampel Committee 1998). The Greenbury Committee was established by the Confederation of the British Industry (CBI). In 1995 it published a report on directors’ remuneration in response to both the size of directors’ remuneration packages and their inconsistent and incomplete disclosure in the annual report (Greenbury Committee 1995: 9-12). The Greenbury Report contains a code of best practice in executive remuneration, which is not elaborated upon further in this study.

The Hampel Committee has reviewed these reports, their implementation and the view of the parties involved. In order to do so, the Hampel Committee submitted a questionnaire and received 140 reactions. Moreover, the Hampel Committee members took part in over two hundred individual and group discussions. Finally, they received 252 responses to their preliminary report (Hampel Committee 1998: 5-6). The Hampel Report discusses corporate governance in general, the role of directors and shareholders, remuneration issues and accountability and audit.

The Hampel Report extends the recommendations of the Cadbury Committee for several issues. Both committees agree on the usefulness of NEDs on the board, but the Cadbury Report does not give any recommendations about the relative number of NEDs. The Cadbury Committee only recommends including at least three NEDs, whereas the Hampel Committee extends this by recommending that NEDs should not make up less than one third of the board. This is necessary because of their importance for corporate governance, and with less mass on the board the Hampel Committee believes that it is difficult to be effective (Hampel Committee 1998: 3.14). A majority of these NEDs should be independent according to both committees. The definition given by Cadbury is endorsed by Hampel, because the Hampel Committee believes that more precise criteria are not practicable (1998: 3.9). The board should decide whether a NED is considered to be independent and the board should disclose in the annual report which NEDs are independent.

Hampel followed Cadbury’s recommendation to separate the CEO and chairman, but remarked that a number of companies have combined the two roles successfully (1998: 3.17). Even when there is a separate CEO and chairman, the Hampel Committee foresees situations in which another contact point is desirable. Therefore, the Hampel Report recommends appointing a senior independent NED, who can be contacted if there is a need to contact the board while bypassing the chairman or CEO (1998: 3.18). This is a different view of the senior NED from the Cadbury Report, who is supposed to function as a contact point for board members only. The senior independent NED in the Hampel Report is a contact point for all the constituents of the company.

Furthermore, the Hampel Committee addresses the discussion about a unitary board versus the dual board structure and the maximum tenure and age. Despite some enthusiasm for the dual board structure, Hampel mentions that overwhelming support exists for the unitary board structure. According to Hampel a unitary board structure is flexible by offering the option to delegate certain tasks to board committees or operational decisions to an executive committee (1998: 3.12). Hence, there is no need to offer the possibility to establish a dual board structure. With regard to a maximum tenure and age, the Hampel Committee considers the recommendation of the Cadbury Committee to appoint NEDs for a specified period of time to be a good initiative. The Hampel Report extends this recommendation to include all the members of the board and sets the interval for re-election at a maximum of three years (1998: 3.21). Other proposals for an age limit of 70 years and a maximum number of ten years in office for NEDs would be inappropriate, according to the Hampel Committee (1998: 3.22). Although Hampel does not exclude the possibility that effectiveness and objectivity may decline with increasing age and tenure, the report stresses that a deeper understanding of the company is a valuable asset as well. Therefore, the Hampel Committee does not make any recommendations in this field.