Page 135 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Corporate Governance and Ethics

Notes 6.1.2 The Greenbury Report 1995

The committee published its report on 17th July 1995 and its key themes were: ‘accountability,
responsibility, full disclosure, alignment of Director and shareholder interests, and improved
company performance’ (Directors’ Remuneration: Greenbury 1995). The Greenbury Committee
was formed after widespread public concern over what were seen as excessive amounts of
remuneration paid to directors of quoted companies and newly privatised companies. ‘Recent
concerns about executive remuneration have centered above all on some large pay increases
and large gains from share options in the recently privatised utility industries. These increases
have sometimes coincided with staff reductions, pay restraints for other staff and price increases…
there have also been concerns about the amounts of compensation paid to some departing
directors’ (Greenbury Report, 1995:9). The Greenbury Committee were keen to ensure that
directors’ remuneration was linked to company performance, and the committee did not seem
to see a problem with high levels of pay per se, as long as they were justified on the basis of the
company’s financial results.
A key concern should be to ensure, through the remuneration system, that director’s share the
interest of shareholders in making the company successful. Performance-related remuneration
can be highly effective in aligning interest in this way. In many companies, therefore, there will
be a case for a high gearing of performance-related to fixed pay. But there are two constraints on
this. First, there will usually be a level of basic salary below which it will not be practicable to
go. Second, the requirements and priorities of companies vary. The gearing, which suits one
company, may be quite unsuitable for another (Greenbury Report 1995, 38).
The Greenbury Report also addressed the problem of departing directors whose performance
had not been noticeably successful, but who still manage to live the company with generous
compensation for loss of office.

Compensation payments to directors on loss of office have been a cause of public and shareholders
concern in recent times. Criticism has been directed at the scale of some of the payments made
and at their apparent lack of justification in terms of performance. Some payments have been
described as ‘rewards for failure’ (Greenbury Report, 1995, 45). When the Greenbury Report was
published in 1995 it dealt specifically with the question of directors’ remuneration and many of
its recommendations were developed from the earlier Cadbury Report. The Greenbury Report
recommended that the remuneration committee should consist exclusively of non-executive
directors (the Cadbury Report had recommended wholly or mainly non-executive directors).
These non-executive directors should have no personal financial interest, no potential conflicts
of interest arising from cross-directorships and no day-to-day involvement in running the
business.

6.1.3 The Hampel Report 1998

The Hampel Committee was created in 1995 to review implementation of the findings of the
Cadbury and Greenbury Committees. The Hampel Committee published its report in 1998.
Most of the recommendations in the earlier reports were then published in 1998 by the London
Stock Exchange as The Combined Code: Principles of Good Governance and Code of Best Practice. The
Combined Code (although redrafted since its original publication) is the currently applicable
code of best corporate governance practice for UK listed companies. The recommendations of
Hampel were along similar lines and on similar issues to Cadbury.
An important contribution made by the Hampel Report was the emphasis attributed to avoiding
a prescriptive approach to corporate governance improvements and recommendations. The
Cadbury Report highlighted the importance of focusing on the spirit of corporate governance
reform, and Hampel reinforced this by stipulating that companies and shareholders needed to

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