Cadbury Theory

Theory does not tell us in what situations devices are substitutes and when they reinforce each other. For example, if a company has large outside shareholdings, is the oversight of large shareholders a substitute for monitoring management activity by independent directors, or does the presence of large shareholders mean that they use their influence to encourage the appointment of additional independent directors? Bathala and Rao (1995) find that board composition is systematically related to a number of other variables including institutional holdings, growth, volatility, and CEO tenure.

Dedman (2000) investigates whether compliance with certain recommendations of the code contained in the Cadbury Report (1992) is related to firm size, ownership

Larger firms are more likely to comply with the Code. One dimension of governance is the ability of external stakeholders to replace management, if it is not performing in accordance with their wishes. Management that is hard to replace is described as ‘entrenched’. Dedman found CEO ‘entrenchment’ was negatively associated with the number of non-executives, but the influence of CEO ownership reduced significantly following the introduction of the Cadbury Code. Dedman found no evidence of an active role of the institutional investors in intervening with their investee companies’ governance structure. Dedman (2002) finds that while there is evidence of widespread compliance with the Code, existing research fails to find any direct relationship between the number of non-executives on UK boards and firm value. Nevertheless, she suggests there is evidence that compliance with the 1992 Report led to a reduction in accounting manipulation and that top executives were

However, 35% of the non-executives in their sample were not independent because they: were advisers, directors/ employees of interrelated companies; had loans from the company; or were suppliers or customers of the company. Weir and Laing (2001) examine the extent of Cadbury compliance in 320 non-financial UK-based listed companies for the years 1995 and 1996. They collected the governance data from the 1995 annual reports and the performance measures were taken from the 1996 annual report. They report widespread compliance (separating the role of Chair and CEO, sufficient number of non-executive directors on the board and adoption of a remuneration committee) with the Cadbury Code. In addition, they evaluate the link between governance structure and corporate performance as measured by return on assets. They found: combined leadership structure was common in the two highest quartile groups; the highest performing quartiles had the lowest proportions of non-executive directors on their boards; and the best performing quartiles had the lowest representation of unaffiliated non-executive directors. In their interpretation, the benefits of combining the role of Chair and CEO outweigh those of separation and, merely adopting a specified set of