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Indeed, we make the point that all the checks and balances within the corporate governance system have the ultimate aim of controlling and monitoring company management. The corporate governance mechanisms cannot prevent unethical activity by top management, but they can at least act as a means of detecting such activity before it is too late.
When an apple is rotten there is no cure, but at least the rotten apple can be removed before the contagion spreads and infects the whole basket. We aim to explore the various checks and balances, and mechanisms by which good corporate governance ensures successful business and social welfare maximization in the rest of this book. Enron: a case study in corporate governance failure [43] Questions for reflection and discussion 1 Read a selection of newspaper articles and academic writings on the collapse of Enron.
Do you think that the Enron management behaved in an unethical manner? If not, which mechanism do you consider is the most important? This is really what corporate governance is about. Do you think they are all of equal importance? Which approach do you prefer? Discuss the reasons for your answer. Chapter 3 Corporate governance reform in the UK Aim and objectives This chapter considers the process of corporate governance reform within the UK environment.
Introduction In Chapter 2 we considered the fall of Enron and the case it presented for corporate governance reform. Although Enron has initiated further changes to UK corporate governance, a process of reform has been under way for a decade. This does not imply, however, that inherent corporate governance problems do not persist in UK business.
Directors continue to be rewarded for poor performance and even failure, as we discuss in Chapter 4. Nevertheless, the UK is generally acknowledged as a world leader in corporate governance reform.
This was not a predetermined strategy but the result of a growing interest in corporate governance issues within the board- room, the institutional investment community and the Government. It was in part a reaction to scandals, such as the Maxwell case see Illustration 3.
Maxwell built up his corporate empire over time, but took on too much debt and pursued fraudulent activities in order to survive. The empire was founded mainly on two companies which were publicly quoted: Maxwell Communication Corporation and Mirror Group Newspapers, as well as a large number of private companies. One problem was the lack of segregation of positions of power.
Robert Maxwell was both chief executive and chairman of Maxwell Communication Corporation from to He also held the positions of chairman and chief executive in Macmillan Publishers from to Such undivided control is now considered to represent inarguable corporate governance weakness.
A second problem was that although Maxwell appointed non-executive directors to the board, they did not appear to perform a truly useful and independent function. The non-executive directors were reputable people and helped to give the company an aura of respectability. Furthermore, the audit function did not perform effectively.
The auditors were in a position to observe movements of funds from the pension fund to the company, but did not seem to notice such activities in practice.
Although there is an acknowledged expectations gap in auditing, this sort of audit failure is not acceptable. Clearly, trustees are responsible for pension fund monies and should have been in direct control of transferral of funds between the pension fund and the sponsoring company.
So why did they allow money to be moved from one source to the other? However, the Maxwell case raises another important issue that is central to corporate governance, that of ethics.
Nevertheless, Maxwell rose from the ashes and went on to set up another business concern. But leopards do not change their spots. How can ethics in the boardroom be monitored and controlled? Corporate governance reform in the UK [47] corporate governance reform in the UK and is the forerunner of numerous policy documents, principles, guidelines and codes of practice in the UK and elsewhere.
As we saw in Chapter 1 there are a number of ways in which a shareholder the principal can monitor and control company management the agent including: shareholder voting at AGMs; one-to-one meetings between a representative fund manager and an investee company director; the takeover mechanism; shareholder resolutions; the threat of divestment. We also commented that institutional investors in the UK have an important role in monitoring company management.
As we discuss in Chapter 5 the potential role that institutional investors can play in corporate governance has been empha- sized in UK policy documents and accompanying codes of best practice since the early s. However, shareholder activism is not the only way in which company management are controlled and governed. There were some spectacular cases of company failure and corporate abuse of power in the late s and early s, which created an incentive for corporate governance reform in the UK.
One example is summarized in Illustration 3. We now introduce each of the initiatives within the agenda of UK corporate governance reform. We do not at this point delve into the detailed content of each report and set of recommendations, as they are covered in later chapters when we discuss individual initiatives in more depth. The Cadbury Report As a result of public concern over the way in which companies were being run and fears concerning the type of abuse of power prevalent in the Maxwell case inter alia, corporate governance became the subject for discussion among policy makers.
In this sense the formation of the Cadbury Committee may be seen as reactive rather than proactive. The Cadbury Report and its accompanying Cadbury Code derived their names from Sir Adrian Cadbury, who chaired the committee that produced them. The Cadbury Code was not legally binding on boards of directors. The result of this was that all companies publicly quoted on the Stock Exchange had to state in their annual reports whether or not they had implemented the Code in all respects.
If they had not complied with the whole Code, then they were compelled to make a clear statement of the reasons why, detailing and explaining the points of non- compliance. Three general areas were covered by the Cadbury Report and its accompanying Code, namely: the board of directors; auditing; and the shareholders. The Cadbury Report focused attention on the board of directors as being the most important corporate governance mechanism, requiring constant monitoring and assessment.
However, the accounting and auditing function were also shown to play an essential role in good corporate governance, emphasizing the importance of corporate transparency and communication with shareholders and other stakeholders. There is no denying the substantial impact that the Cadbury Code has had on corporate Britain and, indeed, on companies around the world.
There have been endless cases 1 The Yellow Book provided the requirements of the Stock Exchange with which all listed companies had to comply. This has now been superseded by the overarching responsi- bilities of the FSA. Corporate governance reform in the UK [49] Illustration 3. One chief criticism was on his remuneration. Indeed, remuneration and compensation packages have attracted much attention in the UK, especially among minority shareholders.
This was seen as unfair by many of the shareholders who attended and caused an outcry at the time. The case is especially memorable because a pig named Cedric, after Cedric Brown, was paraded outside the company during the AGM.
Fat Cat incidents such as the notorious case of British Gas in the mids see Illustration 3. Shareholders in general have become ex- tremely concerned about unseemly pay increases for company directors. All these boards giving themselves big pay rises even when they fail. Ultimately, we are partly responsible because we have got some votes and some shares. The issue of executive remuneration and the impact of the Greenbury Report, as well as its successor, is considered in detail in Chapter 4.
The Hampel Report was published in and the Com- bined Code arose from it. This Code brought together all the issues covered in Cadbury and Greenbury.
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. This is typical of the UK approach to corporate governance and accounting as opposed to the US style of legislation, the rules-based approach.
Indeed, the report stated: Good corporate governance is not just a matter of prescribing particular corporate struc- tures and complying with a number of hard and fast rules. There is a need for broad principles. This is how the Cadbury and Greenbury committees intended their recommendations to be implemented. Too often they believe that the codes have been treated as sets of prescriptive rules. The shareholders or their advisers would be interested only in whether the letter of the rule had been complied with—yes or no.
The Hampel Report, , p. Indeed, there is a widely held perception that the report represented the interests of company directors more than those of shareholders and that much of the positive impact from the Cadbury Report was diluted by the Hampel Report. The Hampel Report clearly felt the need to redress the balance between shareholders and stakeholders and made strong statements on these issues.
For example, the Hampel Committee stated that: The importance of corporate governance lies in its contribution both to business prosperity and to accountability. In the UK the latter has preoccupied much public debate over the past few years. We would wish to see the balance corrected. Public companies are now among the most accountable organisations in society. We strongly endorse this accountability and we recognise the contribution made by the Cadbury and Greenbury committees.
UK companies should not be complacent. Accountability is one area where the corporate success of the future will be measured. Generally, we believe that Hampel was misguided in this area and in its perception of public, corporate and shareholder sentiment. As discussed in Chapter 1, there is a strong demand for greater accountability and there is also a growing perception that companies that are accountable to a broad range of stakeholders display better long-term performance.
Although further research is required to demonstrate this link unequivocally, evidence is emerging that demon- strates that the approach of the Hampel Report was outdated and retrograde in this respect. These issues are revisited throughout the book, but especially in Part III.
An important contribution made by the Hampel Report related to pension fund trustees, as pension funds are the largest group of investors. Pension fund trustees were targeted by the report as a group who needed to take their corporate govern- ance responsibilities more seriously. In particular, pension funds and their trustees were encouraged by the Hampel Committee to adopt a more long-term approach to institutional investment, in order to avoid short-termism for which UK companies are notorious.
Pension funds were highlighted as the main culprits in placing short- term pressure on their investee companies. We deal with these issues in more detail in Chapter 5. In this area, the Hampel Committee clearly picked up on and developed the spirit of the original Cadbury Report. Generally speaking, the Combined Code readdressed all the issues raised in previous reports, bringing the major points together and concluding with basic principles and provisions.
It then detailed a series of provisions that represented ways in which the general principles may be achieved. The second part dealt with institutional shareholders and included three sections covering: E 1.
Share- holder Voting; 2. Dialogue with Companies; and 3. Evaluation of Governance Disclosures. We can immediately see that all of these issues were dealt with in Cadbury and in Greenbury. Under each main principle there was a list of provisions, giving details of how the Principles may be attained. The impact of the Combined Code and its predecessors on UK company directors and institutional investors has been far-reaching, especially in the area of investor relations and shareholder activism.
In a decade, corporate attitudes toward their core investors have been transformed from relative secrecy to greater transparency. We summarize the fall of Barings in Illustration 3.
Read it to grasp a feel for the type of corporate governance problems that may arise in companies unless the necessary checks and balances are in place. As a result, the Turnbull Committee was formed which published a report at the end of the s devoted entirely to these issues.
He took them out speculatively, but the Japanese market turned the opposite direction from that expected at the time. This was against generally accepted principles, as it gave him too much control—it is similar to the problems of the same person acting as chief executive and chairman of a company. Indeed, lack of segregation of these roles is seen as one of the main failings leading to the fall of Barings.
Here there is a parallel between Leeson and Maxwell see Illustration 3. Leeson then started to take bigger risks. A large French client wanted to buy options contracts on the yen for a ridiculously low price, and in order to keep the client Leeson made the deal.
It resulted in a massive loss which he transferred to the secret errors account. He made loss after loss against the yen, following the Kobe Earthquake in Japan, which rocked the stock exchange. He could not make up the losses. He eventually ran up a debt in yen options of about million dollars. He thought they would solve it and never considered the bank may collapse.
Still, if the bank had exercised the correct level of control, the situation could not have arisen. There was a clear failure of the audit function.
The director in Singapore was keen on cost savings and did not want to pay out more salaries. He instead insisted that the staff were young and inexperienced and that Leeson could train them as they worked.
This was another loop- hole in the system. By the time the London centre of Barings realized that there was a serious problem it was too late. The reasons for the fall of Barings and the Leeson affair can be summarized as:. On the part of Nick Leeson: unethical behaviour, trading unlawfully. Since this affair and others there have been big moves to improve risk management within the banking sector.
The corporate governance initiatives that have been adopted by companies in the UK to improve accountability and transparency have also been taken on by banks.
Disclosure of risk-related information is immensely important for banks, as it is for other companies. The report provided an overview of the systems of internal control in existence in UK companies and made clear recommendations for improve- ments, without taking a prescriptive approach. The Turnbull Report was revolu- tionary in terms of corporate governance reform.
It represented an attempt to formalize an explicit framework for internal control in companies. The USA, with its Treadway Commission , paid attention to internal control, but the Turnbull Report has focused worldwide attention on this aspect of corporate gov- ernance.
The Turnbull Report sought to provide an explicit framework for reference, on which companies and boards could model their individual systems of internal control. The aim was to provide com- panies with general guidance on how to develop and maintain their internal control systems and not to specify the details of such a system.
We examine the elements of the explicit framework for internal control presented by the Turnbull Report in Chapter 6. The Higgs Report Although the Cadbury Report and the Hampel Report stimulated substantial improvements in corporate governance in UK listed companies, certain areas have been highlighted for further examination.
For example, one pension fund director we interviewed suggested that: There is a feeling that somebody ought to exercise constraint on boards. The general recommendations included a greater proportion of non-executive directors on boards at least half of the board and more apt remuneration for non-executive directors. One important practical recom- mendation of the Higgs Report was that one non-executive director should assume chief responsibility as a champion of shareholder interests.
We return to the detailed implications and impact of the Higgs Report in Chapter 4. The Smith Report As an accompaniment to the Higgs Report, another review was commissioned by the UK Government in response to the Enron scandal, inter alia, with the aim of examining the role of the audit committee in UK corporate governance.
This Report was published in January Improvements in this area represent one way of keeping a check on the production of reliable and honest accounts. Never- theless, some have suggested that the Report has not gone far enough. This would be counterproductive as not all companies would be in a position to comply.
We discuss the detailed recommendations of the Smith Report in Chapter 6. The language, not the message, was altered.
One of the main targets of the redrafted Code was to readdress executive remunera- tion, as the new version of the Code focused on forcing companies to avoid excessive remuneration which displayed little relation to corporate performance. The revised Code also placed an emphasis on shareholder activism as a means of furthering corporate accountability and transparency.
We reproduce the most up-to-date draft of the Combined Code in the Appendix p. We now consider the reg- ulatory environment within which the UK codes of practice have been introduced. The Cadbury Report emphasized the importance of adopting an approach that encouraged compliance with a volun- tary code of best practice. They would be encouraged to comply in spirit rather than in letter Cadbury Report, , p.
This is an approach that has continued to the present day. It is not, however, an approach that has been adopted at a global level. The choice by many countries to adopt a more legalistic and statutory approach to corporate governance reform rests in part on the legal framework already in place in the countries them- selves. The USA, as discussed earlier, prefers a more regulated, rules-based environment.
In the UK, companies disclose details of non-compliance and provide a general compliance statement. For example, the Corus annual report of provided the following information: The board believes that during the period it has complied with the provisions of the Code of Best Practice with the following exceptions: i The reduction of notice periods for directors to one year or less.
This is a temporary situation, arising as a result of the resignation of the joint chief executives in December In the FSA assumed control of company oversight, taking over the powers of the stock exchange listing rules. The boards of smaller listed companies who cannot, for the time being, comply with parts of the Code should note that they may instead give their reasons for non-compliance.
In particular, the appointment of appropriate non-executive directors should make a positive contribution to the development of their businesses. The Cadbury Code made no distinction in its recommendations between larger and smaller listed companies. Hampel discussed whether a distinction should be made but concluded it should not, stressing that high standards of governance were as important for smaller listed companies as for larger ones.
GAAP concluded that each company should be able to determine its corporate governance procedures in the best interests of the company. The Com- bined Code should not be prescriptive, but smaller quoted companies need to inform their shareholders of any ways in which they are not complying with the Code. Communication is the most important issue. In the Annual QCA Smaller Company Analyst Survey showed that the number of institutional investors prepared to invest in UK smaller quoted companies was declining for the second consecutive year.
They suggested alternative recommendations that were more feasible. Ranking corporate governance initiatives As we can see from our above discussion, a broad range of corporate governance initiatives have arisen from the corporate governance policy documents and codes. However, there is little evidence relating to the relative importance of these initia- tives. Are they all of equal importance to investors, for example? Solomon et al.
They examined which corporate governance initiatives were considered to be of most importance to UK institutional investors. Table 3. The investors were asked the extent to which they agreed that each of the various initiatives had led to an improvement in cor- porate governance.
In second place came the splitting of the chief executive and chairman role. Accountability by the investors themselves concerning their own role in corporate governance received less agreement as declaration of voting 3 The respondents selected a score from 1 strongly disagree to 7 strongly agree.
Corporate governance reform in the UK [61] policy by institutional investors and greater transparency in their voting, as well as limitations on proxy voting, were ranked toward the end of Table 3. The institu- tional investors who responded clearly required company management to be accountable, but were not as interested in discharging their own accountability. The Enron case presented in Chapter 2 involved serious weaknesses in the areas of non-executive directors, power held at the top, and the audit function.
Similarly, the Barings case see Illustration 3. Other recent cases of corporate failure, such as WorldCom, were also attributable to weaknesses in the accounting and audit function. Why is good corporate governance important? However, is there really evidence to support these initiatives?
There are certainly those who are opposed to the ongoing process of corporate governance reform. Many company directors oppose the loss of individual decision-making power, which comes from the presence of non-executive directors and independent directors on their boards.
They refute the growing pressure to communicate their strategies and policies to their primary institutional investors. Such concerns need to be noted and debated. The Cadbury Report emphasized the importance of avoiding excessive control and recognized that no system of control can completely eliminate the risk of fraud such as in the case of Maxwell, Illustration 3.
This is an important point, because human nature cannot be altered through regula- tion, checks and balances, as discussed in previous chapters. Branson was the primary owner of his Virgin company from its creation. After some years, he was persuaded to gain a listing on the London Stock Exchange as this would provide him with valuable funds for his varied business ventures and endless new projects.
However, the regular trips to the City of London to meet with institutional shareholders and discharge accountability to his shareholders cramped his style of business management. He withdrew from the stock market as soon as he could in the mids! These criticisms cannot be ignored. They show, for example, that institutional investors agreed strongly with the Hampel view that corporate govern- ance is as important for small companies as for larger ones.
Lastly, the institutional investors perceived a role for themselves in corporate governance reform, as they agreed that the institutional investment community should adopt a more activist stance. This is all encouraging. Corporate governance reform in the UK [63] Table [3. Indeed, it has been shown that US companies with weaker corporate governance structures in- dicated by substantial agency problems perform less well than companies with better corporate governance structures see, e.
Lens an American investment institution experimented with the link between corporate governance and corporate performance in its approach to institutional investment. This fund was set up as a vehicle for collective action. The fund was invested in companies with acknowledged weak corporate governance structures. Using extensive shareholder activism, the investee companies have been forced to improve their internal corporate governance, which has resulted in sub- stantial increases in share valuation.
This has led to excess returns to portfolio investment, well above the average market indices. Recently, Lens has joined forces with a major UK institutional investor, Hermes, and has set up a similar fund in the European market, which is also succeeding in achieving substantial excess returns.
Chapter summary In this chapter we have considered the development of policy documents and codes of practice for corporate governance in the UK, focusing on the work of the Cadbury Report, the Greenbury Report, the Hampel Report, the Turnbull Report, the Higgs Report and the Smith Report. It is important at this stage to note that corporate governance reform is not solely a UK issue but has taken centre stage in the international arena.
Further, there have been several attempts to produce internationally acceptable standards of corporate governance at a global level, as we discuss in Part II. However, in the next chapter we turn to a discussion of the UK agenda for corporate governance reform in more detail, by examining the essential role played by boards of directors in corporate governance.
Questions for reflection and discussion 1 Analyse and debate the extent to which you consider the initiatives aimed at corporate governance reform in the UK represent an improvement to the system of corporate governance.
Do you think that Richard Branson was right in his concerns that corporate governance reform slows down decision making and creates time-wasting, unnecessary bureaucracy? Chapter 4 The role of boards in corporate governance Aim and objectives This chapter examines the role of boards of directors in corporate governance, mainly from a UK perspective.
Introduction In Chapter 3 we discussed the series of UK policy documents and codes of practice aimed at reforming corporate governance, initiated by the Cadbury Report The Cadbury Report reviewed the structure of the board and the responsibilities of company directors, making recommendations for best practice.
The report recommended that company boards should meet frequently and should monitor executive management. For a company to be successful it must be well governed.
Garratt drew on his experiences on company boards as well as his experience as an academic to highlight problems within boards and make recommendations for corporate governance improvements in this essential area. Further, there should be a clear division of responsibility at the top of the company, ensuring this balance of power and authority.
In the Higgs Report re-emphasized the importance of splitting the chairman and chief executive roles in UK listed companies. However, Higgs recommended a change from Provision A. The Combined Code, , p. Research into split roles According to the academic literature, splitting the role of chairman and chief execu- tive is a corporate governance initiative that can reduce agency problems and result in improved corporate performance because of more independent decision making Donaldson and Davies, In Chapter 1, we considered that agency problems could be lessened by mechanisms that aided monitoring of boards in order to align shareholder and management interests.
However, it has been suggested that such improvements may be a case of wishful thinking and that the evidence is not persuasive enough to engender splitting the roles in practice Daily and Dalton, However, high turnover of directors may not always involve replacing poor managers with better ones. There may be ulterior motives behind such replacements, which do not result in better people on the board. Basing their analysis on these assumptions, Dahya et al.
Dahya et al. This implies that the CEO usually also the company chairman wields excessive power and has ultimate control over decision making.
Indeed, statistical evidence has shown that corporate performance and value were a decreasing function of board size Yermack, For most companies, the CEO and chairman tend to be the same person. There is an emerging consensus opposing this practice, as expressed in the following statement: Some of the Sarbanes—Oxley rules for bosses and directors may be too cumbersome or prescriptive. A more useful idea is a toughening of checks and balances for bosses.
The role of boards in corporate governance [69] Best of all, American companies should adopt the common European practice of sep- arating the jobs of chairman and chief executive, entrenching a check at the heart of their corporate governance systems. The corporate board, with its mix of expertise, independence, and legal power, is a potentially powerful governance mechanism. Byrd and Hickman, , p. It stipulated that non-executive directors should provide an independent view on corporate strategy, performance, resources, appointments and standards of conduct.
Indeed, the Report stated that at least two of the minimum requirement of three non-executive directors should be independent. Several ways of ensuring the independence of non-executive directors have been suggested. Another way was to encourage non- executive directors not to take part in share option schemes as this could also compromise their independence.
The Cadbury Report also stressed that the appoint- ment of non-executive directors was an important decision that should be taken via a formal selection process using a nomination committee , again strengthening their independence. This is an issue which has become increasingly problematic as more non-executive directors have been deemed necessary on boards.
The Hampel Report readdressed the role of non-executive directors but did not increase the desirable number of non-executives on the board. The balance of non-executive and executive directors recommended by the accompanying Com- bined Code remained unchanged from the number suggested in the earlier Cadbury Code.
Both Codes stipulated that non-executive directors should comprise not less than one-third of the board. This represented the UK equivalent of the Sarbanes— Oxley Act , as it provided a response to the problems highlighted by Enron. The consultation document was published in June and requested responses from interested parties such as the Stock Exchange, major institutional investors, the Institute of Directors. The terms of reference for the Higgs Review were set out in this consultation document.
The terms of reference also stated that, from the perspective of UK productivity performance, progressive strengthening of the quality and role of non-executive directors was strongly desirable.
Lastly, the terms of reference stated that the review should: g build and publish an accurate image of the status quo relating to non-executive directors; g lead debate on non-executive director-related issues; g make appropriate recommendations to the Government, or other relevant parties.
In keeping with the typical UK approach to corporate governance reform, we can see from the Higgs consultation document that the government intended to maintain a voluntary environment in the area of non-executive directors, avoiding regulation or legislation. As astute deal-maker at the Warburg investment bank, an engaging dinner companion and comfortably rich,.
The sort of chap that British governments down the years have got to run committees to defuse political bombs with some sensible proposals. In many quarters this call was answered by discon- tent, as we can see from Illustration 4. Another section of the Higgs Report was devoted to relationships with share- holders and contained a number of far-reaching and controversial recommenda- tions, emphasizing that: The role of the non-executive director includes an important and inescapable relationship with shareholders.
Higgs Report, , p. Such a linkage should be synergistic, as the combination of the two mechanisms should result in a much stronger monitoring instrument than when they function separately. The role of boards in corporate governance [73] Illustration 4. Similarly, Henley abandoned a similar course for similar reasons.
One reason certainly seems to be a feeling among board members that NEDs have no need for training. They are ready for the job in hand and have the adequate experience already. Forcing them to take courses and attend training sessions may simply be a time-wasting exercise, detracting from their main aim of serving on company boards. This attitude does, however, display a certain level of arrogance. To what extent can anyone ever claim to know everything about what they do?
There is always more to learn. Such amateurism is a thing of the past in most areas of business today, as top management tend to be trained better than they have ever been. NEDs need just as much encouragement to take courses and receive training as anyone else with an important, responsible role to play in business.
Clearly, this is another way of augmenting the monitoring role of both non-executive directors and institutional investors. And that would be a madhouse. Tassell et al. For example, a poll of company directors in the Top 30 listed companies, immediately after the publication of the Report, indicated that the majority viewed this recommendation as potentially divisive and destructive in the boardroom Tassell, 31 January There was a general attitude among people we interviewed that such insurance would represent a waste of resources as it would simply involve executives insuring themselves against events that would never transpire.
Recent research has shown that only 95 directors of the 2, in the FTSE held two or more posts on boards Tassell et al. It seems that, although the Higgs Report was conducted partly in response to such corporate governance failures as Enron and was therefore partly reactive in nature, the recommendations contained in Higgs were far-reaching and therefore more proactive than its predecessors.
This was probably the reason why the Report caused such a stir in UK companies! We now turn to considering evidence from the academic literature concerning the usefulness of the non-executive director function.
We look now at a selection of empirical evidence from the academic research in favour of the presence of non-executive directors on boards, as well as evidence against it. Evidence in favour From an agency theory perspective, non-executive directors may be perceived as playing a monitoring role on the rest of the board.
There is a substantial quantity of academic literature indicating that boards of directors perform an important corporate governance function and that non-executive directors act as necessary monitors of management e. Our own research has shown that a high degree of importance is attached to the non-executive director function by the UK institutional investment community. We surveyed a large sample of investment institutions and the respondents ranked the presence of non-executives on boards as the most important corporate governance mechanism recommended in successive policy documents see Table 3.
Without the monitor- ing function of non-executive directors it would be more likely that inside executive directors would be able to manipulate their position by gaining complete control over their own remuneration packages and securing their jobs Morck et al.
Further, this may in turn be related to a greater proportion of non-executive directors on company boards. Their 4 See Solomon and Solomon for a discussion of conceptual frameworks that may or may not challenge the status quo. Higgs was invited by the Government to review the role and effectiveness of non-executive directors in UK corporate governance.
A poll of company directors in the top 30 listed companies, immediately after the introduction of the Report, showed they saw some recommendations as potentially divisive and destructive in the boardroom Tassell, 31 January The aspect of Higgs that caused the greatest stir was the recommendation that there should be a senior independent director a SID to champion shareholder interests.
Accompanying this concept was the suggestion that this shareholder-friendly non-executive director should attend the meetings between executives and their institutional investors. Higgs considered that non-executive directors should be more closely involved in the engagement process and that their monitoring role would be enhanced through greater contact with core investors.
Fears that this could be divisive represent exactly the executive attitudes that Higgs sought to change. Resistance to such recommendations highlights a lack of align- ment between executives and their shareholders at the heart of corporate decision making, which is reminiscent of an agency problem.
If more shareholder representation is seen as divisive, this could be a sign that directors are still far away in their objectives from their shareholders. This was clearly a radical monitoring device that would prevent cronyism in appointments. Representatives from both the CBI and the Institute of Directors ID expressed serious concerns that this and other recommendations could be divisive.
Again, if they were no agency problems inherent in businesses, this type of knee-jerk reaction would be less likely. Another recommendation of the Higgs Report was that the largest UK listed companies should not appoint retiring chief executives as chairmen, as this could encourage boardroom complacency.
Companies generally ignored this recommendation, with John Sainsbury being an outstanding example in their appointment of Sir Peter Davis in March Flanagan, However, the director of the voting agency, Manifest, considered that removing Sir Peter, at the same time as the chairman was retiring, would create too much instability in the company.
Such apathy and complacency are symptomatic of an in- herent corporate governance problem. Strong reactions to the recommendations of the Higgs Report from the institutional investor community were voiced at the conference of one of the largest investor groups, the National Association of Pension Funds NAPF , in Edinburgh in March Tassell, 14 March b.
The amount of discus- sion and the level of dissatisfaction were considerable. But change is never easy: no pain no gain. Accountability will only improve if changes are made.
Indeed, Weisbach found evidence that the turnover of chief executives was more strongly related to company performance in companies characterized by a majority of non-executive directors.
The presence of outsiders on company boards is also thought to be positively related to corporate control activity, as outsiders can facilitate takeovers, thereby activating the takeover constraint that disciplines company management Agrawal and Knoeber, Again, this endorses the presence of non-executive, outside directors on boards.
Some evidence endorses the position of executives in preference to non-executives on boards. Using event study methodology, the paper reported a positive share price reaction to the announcement of inside director appointments.
There is also a perception among some academics and practitioners that the involvement of non-executive, outside directors on boards can damage corporate governance by reducing entrepreneurship in the business and by weakening board unity. The Economist, 13 June Indeed, there is a potential for the appointment of non-executive directors to result in more cronyism and a more comfortable network of close ties and cosy relationships between directors of leading companies.
The presence of outside directors on US boards represented one of seven mechanisms used to control agency problems examined by Agrawal and Knoeber Their conclusion was that companies had too many outside directors on their boards. This is not encouraging evidence for sup- porters of the UK Higgs Report. Agrawal and Knoeber, , p. However, their results are interesting and beg further investigation. They emphasized the interdependence of various control mechanisms, such as the non-executive director function, and took account of such interrelationships in their analysis in order to avoid spurious results.
Too great a proportion of insiders or outsiders can swing the balance in the wrong direction, for example: If there are too many insiders, the management team can become excessively cohesive. This sets up a very dangerous situation because the directors tend to derive their judge- ment only from colleagues. On the other hand, the addition of many outsiders brings new information and ideas and allows the entire board to make sound decisions.
Companies need strong, knowledgeable insider directors as well as independent outsiders in order to represent stockholders most effectively. Alkhafaji, , p. Such corporate governance mechanisms as the presence of independent, non-executive directors are necessary to improve the quality of governance in listed companies.
Another question addressed in the academic literature asks whether or not non- executive directors who are alleged to be independent are truly independent, or whether their independence is debatable. One of the major problems highlighted in the literature arises from the role played by executive directors in appointing non-executives.
Short also debated this issue, concluding that far more research was required. Who wants the job anyway? As in many other areas of UK industry, recommendations for improvements, greater accountability on remuneration and many other factors are making such positions as that of a non-executive director less attractive to prospective newcomers.
As we mentioned above, this was a concern detected in the Cadbury Report and covered in the Higgs Review. Indeed, there appears to be a growing reluctance to become a non-executive director The Economist, 31 October This is also the case in the USA where people are less and less inclined to become involved in companies as either inside or outside directors, given the potentially frightening repercussions from Sarbanes—Oxley.
If non-executive directors are meant to bring impartiality into the boardroom, the question for legislators is the extent to which legal liability, including criminal sanctions, should attach to the role of non-executive directors.
Such organizations as PRONED act as a type of professional dating service, matching prospective non-executive directors to suitable company boards. As we can see from this textbook, corporate governance is a far broader subject than that! However, the contentious issue of executive remuneration and the problems of setting pay at appropriate levels is an extremely important aspect of corporate governance.
The role of boards in corporate governance [81] Illustration 4. Just a few tasty morsels of pay to chew on. The ABI expressed similar concerns. These are just a random handful of cases. A cursory glance at the media would reveal many more.
The problem is by no means restricted to the UK. What do you think about these levels of pay? This gives an indication of the salaries earned by senior board members. A scatter of contentious salary packages is collated in Illustration 4. Further, some people have felt that such high rewards have not been accompanied by high performance.
The Greenbury Report may be seen as reactive rather than proactive in nature, as it responded to public sentiment. The Greenbury Committee consisted of leading investors and industrialists and the chairman was Sir Richard Greenbury.
Also, full disclosure of remuneration and other related information was raised as requiring attention. One important aim of the Committee and of the earlier Cadbury Code of best practice was to create remuneration committees that would determine pay packages needed to attract, retain and motivate directors of the quality required but should avoid paying more than is necessary for this purpose.
This was an initiative intended to improve transparency in this area. Clearly, the intention was to prevent executive directors from designing their own pay packages. The need for an independent remuneration committee has been highlighted in the academic literature as an essential mechanism to prevent executives writing and signing their own pay cheques Williamson, The revision of the Combined Code in July , in the wake of the Higgs review on non-executive directors, incorporated a series of provisions aimed at preventing excessive executive pay Tassell, 22 July The new draft aimed to avoid the upward ratchet of pay levels that do not correspond to performance.
Research into executive remuneration There is a vast quantity of literature relating to executive remuneration. This paper made a policy recommendation that US boards should split the roles of CEO and chairman, in line with the recommendations of Cadbury, inter alia. Generally, the more control the CEO has over appointing other board members, the higher their remuneration tends to be Lambert et al. With respect to remuneration committees, Bostock found that the recom- mendation to establish remuneration committees produced a speedy response, with a large number of UK company boards establishing committees comprising relatively few executive directors.
The author debated that not only was remuneration harmonizing at an inter- national level but it was also following US levels, which are traditionally higher than in other parts of the world. The paper reviewed the data on the remuneration of US executives, concluding that the pay packages of US chief executives were far more lucrative than those of executives in other countries around the world.
The paper discussed a number of market-oriented drivers for executive pay convergence and linked this evolution to the steady convergence of global corporate systems toward a market-based structure: a more market-driven global corporate governance system may be characterized by more lucrative executive pay structures. One of the main issues raised was disclosure of executive remuneration.
Moreover, shareholders would be able to see the remuneration that incentivizes executives to maximize shareholder value. Indeed, equalization of executive remuneration is likely to occur at a higher, rather than a lower level.
However, the actual powers shareholders gained by such a change were perhaps less far-reaching than one might imagine. The vote is only advisory. In other words, the company does not have to take any notice of the outcome, should it prefer not to.
Shareholders do not have the opportunity to vote on the remuneration of individual directors. Further, some institutional in- vestors have reacted negatively to the proposal, as they see it as a means of passing the buck from directors to shareholders, forcing them to discharge accountability and responsibility rather than the companies, for pay levels Mayo and Young, This greater level of shareholder involvement should result in improved accountability and more reasonable remuneration packages.
Indeed, this was a recommendation of the Cadbury Report, which stated that: The weight of responsibility carried by all directors and the increasing commitment which their duties require emphasise the importance of the way in which they prepare them- selves for their posts. Cadbury Report, , p. Hampel also highlighted the necessity of training for directors on relevant new laws, regula- tions and evolving business risks.
As suggested in Cadbury, there is an important role for business schools to play in providing high-quality training and corporate governance education for company directors.
A sympathetic viewpoint Having reviewed the many areas where corporate governance reform has targeted boardroom practice, we may wonder if such changes have started to discourage people from entering the boardroom.
Corporate reputation, built up over decades, can be destroyed overnight. Although the Act applies directly to the USA, it has severe implications for directors in other countries who may have any business connections with US companies. From a business viewpoint, the patient is the corporation, the doctor is the board, and the shareholders are the family that sues the board for malpractice.
Every detail of pay packages is disclosed in the annual reports—no stone is left unturned. However, even if remuneration has been curbed, or at least observed, it is not a pittance. Perhaps direc- torships should be put out to tender? This is a proposal that would be unlikely to hold water in the City but one that, in a watered-down version, may be worth considering, as companies and shareholders strive for greater accountability and transparency.
Chapter summary In this chapter we have considered the role of boards of directors in corporate governance, focusing mainly on UK listed companies. We have looked at the evolu- tion of their role and the evolution of the UK codes of best practice in corporate governance and their accompanying policy documents, from the Cadbury Report in to the Higgs Report in We have highlighted the growing importance of the role of independent non-executive directors in corporate governance, as they provide an independent view on corporate strategy and help to attain a balance of power.
Lastly, the contentious issue of executive remuneration has been discussed, as has the empirical evidence linking excessive pay packages to weak corporate governance structures and poor corporate performance.
In the UK, corporate governance has a sound base, but there is always room for improvement. The academic research in this area has pro- vided mixed results on all issues relating to boards of directors.
Nice, simple plans. Take your pick. You can use a hack saw for this, or as long as you use aluminum track, you could cut this on a miter saw as well. Be careful if you have a SawStop — I read somewhere that metal may cause the mechanism to engage and ruin the blade and the cartridge. Not sure if that is true, but I never wanted to test it…. Well, if the saw blade on a SawStop encounters conductivity above a certain amount, it triggers the trip.
However, there is a simple override with a key when cutting wet wood treated for example or other conductive material. In the picture it looks like you screwed the track on the fence but not on on the table surface. Is that correct?
Also on the fence, did you use a cut downed closet flange bolt? The T-track is screwed to the fence and the other two pieces of T-track are screwed to the table surface. I did use closet flange bolts from the local hardware store as part of the hold-downs for the fence. They work nicely. One more question. What is the purpose of the notch on the top of the fence? The purpose of the notch is two fold. It lets my built-in light on the drill press illuminate the work area a bit better.
It also helps if I need to drill a hole really close to the fence. In that situation, the chuck can hit the fence, not allowing the bit to lower into the work piece.
With the cut-out at the top of the fence, I can get the chuck a bit lower. Sometimes I even need to elevate the work piece with a scrap board to keep the chuck from hitting the fence in those tight situations. I picked up my hose at an auto parts store. The idea is just to center the bolt inside the pvc so the nut tightens equally on the rim of the pvc.
Hi, thanks for posting this. Did you have to modify your drill press lowering lever to make this fit? Or am I missing something?? It could be that the feed levers on the drill press are longer than most. I do know that most feed levers unscrew from the hub mechanism and that you could shorten them but cutting them back.
The other alternative is to trade your press in on another model that would work now that you can see what tolerances are needed between the drill press table and the levers.
I have the same problem. When I attach this beautiful! As I look at pictures of drill presses I see very few which do not have the crank behind and level with the deck.
If you move the table far enough forward for the crank to work the fence is right under the drill bit. I have the perfect solution. Build a tool storage section under the bottom center section of the table that will raise the table high enough to clear the handle.
I had a similar problem but the solution turned out to be rather simple. The essentially acted as a giant washer and gave me the additional clearance needed. You might try to loosen the table elevation clamp and swing the table out of the way. Adjust the drill bit and swing the table back. On most Craftsman drill presses, the elevation handle tend to interfere with the table. One other solution is to modify the table and fence to allow a notch on the right hand side to permit the handle to operate.
Good luck. Thank you for commenting. Another reader sent this in via email. We will pass this information along! Hi guys, thanks for the response!
Maybe your way would work too? Thanks everyone. I want to make this table and want to be able to fix the problem as I have the same drill press.
Rockler, no doubt has great products, along with high prices. I have enjoyed the video and made modifications to it. When you have to save up to buy screws to hold pieces of wood together, you have to consider every way to save money.
God Bless you all and be careful, I just cut my wrist on a jig saw. There is not a separate PDF, as everything that you should need for this project is embedded directly into the article itself. Let us know if there is information missing that you need for this build. The cast iron table on my drill press has only one hole in it. Would I need to drill more? If so, how would I go about doing that?
Can you tell I am a new drill press owner? The metal table that comes with most drill presses has several slots or holes to fasten a wood platform to it using bolts, nuts and washers. If your drill press has a factory metal table without holes, you could drill some or get creative with ways to clamp or trap a wooden platform to the table. ZD: My factory table has only one hole, at one of the corners.
I am thinking of adding some short boards to the bottom of the custom-made table to form a frame that slips over the factory table. Should be a fun project. This is project is set-up with step by step instructions, and at this time, does not come with any printable material.
If you have any questions on this project, please let us know and we would be happy to assist you. Hope that helps a bit. If you want to print this, in Windows, use Ctrl-p on the keyboard and this will pop up the print process which will send the whole article to your printer.
The first picture shows them flush in the back. Hi, Kim. It is not necessary to cut the semi-circle in the table. It is on the fence so that the fence can easily be slid off the rear of the table without interference from the post.
While the fence and table are in use, they are both forward of the post. Useful piece — I was enlightened by the analysis! Does someone know where my company might be able to obtain a template KE P11 document to fill in? How do I mount the shop made table to a circular drill press table. Hi Aaron. Thanks for your questions. The mounting process should be the same regardless of the shape of the table.
As the author describes, he bolted a piece of scrap plywood to the stock table on the drill press, then he used screws to attach this auxiliary table. In terms of squaring the table to the drill press, first look to see what adjustments are available on the drill press itself, then use shims underneath the auxiliary table to make any additional adjustments that are necessary. Good luck with the project!
I made the Drill Press Table … a wonderful addition in my shop. All 4 threaded inserts align with the slots in the drill press table, but I normally only use two at a time. Quick detachment, especially when I often switch from wood work to metal work, and prefer to NOT get oil and metal residue on the lovely wooden table.
I built this table from your plans…. Thanks for the project!! I just completed this cool table to go on my new Wen Drill press. To attach it to the table I sat the table on the metal plate and centered it with the laser in the middle of the replaceable plate, then traced the 4 oval slots on the bottom of the wood table and inserted Rockler T-Track and used 4 bolts in the track to hold it down.
This makes it easy to remove in the event I ever need to. I built your drill press table and it works quite well; Much better than my previous one. GREAT plans! I made some changes which may interest you: 1. I was afraid the insert-removal finger hole would get in my way. Therefore I drilled a 1 inch hole in the lower plywood layer beneath the intended insert. A dowel and a light tap from beneath the table pops the insert out.
While assembling the upper and lower plywood layers after the insert hole had been cut , I laid one on the other and drew the outline of the insert on the lower lawyer.
I extended the drawn lines a couple of inches as guides and covered the insert area with blue masking tape. I glued up the area as you did but without worrying about getting glue where the insert would eventually go.
Once the upper and lower layers were glued up and dry, removal of the tape revealed a clean no-glue zone. I have to remove the woodworking table quite often for metal work and pulling or replacing the mounting bolts was a pain.
No one is going to look under there! Two clamps were used so that only one turn is required of each to tighten or loosen the clamps allowing quick and easy removal of the table.
Second thoughts: I should have offset the insert an inch either right or left. I thought of this too late to incorporate it. I also had some ideas of my own to add. It also provides a nice space to store bits and small parts. Make the top of the riser box extra wide to allow securement of the new table to it.
Carriage bolts attach the bottom of the riser box to the metal table via the slots already there. Incise the tape with a sharp knife along the margins of the hole with the boards aligned, then remove the excess before gluing. After gluing, peel-away the tape to leave a clean bottom. If you use screws instead of nails to hold the pieces together during the glue-up, they can be aligned temporarily and separated again as needed here, and below.
Cut extra inserts from the same stock as the main boards to ensure identical thickness when a new insert is eventually needed. Bolts can be inserted up through slots cut in the flanges of the top of the riser box to securely attach the box to the table. Make sure the T-nuts are located outside of where the T-tracks will be inserted in the top.
Insert bolts up into the T-nuts during the gluing to ensure glue stays out of the threads. Wooden bow-clamp cauls can ensure adequate pressure for gluing without pressing up on the temporary bolts. Thanks for some excellent suggestions. Hi Marc, The clamp hold-downs for the fence can be brought back to the rear edge of the fixture. The cut-out for the fence assembly allows you to approach the shaft and then remove the fence from the backside if necessary.
I am sorry you are having trouble downloading the plans for this table top. Please try hard refreshing the page or try using a different browser. If you are still having trouble downloading the plans please contact our customer service team at and they will assist you. Why is it there and what does it do? When the insert gets full of holes from the drill bit penetrating your project piece you can replace it with a fresh one.
Also, if you are using a sanding cylinder as pictured at the top of the article, you can remove the insert and lower the sander below the top surface allowing you to sand right to the bottom of the workpiece, as well as allowing you to use a fresh part of the sander.
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Fellin
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Simpoticniy_Tvar
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