2. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
1. Introduction
Corporate governance has become more prevalent over the past decade with rising pressure for
companies to increase disclosure in their annual reports, making it an interesting choice of topic.
Disclosures provide evidence that management of a company are responsible and trustworthy and
this is vital for society as a whole. Strong corporate governance can be viewed as a mechanism
that encourages management to share characteristics of an external auditor who can act with
integrity, fulfilling their responsibilities with honesty and without succumbing to threats of self
interest (Porter, Simon and Hatherly, 2003).
The overall aim of this report is to investigate the level of corporate governance disclosures in the
UK over several years. The report will begin with an argument explaining why corporate
governance is necessary based on academic literature. Followed by an overview of the important
disclosure regulations in the UK. The empirical analysis investigates the annual reports of the two
firms, Vodafone PLC and Cobham PLC, with the intent of finding if their corporate governance
disclosures are in accordance with regulation. Thereafter, the report will conclude by discussing
the results and future recommendations to improve the level of disclosures, using knowledge
gained from the literature review. It is expected that there will be an adequate level of corporate
governance disclosures amongst the two UK firms, proving to investors that they are operating in
the interests of shareholders through ‘…transparency of governance practices…’ (Bauwhede &
Willekens, 2008, p.101).
2. Literature Review
There is vast academic literature and empirical research into corporate governance and this section
discusses why it is necessary.
2.1 Prior Literature
Corporate governance contributes to auditing the nonfinancial aspects of a company. Corporate
governance can be defined as a process comprising of accountability to shareholders, supervision
of managerial action and setting strategic direction (Tricker, 1984). Similarly, Denis (2001)
describes it as the processes and structures that direct and control the business with the main
objective of enhancing value for shareholders. Strong corporate governance gives shareholders
more confidence in a company and it gives reassurance to capital markets (Elliot and Elliot, 2007).
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Companies disclose this information in their annual reports and the reliability is checked by an
external auditor who discloses their opinion on the quality of the financial statements
(ibid).Therefore, disclosures help to make a firm more transparent as they communicate to
shareholders that the company is being managed well and this is why investors consider corporate
governance as an important aspect of a company’s evaluation.
In earlier years corporate governance was mainly academic theory and there was a problem
because the framework existed but implementation was poor as the corporate world did not take
seriously. Then in 2001, big corporate failures highlighted the importance of corporate governance.
The collapse of Enron and WorldCom led to approximately $240 billion of investors’ money being
lost as well as a drop in investor's confidence, leading to the withdrawal of funds from the equity
markets or the demand of a higher premium (BBC News, 2004). Enron and WorldCom were seen
as part of a broader problem as there were other companies that also collapsed. Corporate
governance has become more prevalent because of recent scandals in the United States and United
Kingdom. In some cases lost capital was unexpected because annual reports show good
performance. Yet, fraudulent management behaviour has led to the collapse and failure of
companies that were perceived to be successful.
The main reason for corporate governance stems from the conflict between the principal and the
agents. Agency theory suggests shareholders need to monitor the performance of managers as
they can be tempted to act in their own self interest and may not work towards increasing the
profitability of the firm (Brealey and Myers, 2003). In the UK many public companies shares are
widely held by many small investors. Shareholders legally own the firm but the managers control
the daytoday activities. This is referred to as the separation between ownership and control
(ibid). This causes asymmetric information, which is the uncertainty and incomplete information
between uninformed players managers know more about true value of the firm in comparison to
shareholders (ibid). Subsequently, agency problems can arise due to private information about
actions and other outcome relevant parameters being reserved by managers so that shareholders
receive misleading or incomplete information (Denis, 2001). In summary, shareholders are trusting
managers to make correct decisions on their behalf but they are removed from the actual
daytoday running of the firm. Effectively they have less control even though they are the legal
owners, making corporate governance is necessary to help overcome agency problems.
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In support, Bauwhede and Willekens (2008) found that the level of disclosure of corporate
governance information is positively related to the degree of separation between ownership and
control. This means more dispersed ownership leads to a greater need for corporate governance.
They also say that strong corporate governance helps to reduce information asymmetry and
agency cost and improve investors’ confidence. Their results also suggest that a firm’s disclosure
policy on corporate governance is tailored to some firmspecific, as well as institutional
characteristics. This means that different firms will have different corporate governance structures
as they will choose mechanisms that fit with their business.
Corporate governance disclosure literature focuses on the role of the separation of the CEO and
chairman, board of directors, remuneration committee and audit committee. Some argue that the
separation of the role of the CEO and chairman in a firm can reduce agency costs and improve
performance, ideally shareholders would prefer an independent outsider as chairman but it is
usually someone that has ties with the company (Brickley, Coles and Jarrell, 1994). According to
Jensen (1993) the role of the CEO is to run the daytoday business, whereas, the role of the
chairman is to run board meetings and oversee the process of hiring, firing, evaluating, and
compensating the CEO. Significantly, Brickley, Coles and Jarrell found that firms with a combined
chairman & CEO would increase their values by separating the titles. However, they also note that
there are costs involved with separating the roles, for example agency costs of controlling the
behaviour of the chairman and information costs.
Companies in most countries are required by law to have a board of directors, who are supposed
to act on behalf of the shareholders, monitor top management discretionary behaviour and ratify
main decisions (Hart, 1995). The Cadbury Committee produced a report proposing a 'Code of
Best Practice' mainly focusing on the board of directors as being the most important mechanism
and they introduced the concept of independence of nonexecutives (Elliot & Elliot, 2007). The
Code of Best Practice states that companies should have a compensation committee that is made
‘wholly or mainly’ of independent directors. It also specifies that the roles of CEO and Chairman
should ideally be separated and boards should have at least three nonexecutives (NEDs) and at
least two of them should be independent. The Higgs Report (2003) is a revised Combined Code
that also focuses on the independence of the board. It says that at least half of the board should be
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comprised of independent NEDs and a senior independent should represent the opinion of the
others and 'a nonexecutive director is considered independent when ... there are no relationships
or circumstances which could affect, or appear to affect, the director’s judgement.' Examples of
relationships include a former employee of the company or group, a material business relationship
with the company within the last three year, receives additional remuneration from the company,
close family ties with any of the company’s advisers or directors, holds crossdirectorships, or
represents a significant shareholder or has served on the board for more than ten years.
The Greenbury Report (1995) specifies that there should be a remuneration committee that
consists ‘exclusively’ of NEDs and full disclosure of directors’ remuneration should be given in
annual reports. Core, Holthausen and Larcker's study into corporate governance and chief
executive officer (CEO) pay suggests that firms with weaker governance structures have greater
agency problems. Agency problems impacts upon compensation and often CEOs that work within
companies that have greater agency problems receive greater compensation for bad performance.
Therefore, corporate governance is needed to monitor CEO compensation and CEOs earn greater
compensation when governance structures are less effective (Core, Holthausen and Larcker,
1999). However, they mention that a critic of this is the board of directors is influenced by the
CEO, so they do not always structure the CEOs compensation package to maximize value for
outside shareholders.
The importance of nonexecutive directors is summed up approprately by Pass (2004) who says
that NEOs introduce integrity and accountability into the Board as they exercise independent
judgement. This helps to safeguard the interest of shareholders against managers who may be
tempted to act in selfinterest. NEOs also identify risks and opportunities that may be overlooked
by managers immersed in the daytoday running of the business. However, Pass also identifies
limitations of NEOS such as they may have time constraints because they usually have
directorships in more than one company. Secondly, NEOs may not fully understand complex
business issues because they will not have domain knowledge of the company and this may also be
because they do not receive enough information from the company.
One of the main benefits of having an audit committee is that they help to protect external auditor's
independence by mediating the relationship between management and the external auditor (Turley
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and Zaman, 2004). They monitor the audit process and internal controls and in regards to financial
reporting quality they help to reduce errors and irregularities. Audit committees have been adopted
internationally and although they are expected to bring benefits Turley and Zaman found that
'...there is no automatic relationship between the adoption of audit committee structures or
characteristics and the achievement of particular governance effects…' A big issue linking to
external auditors and audit committees is the provision of nonaudit services. Often audit
companies identify and market NAS to management. The problem arises about whether advice
from NAS will lead to the firm making business decisions because this would then give the auditor
an economic interest in the firm (Jeppesen, 1998). This is a threat to independence which can
make the audit less effective. However, new regulation after the Enron collapse in 2001 means
companies are required to disclose any NAS provided by the audit firm so this increases
transparency and shareholders have a better insight into the firms activities. The SarbanesOxley
Act 2002 was a response to corporate scandals. The act sets out reforms for good governance,
such as having an independent audit committee and disclosing the use of internal controls (Ohio
Cooperative Development 2002). It also prohibits accounting firms from providing some nonaudit
services while auditing a firm such as bookkeeping, appraisal but excludes tax preparation.
Nowland (2008) examined the introduction of the voluntary corporate governance codes on
companies in Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, and
Taiwan. Their results suggest that disclosure practices have improved since the introduction of
voluntary corporate governance codes and there is a ‘levelling out of disclosure practices across
companies’ (Nowland, 2008). The results also indicate that the voluntary codes have had ‘…an
indirect effect on company disclosure practices through their effect on company governance
practices’ and. the codes were found to have a ‘…significant effect on board independence’
(Nowland, 2008). It is expected that there will be similar results in the UK.
2.2 UK Regulatory Review
This section provides an overview of the United Nations Conference on Trade and Development
(UNCTAD) ‘guidance on good corporate governance practices in corporate governance
disclosure’ (2006). It is based on all of the regulations preceding 2006 and it is a good starting
point to understanding what is suggested for disclosure requirements. It states there should be
disclosure regarding the process for holding and voting at annual general meeting as well as all
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7. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
other information necessary for shareholders. The company should give notification of the agenda
and proposed resolutions in advance and the results of a general meeting should be communicated
to the shareholders.
The composition of the board must also be disclosed, such as the balance of executives and
nonexecutive directors, and whether any of the nonexecutives have any affiliations (direct or
indirect) with the company. It also says where there might be issues that stakeholders might
perceive as challenging the independence of nonexecutive directors, companies should disclose
why those issues do not affect the governance role of the nonexecutive directors. They must also
mention the number, type and duties of board positions held by an individual director. As well as,
biographical information and qualifications of all board members to assure shareholders and other
stakeholders that the members can effectively fulfil their responsibilities. In terms of evaluation, the
board should disclose whether it has a performance evaluation process in place, either for the
board as a whole or for individual members. Disclosure should be made of how the board has
evaluated its performance and how the results of the appraisal are being used. Companies must
also disclose responsibilities of the internal audit function and if they do not have an internal audit
function they must explain why.
They must disclose how directors’ remuneration is chosen, which is usually done through a
remuneration committee. A clear distinction should be made between remuneration mechanisms
for executive directors and nonexecutive directors. It should be clear whether remuneration is tied
to the company’s longterm performance. Information regarding compensation packages should
include salary, bonuses, pensions, share payments and all other benefits, financial or otherwise, as
well as reimbursed expenses.
UNCTAD (2006) states firms must disclose that the board committees are intended to enhance
independent judgement on matters in which there is potential for conflict of interest, and to bring
special expertise in areas such as audit, risk management, election of board members and executive
remuneration and the composition and functions of any such groups or committees should be fully
disclosed.
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The next section summarises the Combined Code, which also provides suggestions for disclosures
and most companies follow this corporate governance code. As well as preparing financial
statements in accordance with the UK Generally Accepted Accounting Practice (UK GAAP), in the
UK it is part of the London Stock Exchange (LSE) Listing Rules for listed companies to comply
with the Combined Code and all companies must provide a compliance statement. The Combined
Code (2003) was introduced after the large corporate scandals such as Enron. Although it uses the
word ‘suggestions’ it can be seen as mandatory because if a company chooses not to comply with
one or more provisions of the Code, it must give shareholders a careful and clear explanation of
why it has made this decision. The Combined Code was first introduced in 1998 and has been
updated since then; the Combined Code 2003 is a revised version of the 2002 Code.
The names of the chairman, the deputy chairman, the chief executive, and members of the
nomination, audit and remuneration committees must be disclosed as well as the number of
meetings of the board and the directors’ attendance. The names of the independent nonexecutive
directors whom the board determines to be independent should be stated and any other significant
commitments of the chairman, any changes to them during the year, and the performance
evaluation of the board, committees and directors has been conducted.
The board should establish a remuneration committee of at least three members, who should all be
independent nonexecutive directors. The remuneration committee should have responsibility for
setting remuneration for all executive directors and the chairman, including pension rights and any
compensation payments. The committee should also recommend and monitor the level of
compensation and structure.
There should also be an audit committee of at least three members who should all be independent
nonexecutive directors. The main role and responsibilities of the audit committee should be set out
in written terms of reference and should include monitoring the integrity of the financial statements
of the company, and any formal announcements relating to the company’s financial performance.
As well as, reviewing the company’s internal financial controls, internal control and risk
management systems, it is also their duty to make recommendations to the board that are put to
the shareholders for their approval in the general meeting. They are involved with the appointment,
reappointment and removal of the external auditor and to approve the remuneration and terms of
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engagement of the external auditor and they must monitor the external auditor’s independence and
objectivity and the effectiveness of the audit process. In relation to nonaudit services they must
develop a policy on the engagement of the external auditor that accounts for relevant ethical
guidance regarding the provision of nonaudit services by the external audit firm. The annual report
should explain to shareholders how, if the auditor provides nonaudit services, auditor objectivity
and independence is safeguarded. Regarding whistleblowing, the audit committee should review
arrangements to staff of the company to raise concerns without facing any reprimands.
The 2003 Code was updated in 2006 and more recently in 2008. The successive codes cover the
same provisions as the 2003 Code but they apply to different accounting periods (Financial
Reporting Council Website, 1009).
2.3 Summary
Clearly there is are some overlaps with the UNCTAD guide
(2006), the Combined Code (2003) and corporate governance
literature and each give greater detail on different areas. Table
2.1 summarises and highlights the key areas in the corporate
governance guidelines. This provides the framework for the
areas to focus on when investigating the level of disclosures in
the annual reports of Cobham and Vodafone. These key
requirements should be found in all the annual reports of PLCs because they must abide by the
rules of the London Stock Exchange and legal requirements. Any additional noncompulsory or
voluntary disclosures give investors greater confidence about a firm.
3. Empirical Analysis
3.1 Company Backgrounds
Cobham is ranked near the middle of ninetyseven companies in the aerospace and defence
industry (Reuters Website, 2009). The main activity of the company is the design and manufacture
of equipment, specialised systems and components that are supplied to the aerospace, defence,
industrial and communications markets and the governments of the UK and USA are the their
largest group of customers (Cobham Annual Report, 2001). The current climate in the aerospace
and defence industry is summarised well by accounting firm PricewaterhouseCoopers who say
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that the aerospace and defence industry faces an uphill climb and in 2008 activity in the industry
was very low due financial and economic concerns and civil aviation overcapacity fears (PwC
Website, 2009). They also say that the outlook for defence sector spending remained uncertain.
Vodafone is ranked amongst the last top ten of the ninety companies in the wireless
telecommunications services industry (Reuters Website, 2009). Their main activity is to provide
mobile communication, mainly voice calls and text messaging, to individual and enterprise
customer and in 2007 they reported having 26% of the UK customer market share (Vodafone
Annual Report, 2007). In 2008 the telecommunications industry has become more volatile due to
falling prices, fierce competition from Orange, 02, TMobile, and 3 UK, transformational
innovation such as new broadband technology and new regulations (PwC Website, 2009).
Although there is fierce competition in this industry there are also high barriers to entry as the
access to telecommunication networks, 2G and 3G licences is granted by the government. The
industry is closely regulated by the Office of Communication who monitors the level of
competition, pricing and service availability in the UK (OfCom Website, 2009).
Vodafone's history started in 1982 and three years later they made the first mobile phone call in the
UK (Vodafone Website, 2009). Cobham have a much longer history as they were founded in 1934
by aviation pioneer Sir Alan Cobham (Cobham Website, 2009). At present, Vodafone and Cobham
both operate in a global business environment mainly in Europe, North America and Australia.
Vodafone also operate in Asia and the Middle East. In 2001 Vodafone employed approximately
56,800, which increased to 66,000 in 2007. Cobham have fewer employees; in 2001 they had
7,823, which increased to 9500 in 2007.
Vodafone has a strong presence on the high street with stores throughout the UK and a much
higher number of employees in comparison to Cobham. Cobham operates in an industry that is
more closed off from the public, but as they deal with the government they are likely to be closely
monitored. They are both large companies and although they operate in different industries this will
give an insight into the extent of disclosures in different industries in the UK.
3.2 Methodology
To conduct a quantitative analysis of corporate governance disclosures the Standard and Poor’s
Corporate Governance Scores (2002) methodology will be used as a guide. The Standard and
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Poor’s Corporate Governance Score represents an assessment of the internal standard of a
company’s corporate governance practices and policies and it is based on best practices and legal
regulations at the time. Standard and Poor’s assign companies with a Corporate Governance Score
(CGS) from CGS10 (highest) to CGS1 (lowest).
To conduct their analysis Standard and Poor’s (S&P’s) analysts meet with the management, other
officials, and shareholders of the company being evaluated to discuss the company’s corporate
governance. The scoring committee then votes to produces a CGS. Standard and Poor’s also
mention they partly rely on unaudited information and other nonpublic information. The
quantitative analysis in this report will be based solely on the information provided in the
companies’ annual reports.
There are four components that contribute to formulating the S&P’s CGS of a company. These
include ownership structure and influence, financial stakeholder rights and relations, financial
transparency and information disclosure and board structure and process. The S&P’s index is
extensive and the four components constitute of many subcategories. These four components and
some of their subcategories will be the basis for the quantitative analysis of Cobham and
Vodafone and the development of a disclosure index that is unique to this report.
Firstly, the criterion specifies that there should be public information on the company’s ownership
structure. There should be a breakdown of shareholdings that identifies majority shareholders,
director shareholdings, evidence of indirect shareholdings and management shareholdings. Key
points to identify are affiliations amongst shareholders, corporate structure, and shareholding and
management of key affiliates, outside holdings of major shareholders internal financial and
operational control system, management shareholding.
Secondly, under financial stakeholder rights the first point is that shareholders should be able to
call an annual general meeting. Important issues include shareholder meeting procedures, the
notices of meeting, participation at meetings, previous meeting minutes, shareholder information on
voting procedures and shareholder attendance record. Ownership rights and financial rights should
be disclosed including share structure and rights of common and preferred shares, shareholder
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agreements, dividend history and examples of share repurchases and swaps. Additionally there is
the issue of takeover defences and corporate control.
Thirdly, financial transparency is important because it prevents critical decision information being
withheld. Shareholders and creditors and the public should have access to disclosures. The
financial statements need to be understandable and there should also be nonfinancial information
of good quality. A critical issue is the independence and effectiveness of the audit process. This
can be maintained by audit contracts and reports, finance and control systems, and an audit
committee.
Fourthly, key analytical issues for board structure include the board size and composition and
board leadership and committees. The effectiveness of the board depends on definitions of board
role processes for identifying, evaluating, managing and mitigating risks faced by the company,
board and committee meeting’s agenda and management compensation process. Additionally, an
appropriate proportion of the directors should be independent and directors should be elected under
a transparent system in which they are not able to participate. In regards to board and executive
compensation, directors and executives should be fairly remunerated and motivated to ensure the
longterm success of the company. The level and form of compensation, the compensation setting
process and the performance evaluation criteria are all important factors.
The CGS index for this report will be developed based on the structure of the S&P’s CGS but it
will be adjusted to include factors discussed in the literature review. There are some overlaps with
the Combined Code, UNCTAD and S&P’s but some areas are not specifically mentioned in S&P’s
index. These include internal audit committee, remuneration committee, the separation of CEO and
chairman, and disclosure of board members’ backgrounds (summarised in table 2.1). The year
2001 will be analysed to identify disclosures before the introduction of the 2003 Combined Code.
Comparisons will then be made with the 2005 annual reports. The UNCTAD Guidance on Good
Practice was then introduced in 2006, hence annual reports in 2007 will be analysed to see if there
were improvements a year later. Shareholder figures and ratios will then be analysed to see if there
is any correlation with profitability and the developed CGS.
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Subsequently, a qualitative analysis will examine the detail of the disclosures of the two companies
over the three years. Additionally, primary research will be carried out by questioning the people in
charge of corporate governance at Cobham and Vodafone (see appendix 1). A drawback of
company correspondence is that there may be a degree of bias. However, it will provide an insight
into corporate governance within the companies.
3.3 Quantitative Analysis
Developed CGS Index
There are a total of twentyfour subcategories for the developed corporate governance index.
Scores have been put into three categories: 1215 is a grade C, 1620 is a grade B and 2124 is a
grade A. As this is a basic index, a score below 12/24 means that the company meets less than
half of the specified requirements and this would be classed as failing to disclose enough on
corporate governance. This section presents the developed CGS that was created as part of this
report using Microsoft Excel (See table 3.1 and table 3.2).
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In table 3.1 it can be seen that the overall level of disclosure increases over the three years for the
developed CGS index. Cobham met the requirements for ownership structure and compliance
disclosure from 2001. Since 2001 their disclosures on financial transparency were also strong.
The main weakness relating to the board structure was the lack of independent directors.
However, in 2007 at least half of the Board were independent directors. Cobham achieved a B
grading in 2001 and 2005. They reached an A in 2001 but only just met the boundary. This means
that they still have some areas to improve on, mostly relating to stakeholder rights and relations.
Table 3.2 (below) illustrates that Vodafone’s level of disclosure also improved each year.
However, unlike Cobham, they achieved a C in 2001. This is down to the reason that they did not
provide profiles or background information on their directors. In 2005 they have a higher score
than Cobham. This is because they provide more disclosure on financial stakeholder rights and
relations and at least half of their Board are independent directors, which is unlike Cobham. In
2007 Vodafone have the same scoring as Cobham and both companies meet the majority of the
scoring requirements. Both companies scored 21/24. However, neither company mentions any
affiliations amongst shareholders and no minutes are provided on previous meetings. One
difference is Cobham do not provide a share price history in any of their reports. A second
difference is Vodafone has no mention of any whistleblowing policies, whereas Cobham mention
whistleblowing in 2007. This is the main criticism of Vodafone’s disclosure level.
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Vodafone for the three years. Vodafone’s operating profit has improved over the three years but
2007 still shows a loss of approximately £1.6 billion. Cobham also has greater total equity
shareholders' funds, which increases each year. Whereas, Vodafone’s shareholders’ funds
decreases each year and this can be a concern for investors. Cobham’s dividend per share of
23.23p is much higher than Vodafone in 2001 but shows a great decline in 2005 where it is close
to Vodafone's dividend per share of 4.07p. Vodafone’s net profit margin is negative in all three
years and this is the same for their ROE. Cobham’s net profit margin increases from
approximately 12% to 16% but their ROE drops from 27% in 2001 to 21.5% in 2005. Cobham's
EPS is highest in 2001, 59.4p and then shows a drop in 2005.Both companies' EPS increases in
2007, although Vodafone's EPS is negative for all three years. Dividend cover is negative for
Vodafone and this mean that realistically they have no dividend cover, a negative value can show
that a company is in difficulty (BNET Website, 2009). On the other hand, Cobham have a steady
dividend cover of around 2.8 times over the three years and favourably ‘A dividend cover of at
least 2 suggests that a company has sufficient funds to pay for the dividend’ (BNET Website,
2009).
Summary
There is not a strong correlation between the level of corporate governance disclosures and the
two firms’ profitability. This is because the two companies have very different financial results.
Tables 3.1 and 3.2 show both companies achieved a high CGS in 2007 but looking at the financial
table (3.3) Vodafone has made operating losses each year, while Cobham has made a substantial
profit and show stable profitability for investors. However, table 3.3. does show that despite
Vodafone’s figures being in the negative region they are improving slightly each year, indicating
their management performance is also improving. In section 3.1 it was discovered that the
telecommunications industry can be volatile and there is fierce competition. This shows that there
are other factors that influence profitability despite the level of corporate governance or
disclosures.
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3.4 Qualitative Analysis
The qualitative analysis s organised into the same four main areas as the quantitative analysis. It
examines and refers to information from the companies Annual Reports.
Ownership Structure and Compliance
Vodafone:
In 2001 Vodafone was listed on the London Stock Exchange (LSE) which required them to follow
the Combined Code. They say they complied with the Code apart from the exception of ‘Provision
A.10’ on disclosures on ‘training for directors’. They explain that instead of a training programme
all directors are given guidance on their duties and the company believes information and
assistance for directors is “more than adequate”. In 2005 they are also in compliance with the
Combined Code with the exception of the Remuneration Committee. The combined Code says all
NEOs on the Remuneration Committee should be independent. However, Lord MacLaurin, the
Chairman on the Board was not an independent member of the Remuneration Committee for
several months; he then stepped down in March 2005. They fully comply in 2007.
In the 2005 Annual Report the company’s American Depository Shares (ADSs) are used on the
New York Stock Exchange (NYSE), meaning that they need to meet the NYSE regulations. The
NYSE requires US companies to comply with its corporate governance rules. For example, NYSE
requires detailed tests of independence of board members but the Combined Code does not have
this. However, although foreign private issuers like Vodafone are mostly exempt they are required
to disclose a summary of how the corporate governance practices already being followed may
differ from NYSE rules. From 2002 the SarbanesOxley Act applied to Vodafone. They now also
have a Disclosure Committee who are responsible for reviewing and approving procedures for
public disclosure. They also say that they are ‘making good progress’ on ensuring compliance
with section 404 of the SarbanesOxley Act which was required for 2007.
In regards to substantial shareholdings, in 2001, there were no holdings in the ordinary share
capital exceeding 3%, except Hutchison Whampoa Limited that had a holding of 3.14%. In 2005
they have four majority shareholders, the highest being The Capital Group Companies, Inc. with
7.92% and it is disclosed that there are no arrangements that could result in a change of control of
the company. In 2007 only one company, Legal & General Investment Management, had
substantial holdings of 4.02%.
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Cobham:
Cobham also follow the Combined Code and the Listing Rules of the Financial Services Authority
(FSA). In 2001 Cobham did not comply with all of the provisions in the Combined Code and most
of the issues were concerning independence. The senior nonexecutive director Lord Rockley was
not considered to be independent because of the length of his service. Additionally, they did not
meet all of the provisions for remuneration committees. They disclose that not all of the
nonexecutive directors on the remuneration committee were independent throughout the year.
However, they said the nomination committee was considering appointing an independent
nonexecutive director to replace Lord Rockley. In 2005 they also had issues of independence.
Again they did not fully comply with all of the Combined Code because less than half of the Board.
They said they were '...seeking to appoint an additional independent nonexecutive director'. In
2007 their level of compliance increased and they met all of the provisions in section 1 of the
Combined Code.
In 2001 they had six shareholders with major interest, over 3% in their ordinary share capital. In
2005 they clearly tabulate the investors that have a majority shareholding in the ordinary share
capital of the company. It is distinctive that they have large and wellknown financial companies
that have a major interest in their share capital. In evidence Lloyds TSB owned 4.75% in 2005,
which increased to 6.98% in 2007. Sir Michael Cobham held 4.43% of the shares before he past
away in April 2006.
Financial Stakeholder Rights and Relations
Vodafone:
In 2001 as well as holding an Annual General Meeting, they state that they have briefing meetings
with the major institutional shareholders in the UK, US and Europe twice each year.
Communication is mainly through the Annual Review and Summary Financial Statement. Financial
information is available on the company website. In 2005 the Annual General Meeting was
broadcasted live on the company website. In addition, from 2007 companies can register to
receive news on Vodafone.
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Cobham:
In 2001 communication with shareholders was via their website and they say 'Shareholders have
the opportunity to question the chairmen of the board and of the principal board committees at the
company's annual general meeting' (Cobham Annual Report 2001). In 2005 they clearly state when
there Annual General Meeting is and they enclose a notice explaining the business that will be
conducted at the meeting with the Annual Report sent to shareholder.
Financial Transparency and Information Disclosure
Vodafone:
They have an Audit Committee that meets three times and there is a brief description of the role of
the committee. In the 2001 Annual Report, it says that the Board has established procedures to
implement the Turnbull Guidance, “Internal Control: Guidance for Directors on the Combined
Code”. The Board had overall responsibility for the system of internal control, which provide
‘reasonable’ assurance against material misstatement. Disclosure on the Audit Committee and
internal controls remains the same in 2005.
The disclosure on nonaudit services in 2001 is very brief. They only say that Deloitte & Touche
charged £22 million for nonaudit serves. This includes £4 million for corporate finance services,
£3 million for tax advice and £15 million for IT consultancy and other services. Later in 2005 they
say that to help ensure auditor independence is not compromised the Audit Committee adopted
policies to provide for the preapproval of permitted nonaudit services. In 2005 they spent much
less on nonaudit services, it fell to £4 million, and a breakdown of audit fees is included in the
notes to the financial accounts under ‘operating loss’. In 2007 the Audit Committee receives in
writing ‘details of relationships between Deloitte & Touche and the Company that may have a
bearing on their independence and receives confirmation that they are independent of the
Company…’ This step helps to verify the independence of the auditors. Again the cost of
nonaudit services has decreased, it is £3 million in 2007. An analysis of the nonaudit services
fees is located in ‘note 4’ to the Consolidated Financial Statements. Fees for nonaudit services
include taxation and 'other' fees which they explain relates to preparatory work.
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Cobham:
There is a description of the duties of the Audit Committee similar to Vodafone. In 2001 Cobham's
Audit Committee meet three times a year and 2/3 of the members are independent. There is no
mention on nonaudit services in the corporate governance section. In 2005 they mention that all
of the committee are independent and they are responsible for selecting the auditors and specifying
the nonaudit work that they can provide. In 2007 they mention they have nonaudit policies and
the fees paid to external auditors is given in note 2 to the financial statements. The set out of the
audit fees is not very clear and they have £0.1m for 'all other services' but there is no explanation
of these services.
Board Structure and Process
Vodafone:
In 2001 the biographical details of the company’s fifteen directors is not included in the Annual
Report instead it is given in a separate document, known as the ‘Annual Review’. In 2001 they
specified changes to the Board, for example Arun Sarin resigned as an executive director but
stayed on as a nonexecutive director (NEO). They also disclose the resignations of other board
members. They say in 2001 that the board meets six times a year and ‘one other occasion to
consider strategy’. At the meetings they discuss financial budgets and forecast and new
opportunities for the company. In 2005 they give a more detailed breakdown of the Board
members and their responsibilities. A table was included to present the number of meetings for
each committee and the Board and the directors’ attendance. Noticeably, there is not full
attendance for most of the committee meetings. However, attendance increased in 2007 and there
are much fewer absentees.
In 2007 they biographical details of the directors and management are clearer with accompanying
photos of the Board member and it is easier to identify the independent directors and NEOs. They
now include the number of years that directors were on the Board. The biographies show that
there is a huge range of other large, wellknown and successful companies that directors have
worked for. The Chairman Sir John Bond was a NEO of Ford Motor Company, Group Chairman
of HSBC Holdings plc and had a previous nonexecutive role with competitor Orange plc. This
signals that the company has directors and management with vast business experience.
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21. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
In 2001 they have a Remuneration Committee consisting of entirely independent NEOs and
disclosure on remuneration spans over nine pages. They have disclosures on the executive
directors’ and NEO’s remuneration, pension benefits, longterm and shortterm incentives and
share options illustrated by tables. In 2005 the remuneration report is again very detailed and they
say, “Since the introduction of the current Executive Remuneration Policy in 2002, the
Remuneration Committee has conducted annual reviews to ensure that the Policy continues to
serve the Company and shareholders.”
Cobham:
In 2001 they have photos of the nine Board members but no labels of which director is in the
photo. In the profiles they mention when members were appointed, their ages, where they
previously worked and if they are directors or NEOs. In 2001 they had three NEOs but there is no
mention of any independent directors. There is also not sufficient information on how often the
Board members they only disclose that 'the Board as a whole meets regularly during the year'
(Cobham Annual Report 2001). On a positive note, they also disclose that the role of the Chairman
and CEO is separated. They have brief descriptions of the responsibilities of their remuneration
nomination and executive committees, with an extensive report on director's remuneration and
compensation levels. In 2005 the profiles on the Board of directors include clearly labelled photos
with a descriptive biographical paragraph. The 2005 clearly states that 1/3 of the directors are
independent. In 2005 their board structure improved in terms of corporate governance. They have
a nonexecutive Chairman, Gordon Page. Page was also Chairman in 2001 but in the 2005 report
he is titled as 'nonexecutive' Chairman.
In 2001 they mention that the board meet regularly but there is no further detail. The disclosure on
board meetings becomes much more detailed in 2005. In 2005 and 2007 they give disclosure on
the number of meetings. In 2005 five of the nine board members did not attend at least one
meeting. Attendance did not fully increase in 2007 as seven of the nine board members did not
attend at least one meeting.
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22. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
NonMandatory Disclosures
In 2001 Vodafone’s executive directors, functional heads and regional chief executive officers
meet on ten occasions each year as an Executive Committee. This committee is responsible for the
daytoday management of Vodafone. They also created two new management committees in
2001. This was the Group Operational Review Committee, who meet ten times a year, and the
Group Policy Committee, who meet eight times a year, who help oversee the execution of the
Board’s strategy and policy with the Executive Committee. They also have a Nominations
Committee who meet ‘as required’. They say the Board provides a formal transparent procedure
for the appointment of new directors to the Board which complies with the Combined Code. The
2005 report shows that in addition to requirements of the LSE and NYSE. Vodafone also
implement their own ‘Business Principles’. This is to define its relationship with all stakeholders
and govern how Vodafone conducts is daytoday business. Every employee is expected to act in
accordance with the Business Principles and they track implementation of it through internal
audits. In 2007 Vodafone include disclosure on their corporate governance rating. The Governance
Metrics International, a global corporate governance ratings agency, ranked them amongst the top
UK companies and they scored a rating of 10/10. Cobham do not provide extensive nonmandatory
disclosures.
In 2008 both companies was included in PwC's 'Best Practice for Corporate Governing Reporting’
publication. Vodafone show good examples of disclosing board's commitment to high standard of
corporate governance, compliance and supplying information and professional development to
directors. Cobham is used as an example for explaining circumstances where directors can be
reappointed by shareholders.
An email was sent to both Cobham and Vodafone to gather their views on corporate governance
directly. There was no reply from Vodafone. A response email the Deputy Company Secretary at
Cobham, Lyn Colloff, is shown in Appendix 2.
4. Discussion
Vodafone and Cobham are both large companies with many different shareholders; it was found in
the qualitative analysis that in all three years no shareholder has a substantial shareholding greater
than 10%. Bauwhede and Willekens (2008) argued more dispersed ownership means there is a
greater need for corporate governance. Disclosures in the earlier annual reports remain present in
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23. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
the later reports. The areas mentioned in the 2001 reports are also mentioned in the 2005 report
and also in 2007. This shows that the level of disclosure is being building up each year and nothing
is being taken out of the reports. This is shown by the size of the corporate governance section
increasing in pages in each year. In summary, the overall level of disclosure has increased and by
the final year the disclosures are at a high level. In support, Lyn Colloff said, '...corporate
governance disclosures [at Cobham] has definitely increased in recent years'. This may be due
changes in regulation and the introduction of the Sarbanes Oxley Act in 2002, the Combined Code
in 2003, and corporate governance disclosure guidelines such as UNCTAD (2006).
These are favourable results as 'investors are prepared to pay a premium to invest in companies
perceived to enjoy good governance' (Elliot and Elliot, 2007). Both companies had a fair level of
disclosure in 2001, despite corporate governance being new and many regulations were not
mandatory. This shows they were on the right corporate governance path before the reaction to
corporate scandals. By 2007 Vodafone appears to have a slightly higher overall level of disclosure,
in particular they provide more nonmandatory disclosure, for example ‘Business Principles’. They
are also referred to several times in PwC's Best Practices guide (2008).This type of voluntary
disclosure signals good corporate governance. It also shows that they are creating corporate
governance mechanisms that fit into their business, which can also be effective. This supports
Bauwhede and Willekens who argued that a firm's disclosure policy '...is tailored to some
firmspecific as well as institutional characteristics'. Cobham's Deputy Company Secretary, Lyn
Colloff, also believes that, 'Disclosures are expected to be tailored to the individual company...'
(See appendix 2).
The results support Nowland's argument on firm disclosure practices (2004) because it can be
seen from the quantitative analysis that there is a 'levelling out of disclosure practices ...’ Figure
4.1 (below) is intended to show the patterns in the level of the developed CGS, calculated in the
quantitative analysis, and the level of the firms' ROE shown in table 3.3. In 2007, the level of
disclosures for both Vodafone and
Cobham has improved and they have
the same CGS Score. Further research
would need to be carried out in this
area to see if this levelling out applies to
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24. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
all PLCs in the UK. As both companies' investment ratios show some improvement this could be
partly due to corporate governance, which relates to '…. maximising shareholder value' (Denis,
2001). Table 3.3 shows Vodafone's figures have increased, yet some of their figures are still
worrying. Figure 4.1 highlights that their ROE has remained fairly constant but it is still in the
negative region. Cobham's ROE has also remained consistent. To increase the strength of this
evidence, further research needs to be done in this area with a higher number of firms and
profitability ratios over a longer time period.
It is not possible to gauge the level of detail in the disclosures from the corporate governance index
results. The qualitative analysis helps to overcome this limitation. The quantitative analysis shows
they met disclosed disclosure requirements in key areas. The qualitative analysis goes into more
depth about the information in the reports on the board of directors, shareholder relations, financial
transparency and compliance. In example, from the qualitative index Cobham's 2001 annual report
shows that they did give a compliance statement. However, analysing qualitatively there are deeper
issues. Although they complied with most provisions there are some exceptions that they did not
comply with that impact independence.
Corporate governance has more impact on nonfinancial aspect of a firm. In support, the Deputy
Company Secretary at Cobham says that, “Most of the corporate governance requirements are
good business practice in any event. The benefit of corporate governance is achieved by running
the company in the spirit of good corporate governance...” This links to the definition that it
provides a framework for accountability to shareholders, supervision of managerial action and
setting strategic direction.
Both Vodafone and Cobham had a separate CEO and Chairman since 2001, in accordance with the
Combined Code. Brickley, Coles and Jarrell (1994) argued that this should improve performance
and increase value. In addition, by 2007 at least fiftypercent of Vodafone's Board of Directors
comprised of independent nonexecutive directors for both companies. This is one of the
requirements specified by the Higgs Report. According to Pass (2004), NEOs bring the benefit of
integrity and accountability when they exercise judgement. However, disclosures do not provide a
full insight into the board's real activity. There is a possibility that NEOs do not completely fulfil
their role. For example, in 2001 and 2005 there was not full attendance at the board meetings, with
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25. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
some improvement in 2007. Also, the companies disclose that information is given to members of
the Board so that they are able to carry out their governance duties effectively. However, there is
no guarantee that directors will read all of the relevant information and they do not disclose the
length of meetings or the topics discussed. In addition, Pass (2004) said that directors can have
time restraints because of multiple directorships. This shows that there are limitations to corporate
governance mechanisms and disclosures. Higgs (2003) argues ‘a nonexecutive director is
considered independent when... there are no relationships or circumstances which could affect...
the director’s judgement' and there is little disclosure on this in the reports. In example,
Vodafone’s statement of appointment the Board in 2007 says that there is a ‘formal, rigorous and
transparent procedure’. This can help to reassure shareholders that suitable directors are appointed
to the board. Yet, there is no mention on board members being fully independent and objective or if
there is a criterion to ensure independence. Cobham had some independence issues in 2001 and
2005 but by 2007 they also had at least fiftypercent independent directors.
Turley and Zaman found in their research that '… there is no automatic relationship between the
adoption of audit committee structure or characteristics and the achievement of particular
governance effects. However regulations such as the SarbanesOxley Act and the Combined Code
include requirements on audit committees as an important area. Vodafone and Cobham give
disclosures on their Audit Committees and the level of detail increases each year. The Combined
Code (2003) says that if NAS are provided then the annual report should explain that the external
auditor's independence is safeguarded. However, there is no full explanation in any of the annual
reports. Cobham do not explain what their 'other' nonaudit service fees cover. Additionally,
Vodafone have no mention of whistleblowing policies and Cobham mention only mention
'whistleblowing policies' very briefly. These are areas related to audit committees that could
benefit from more detailed disclosure.
The analysis shows there is room for improvement and a few areas still need increased disclosure.
Lyn Colloff provides business insight into this saying, “The amount of disclosure is likely to
change (… increase) in response to recent market conditions. The Financial Reporting Council,
who own the combined code, have already announced a review of the existing code. Expected
changes to the Code are likely to be around behaviours within the Board Room...”
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26. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
A limitation to the empirical analysis of this report is that there is a lack of resources or business
status to carry meetings with the companies or access private company information. It is also
difficult to access analyst reports, such as Standard & Poor’s, to compare the developed CGS
because they require a subscription fee. As an extension, it would be beneficial to analyse a greater
number of PLCs in different industries and over a longer time period to observe if the level of
corporate governance is similar to the results for Cobham and Vodafone. Corporate governance
literature and regulations covers numerous points and this report focuses on several specific areas.
Therefore, it would be beneficial to examine greater areas of disclosure that were not included in
the developed corporate governance index but are mentioned in the Combined Code, UNCTAD
guide and S&P's index. Examining the disclosure levels and requirements in other countries would
provide a relative level of disclosures compared to the UK and this would be beneficial due to the
increase of globalisation and firms operating in global business environments.
5. Conclusion and Recommendations
Vodafone complied with the majority of provisions in the Combined Code in 2001, 2005 and 2007.
The evidence from the quantitative and qualitative analysis indicates that Vodafone had a higher
level of disclosure since 2001. Vodafone also gives additional nonmandatory disclosures. This is
unlike Cobham who had a greater number of exceptions in the first years. By 2007 there is a
leveling out of disclosures and both Vodafone and Cobham meet the majority of disclosure
requirements despite being in different industries and different profitability levels. Conversely, it
can be noted that a high level of disclosures does not always directly link with high profitability, as
illustrated by Vodafone’s results in the quantitative analysis. Corporate governance disclosures are
more attributable to the nonfinancial perspective.
The evidence suggests that the overall level of corporate governance disclosures in the UK is quite
high. Yet, it is likely that disclosure requirements will increase as the Combined Code is constantly
being updated since its introduction. The sufficiency of appropriateness of disclosures has become
more important over the years. Public listed companies need to provide the right amount of good
quality disclosures in their annual reports. The companies investigated do meet the main areas of
disclosure on ownership structure, financial stakeholder rights and relations, remuneration and
financial transparency. Although, the results from the empirical analysis indicate that disclosures
relating to the independence of the NEOs needs further improvement.
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27. Corinna Ruth Noel The University of Manchester (2009) Corporate Governance Disclosures
It is recommended that annual reports include more detail on the true independence of NEOs and
they should be able to disclose that there are no prior relationships with the firm. This will show
that NEOs have 'independence in mind and in appearance' (Porter, Simon and Hatherly, 2003).
Another suggestion is to include reasons why directors do not attend meetings. Furthermore, to
assure all stakeholders that there are no engagements in fraudulent activity companies should give
more detail on their whistleblowing policies and the measures they take to safeguard external
auditor’s independence. In addition to this the introduction of ‘detailed tests of independence’ of
board members that check independence against various standards could be introduced and
disclosed. This would be similar to the NYSE corporate governance rules and ‘Bright Line Tests’
(Shearman & Sterling, 2003) as it appears to be a highquality method for ensuring true
independence.
6. Appendix
Appendix 1: My primary research questions
I am interested in finding out your opinions or general feedback in regards to
the following questions:
1) Do you believe the amount of corporate governance disclosures in the Cobham
Annual reports has increased in recent years?
2) Do you think the amount of disclosure will continue to increase?
3) Do you feel that your shareholders value corporate governance disclosures?
4) Have your work activities ever been changed due to corporate governance
requirements?
5) Does corporate governance limit the independence of the directors in any way?
6) Do you believe the benefits of corporate governance outweigh the costs
involved in setting up and monitoring corporate governance systems?
Appendix 2: Email response from Deputy Company Secretary at Cobham
Subject: RE: Corporate Governance
From: Lyn (Cobham) (@cobham.com)
Sent: 27 April 2009 10:34:30
To: corinna.noel@student.manchester.ac.uk
Cc: Julian (@cobham.com)
Corinna
Julian has passed this on to me to respond to as it is more my role to manage
corporate governance compliance.
The amount of corporate governance disclosures has definitely increased in
recent years. Each year the combined code disclosures are required to be
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