EecIivecorporaIegovernancerameworksEncouraging enIerpriseand markeI condence -- - - - - - - - - - - - -- - - - -- -- -- - -- - - - - - - - - - w - - - - DiculIies arise insIriving Io achievea single,globalapproach Io corporaIegovernance.There are Ioo manydeep-rooIed culIural and sIrucIuraldierences or a single approach Io workegually well in allcounIries and or allcompanies regardless o Iheir sIage odevelopmenI and business. The ICAEWhas launched Ihe iniIiaIive Io challengecommonly held assumpIions, idenIiyundamenIal guesIions, seIchallengesor uIure researchand generaIe pracIicalproposals. This will include: ConIrasIingUS and UK securiIies markeIs and howIhey impacI naIionaland inIernaIionalpolicy,invesImenI,business andaccounIing. - ConIrasIing modelso corporaIe governance inEUMember SIaIes, drawingouI poIenIialimplicaIions or uIure convergence. - - ExploringIhe dierenIsources o nance asbusinesses evolve and Ihe implicaIionsor corporaIe governance.AbouI Ihe ICAEWThe ICAEW is Ihe largesIproessionalaccounIancy bodyin Europe and has over 128,000members in142 counIriesworldwide.Since Ihe esIablishmenI o Ihe CadburyCommiIIee in11,Ihe ICAEWhas played asignicanIrole in Ihe developmenI o corporaIe governance in Ihe UK.I you would like Io knowmore abouI or and relevanIevenIs and publicaIions visiIwww.icaew.co.uk}dialogueincorpgovThe globalisaIion o capiIal markeIs and capiIalows, corporaIe scandals and newly developingeconomies are encouraging demands or consisIencyin corporaIe governance pracIices so as Io reducecomplexiIy and conusion. Dialogue can helpaciliIaIe a beIIer undersIanding o dierenIapproaches Io corporaIe governance and osIeran appreciaIion o eguivalenI sysIems.EecIive corporaIegovernance rameworksEncouraging enIerprise and markeI condenceConIacI Ihe auIhorEor more inormaIion abouI Ihis paper or Ihe iniIiaIive please conIacI:Kerrie WaringCorporaIe Governance Manager, ICAEWEmail: kerrie.waring@icaew.co.ukTelephone: +44 (0)20 720 8714AcknowledgemenIsThanks are given Io Ihose who advised on Ihe preparaIion o Ihis paper, includingmembers o Ihe ICAEWs CorporaIe Governance CommiIIee, parIicipanIs aI IheICAEW roundIable in WashingIon DC in December 200S, RoberI Hodgkinson,JonaIhan HunI, Andrew Gambier and Debbie Homersham o Ihe ICAEW, andNick Toyas o NT&A.Scope and useCorporaIe governance is a broad discipline and Ihis discussion paper is noI inIendedIo cover every aspecI o corporaIe governance. II provides inormaIion on issuesraised in Ihe -- -consulIaIion paper and generally ocuses on publiclyguoIed companies and insIiIuIional invesIors, parIicularly Ihose operaIinginIernaIionally.This discussion paper should be read in conjuncIion wiIh Ihe oIher papers in Ihe series ocused on business,invesImenI and accounIing issues and Ihe -- -consulIaIion. - Beyond Ihe myIh o Anglo-AmericancorporaIe governanceIn June 200S, TheInsIiIuIeo CharIeredAccounIanIs inEngland& Wales (ICAEW)launched Ihe iniIiaIive. IIs aim isIoexploredierences beIween US and UK corporaIe governancesysIemsand Ihe pressuresIhese dierences creaIeorinIernaIional business and invesImenI. The inIenIionis or IhisworkIo helpinormpolicy makers onboIhsideso IheAIlanIic.As parI o Ihe iniIiaIiveIhe-- - consulIaIion paper was publishedinDecember200Sand isrelevanI Io boards, invesIors, IheaccounIancy proessionandpolicy makers.II highlighIs 21 guesIions represenIing someo IhemosI challenging aspecIs o cross-border corporaIe governanceand IhecomparabiliIy o US andUK governance sysIems.As conIexI or responses Io Ihe-- -consulIaIion, our discussionpapers provideinormaIion onIhe currenI sIaIe o corporaIe governanceinIhe US andIhe UK.{ -P - B{ --- --- P --{ - --- -P- -- { ----- - P - The iniIiaIivealsoencourageson-going dialogue Ihroughace-Io-acemeeIings. AI IheICAEWIransaIlanIic roundIable inWashingIonDCinDecember200S, Ihe imporIanceo dialogue around corporaIe governanceorglobal capiIalmarkeIs was emphasisedby SECCommissioner CynIhia A. Glassman:L - -B -- - - A - - K1Apaper summarising Ihe ndings o Ihe iniIiaIiveis expecIedIo be nalisedinlaIe200. II willinclude evidenceromresponses Io Ihe-- - consulIaIion andeedbackrom ace-Io-ace meeIings androundIable evenIsonboIhsides o Ihe AIlanIic.1Remarks o SEC Commissioner CynIhiaA. Glassman aIIhe ICAEW roundIable, WashingIon DC, December 200S. --EecIive corporaIegovernance rameworksEncouraging enIerprise and markeI condenceConIenIs - - B -- - - - - - --- - -- - - - - - - - - - - A- - - - - - - - - - - - -2InIroducIion Io Ihe 200S, Anne Simpson, ICGN.3'Key developmenIdaIa and sIaIisIics, DaIa or US andUK, 200S World DevelopmenIIndicaIors, The WorldBank Group.InIroducIionCorporaIegovernance iscommonly reerredIoas Iheway in whichcompanies aredirecIed andconIrolled. Companies play a signicanI role in socieIy by creaIing wealIh,providing employmenI, paying Iaxes andgeneraIing invesImenI reIurns. Someo IheworldsbiggesI companies havemarkeI capiIalisaIionslargerIhanIhegross domesIicproducI o enIireeconomies. The enIerprise andaccounIabiliIy o such companiesareIhereorehighly imporIanI asreecIedinIhewords o Anne Simpson, ExecuIiveOcero IheInIernaIional CorporaIeGovernance NeIwork:L - - -- - - -- - -- - - - - - - - - - -K2AllcounIries have Iheirown uniguesysIemo corporaIegovernance reecIing dierenIeconomic, culIuraland legalcircumsIances. The eecIiveness o corporaIegovernance isdependenI ona myriado acIors andcannoI simply bemeasured by proIabiliIy, growIhor share perormance. There are many variables IhaI aecI eachmeasure. However, iI isaairassumpIionIhaI goodcorporaIe governancehelps Io underpinmarkeI condence andnancial sIabiliIy. The US and IheUK boIhhavelong IradiIions o corporaIe governanceandboIhhavesuccessuleconomies as indicaIedin IhesIaIisIicsbelow: --- - FopulaIion 24 million 0millionGross NaIional Income per capiIa (US$) 41,440 33,30GDF(US$ billions) 11,711.8 2,124.4EcienI capiIal markeIs rely upon anumber o acIorsincluding goodliguidiIy andlowIransacIion cosIs. TheavailabiliIy o highgualiIy and IransparenI inormaIion alsoaids eciency Ihroughhelping Io mainIain invesIorcondence andoverall markeIaIIracIiveness. Anumber o legislaIiveand regulaIory measures supporI ecienI markeIsIhrough reguiremenIsand recommendaIions orgoodcorporaIegovernance, coupledwiIha robusI andindependenI judicialsysIem Io prosecuIeailures.Folicy makers are responsibleorencouraging enIerprise, promoIing Ihe aIIracIivenessocapiIalmarkeIs andmainIaining markeI condence. They arechallenged wiIhreachingan appropriaIebalance o regulaIionandvolunIary acIionin deIermining a naIionalcorporaIe governanceramework. InaddiIion, Ihe globalisaIiono capiIal is encouragingincreasedcommunicaIion andco-operaIion beIweenpolicy makers who increasinglyconsiderinIernaIional inuencesonnaIionalIradiIions whendeveloping policy oncorporaIe governancemaIIers. -This discussionpaper, - P - B, ouIlines Ihelegal, regulaIory and volunIary corporaIe governancerameworks o IheUS andIhe UK and idenIies Ihe relevanI supervisory and enorcemenIauIhoriIies ineachcounIry. II provides inormaIionrelevanI Io Ihe guesIionsinIhe secIiono Ihe -- -consulIaIion paper. TheseguesIionsarereproducedbelow andcross-reerencedIo IherelevanI pages in Ihis paper:-- - -- Q1. HowcanIhe exchangeo inormaIionand co-operaIionbeIweenpolicy makers be encouragedIomiIigaIeregulaIory conicI and overload7 Q2. Is Ihere a dangero regulaIionaecIing Ihelong-Ierm aIIracIiveness oUS securiIies markeIsIo non-US companies7 11Q3. WhaI are Ihe beneIs anddisadvanIages o boIh a shareholder-ledanda regulaIor-ledapproachIocorporaIegovernance7 17Q4. In a Iakeover, should Ihe lawenable direcIors as duciaries Io pursuea corporaIe inIeresI IhaI diers rom IhaI o Ihe currenI shareholders7 241. The drivers or inIernaIional harmonisaIionThe increasingly inIernaIionalnaIure o businessandinvesImenI, coupled wiIhregulaIoryresponses Io corporaIe scandals, areencouraging demandsrom companiesand invesIorsorconsisIency incorporaIegovernance pracIices across borders. EsIablishing comparablesIandards and harmonising Ihem, where possible, is imporIanI in areas such as shareholderrighIs, boardresponsibiliIies anddisclosure. ComparabiliIy canproviderealbeneIsIobusiness andinvesImenI by helping Io reduce complexiIy and poIenIialconusion.While onesysIemo corporaIegovernance cannoI apply Io all counIries, Ihere areopporIuniIiesor commonly accepIedpracIices Io encouragemore ecienI globalcapiIalmarkeIs. EorexampleIheEuropean CommissionsCompany LawandCorporaIeGovernance AcIion Flan4wiIhiIsvarieIy o direcIivesand oIher measuresis aimedaIharmonising, where possible, key aspecIs o company lawandcorporaIegovernanceinall Member SIaIes.The -- -consulIaIion paper raises Ihe ollowing guesIion: - A In considering Ihis guesIion, Ihe ollowing areas arerelevanI: US andUK responses Io corporaIe scandals. AdvanIages and diculIies wiIh cross-bordershareholderengagemenI. Trends o oreigniniIialpublic oerings. InIernaIionalregulaIory co-operaIion. BCorporaIescandalsonboIh sides o IheAIlanIicaccenIuaIedIheneedorgovernmenIsandregulaIors Io reinorce business inIegriIy and insIilmarkeI condence. TheUSresponded Io Enronand WorldCom by building on Ihe 130s SecuriIies AcIs, IhemselvesinIroducedasa response Io Ihe sIockmarkeI crash o 12, wiIhIhe enacImenI o IheSarbanes-Oxley AcI in 2002.In Europein 2003, anumber o highprolescandals, including Ahold in Ihe NeIherlandsandFarmalaI inIIaly, damagedmarkeI condence. AI IhesameIime inIhe UK Ihe HiggsSandIheSmiIhreporIs examinedIhe roleo non-execuIivedirecIorsandaudiI commiIIeesrespecIively. The UK responsewas IosIrengIhen IheCombined Code onCorporaIeGovernance7by rening exisIing recommendaIions andinIroducing new ones in2003.The European Commissionalso acIed Io help insIilmarkeI condence, IheimporIanceo whichwas sIressedby AlexanderSchaub, DirecIor-Generalo DG InIernal MarkeIandServices aI IheEuropeanCommission:L - -- - B -- - - - - - -- - -- -- - B - - -4'AcIion Flan on modernising company law and enhancing corporaIe governance in Ihe European Union, EuropeanCommission, 2003.S'Review o Ihe role and Ihe eecIiveness o non-execuIive direcIors, DeparImenI o Trade & IndusIry, January 2003.'AudiI CommiIIees Combined Code Guidance, Einancial ReporIing Council, January 2003.7Combined Code on CorporaIe Governance, Einancial ReporIing Council, 2003. - - -- B - -- - K- - --- -- - --- B - - B -K8However, Ihe inIroducIiono new regulaIory measurescannoI eliminaIeIherisk o uIurescandals occurring. Enron isoIenciIed as anexampleo a company IhaI 'Iickedall Iheboxes buI where direcIors were perceivedas ailing Iouphold Iheir duciary duIies. In IhisrespecI, whileregulaIioncanseI ouI minimumsIandards, a comply-or-explainapproachIhrough a codedevelopedby key parIicipanIsin IhemarkeI canencouragegoodpracIiceoverand above legislaIivereguiremenIs. Eorexample, Ihe pracIiceo separaIing Ihe roleso IhechairmanandIheCEOinIheUK is noI reguiredbuI is neverIheless common.Likewise, Ihere isno reguiremenI under Ihe Sarbanes-Oxley AcI orIheappoinImenIo a lead independenI direcIor yeI IheposiIionis becoming common inIhe US.The complemenIary roleo regulaIionand individualinIegriIy weredescribed by CynIhiaA. Glassman, SECCommissioner, as ollows:L - - - - - - -- - - - - - --- - - -- - - --- - - - - - - - - - - -K - K- -KRegulaIion andcorporaIe governanceprinciples aim Io align IheinIeresIs o direcIors,managemenI and shareholders inpursuing Ihe success o Ihe company. Folicy makersare challengedwiIhsIriking Ihe righI balancebeIweenmarkeI orces and regulaIionincreaIinganeecIivecorporaIegovernance ramework. -- -Increasedco-operaIion beIweenshareholdersaround Ihe world can encouragegreaIerundersIanding o undamenIal corporaIe governance principles. Shareholders are becomingmore aIIuned Io dierences inareassuch as shareholder righIs and are encouraging IheharmonisaIiono sIandards inIhecounIries inwhich Ihey invesI. MoreinvesIors arebuying shares incompanies ouIsideIheir homemarkeI. Eor example, UK holdings oUS eguiIy and debI, as o 30June2004, IoIalled $488billion anincreaseo $8 billionromIheyearbeore.10US holdings o UK eguiIy anddebI, aso December31 2004,amounIed Io $738billion, IhelargesI amounI invesIed in any counIry ouIside IheUS.11The inuenceo oreign shareholders ondomesIic companiesis oIenapparenI whenIhere areissues o concern abouI Ihegovernance o a company. Eor example, CalFERS(IheUS pensionund) joinedorces wiIhUK invesIors regarding IherecruiImenI o a new - - -8KeynoIe address by Alexander Schaub, DirecIor-General o DG InIernal MarkeIs and Services, EuropeanCommission, aIa TransaIlanIic CorporaIe Governance Dialogue evenIorganised by Ihe European CorporaIeGovernance InsIiIuIe and Ihe American Law InsIiIuIe, 27 SepIember 200S.Remarks o SEC Commissioner CynIhiaA. Glassman, aIIhe ICAEW roundIable, WashingIon DC, December 200S.10ReporIon Eoreign ForIolio Holdingso USSecuriIies as o June 30, 2004, DeparImenIo Ihe Treasury, EederalReserve Bank o New York, Board o Governorso Ihe Eederal Reserve SysIem, June 200S.11ReporIon US ForIolio Holdingso Eoreign SecuriIiesas o December 31, 2004, DeparImenI o Ihe Treasury,Eederal Reserve Bank o New York, Boardo Governorso Ihe Eederal Reserve SysIem, December 200S.CEO, who was Ihesono Ihechairman, aI BSkyB. They joinedone o Ihe largesI pensionunds inIheUK, UniversiIy SuperannuaIionScheme(USS), inreadingouI a joinI publicsIaIemenI o disconIenI aI Iheshareholders annual meeIingin 2003.In anoIher example, pensionunds rom aroundIhe worldlaunched a class acIion lawsuiI againsI NewsCorporaIionover Ihe abiliIy o shareholders Io voIeonIhe use o apoisonpillasa Iakeover deence. The lawsuiI was ledinIheDelaware Chancery CourIon behal o Iwelve unds, Iwo romIhe US, sevenAusIralian unds andIhreeEuropeanunds, including HermesFensions ManagemenI LIdand USS rom Ihe UK. NewsCorporaIionreincorporaIedromAusIralia Io IheUS sIaIeo Delaware in2004whereshareholderapprovalis noI reguiredor Iheuseo a poisonpill. ThemanagemenIwelcomedIhe new regimebuI Ihe shareholdersconsideredIhisIo be a breach o Ihecompanys conIracIualcommiImenI Io seekshareholder approval or a poisonpill. As aresulI o Iheshareholders lawsuiI, Iheir righIIovoIeon Ihe poisonpill was resIored.While oreign shareholders caninuence corporaIegovernance innaIionalmarkeIs,Ihere aremany barriers Io cross-border engagemenI resulIing rom disparaIeregulaIionsindierenI counIries. These include a generallacko amiliariIy wiIh overseas markeIs,language diculIies, inadeguaIevoIing righIs, pracIical diculIiesincasIing voIes andlack o inormaIion. Anexampleo Iheway Iheseissues are being addressed isevidenIinIhe European Commissionsproposed direcIive onshareholder righIs publishedinJanuary 200whichis relevanI IoalllisIed companies inEU MemberSIaIes andseIsouI minimumsIandards. InemphasisingIheimporIanceo IhedirecIive, Ihe EuropeanCommissions InIernal MarkeI and Services Commissioner, Charlie McCreevy said:L- -- -- - K- A - - --- -- -- - P - - - -- - -K12 - - -SIockexchanges inboIh IheUS andIheUKaIIracI highnumbers o inIernaIionalcompanies. TheoreigncounIries wiIhIhehighesI number o companies lisIedonIheNew YorkSIock Exchange (NYSE) and IheLondon SIock Exchange(LSE) are indicaIedinIhe Iable below: - - Canada 82 Ireland 72UniIed Kingdom S2 UniIed SIaIes 7Brazil 34 Canada 48Mexico 21 AusIralia 41Japan 1 Bermuda 3Erance 1 India 24NeIherlands 18 Israel 24Chile 18 Japan 20Germany 1 CaymanIslands 17Bermuda 1S NeIherlands 1SOIher 14S OIher 17 - - - - -12'CorporaIe governance: Commission proposalsIo make iI easier or shareholdersIo exercise Iheir righIs wiIhin IheEU FressRelease, Brussels, European Commission, 10 January 200.13'Eoreign companies regisIered and reporIing wiIh Ihe U.S. SecuriIiesand Exchange Commission, Oce oInIernaIional CorporaIe Einance, Division o CorporaIe Einance, U.S. SecuriIiesand Exchange Commission,December 31, 2004.14'Companies LisIed on Ihe London SIock Exchange, 'AbouI Ihe Exchange: SIaIisIics, London SIock ExchangewebsiIe as aI 21 March 200.The number o US companiesonIhe LSE1Sis secondonly Io Ireland, whileIheUKaccounIs or Ihe largesI number o oreign regisIranIs o Ihe US SecuriIies andExchangeCommission(SEC) aIerCanada.1RelaIivegeographic locaIionandhisIorical economicIies (orexample beIweenCommonwealIh counIries) arereecIedincapiIal markeIchoices. TheIype o corporaIe governancerameworkalso has an eecI ona companysdecisionIo choose onejurisdicIionoveranoIher.The impacI on naIional corporaIe governancepracIices o increasedinIernaIional businessandinvesImenI canbe signicanI. Companies lisIing onmoreIhanone sIockexchangeare oIenaced wiIhdiculI, duplicaIive and someIimes conIradicIory laws and regulaIionwhich resulI inexIra cosI. Some o Ihe UKs largesI companieshave high proporIions oIheir asseIsdeployed overseas. Eor example, GlaxoSmiIhKline (GSK)has more IhanS0%o iIssalesin IheUS andIheCEOalong wiIhmany oIher boardmembers are basedinIheUS. Thereorewhile GSK is a UK company, iI can begreaIly inuenced by US governancepracIice, orexampleonexecuIive pay.However, a wholly sIandardisedapproachIocorporaIegovernance cannoI beimposedon allcompanies andall jurisdicIions. Companies vary by sizeand indusIry and IheenvironmenI Ihey operaIeinis deIermined by legaland culIuralIradiIions. TheimporIanceo exibiliIy in Ihe designo mandaIory andnon-mandaIory measuresinaninIernaIionalconIexI isapIly summarisedby Ihe laIe FeIer Drucker:L- - - - - - - K17 - InIhe ace o corporaIescandals, policy makers havebeen challenged wiIh adapIingnaIional laws andpracIices Io miIigaIe problemswhile aciliIaIing IheadopIionoinIernaIionally accepIed sIandards. In addiIion, Ihe cosIs andbeneIs o implemenIingnewregulaIion musI beassessed whenconsideringiIs appropriaIenessasa policy measure.The exIraIerriIorialimpacI o IheSarbanes-Oxley AcI onoreignregisIranIso Ihe SECprovides anexampleo Ihe diculIies involvedindeveloping appropriaIenaIionalregulaIion, while Ialking inIo consideraIionIhe inIernaIionalimpacI o such measures.In addressing Ihis issueSECCommissionerFaul S. AIkins said:L - - B N M K- K- - --- -- - - - - --- - - - -- - - B -- - -- - - - --- - - - - K18 - - -1SLondon SIock Exchange SIaIisIics, June 200S.1'Eoreign companies regisIered and reporIing wiIh Ihe U.S. SecuriIiesand Exchange Commission, Oce oInIernaIional CorporaIe Einance, Division o CorporaIe Einance, U.S. SecuriIiesand Exchange Commission,December 31, 2004.17'FeIer DruckersLegacy Includes Simple Advice: IIs AbouIFeople, ScoIIThurm and Joann S. Lublin, , 14November, 200S.18Speech by SEC Commissioner Faul S. AIkins, 'The Sarbanes-Oxley AcI o 2002: Goals, ConIenI, and SIaIusoImplemenIaIion, , March 2S, 2003.CommissionerAIkins enIhusiasmorincreaseddialoguebeIween Ihe US and Europewas also reecIed inIhe words o Dr Alexander Schaub, DirecIor-Generalo DG InIernalMarkeI andServicesaI Ihe EuropeanCommission:L - -- - -- -- - - - - - - - - - -- - -- - K1In anaIIempI Io inIroduceguidance or governmenIsandregulaIorsaround howIoimplemenI goodcorporaIegovernance pracIice, Ihe OrganisaIionorEconomicCo-operaIionandDevelopmenI (OECD) publishedIhe - in1, subseguenIly revisedin2004 (seeAppendix1). Recognising IhaIIhere is no singlerighI approach, Ihe principles providea reerence poinI or allcounIries,inshaping IheircorporaIe governancerameworks:L - B- NM - - - -- - - - -- - B - -- - B - - -- BK20 - - -1KeynoIe address by Dr Alexander Schaub, DirecIor-General o DG InIernal MarkeIsand Services, EuropeanCommission, aIa TransaIlanIic CorporaIe Governance Dialogue evenIorganised by Ihe European CorporaIeGovernance InsIiIuIe and Ihe American Law InsIiIuIe, 27 SepIember 200S.20 - (2004) Freamble, p. 13.2. US regulaIor-led corporaIe governanceThe US approachIo corporaIegovernance can be characIerisedasa regulaIor-ledsysIempredominanIly enorcedIhroughSEC regulaIion, sIock exchangelisIing rulesand sIaIelaw. The US does noI havea code o corporaIe governancesimilar Io IhaI o IheUK, givenIhe ederalnaIureo iIs consIiIuIion. While Ihe inIernalaspecIs o corporaIe governance,suchasdirecIors duIies and shareholder righIs, area maIIerorsIaIe law, IheSECandsIock exchangesalso play a signicanI role in Ihegovernanceo lisIed companies.The roleso Ihevarious regulaIory auIhoriIiesinIheUS are describedby Mark RoeoHarvard LawSchool:L -- -- - - - - - -- -- -- - - - - - - - - -- -- -- - -- - -- - - - - - - - P - --- -- -- P -- - - - - -K21The-- - consulIaIion paper raises Ihe ollowing guesIion: - -- --- -In considering Ihis guesIion, Ihe ollowing areas arerelevanI: The decenIralisedapproachIo US company law. The roleso IheSECand Ihe Fublic Company AccounIingOversighI Board(FCAOB)andrelevanI regulaIions. The Irendo companies regisIering wiIh IheSEC. The LisIing Ruleso IheNYSEand NASDAQrelaIedIocorporaIegovernance. --- The US has no cenIralbody o company law andeachsIaIeis reeIo esIablishiIsownmodel. The sIaIe o Delawareis parIicularly inuenIialasiI is Ihe domicile o more Ihanhal o all US lisIed companies. InaddiIion, many sIaIes adopI recommendaIions romIhe ModelBusiness CorporaIionAcI. Thedierencesincompany lawbeIween sIaIescanbe said Io giverise Io 'company law shopping wheresIaIes compeIe or companyincorporaIion. This sysIem o compeIing sIaIecompany lawisdescribedbelow bySIephen Mayson, Derek Erench andChrisIopherRyan:L -- - - - - LK - - - - --- - - - - - - - - 21'RegulaIory CompeIiIion in making CorporaIe Law in Ihe UniIed SIaIes And iIsLimiIs, Mark J. Roe, , Vol. 21, No 2, Oxord UniversiIy Fress, 200S.22, 21sIEdiIion 2004-200S, SIephen Mayson, Derek Erench and ChrisIopher Ryan,OxordUniversiIy Fress.23'The Business JudgmenI Rule as AbsIenIion DocIrine, SIephen M. Bainbridge, S7 83-130, 2004.24'AbouI Ihe SEC: WhaI we do, Ihe invesIors advocaIe: How Ihe SEC proIecIs invesIors, mainIains markeI inIegriIyandaciliIaIescapiIal ormaIion, www.sec.gov. - - -- - - - - - --- - - - - -- - A - - -- - K- - K22The US approachIo IheoversighI o corporaIegovernance aI a sIaIelevel isless relianIon shareholder engagemenI IhaninIheUK where shareholdersareempowered IhroughrighIs incompany lawIo play anacIiverole. However, Iheuse(orIhreaI) o shareholderclassacIionlawsuiIs is moreprevalenI in IheUS andcanbeaneecIivemeasureIo bringabouI change.There is also, generally, moredeerenceIo boarddecision-making in IheUS Ihan inIheUK asdescribed belowby SIephen M. Bainbridge:L - - -- - - - - - - - - - B P- - P - -- B - - - B - -- -K23 - --In IheUS, Ihe133 SecuriIies AcI is IhemosI signicanI pieceo legislaIion governing IhesecuriIies markeIs. II was creaIedprimarily Io ensure an ecienI andIransparenI securiIiesmarkeI and Io miIigaIe Ihe risko raudulenIly misleading nancial sIaIemenIs. The 134SecuriIies Exchange AcI ollowedwiIh Ihe esIablishmenI o IheSECas IheregulaIoryagency or promoIing markeI sIabiliIy, enorcing securiIies laws and, ulIimaIely, proIecIinginvesIors.Fublicly lisIed companies regisIered wiIhIheSECare expecIedIoadhere Io sIricIdisclosurereguiremenIs. They are reguired Io le annual andguarIerly reporIs,regisIraIiondocumenIs or iniIialpurchaseoerings andcopies o proxy maIerials senI Ioshareholdersbeore an annual generalmeeIing. TheSECalso obliges companies involvedina Iakeover siIuaIionIo disclosedocumenIs concerning Ienderoers anddocumenIsrelaIed Io mergers andacguisiIions.Froviding shareholders wiIhinormaIionupon which Ihey can makeinvesImenI decisionsis a key prioriIy o Ihe SEC:L - - -- - - - - -- -- - - -- - - - - - - - - -- B - - -- - -- - - - A - - - --K24 - In Iheyear Io OcIober 2004IheSECmadearound 00legal lings2SagainsI companiesandindividuals orviolaIions. This was anincreaserom2001(480legal lings) andmayreecI more sIringenI oversighI since IheenacImenI o Ihe Sarbanes-Oxley AcI. The mosIcommonviolaIions IhaI may lead Io SECinvesIigaIions include:{ L- - - - - B ---- -{ -- -- --{ - --{ - --K - --{ -K -- -- { - -- -K2 - - -In July 2002, in responseIoIheEnronandWorldCom scandals, Ihe Sarbanes-Oxley AcIwas enacIed inan eorI Io mainIaininvesIor condenceand combaI raud onIhemarkeI.The AcI inIroducedmeasures Io sIrengIhenIhecomposiIionand independenceo audiIcommiIIees, enhance nancialdisclosures andseI upIheFCAOB Io oversee Ihe audiIingproessionandIhus proIecI Ihe inIeresI o shareholders.The key acIiviIies o Ihe FCAOB as deIerminedby IheSarbanes-Oxley AcI are as ollows:{ - P B- - - -- - - -{ -- P - -- - B- - ---{ - P - -- --{ P - - - --- - B-27SECregisIered companiesarereguiredIo abideby Ihe Sarbanes-Oxley AcI and Ihe rulesimplemenIed by Ihe SEC, alIhoughIheimplemenIaIion o rules issomeIimes deerredororeignprivaIeissuers (EFI) andsmallUS companies. Eor example, Ihereis a IimeIableordeerredimplemenIaIion o Ihe reguiremenIso SecIion404 whereby managemenI musIaIIesI Io Ihe eecIiveness o inIernal conIrolsover nancialreporIing.There arearound 1,3S0 EFIs regisIeredwiIh IheSEC, o whichapproximaIely 10% areromIheUK. Since 2001, Iherehasbeen a decrease o approximaIely 2S% o UKcompanies regisIered wiIhIhe SEC, compared Io anoveralldecrease o all oreigncompanies o 8%, as indicaIedinIhelaIesI available sIaIisIics over: - 2S -, 24AugusI 2004.2'AbouI Ihe SEC: WhaI we do, Ihe invesIors advocaIe: How Ihe SEC proIecIs invesIors, mainIains markeI inIegriIyandaciliIaIescapiIal ormaIion, www.sec.gov.27Summarised rom Ihe 2004Annual ReporI, FCAOB. - - -- --2004 107 1,2402003 11S 1,2322002 134 1,312001 143 1,344Eor EFIs wiIha lownumbero US eguiIy shareholders Ihe adminisIraIive cosIs ocompliance wiIh SEC reguiremenIs canouIweighIhebeneIso a US lisIing leadingIoa decision Io deregisIer as summarisedinIhe caseo Cable& Wireless plc below: -- - - -- - - -- - - -- - --K - - --- - --K -- - - -- --K -- - - - - - -- -- - -- - - -- - --- -- - B- - - - -- - --K- - - -- -- -- - - -- - - - B- - -- - -- - - - -- - - - - 28'Eoreign companies regisIered and reporIing wiIh Ihe U.S. SecuriIiesand Exchange Commission, Oce oInIernaIional CorporaIe Einance, Division o CorporaIe Einance, U.S. SecuriIiesand Exchange Commission,December 31, 2004.2'Cable & Wireless FLC NYSE delisIing and IerminaIion o ADR Frogramme, News AlerI, HemscoII Frice AlerIs, SepIember 200S.The conseguence o recenI regulaIion in Ihe US was recenIly reerred Io by Alan Greenspan,ormer chairmano Ihe US Eederal Reserve. Whilerecognising IhaI Ihe Sarbanes-Oxley AcIhad broughI beneIs, he emphasised Ihe heavy regulaIory burden iI has creaIed orcompanies:L - -- - - -- -- -- - - - - -- - - P -- - - P - - --- -B - -- - - -- -- - - - -- - K30Mr Greenspans viewswereechoed inIhe UK where a survey o over 0chairmen(including 40chairmenrom ETSE100 companies)conducIedby RussellReynoldsAssociaIes oundIhaI:{ L- - - - - - - { - - - -- - -- K31NoI all commenIaIors IakeIheviewIhaI IheregulaIory burdensince Ihe enacImenIo IheSarbanes-Oxley AcI is deIrimenIalIoIheaIIracIiveness o Ihe US sIock markeIs.The ormer Mayor o NewYork, Rudy Giuliani, sIaIed IhaI London andTokyo willevenIually adopI regulaIionsas Iough as Ihose inIhe US.32AI Ihe World Economic EoruminDavos in200S, John Thain (CEO o Ihe NYSE) emphasisedIhe viewIhaI EuropeanandAsiancompanies wouldsIillwanI Io lisI on US exchanges becauseo Iheaccess IoUS capiIal:L - - -- - - K- - - - - - - - - K33However, Ihe increasing Irend ororeigniniIial public oerings(IFOs) Io choosemarkeIsouIside IheUS Io raisecapiIalwas highlighIedinMarch200 by FeIer Weinberg, ormerCEOo GoldmanSachs InIernaIional, in Ihe -:L - - - - - - - -- - - - - - --- - - - - -- B - - - -- - - - - K34 - 30'Greenspan predicIsUS governance revamp, -, 13April, 200.31'The Chairmans reporI corporaIe governance or good or ill7, Russell ReynoldsAssociaIes, 200S.32'Greenspan predicIsUS governance revamp, -, 13April 200.33'NYSEchie expecIs Europe Io move closer Io Sarbanes-Oxley, John Gapper, -, 28January 200S.34'How London Can Close Ihe Gap on Wall SIreeI, FeIer Weinberg,-, 30March 200. - - The NYSE wasesIablished in 172 andis Ihe worlds largesI exchangeby markeIcapiIalisaIion. II has sevenIeenIimes Ihe number o Irades andour anda hal IimesIhe markeI capiIalisaIiono IheLSE.3SThere arearound 3,100 US companies and430non-US companies lisIedonIhe NYSE.3NASDAQ, esIablishedin171, was Ihe worldsrsI elecIroniccompuIer-based sIockmarkeI and has around3,300 lisIedcompaniesincludingabouI 20oreigncompanies.37BoIhIheNYSEand NASDAQ redraIedIheir LisIing RulesIo accommodaIechangesinIroducedby Ihe Sarbanes-Oxley AcI (see Appendix 2orNYSEcorporaIegovernancesIandards). ThesenewreguiremenIs have beenlargely harmonisedbeIween IheIwoexchanges andwereapprovedby IheSECin2003. ThelisIing rule changes, alongwiIhnewSEC regulaIion, havebeen crediIedwiIh a subIle power shiI onboards o direcIorsinIhe US, away rom Ihe concenIraIedpowero Ihe chie execuIiveIoIhecollecIivedecision-making o IheenIire board. This changeis generally encouraged Ihroughanincrease in Ihe roleand independenceo non-execuIivedirecIors, Ihe enhanced roleandresponsibiliIy o Ihe audiI commiIIee, andincreased shareholder parIicipaIioningovernance maIIers, or example IhroughIheapprovalo eguiIy compensaIionplans.OnboIh Ihe NYSE andNASDAQ, Ihe new corporaIegovernance sIandardsareapplicableIoallcompanies lisIingordinary ('common) eguiIy shares. Eailure Io comply wiIhIhecorporaIe governancesIandards couldleadIo Irading being suspendedor Ihe companybeing de-lisIedromIheexchange. However Iherearesome excepIions, or examplecompanies wiIhconIrolling shareholders (i.e. Ihose wiIhmore Ihan S0% o IhevoIingpower) neednoI: comply wiIhindependencecriIeria, havea nominaIion('nominaIing) commiIIee, or have a remuneraIion('compensaIion) commiIIee.Eoreign companies arealso exempI rom Ihe corporaIegovernance sIandards, wiIhIheexcepIion o provisions mirroring reguiremenIs o IheSarbanes-Oxley AcI, orexample,inrelaIionIo IhemandaIory reguiremenI or audiI commiIIees. However, Ihey areexpecIedIo ollow IhecorporaIegovernance rules o Ihe homecounIry and arereguiredIodiscloseany signicanI ways inwhichIheir corporaIegovernancepracIices dierromIhoseollowed by US domesIic companies underNYSElisIing sIandards. - 3S'How London Can Close Ihe Gap on Wall SIreeI, FeIer Weinberg,-, 30March 200.3www.nyse.com.37'Eoreign companies regisIered and reporIing wiIh Ihe U.S. SecuriIiesand Exchange Commission, Oce oInIernaIional CorporaIe Einance, Division o CorporaIe Einance, U.S. SecuriIiesand Exchange Commission,December 31, 2004.3. UK shareholder-led corporaIe governanceModern corporaIegovernance inIhe UK beganinIheearly 10s inIhe wakeocorporaIe scandals suchasFolly Feck InIernaIional38andMaxwell.3In responseIoIhesescandals, Ihe UK governmenI encouragedIhe markeI Io develop a soluIionIo miIigaIeIhe risko morescandalsoccurring andIo improve markeI condence. This led Io IhedevelopmenI o Ihe Combined Code, IhecornersIone o Ihe comply-or-explainapproachIocorporaIegovernance.AlIhoughIheUK approachIo good governanceis oIenreerred Io as 'sel-regulaIoryor 'principles-based, iI is underpinnedby a robusI sysIemo company lawand markeIregulaIion. Shareholdersin IheUK play anacIiverole incorporaIe governanceand areaccordedgenuine power andinuence Ihroughcompany lawIo hold boards Io accounI,henceIhe reerenceIo Ihe shareholder-ledapproach.The-- - consulIaIion paper raises Ihe ollowing guesIion: B- -- - In considering Ihis guesIion, Ihe ollowing areas (inaddiIion Io Ihe previous chapIer)are relevanI: The Companies AcIs and shareholder righIs. The roleso IheEinancial Services AuIhoriIy (ESA) and IheEinancial ReporIingCouncil(ERC)andrelevanI regulaIions. The LondonSIockExchange. The evoluIion o Ihe comply-or-explainsysIem. - -Company lawinEngland andWales is governedby IheCompanies AcI o 18SandIhe Companies AcI 18. Companies may ollowa modelseI o ArIicles o AssociaIionknown as TableAwhichprovides rules regarding Ihe inIernalgovernance o companies.TableAwillapply as a deaulI seI o ArIicles or, alIernaIively, companies cancreaIeIheirownArIicles ensuring Ihey comply wiIh IheCompanies AcIs.The Companies AcIs provide or sIrong shareholder righIs, over andaboveIhebasicrighIs associaIedwiIh IherighIs Io receive dividends andIo buy, sell andIranser shares.They include righIs Io callexIraordinary generalmeeIings, approve dividends, exercisepre-empIionrighIs on new shareissues and, ulIimaIely, remove a direcIor rom Iheboard. The AcIsprovisions enable a democraIicprocessor boardaccounIabiliIy, inormedby addiIionaldisclosures resulIing romIheCombinedCodeonCorporaIeGovernance,andacIivaIedby Ihe generalwillingness o UK insIiIuIionalshareholders Io assume agovernance oversighI role.UK company lawis currenIly undergoinga comprehensive review, pursuanI Io IhegovernmenIs objecIives Io ' - - - - 38The downall o Folly Feck InIernaIional in 10 was linked Io Asil Nadir who obIained a conIrolling sIake in Ihecompany and pursued highly geared growIh Ihrough acguisiIion.3The Maxwell scandal was aIIribuIed Io an over-concenIraIion o power in Ihe handso RoberI Maxwell whoheaded Ihe Mirror GroupFLC. More Ihan SS0 million o invesImenIs disappearedrom Ihe groups pensionundsprior Io iIs collapse..40The Company LawReorm Billaims Ioclariy and simpliy cerIain areas oexisIing company law, includingdirecIors obligaIions Io Ihe company, iIs members andoIher sIakeholders. European company lawdirecIives also have a conIinuing impacI onIhe UKs corporaIegovernance legalramework. - The EinancialServices andMarkeIs AcI 2000(ESMA) provides IherameworkorIheregulaIion o Ihe nancial servicesindusIry inIhe UK. TheAcI placed newresponsibiliIieson IheESAgivingiI sIaIuIory powersIo issue rules andguidance acrossIheUK nancialservices indusIry. TheESAis unded by Ihenancial services indusIry (i.e. ees rom rmsregulaIed by IheESA) and isindependenI rom governmenI. IIsourobjecIives areasollows:{ B B B --{ -- - B --{ - - -- { B - -- --- - - B 41The ESA isresponsible or Ihe UK LisIing AuIhoriIy (UKLA) whichregulaIes Iheadmissiono securiIies Io IheMainMarkeI o IheLSEIhroughLisIing Rules. TheESAhas Ihe powerIoimpose unlimiIedcivilpenalIiesoncompanies anddirecIors i LisIing Rules arebreached. Whilea rareoccurrence, iI may wiIhdrawIhe auIhorisaIiono a companyromIheMain MarkeI and, in exIremecases, may carry ouI criminalprosecuIionsIhroughIhe courIs.While IheESAcanpenalisecompanies orviolaIions o IheLisIing Rules andoIhermarkeI relaIedregulaIions, IheERCis generally responsibleor moniIoring IheuseoIhe Combined Codeon CorporaIe Governance whichis appendedIo Ihe LisIingRules.The ERC isIheUKs independenI regulaIor orcorporaIe reporIing andgovernance andhas some sIaIuIory powers derived rom FarliamenI.The ERC plays a signicanI parI in corporaIegovernance inIhe UK becauseo iIsoversighI rolein relaIion Io Ihe accounIancy proessionand iIs responsibiliIy orseIIingandenorcing sIandards. AIer IheEnron andWorldCom scandals IheUK governmenIsIrengIhened Ihe roleo IheERCand exIended iIs oversighI roleso IhaI iI coveredIheAccounIing SIandards Board, Ihe AudiIing FracIices Board, Ihe FroessionalOversighIBoardor AccounIancy, Ihe EinancialReporIing ReviewFanelandIheAccounIingInvesIigaIion andDiscipline Board. SubseguenIly, planshave beendevelopedIo bringIhe acIuarialproessionand sIandardseIIing inIo Ihe ERCsIrucIure.The ERC, whichis currenIly undedegually by IheUK governmenI, lisIedcompanies andIhe accounIancy proession, denes iIs aim andobjecIivesasollows:L - B - - B - - - 40Company Law Reorm Bill, WhiIe Faper 200S, DeparImenIo Trade & IndusIry.41'SIaIuIory ObjecIives, Einancial Services AuIhoriIy, www.sa.gov.uk}Fages}abouI}aims}sIaIuIory. -- -- - -- -- - B K42 The LSE was ormally esIablishedin 1801 andis nowa publicly lisIedcompany. II is IhelargesI sIockexchange inEurope andis comprisedo IheMainMarkeI wiIharound1,3S0companies andIhe AlIernaIiveInvesImenI MarkeI (AIM)whichcomprises around1,400mainly smaller, growing companies.The LSE Main MarkeI and AIM have aroundS0overseas companies, 7 o whichareromIheUS.43Asurvey published in December 200S oundIhaI Ihe number o oreigniniIial public oerings in200S onIheLSEincreased by 82% romIhe yearbeore wiIh12oreigncompanies rom2 dierenI counIries. While access Io capiIalwas Ihe mainreasonciIed orchoosing Io lisI onIhe LSE, 0% o survey respondenIs ciIedreguiremenIsgeneraIedby IheSarbanes-Oxley AcI as a subsIanIivereasonornoI lisIingin IheUS.44Companies lisIed onIheMainMarkeI and AIM, arereguiredIo abide by conIinuingobligaIions. These include Ihe reguiremenIsIo publish accounIs IhaI conormIoGenerally AccepIed AccounIing Frinciples, adopI IheModel Code andmake regulaIorylings in accordancewiIh company lawandlisIing rules. However, Ihere are dierencesbeIween IheIwomarkeIs as summarisedinIhe Iable below: - -- - - Minimum 2S% sharesin public hands No minimumshares Io bein public handsNormally 3year Irading record reguired No Irading record reguiremenIFrior shareholder approvalreguiredor No prior shareholder approval orsubsIanIialacguisiIions anddisposals IransacIionsFre-veIIing o admission documenIs Admission documenIs noI pre-veIIedby IheUKLA by Exchangenor by IheUKLAinmosIcircumsIances. The UKLA willonly veI anAIM admission documenI where iI is also aFrospecIus underIheEU FrospecIus DirecIiveSponsors neededorcerIain IransacIions NominaIedadviser reguiredaI allIimesMinimum markeI capiIalisaIion No minimummarkeI capiIalisaIion - - 42'RegulaIory SIraIegy, Einancial ReporIing Council, December 200S.43'Companies lisIed on Ihe London SIock Exchange, AbouI Ihe Exchange: SIaIisIics, London SIock ExchangewebsiIe as aI 21 March 200.44'LSEaIIracIs record number o inIernaIional rms, ReuIers, London, 20December 200S.4STable reproduced rom Ihe AIMwebsiIe: www.londonsIockexchange.com. -Companies lisIed onIheLSEsMainMarkeI need Io comply wiIhIheLisIing Rules. Thisincludes Rule.8. which sIaIes IhaI Ihe ollowing iIems musI be includedinIhe annualreporI andaccounIs o domesIic companies: a narraIivesIaIemenI o howiI has appliedIheprinciplesseI ouI in SecIion1 o IheCombinedCodeon CorporaIeGovernance, providing explanaIion whichenablesinvesIors Io evaluaIe howIhe principles havebeen applied, and a sIaIemenI as Io wheIher or noI Ihe company has compliedIhroughouI Ihe accounIingperiodwiIhIheCodeprovisions seI ouI in SecIion1 o Ihe CombinedCode. AcompanyIhaI has noI complied inullwiIh IheCodeprovisions, or compliedwiIhonly someoIhe Code provisions, IhroughouI iIs accounIing period, musI speciy IheCode provisionswiIhwhichiI has noI compliedand give reasons ornon-compliance.The Combined Code(see Appendix 3)provides recommendaIions inIwoparIs: SecIion 1conIains recommendaIions orcompanies covering direcIors, board sIrucIure,remuneraIion, accounIabiliIy andaudiI, andrelaIions wiIh shareholders, and SecIion 2conIains recommendaIions orinsIiIuIionalshareholders covering IheirresponsibiliIies Io enIer inIo dialogue wiIhcompanies, Io evaluaIegovernancedisclosuresandmakeconsidered use o Iheir voIes.The eecIiveimplemenIaIion o Ihe Combined Code inIhe UK relies on Ihe abiliIyo shareholders Io exerciseeecIiveinuence over boards IhroughrighIs accorded IoIhem incompany legislaIion. While boIhIheESA(IhroughIhe UKLA) andIheERChaveoversighI responsibiliIies or Ihe LisIingRules and Ihe Combined Code respecIively,Ihey do noI make judgemenIs onIheaccuracy or adeguacy o corporaIegovernancedisclosure. DirecIorsareobligedIodisclosehowIhey have complied, ornoI as Ihecasemay be, wiIhIheprovisions o IheCodeand Io explainany non-compliance Ioshareholderswho, ineecI, acI as guasi-regulaIors.Eoreign companies arenoI reguiredIo abideby Ihe recommendaIions o IheCombinedCode. However, LisIing Rule.8.7 sIaIes IhaI:L -- - - -- - - - - -B - - - -- KThe European Commissions 4Ihrevised Company LawDirecIivewill also reguireallcompanies incorporaIed inEU Member SIaIesandlisIed ona sIock exchangein IheMember SIaIes Io make a corporaIegovernancesIaIemenI inIheir annualreporI. - - -The reguiremenIsona company or lisIing onAIM are lessdemandingIhanor IheMain MarkeI. Eor example, Ihereare no Ihresholdsoncompany size, Irading recordorproporIion o shares inpublic hands. AIM lisIedcompanies arealso noI subjecI Io IheLisIing Rules buI are governed by AIM Rules4publishedby Ihe LSE. DirecIors o AIMcompanies arealso subjecI Io Ihe ModelCode andIhe Criminal JusIice AcI 13.While AIM lisIedcompanies are noI obliged Io ollowIhe Combined Code Ihey arereguiredIoappoinI a nominaIed advisor(NOMAD) who is responsibleorensuring IhaIIhe company is complying wiIhiIs relevanI lisIingrules. NOMADsalso helpinIhepreparaIiono a companys prospecIus, Ihe applicaIion process or an AIM lisIing andIhe maIching o buyers andsellerso a companys shares and generally aciliIaIecommunicaIionbeIween Ihecompany andIheinvesImenI communiIy.AIM companies are less inclined Io havelargeinsIiIuIionalshareholdings andIhereoreshareholdersplay a less signicanI oversighI role. InIhis respecI NOMADsplay acorporaIe governanceoversighI role by acIing as guasi-regulaIors. UlIimaIely, IheNOMADsrepuIaIiondepends upon IheeecIive uncIioning o AIM andIhecompaniesIhey advise. The oversighI o NOMADsIhemselves is Ihe responsibiliIy o IheLSEwhichacIs as Iheir supervisory auIhoriIy.The increasedpopulariIy o AIM, parIicularly since Ihe advenI o IheSarbanes-Oxley AcIinIhe US andiIs eecI on smallercompanies, wasreecIedina recenI arIicleinmagazine:L - - --- P P - - - -- -- - - - K47 IniIialcorporaIe governancedevelopmenIs inIheUK began in Iheearly 10s inIhewakeo corporaIe scandals leading Io Ihe esIablishmenI o a commiIIee led by Sir Adrian Cadbury.The resulIing 'ReporI o Ihe CommiIIeeon Ihe Einancial AspecIs o CorporaIe Governance(Cadbury ReporI)48publishedin 12 ouIlined a number o recommendaIionsaround IheseparaIiono Iherole o Ihechie execuIive andchairman, balanced composiIiono Iheboard, selecIionprocesses ornon-execuIive direcIors, Iransparency o nancial reporIingandIheneedorgood inIernalconIrols. TheCadbury ReporI includedaCode o BesIFracIiceandiIs recommendaIions were appendedIo IheLisIing Rules o IheLSE.In 1S, ollowing concerns abouI direcIors pay and share opIions, a commiIIee chairedby Sir RichardGreenbury publisheda reporI on direcIors remuneraIion4(GreenburyReporI). ThereporI recommendedexIensivedisclosurein annual reporIs onremuneraIionandrecommendedIheesIablishmenI o a remuneraIioncommiIIeecomprisedo non-execuIive direcIors. Again, Ihe majoriIy o Ihe recommendaIions were appendedIoIheLisIing Rules as goodpracIice. - - 4'AIMRulesor Companies, London SIock Exchange, July 200S.47'European dream7, , ICAEW, April 200.48'ReporI o Ihe CommiIIee on Ihe Einancial AspecIs o CorporaIe Governance, Gee Fublishing LId, 1 December 12.4'DirecIors RemuneraIion: ReporI o a SIudy GroupChaired by Sir Richard Greenbury, Gee Fublishing LId,17July 1S.S0'Einal ReporI o Ihe CommiIIee on CorporaIe Governance, Hampel CommiIIee, Gee Fublishing LId, January 18.S1'Frincipleso Good Governance and Code o BesI FracIice, Gee FublishingLId, 18.S2The SmiIh Guidance on AudiI CommiIIees, Einancial ReporIing Council, January 2003.S3The Tyson ReporI on Ihe RecruiImenI and DevelopmenI o Non-ExecuIive DirecIors, DeparImenI or Trade& IndusIry, June 2003.S4Einancial ReporIing Council, July 2003.SS'Summary o responsesIo Ihe review, Review o Ihe 2003 CombinedCode, Einancial ReporIing Council,January 200.S'Fension Eunds EngagemenIwiIh Companies, NAFE, AugusI 200S.In 1, IheHampelCommiIIeewasesIablished Io reviewIheexIenI Io whichIheCadbury andGreenbury ReporIs hadbeen implemenIedand wheIher IheobjecIiveshadbeenmeI. TheHampelReporIS0ledIoIhepublicaIiono IheCombinedCodeonCorporaIeGovernance(18)S1covering areas relaIing Io Ihe sIrucIureandoperaIion oIhe board, direcIorsremuneraIion, accounIabiliIy andaudiI, relaIions wiIhinsIiIuIionalshareholdersand Ihe responsibiliIies o insIiIuIional shareholders.In July 2002, IheDeparImenI o Trade& IndusIry (DTI)and HM Treasury commissionedanindependenI review by Sir Derek Higgs on 'The Role andEecIiveness o Non-ExecuIiveDirecIorswhich waspublished inJanuary 2003. RecommendaIions romIhe reviewincludedrecommendaIionsrelaIedIo: a deniIiono 'independenceandIhe proporIiono independenI non-execuIive direcIors on Ihe boardandiIs commiIIees, an expansionoIhe roleo Ihesenior independenI direcIor Ioprovide an alIernaIive channel Ioshareholdersand leadevaluaIions onIhechairmansperormance, addedemphasisonIhe process o nominaIions IoIheboard Ihrougha IransparenI andrigorous process,andevaluaIiono Ihe perormance o Ihe board, iIs commiIIees andindividualdirecIors.Around IhesameIimeIheERCpublishedIhereporI by IheWorking GroupledbySir RoberI SmiIh'GuidanceonAudiI CommiIIees.S2BoIhIheHiggs andSmiIh ReporIswere publishedin January 2003, ollowedby IheDTI-commissioned TysonReporIS3onIhe recruiImenI anddevelopmenI o non-execuIivedirecIors. TherecommendaIionsromIheHiggs andSmiIh reporIs led Io changes inIhe'CombinedCodeonCorporaIeGovernanceS4publishedin July 2003. II supersedes Ihe18 Code andapplies Io allUK regisIeredcompanies lisIedonIhe Main MarkeI o IheLSEorreporIing yearscommencing onoraIer 1November 2003.The ERC recenIly compleIed a reviewo Ihe implemenIaIion o Ihe Combined Code o2003and publishediIsndings in January 200. Thendings rom Ihe reviewindicaIedIhaI Ihe Combined Code ishaving aposiIive impacI on IhegualiIy o corporaIegovernance among lisIedcompanies inIhe UK asindicaIed below:L - -- - - - - - -- - - - -B - - - - KSSThis viewIhaI Ihe CombinedCodehas ledIoanimprovemenI inIhegualiIy ocorporaIe governanceis consisIenI wiIha surveySby IheNaIionalAssociaIionoFensionEunds which oundIhaI S% o large pension unds believedIhaI corporaIegovernance sIandards inIheUK wereconIinuing Io evolvein a posiIive manner.The ERC reviewalso ound sIrong supporI or Ihe comply-or-explainapproachoimplemenIing Ihe Code amongsI companiesnoIing:L - - - - A - - - - --- - - - -- -- -- - -- -- - - - - - - KKS7The use o corporaIe governancecodesis nowcommonacross Europe andIheresI oIhe world. In200S, Ihe WorldBanks Global CorporaIeGovernance EorumS8publisheda ToolkiI Io assisI developing counIriesonhowIo developand implemenI a codeocorporaIe governance. In Eebruary 200, IheEuropeanCorporaIeGovernanceEorum('TheEorum)whichwas esIablishedby Ihe European CommissioninOcIober 2004,publisheda sIaIemenI o principlesadvocaIing Ihe imporIance o Ihe comply-or-explainapproachinEurope sIaIing:L - - -- - - - - -- - B- - - - - - - B - - - - - - - -- - -- - -- - ---KSThe Eorum also idenIiedIhe ollowingcriIeria inorderor IheimplemenIaIiono acode o corporaIe governanceIo be eecIive. Thereneeds Io be:{ L - - - - --{ - - --- { -- - -- ---K0The Eorums criIeriaor Ihe eecIiveness o a comply-or-explainapproachreecI Iheviews o Mario Draghi, ormerly Vice Chairmanand Managing DirecIoro GoldmanSachs InIernaIional:L - -- -B --- - - - - -- A - -- -- - - - -- -- - ---- - K1 - - S7Review o Ihe 2003 Combined Code, Einancial ReporIing Council, January 200.S8Volume 1: Module 2 Dening Codes o BesI FracIice, ToolkiI2: Developing CorporaIe Governance Codeso BesI FracIice, Global CorporaIe Governance Eorum, 200S.S'SIaIemenI o Ihe European CorporaIe Governance Eorum on Ihe comply or explain principle, EuropeanCorporaIe Governance Eorum, Eebruary 200.0'SIaIemenI o Ihe European CorporaIe Governance Eorum on Ihe comply or explain principle, EuropeanCorporaIe Governance Eorum, Eebruary 200.1KeynoIe address by Mario Draghi, Vice Chairman and Managing DirecIor o Goldman SachsInIernaIionalTransaIlanIic CorporaIe Governance Dialogue evenI organised by Ihe European CorporaIe Governance InsIiIuIeandIhe American Law InsIiIuIe, 2004.4. The markeI or corporaIe conIrolThe powers andresponsibiliIies accordedIoboards, shareholders and regulaIors o a IargeIcompany in response Io a Iakeover bid arevery dierenI beIweenIheUS andIhe UK.These dierences areapIly summarisedby DanKonigsburg o SIandard& Foors:L - - - - - - - -- - -- -- - - - A - - - - - - -- -- - - - -- -K B - -- - - - - - - - - -- - K2In IheUK, IhemarkeI acIs wiIhina sel-regulaIory process deIerminedby Ihe CiIy Codeon Takeovers and Mergers ('Takeover Code), backed upby relevanI company legislaIionandmarkeI regulaIion. In Ihe US, aI a ederal level, Ihe Williams AcI 18 clariesIherules governing acguisiIions andsIaIelawgovernsIheuseo deence mechanisms.The -- -consulIaIion paper raises Ihe ollowing guesIion: - - -B- - - - --In considering Ihis guesIion, Ihe ollowing areas arerelevanI: The markeI orcorporaIe conIroland corporaIe governance. TakeoverregulaIioninIheUS andIhe UK. The roleand powers o direcIorsandshareholdersinIakeoversiIuaIions. Global markeI inIegraIion andimplicaIions or Iakeover regimes. - A-AundamenIalproposiIiono capiIalismis IhaI a company is an enIiIy o joinIenIerprisebeIween Ihose who conIrol iI (i.e. IhedirecIors) andIhosewho own iI(i.e. Ihe shareholders). DirecIorsareresponsible or acIingin IhebesI inIeresIso Ihecompany andpursuing iIssuccessor IhebeneI o shareholders. Shareholders inIurn,empower direcIors IoleadIhe company ina duciary capaciIy, whilemainIaining adegreeo decision-making conIrolIhroughincorporaIionrighIs.Agency Iheory applies whereIhere is a separaIion o ownershipand conIroland asserIsIhaI a misalignmenI canoccurbeIweenIhe inIeresIs o Ihosein conIrolo IhecompanyandIhose who owniI, resulIing inconicIs.3, 4The ways inwhichIhese conicIs can bemiIigaIed aredescribedineacho IheoIher discussionpapers in Ihe serieswhichdescribe: - 2D. Konigsburg, 'SimilariIies and Dierences in Ihe UniIed SIaIesand UniIed Kingdom, in -(G. Dallas, ed.), ch.1-3, New York: McGraw-Hill, 2004, The McGraw-hill Companies, Inc.3L K A. Berle and G. Means, New York, HarcourI Brace & World Inc, 1S2.4'Theory o Ihe Eirm: Managerial Behaviour, Agency CosIsand Ownership SIrucIure, M. Jenson and W. Meckling, -, Vol. 3, 17. Ihe eecIiveuncIioning o Ihe boardIhroughdemonsIraIing leadershipandindependenI oversighI o managemenI, Ihe ownershiprighIsandresponsibiliIies o shareholders Io hold boardsIo accounI, and Ihe provision o reliableinormaIionby Iheboard Io shareholderswhichpermiIsmeaningulanalysis o company perormance.AneecIivemarkeI or corporaIeconIrolcanbe consideredanoIher mechanism by whichagency conicIscanbeaddressed andchecks onIheecacy o a companysmanagemenIcanbe mainIained. FuI simply, i IheincumbenI managemenI arenoI consideredIo beeecIively pursuing Ihe success o Ihe company Io maximiseshareholdervalue, IhenIheymay become vulnerableIo Iakeoverbids romoIhercompanies. However, well-managedcompanies may also bevulnerable Io Iakeover given Ihe premiums arising as a resulI o aproposedIakeover and Ihereadiness o some insIiIuIionalinvesIors Io capiIaliseonIhis. - In IheUK, shareholders are IheulIimaIearbiIers indeciding wheIherornoI a hosIileIakeover should succeedor ail andIhey musI bewilling Io sell Iheirshares inorderora Iakeover Iobesuccessul. TheCompanies AcI 18S provides IhaI i holders o0percenI o Ihe companysshares accepI an oer wiIhinour monIhs IhenIhebiddermay compulsorily purchaseIhe remainder.SSecIion 134o IheCompanies AcI 18S obliges a shareholder owning Ihree per cenI oa companys shares Io inorm IheIargeI company IhaI Ihey havereachedIhis Ihreshold.They musI subseguenIly advise Ihe company i Ihe shareholding alls or risesby onepercenIage poinI andSecIion 212 o IheCompanies AcI compels shareholders Io idenIiyIhemselves i reguiredso Io do by Ihe company. TheAcI alsoincludes provisions aroundegualiIy o shareholders, insider dealing and resIricIionsonIhe abiliIy o a company Iobuy iIs ownshares.When an oer is madeora company, markeI parIicipanIs are expecIedIo ollowIheTakeoverCodeissuedby Ihe Fanelon Takeovers and Mergers ('TakeoverFanel) whichwas esIablishedin18. The TakeoverFanelis comprisedo represenIaIivesrom business,invesImenI andnancial insIiIuIions wiIhexperIise inIakeovers andsecuriIies markeIs.II was IradiIionally a non-sIaIuIory body buI implemenIaIiono Ihe European TakeoverDirecIive7changed iIs sIaIus Io a body wiIhlegislaIive powers. ThesepowersincludeenorcemenI auIhoriIy or Ihe mandaIory reguiremenI orbid inormaIionIo be disclosedandIhepowerIo seeknancial compensaIionon behal o shareholders.The comprehensivemixo markeI parIicipanIsonIhe TakeoverFanelencouragesaccepIance o Ihe TakeoverCoderom allsides. CompaniesIhaI do noI abide by IheTakeoverCodes recommendaIions andhavebeenpublicly criIicisedby Ihe FanelareoIenIreaIedwiIhcauIionby shareholders. While Ihe Takeover Codeis volunIary, iI hasbeen endorsed by IheESAunder IheESMA 2000. Thereore, anyone in breacho IheTakeoverCodemay be liableor prosecuIionorsancIions. - SCompanies AcI 18S, FarIXIIIA(Sec 428-430).The Takeover Fanel includesrepresenIaIivesrom: AssociaIion o BriIish Insurers, AssociaIion o InvesImenITrusICompanies, AssociaIion o FrivaIe ClienI InvesImenI Managersand SIockbrokers, BriIish Bankers AssociaIion,ConederaIion o BriIish IndusIry, InsIiIuIe o CharIered AccounIanIs in England & Wales, InvesImenIManagemenIAssociaIion, London InvesImenI Banking AssociaIion, and NaIional AssociaIion o Fension Eunds.7European Commission DirecIive 2004}2S}EC, April 21, 2004.L - - - - - - - - -- - - -- - - ----- - - -- --- -- - B - - --- KThe aimo Ihe Takeover Codeis Io ensure egualiIy o IreaImenI orall shareholdersinIakeover bids andis relevanI Io public companieswhichare residenI in IheUK,Ihe ChannelIslandsand Ihe Isleo Man. Insome circumsIances privaIecompaniesare also subjecI IoIheCode, orexamplei Ihey have beenlisIed onIheLSEwiIhinIhe previous 10 years.The TakeoverCodehas generalprinciples whicharesummarised as ollows:The TakeoverCodeplaces Ihe proIecIiono IherighIs o shareholders, as eguiIy ownerso a company, as a primary objecIivein a IakeoversiIuaIion. However, FaulMyners,ormer Chairmano GarImore InvesImenI ManagemenI LId, has criIicised Ihe someIimesshorI-Ierm naIureo shareholders andIheir desireorIheshare pricepremiums awardedina Iakeover bid. HealsoconIendsIhaI IheTakeoverCode provides very liIIleIimeoraIargeI company Io organiseIheir deence. In IheUK, a hosIile bid can beclosedwiIhinonly 21days andevenina longer bidIhedeending boardcanproducenewinormaIiononly inIhe rsI 3 days o Iheoer: - - -- - -- - - - - -- - - -- - -B - -- - -- - -- - - - K- - --- - -- - - - -- - - - - -- - - - -- - B - - - - - - B - - - - - -- - - - - - - - - --8 - 8'The Takeover Code, General Frinciples, The Fanel on Takeovers andMergers, SecIion B1.L - - B- - - - - - -- - - -- K- - -- K - -- - K -- KEuropeanlawaecIs Ihe Iakeoverregime inIhe UK. InApril2004, Ihe EuropeanCommissions Takeover DirecIivewas passed seIIing ouI minimum sIandards orIakeoverbids oncompanies lisIed onsIock exchanges wiIhin European UnionMember SIaIes. TheDirecIiveis largely basedonIhe UK approach as embodiedinIheTakeover Code andwasimplemenIed in IhenaIional laws o EU MemberSIaIes on 20May 200.The Oce o Eair Trading, which wasesIablished underIhe Monopolies andMergers AcI1S, may also inIervene ina Iakeover oncompeIiIion grounds. II canmake a reerralIoIhe CompeIiIion Commissionwho may proposeIoIheDeparImenI o Trade& IndusIryIhaI a Iakeover bedisallowedi iI is deemednoI Io be inIhe public inIeresI. - - In IheUS, IakeoveracIiviIy is governedaI a ederallevel IhroughregulaIionesIablishedby IheWilliams AcI passedby Congress in18. The AcI was inIroduced Io proIecIshareholdersand clariedrulesgoverning acguisiIions and Ienderoers ina IakeoversiIuaIionIhroughSECdisclosureregulaIion. Thisincludes disclosurerelaIing Ioshareholding levels where anyone acguiring moreIhanve per cenI o a companysshares musI makeIherelevanI SECling underSecIion13(d)(1) o IheExchange AcI.DeIails o Ihepurchasers idenIiIy andinIenIions musI be disclosedwiIhin10 days oIhe share purchase. The SEC also reguires a bidderIo makeanoer wiIhin a minimumIime period.IndividualUS sIaIes also play a signicanI role inIhe oversighI o Iakeover acIiviIy inIhe US. Each sIaIe varies iniIs approachIo Iakeover lawbuI Ihe sIaIeo Delaware hasspecic provisions prevenIingordeIerring companies rom aIIempIing hosIile Iakeovers.According Io RoberIa Romano:L - - - -- -- - - -- - - -- -- - -- -- -- -- - - -- A - - B -B - -K70In IheUS, direcIors do noI need Io seekshareholderopinionIo use Iakeover deencesandareproIecIed by IheBusinessJudgmenI Rule inIheir duciary capaciIy Io makedecisionsonbehal o Ihecompany andiIsshareholders. InshorI, Ihe decisionoraIargeI company Io accepI anoer rom anoIhercompany is enIirely aI IheboardsdiscreIion. InIheUK, direcIors musI seekshareholderapproval ina Iakeover siIuaIionandmanagemenIs power Iouse deenceIacIics is limiIed. - 'Were sellingBriIain Ioo cheaply,, 1Eebruary, 200.70'Is regulaIory compeIiIion a problem or irrelevanIor corporaIe governance7, RoberIaRomano, , Vol 21, No 2, 200S, Oxord UniversiIy Fress.Deence IacIics caninclude simply advising shareholders why a bid should noI beaccepIedor publishing avourable uIureperormanceIargeIs. MorecomplicaIed deenceIacIics include Ihe issuing o newshares Io a riendly IhirdparIy whowouldnoI IhensellIheshares Ioa poIenIial bidder, conseguenIly IhwarIing IheaIIempI orIhebidderIoIake over Ihe company.II is commonpracIicein IheUS ordirecIorsIo ensure IhaI Ihereare anIi-Iakeoverdevicesinplace suchas poison pillsorsIaggeredboards Io inhibiI IhepossibiliIy o a hosIileIakeover. Eor example, IargeI companies seI up poisonpills (knownas shareholdersrighIsplans) whichdiluIeIheshares held by IhepoIenIialbidder. Foisonpills are eecIive byeiIherallowing exisIing shareholders (excepI Ihe bidder) Io buy moresharesaI a discounIor allowing shareholders Io buy Ihe acguirers shares aI a discounIed price aIer Ihe Iakeoverhas occurred. The laIeJonaIhan Charkham describedIheuseo Ihepoisonpill in Ihe USinhis book, :L- - - P - - - P - - -- - - - - - - K- - - -- K- - - - - - -- - -- K- --- - - -- - - - - - - -K71 - - The globalisaIiono nancialmarkeIs is increasingIheappeIiIeor oreignIakeovers,orexampleIheIakeover o F&Oby Ihe DubaiForIs AuIhoriIy. By diversiying inIonewmarkeIs Ihe biddercanoIen beneI rom economies o scaleand capiIalise onopporIuniIiesnoI available in iIs homemarkeI. Onoccasiona oreignIakeover bidcangiverise Io a degreeo proIecIionism where governmenIsmay wish Io proIecI naIionalasseIs romoreignownership. AI a recenI ICAEWconerenceIhe DirecIorGeneraloIhe TakeoverFanel, MarkWarham, emphasised IhaI iI was noI IheresponsibiliIy o IheTakeoverFanel Io proIecI UK companies rom oreign bids:L - A B- B -- - K- - - -- -- -K72The openness o UK companies IoIakeoverbids, including oreignbids, is illusIraIedby Ihecase o Ihe LSE which hasrecenIly beenIheIargeI o anumber o Iakeoverapproaches including one rom NASDAQ. The ormer CEO o Goldman Sachs InIernaIional,FeIer Weinberg, wasrecenIly guoIedinIhe -emphasising IhebeneIsoconsolidaIionbeIweenUS andUK sIock exchanges:L- - P - -- - -- - - P - - - - K73 - 71 , JonaIhan Charkham, Oxord UniversiIy Fress, 200S, p. 278.72'Takeover Fanel reuses Io block oreign buyers, , 13April 200.73'How London Can Close Ihe Gap on Wall SIreeI, FeIer Weinberg, -, 30March 200.The lack o inIernaIionalharmonisaIiono rules governing Iakeover acIiviIy is a reecIiono IhediculIies insIrivingIo achieve consisIency incorporaIe governancesIandardsworldwide. DiculIies arisebecause o dierences in sgueeze-ouI and sell-ouI rules,reguiremenIs or mandaIory bids, ownership disclosure Ihresholds, Ihe egualiIy oshareholdersand Ihe powers o direcIorsIo Iake decisions. While Ihe EuropeanCommissions Takeover DirecIivedoes muchIoassisI consisIency inIheseareas amongEU Member SIaIes, iI couldnoI gainagreemenI around Iheuse o deensive IacIics andIhe righIs o shareholderIo approve suchIacIics. ConseguenIly, Member SIaIes canchoosewheIheror noI Io permiI pre-bidor posI-biddeence IacIics Ihrough Ihe adopIiono ArIicles 11 and respecIively.The diculIy o developing consisIenI IakeoverlegislaIionacross borders was highlighIedby Marco BechI, Tim Jenkinson andColinMayer:L - - B - - - - - B --- - -- - - - - - B - - -- -- --- - - - - --- - - - - -K74 - 74'CorporaIe Governance: An AssessmenI, Marco BechI, Tim Jenkinson, Colin Mayer, , Vol. 21. No 2, Oxord UniversiIy Fress, 200S.Appendix 1OECD Frinciples o CorporaIe Governance - -- The corporaIe governancerameworkshould promoIe IransparenI andecienI markeIs,be consisIenI wiIhIhe rule o lawand clearly arIiculaIe Ihedivisiono responsibiliIiesamong dierenI supervisory, regulaIory and enorcemenI auIhoriIies. - -- - -The corporaIe governancerameworkshould proIecI andaciliIaIeIheexerciseoshareholdersrighIs. --The corporaIe governancerameworkshould ensure IheeguiIable IreaImenI o allshareholders, includingminoriIy andoreignshareholders. Allshareholders shouldhaveIhe opporIuniIy Io obIaineecIiveredress orviolaIiono Iheir righIs. -- The corporaIe governancerameworkshould recognise IherighIs o sIakeholdersesIablishedby lawor Ihrough muIualagreemenIsand encourage acIive co-operaIionbeIween corporaIionsandsIakeholders increaIing wealIh, jobs andIhesusIainabiliIyo nancially soundenIerprises. -- -The corporaIe governancerameworkshould ensure IhaI Iimely andaccuraIe disclosureismade onall maIerialmaIIers regarding Ihe corporaIion, includingIhenancialsiIuaIion,perormance, ownership, andgovernance o Ihe company. --- The corporaIe governancerameworkshould ensure IhesIraIegic guidanceo Ihecompany, Ihe eecIive moniIoring o managemenI by Ihe board, andIheboardsaccounIabiliIy Io Ihecompany andIhe shareholders.7S - 7S - , OECD FublicaIions, 2004.Appendix 2NYSE CorporaIe Governance Rules:SecIion 303A1. LisIed companies musI havea majoriIy o independenI direcIors.2. InorderIo IighIenIhe deniIiono 'independenI direcIoror purposes o IhesesIandards: (a) no direcIorgualies as 'independenIunlessIheboardo direcIorsarmaIively deIermines IhaI Ihe direcIor has nomaIerial relaIionshipwiIhIhelisIed company (eiIher direcIly or as a parIner, shareholder or ocer o anorganisaIionIhaI has a relaIionshipwiIhIhecompany). Companies musI idenIiy whichdirecIorsare independenI anddiscloseIhe basisor IhaI deIerminaIion. |The rules IhensIipulaIe a number o criIeriaor deIermining wheIher a direcIor isnoI independenI.|3. To empower non-managemenI direcIorsIo serveasa moreeecIivecheck onmanagemenI, Ihe non-managemenI direcIors o eachlisIed company musI meeIaI regularly scheduled execuIive sessions wiIhouI managemenI.4. (a) LisIedcompanies musI have a nominaIing}corporaIegovernancecommiIIeecomposed enIirely o independenI direcIors.(b) The nominaIing commiIIee musI havea wriIIencharIer. |The rules IhensIipulaIewhaI Ihe charIer shouldaddress.|S. (a) LisIedcompanies musI have a compensaIion commiIIeecomposedenIirelyo independenI direcIors.(b) The compensaIioncommiIIee musI have a wriIIen charIer. |Therules IhensIipulaIe whaI Ihe charIer should address.|. LisIed companies musI haveanaudiI commiIIeeIhaI saIises Ihe reguiremenIs oRule 10A-3 underIhe Exchange AcI.7. (a) TheaudiI commiIIeemusI havea minimum o Ihree members.(b) InaddiIion Io any reguiremenI aI Rule 10A.3(b)(1), allaudiI commiIIeemembersmusI saIisy IhereguiremenIs orindependence seI ouI inSecIion303A.02.(c) The audiI commiIIeemusI havea wriIIencharIer. |TherulesIhensIipulaIe whaIIhe charIershouldaddress.|(d) EachlisIed company shouldhavean inIernalaudiI uncIion.8. No change.. LisIed companies musI adopI anddisclose corporaIe governanceguidelines.10. LisIed companies musI adopI anddisclose a codeo business conducI and eIhics ordirecIors, ocers andemployees, and prompIly disclose any waivers o Ihe code ordirecIorsorexecuIive ocers. - 11. LisIed oreignprivaIeissuers musI discloseany signicanI ways inwhichIheircorporaIe governancepracIices dier rom Ihoseollowed by domesIiccompaniesunder NYSElisIing sIandards.12. (a) EachlisIed company CEOmusI cerIiy IoIheNYSEeachyearIhaI heorshe is noIaware o any violaIionby Ihecompany o NYSEcorporaIe governancelisIingsIandards, gualiying Ihe cerIicaIion Io Ihe exIenI necessary.(b) EachlisIed company CEOmusI prompIly noIiy Ihe NYSE in wriIing aIerany execuIiveocer o Ihe lisIedcompany becomes aware o any maIerialnon-compliancewiIh any applicable provisions o Ihis SecIion303A.(c) EachlisIed company musI submiI an execuIed WriIIenArmaIion annuallyIoIheNYSE.13. The NYSE may issuea publicreprimandleIIer Io any lisIed company IhaI violaIesa NYSE lisIing sIandard.7 - 7SecIion 303A, NYSE LisIed Company Manual. The CorporaIe Governance LisIing Rules seI ouI in SecIion 303A oIhe NYSE LisIedCompany Manual were iniIially approved by Ihe SEC on November 4, 2003.Appendix 3Main Frinciples o Ihe Combined Codeon CorporaIe GovernanceSecIion 1: Companies -A.1. Every company shouldbe headedby aneecIiveboard, whichis collecIivelyresponsibleor Ihesuccesso Ihecompany.A.2. Thereshouldbea clear divisiono responsibiliIies aI Ihe heado Ihe companybeIween Iherunning o Ihe boardand Ihe execuIiveresponsibiliIy or Ihe runningo Ihecompanys business. No one individualshouldhaveuneIIeredpowersodecision.A.3. Theboard should includea balanceo execuIive andnon-execuIive direcIors (andinparIicular independenI non-execuIive direcIors) such IhaI no individual orsmallgroupo individualscandominaIeIheboards decisionIaking.A.4. Thereshouldbea ormal, rigorous andIransparenI procedure orIhe appoinImenIo newdirecIorsIo Ihe board.A.S. Theboard should be supplied in a Iimely mannerwiIhinormaIionina ormand oa gualiIy appropriaIe Io enable iI Io discharge iIs duIies. AlldirecIorsshouldreceiveinducIionon joining Iheboard andshouldregularly updaIeand rereshIheir skillsandknowledge.A.. Theboard should underIake a ormaland rigorousannual evaluaIiono iIsownperormanceandIhaI o iIs commiIIees andindividual direcIors.A.7. All direcIors should be submiIIedorre-elecIion aI regular inIervals, subjecI IoconIinuedsaIisacIory perormance. Theboard shouldensureplanned andprogressiverereshing o Ihe board. B.1. Levelso remuneraIionshouldbe sucienI Io aIIracI, reIainand moIivaIedirecIorso IhegualiIy reguiredIorunIhecompany successully, buI a company shouldavoidpaying more Ihan isnecessary or Ihis purpose. AsignicanI proporIion o execuIivedirecIorsremuneraIion shouldbesIrucIuredso asIo linkrewards Io corporaIeandindividual perormance.B.2. Thereshouldbea ormalandIransparenI procedureor developing policy onexecuIive remuneraIionand or xing IheremuneraIionpackages o individualdirecIors. NodirecIorshouldbeinvolvedindeciding his orher ownremuneraIion. - 77The Combined Code on CorporaIe Governance, Einancial ReporIing Council, 2003. C.1.Theboard should presenI a balancedand undersIandableassessmenI o Ihecompanys posiIionandprospecIs.C.2.Theboard should mainIain a sound sysIem o inIernalconIrol Io saeguardshareholdersinvesImenI andIhecompanys asseIs.C.3.Theboard should esIablishormal andIransparenI arrangemenIsor consideringhowIhey shouldapply Ihe nancial reporIingandinIernalconIrolprinciplesandormainIaining an appropriaIe relaIionshipwiIhIhecompanys audiIors. - - --D.1. Thereshouldbea dialoguewiIh shareholders basedon Ihe muIualundersIandingo objecIives. The boardas a wholehas responsibiliIy orensuring IhaI a saIisacIorydialoguewiIh shareholders Iakesplace.D.2. Theboard should use Ihe AGM IocommunicaIewiIh invesIors andIoencourageIheir parIicipaIion.SecIion 2: InsIiIuIional shareholders - --E.1. InsIiIuIional shareholders should enIerinIoa dialogue wiIhcompanies basedonIhemuIualundersIanding o objecIives.E.2. When evaluaIing companies governancearrangemenIs, parIicularly Ihose relaIing IoboardsIrucIureandcomposiIion, insIiIuIionalshareholders shouldgive dueweighIIoallrelevanI acIors drawnIoIheir aIIenIion.E.3. InsIiIuIional shareholders have a responsibiliIy Io make considered use o Iheir voIes.77 - Useul conIacIs AccounIing SIandards Board www.rc.org.uk}asbAssociaIion o BriIishInsurers www.abi.org.ukAudiIing FracIices Board www.rc.org.uk}apbBank o England www.bankoengland.comCompanies House www.companieshouse.gov.ukConederaIiono BriIishIndusIry www.cbi.org.ukDeparImenI o Trade &IndusIry www.dIi.gov.ukEinancialReporIing Council www.rc.org.ukEinancialReporIing ReviewFanel www.rc.org.uk}rrpEinancialServices AuIhoriIy www.sa.gov.ukHer MajesIysTreasury www.hm-Ireasury.gov.ukHermes FensionsManagemenI LId -www.hermes.co.ukInsIiIuIe o CharIeredAccounIanIs inEngland &Wales www.icaew.co.ukInsIiIuIe o CharIeredSecreIariesandAdminisIraIors www.icsa.org.ukInsIiIuIe o DirecIors www.iod.comInvesImenI ManagemenI AssociaIion www.invesImenIuk.orgLondonSIockExchange www.londonsIockexchange.comNaIionalAssociaIion o FensionEunds www.nap.co.ukFensions & InvesImenI ResearchConsulIanIs LimiIed www.pirc.co.uk -- - -AmericanBar AssociaIion www.abaneI.orgAmericanInsIiIuIeo CerIied o Fublic AccounIanIs www.aicpa.orgAmericanSIockExchange www.amex.comBusinessRoundIable www.brIable.orgCalFERS www.calpers.ca.govCauxRound Table www.cauxroundIable.orgConerenceBoard www.conerence-board.orgCorporaIeLibrary www.IhecorporaIelibrary.comCouncil o InsIiIuIional InvesIors www.cii.orgEinancialAccounIing SIandardsBoard www.asb.orgGlobal Froxy WaIch www.davisglobal.comGovernance MeIricsInIernaIional www.governancemeIrics.comInsIiIuIional Shareholder Services www.issproxy.comInvesIor ResponsibiliIy ResearchConsulIancy www.irrc.orgNASDAQ www.NASDAQ.comNaIionalAssociaIion o CorporaIeDirecIors www.nacdonline.orgNaIionalAssociaIion o SecuriIies Dealers www.nasd.comNaIionalAssociaIion o SIaIe Boards o AccounIancy www.nasba.orgNew YorkSIockExchange www.nyse.comFublic Company AccounIing OversighI Board www.pcaob.orgSecuriIies and ExchangeCommission www.sec.govSecuriIies LawyersDeskbook www.law.uc.edu}CCLTIAA-CREE www.Iiaa-crensIiIuIe.org -- - -- --- - - -- - - --- D:cu::on uround thc :mlurtc:und dllcrcncc: bctwccn USund U| :y:tcm: ol corporutcgovcrnuncc chullcngc: thccommonly hcld prc:umptonol un Anglo-Amcrcun modcl.Th: con:ultuton pupcr:ummur:c: kcy quc:ton: uroundhow polcy mukcr: cncourugcbu:nc:: und nvc:tor conldcncc,how compunc: urc drcctcd undcontrollcd, und how d:clo:urcund rcportng rcqurcmcnt: urclrumcd und cnlorccd.--- --- P -- 8ourd: ol drcctor: urc rc:pon:blclor uctng n thc long-tcrm bc:tntcrc:t: ol thc compuny lor thcbcnclt ol :hurcholdcr:. llcctvcbourd: rcqurc :kllcd lcudcr:hp,bulunccd dcc:on-mukng,nlormcd r:k-tukng, goodjudgcmcnt und ntcgrty.Th: pupcr cxplorc: how US undU| bourd: opcrutc dllcrcntlyund thc rolc, rc:pon:bltc:und powcr: ol drcctor: ncuch jur:dcton.- --- - P- - - |n:ttutonul nvc:tor: pluy u:gnlcunt rolc n thc govcrnunccol compunc: n thc US und thcU|. Thcy urc thc guurdun: olothcr pcoplc': moncy throughthc munugcmcnt ol pcn:on:,n:uruncc und :uvng: product:und urc cxpcctcd to uctrc:pon:bly n cxcrc:ng thcrowncr:hp rght:. Th: pupcrcxplorc: thc rolc ol :hurcholdcr:n corporutc govcrnuncc undthcr rght: und rc:pon:bltc:. -- --- - P - Thc d:clo:urc ol mcunnglul,rclublc und tmcly nlormuton to:hurcholdcr: : ol lundumcntulmportuncc lor nlormcdnvc:tmcnt dcc:on-mukng undmurkct conldcncc. |gh lcvcl:ol lnuncul d:clo:urc urcchuructcr:tc ol both US und U|corporutc govcrnuncc modcl:.Th: pupcr cxplorc: thc rolc ol thcuccountuncy prolc::on n hclpngto lucltutc thc low ol cuptulthrough trun:purcnt, cllccnt undtru:tcd nlormuton.DisclosureresponsibiliIiesand building IrusIFromoIing IransparenI andreliable inormaIion ShareholderresponsibiliIiesand IheinvesIing publicExercising ownership righIsIhrough engagemenI -BoardresponsibiliIiesand creaIingvalueDemonsIraIing leadershipand accounIabiliIy --- FressurepoinIsConIrasIing US and UK securiIies markeIs:HowIhey impacI inIernaIional policy,invesImenI, business and accounIing --- - - --- - -K