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Introduction
Corporate governance is concerned with the duties and responsibilities of a company's Board of Directors in managing the company and their relationship with the shareholders of the company. In recent years concern has arisen at the way some companies have been managed (or, often, mismanaged!) and the neglect of shareholders interests. "Principal-agent" theory, in particular draws attention to the potential for salaried professional executives (as "agents") appointed by the company's shareholders (as owners/"principals") to become all-powerful and pursue their own self-interests often to the detriment of value creation for shareholders ([9] Jensen and Meckling, 1976).
This concern has led to a number of reports (prompted by the financial authorities and the government) into corporate affairs ([1] Cadbury Committee Report, 1992; [6] Greenbury Committee Report, 1995; [7] Hempel, 1998; [13] Turnbull Report, 1999; [12] Smith Report, 2003; [8] Higgs Report, 2003) resulting in the introduction of "Codes" of good corporate governance whose main provisions have been incorporated into the listing rules for companies quoted on the London Stock Exchange.
The Cadbury Report led to the first of such Codes - the Code of Best Practice and following the Hempel Report: Principles of Good Governance Code the two were combined in 1998 to establish the Combined Code . In July 2003, following the Smith and Higgs Reports a revised Combined Code on Corporate Governance was issued by the [4] Financial Reporting Council Ltd (2003) becoming applicable to all listed companies for reporting years after 1 November 2003.
Government concern and the various reports and Codes noted above have been influenced by the views of key institutional investors, in particular the [18] Institutional Shareholders' Committee (1991, 1993) and the [16] Association of British Insurers (1990, [17] 1999); and by various "academic studies" (for example, [11] Short, 1996; [2] Clifford and Evans, 1997; [14] Turnbull, 1997; [5] Gay, 2001; [3] Dedman, 2000).
The new Combined Code introduces a number of key "principles of compliance" with regard to the roles of a company's chairperson and chief executive, the composition of the company's Board of Directors and the composition of the Board's three main committees - the Nominations, Remuneration and Audit Committees. The new Code gives greater prominence to the role of non-executive directors in a company's corporate governance structures...