Let there be light: a pioneer in defining effective corporate governance, the author of the 1992 Cadbury Code discusses the current state of affairs and his ideas on righting the wrongs that have plagued the business world - Sir Adrian Cadbury - Interview

Internal Auditor, Feb, 2003 by Christy Chapman

FEW WOULD ARGUE THAT THE LAST YEAR WAS anything but a dim one in the business world. Plunging stock markets, lackluster earnings, and fatal financial fiascoes cast a shadowy pall over the shimmer of the boom so recently experienced.

As part of the fallout, the ills associated with lax governance became blatantly apparent, occasioning boardroom actions all over the globe to identify practices that would sustain organizations. In the midst of this furor stands Sir Adrian Cadbury as an abiding beacon for sound corporate governance. On the forefront of governance efforts for the past 25 years, Cadbury has worked steadfastly to improve the way businesses are directed and controlled. With speaking tours to more than 27 countries and his work on the pioneering Cadbury Code -- the first in-depth statement on corporate governance and a model for sound practice worldwide -- Cadbury has sparked reforms around the globe. Numerous financial markets have established their own codes of best practice based on the Cadbury Code's 1992 recommendations. Cadbury also helped the Organisation for Economic Co-operation and Development (OECD) forge its own governance principles while he was a member of the organization's Corporate Sector Advisory Group on Corpor ate Governance. In addition, Cadbury served as chairman of his family business -- Cadbury Schweppes PLC -- the world's third-largest soft drink manufacturer and the fourth-largest supplier of confectionery, for 24 years. He retired in 1989 and is now chancellor at Aston University in Birmingham, England.

Cadbury recently spoke to Internal Auditor about the current state of corporate governance. The key to avoiding the corporate decrepitude that has stricken so many once shining stars, he says, is a good dose of sunlight.

Sir Cadbury, is corporate governance evolving globally?

We're beginning to see some real convergence of governance practices worldwide. Many differences remain in terms of structure, which involves such issues as whether you have a one- or two-tier board. But governance practice -- meaning the actual processes and standards of governance -- is becoming increasingly aligned across the globe.

There are two main forces bringing about this convergence. First are the big institutional investors like CalPERS and TIAACREF. These groups have their own governance principles and codes, which are presented to the companies in which they invest. Thus, if organizations are seeking investments by the largest institutions, they have to address their governance standards. The second force is the capital markets of the world. If a business wants to borrow money at the best possible rate, it must meet the disciplines that the capital market lays down on financial reporting, financial controls, and board effectiveness.

What does the optimum governance model (ook like?

I don't think there is any one structural model that is optimum for everyone, everywhere. What we need to focus on instead are those key aspects of governance that would apply to any model.

The first involves establishing a board that is clear about its responsibilities. Such clarity includes maintaining a definite distinction between the job of the board - direction, or governance - and the job of the executives - management. That distinction should be agreed upon and understood throughout an organization.

The second element is the need for checks and balances to be built into the governance structure so that no one person has unfettered power.

Next, it's important to have a well-balanced board team. The choice of people sitting on the board should be made carefully. You want the inside knowledge of executives, as well as the independence, skills, and judgment of the outside directors.

Finally, I place a great deal of emphasis on board disclosure and openness. We should expect boards to be transparent about the way in which they direct and control their companies.

How do the United States and European governance efforts compare?

In the United Kingdom, our companies have only one board. However, about two-thirds of a board's members are outside, or nonexecutive, directors, while one-third are company executives. In addition, the great majority of listed companies in the United Kingdom keeps the position of chairman separate from that of chief executive. That clearly is a major difference.

There are two fundamental differences between the European and American approaches to governance. The first involves the separation of supervision from management. In Europe, we have two types of boards. The two-tier board is found in various continental European countries and actually consists of two separate boards: a supervisory board and a management board. No one person can serve on both boards, so there exists an absolutely clear distinction between supervision (the task of the top board) and management (the task of the executives).

The key point is that with a two-tier board, or with the division of the chairman and chief executive posts, you have built in a degree of separation between supervision and management.