The reform initiatives in the UK suggest that corporations are undergoing major changes in their corporate governance structures. Several studies have been conducted to determine the impact of the recommendations of Cadbury on the composition and organization of listed companies. In two early reports, Stiles and Taylor (1993a, 1993b) found that the recommendations of Cadbury were strongly supported by a majority of the top one hundred companies in the UK in 1993. A total of 98 percent had audit and remuneration committees while 86 percent had split the roles of chairmen and CEO.
Conyon (1994) examined changes in the governance structure of approximately 400 large UK corporations between 1988 and 1993. The author concluded that the overall picture was one of rapid change in the governance structure of the corporations surveyed. A total of 77 percent of the sample of listed corporations separated the role of CEO from chairman in 1993 compared to a total of 57 percent in 1987. Conyon also found that 94 percent of the corporations had a remuneration committee in 1993 (compared to 54 percent in 1988). In addition, the study indicated that the incidence of audit committees had doubled and the incidence of nomination committees had trebled between 1988 and 1993. In 1995, the Cadbury Committee published a compliance report based on the top 500 companies and a random sample of smaller companies in the UK (Cadbury Committee Report, 1995).
The committee found that 90 percent of the top one hundred companies had issued a statement of full compliance with the code between September 1993 and December 1994. Conyon and Mallin (1997:35) found a very high degree of adherence to the principles contained in the Code: audit and remuneration committees are now universally adopted by UK-boards. Moreover, Conyon and Mallin indicate that the proportion of non-executives is increasing in the UK. In addition, although the separation of the roles of chairman and CEO was not enforced by Cadbury, only 14.2 per cent of all quoted companies in the UK combined the roles of the CEO and the chairman of the board in 1995 (Conyon and Mallin, 1997). In 1992, this figure was 24.5 percent. More recently, Peasnell et al. (1998) found many changes in the governance structure of 700 non-financial companies in the top one thousand LSE corporations over the period between 1990 and 1996.
Facts 1+2 -> Board Composition: Non-executive Directors Gain Dominance in Boards and the Total Number of Executive Directors Decreases
These figures suggest a development in the attributes of corporate boards in the UK. One of the developments relates to the composition of boards. In 1995, the report of the Monitoring Sub-Committee of the Cadbury Committee indicated that the top one hundred UK listed corporations had complied with the recommendation to appoint non-executive directors to the board. According to ICMG (1995), the report indicated that 97 corporations has appointed three or more non-executive directors to their boards. Two corporations (2 percent) had appointed two non-executive directors. Only one corporation had appointed a minimum of one non-executive director to the board.
These figures have even improved since the publication of the Monitoring Sub-Committee’s survey. According to Spencer Stuart (1996g), all top one hundred listed corporations have complied with the Cadbury recommendation to have a minimum of three non-executive directors. On average, board size ranged between four and seven non-executive directors. The total number of non-executive directors has also increased in the top one hundred of listed corporations in the UK. The average number of non-executives rose from 6.1 in 1991 to 6.5 in 1996. The average number of executive directors decreased from 6.6 in 1991 to 6.1 in 1996 (Spencer Stuart, 1996g). Peasnell et al. (1998) found a similar development. The authors indicate that 45 percent of board memberships in 700 LSE-corporations were held by non-executive directors in 1996 compared to 34 percent in 1990.
Yet, it should be noted that these also include grey directorships. These are non-executive directorships held by directors who have been formerly affiliated with the corporation and/or who are having business and/or family contacts with the firm (see also paragraph 6.4.5 in chapter six of this study). The Peasnell et al. (1998) study indicates that the number of non-grey directors has reached an average of 2.4 directors in 700 LSE-corporations in 1996 and an average of 3.6 directors in the largest corporations in the sample. The authors do not indicate the number of non-grey directorships in 1990.
Fact 3 -> Board Size Has Not Changed Significantly
Despite the developments in the composition of boards, Spencer Stuart (1996g) indicates that corporate boards have not become significantly smaller during the last five years in the UK. The size of the boards of directors has changed a little from an average of 12.7 directors in 1991 to an average of 12.5 directors in 1996. The total number of non-executive directors in the top one hundred corporations was 647 directors (51.6 percent compared to 48.4 percent executive directors) on a total of 1254 executive and non-executive director positions in 1996.
These figures indicate that non-executive directors start to form a majority in corporate boards while the total number of executive directors has declined (Spencer Stuart, 1996g). These findings are supported by Peasnell et al. (1998) who found only little changes in the overall board size of 700 LSE-corporations between 1990 and 1996. Like financial institutions in the US, banking groups have on average the largest boards in the UK. Compared to the US, boards are on average nearly equal of size in the UK.
Fact 4 -> Board Leadership: There Is A Strong Support To Split CEO and Chair Roles
An increasing number of corporations also have separated the role of the chairman from the CEO role. According to Spencer Stuart (1996g), the Cadbury Code has influenced the way corporations divide the power structures at the top of corporations. The study indicates that 25 top one hundred corporations combined these roles in 1991. Only a minority of seven corporations (7 percent) continued to have a combined board leadership structure in 1996. This development suggests that directors are increasingly recognizing the need to formally separate decision management from decision control in their boards.
According to Spencer Stuart (1996g:4-5): “However, these statistics do not tell the whole story. The move towards power sharing at the top has left unresolved the issue of who is boss – an issue that job title alone does not always answer. The splitting of function and hence power between chairman and chief executive officer varies between companies. It also varies according to the strength of personalities involved, with some chairmen exercising far more influence than others over strategy, operations and the board.”
Fact 5 -> Board Committees: Total Number of Board Committee Increases
Board committees have become increasingly popular in the UK. A study by the ICA indicates that 66 percent of 202 companies had audit committees in 1992 compared to 17 percent in 1985 (ICA, 1992). Spencer Stuart (1996g:9) also indicates that board committees are growing in importance in the UK: “Boards are devolving increasing amounts of work to them, more committees are being formed and committee chairmen are increasingly being paid for extra time [. . .] Companies responded to Cadbury by forming at least two committees – audit and remuneration – composed predominantly or exclusively of non-executive directors.”
Facts 6+7+8 -> Board Committees: Audit, Remuneration and Nominating Committees Have Become Common
Spencer Stuart (1996g) indicates that the audit and remuneration committees are the most popular committees in the top one hundred corporations in the UK. Without any exception, both committees are formed by all corporations. The nomination committee is second in popularity with a total of 55 percent of the corporations having such a committee in 1996. Changes have also occurred in the composition of oversight board committees. The Cadbury Monitoring Sub Committee indicated that 90 percent of audit committees are composed of three or more non-executive directors in 1995 compared to 59 percent in 1991 (Cadbury Committee Report, 1995).
In addition to developments in the composition and the leadership structures of boards, the formation of independent oversight board committees may suggest that directors are recognizing the need to formally separate decision management from decision control in their boards.
|←Previous 7.5 About Board Committees||7.7 Summary Next→|