Select Committee on International Development Appendices to the Minutes of Evidence

Attachment 2


Prepared for the British Council by Dr Rosamund Thomas, Director, Centre for Business and Public Sector Ethics, Cambridge, UK, September 1998


  The UK approaches standards of conduct, or ethics, in public and business life by self-regulation or voluntary codes, rather than by statutory authority.

  The Committee on Standards in Public Life (formerly the Nolan, now the Neill Committee), set up in 1994, recommended new codes and principles to cover the behaviour of MPs, Ministers, civil servants and others in public life. These codes and principles, together with institutional developments, have been implemented to bring national government in line with changes in UK society. The Committee went on to address local government in England, Scotland and Wales, and its recommendations are presently being implemented.

  In 1997 the Committee moved closer to a statutory approach to ethics by recommending a new statutory offence, `misuse of public office', which is under consideration. In addition, existing legislation covering criminal offences, such as the law on corruption, is being updated.

  Similarly, the UK business community has always preferred self-regulatory codes to govern the conduct of company directors. The Hampel Committee on Corporate Governance proposed a code and set of principles in its 1998 Report. The City of London and the business community have succeeded, through this report, in retaining self-regulatory codes to govern the conduct of company directors. If, however, the Hampel Code does not succeed in regulating adequately the conduct of those in business, the government may take steps to legislate for this.

  Sections 1 and 2 of this document introduce the subject of ethics in public and business life.

  Section 3 deals with ethics in public life under seven subheadings:

    —  codes of conduct and laws;

    —  institutional changes/reforms;

    —  audit, public accountability and openness;

    —  guiding principles and motivation to encourage good conduct;

    —  external and internal education and training;

    —  democratic trends involving the views of the public;

    —  culture and values.

  Section 4 explores corporate governance in the UK from the Cadbury Committee to the work of the Hampel Committee.

  Section 5 reviews the governance of the financial services industry in the UK, and is followed by Section 6 which covers professional standards of conduct.

  Conclusions are drawn in Section 7.


  The question of ethics in public and business life whether it concerns politicians and public officials or company directors and the corporate sector, is one that has come to prominence in recent years in the UK. The infamous "cash for questions" case, in which certain Members of Parliament were accused of taking payment to ask questions in the House of Commons and arguably contributed to the heavy defeat of the Conservative administration in 1997, is one prominent example. That issue and others were considered by the committee which had been established in 1994 headed by the judge Lord Nolan to look into the wider issues of standards and ethics both for elected politicians and for civil servants and other public officials.

  In the private sector corporate failures and concerns about company directors' responsibilities led to the setting up of the Cadbury Committee which began a review of corporate governance. This work was added to by the later Greenbury Committee, which looked at the "fat cats" issue of company directors paying themselves large bonuses, and the Hampel Committee.

  There are many similarities and some differences in the way in which standards and ethics are approached in the public and private sectors in the UK. This briefing document gives an overview of those issues. It describes how they arose and what steps are being taken to tackle them. The issues continue to be debated. Amongst other things the government is now beginning a review of legislation affecting corporate governance and other company law issues.

  This document was commissioned by the British Council from Dr Rosamund Thomas, Director of the Centre for Business and Public Ethics.


  In 1986, the civil services of the UK and France were reported to be "the two best" in the European Community. The British civil service was "very much admired" for its objectivity, fairness and impartiality. Why, then, the emphasis in the 1990s on a need for ethics in public life?

  By the 1990s numerous changes had taken place in the UK: the privatisation of a growing number of state functions; the contracting-out of a range of government services; renewed emphasis on financial efficiency; reductions in the numbers of civil servants and the separation of executive tasks into Executive Agencies. At the same time Parliament was under increasing pressure from professional lobbyists, and there was a general lack of clarity over the acceptance of gifts, hospitality and outside employment by MPs and Ministers. Citizens, too, were becoming more aware through the media of the public and private behaviour of their elected representatives: the consumer-led society of 1990s Britain was voicing opinions about standards they expected from those in public life. A number of individual cases involving unacceptable behaviour by Ministers and MPs led the then Prime Minister, John Major, to set up in 1994 an independent committee to inquire into standards in public life, chaired by a judge, Lord Nolan. After three years and three published reports, Lord Nolan stood down as Chairman, to be replaced in late 1997 by Lord Neill of Bladon, QC (hence, the committee is now known as the Neill Committee). The new Prime Minister, Tony Blair, has continued the Committee's work; indeed, a fourth area, the funding of political parties, is now being tackled.


  Before the 1990s, "ethics" was not a word commonly used in the UK in the context of public life: the term was "standards of conduct". Now, the term "ethics" has been adopted alongside it. Traditionally, the UK has regulated ethical behaviour, or standards of conduct, in public and business life by reliance on self-regulatory codes as much as on the law. The British civil service, founded on the principles of the Northcote-Trevelyan Report of 1853, espoused the convention of political neutrality, which was upheld by on-the-job training, and by the establishment in 1969 of the Civil Service College, as well as by a disciplinary code. Certain laws had existed from the turn of the century to deal with standards of conduct in public life. Criminal laws, for example, had been enacted to cover unauthorised disclosure of official information—the Official Secrets Act (1911-1939)—and offences of corruption, namely the Prevention of Corruption Acts (1889-1916). A spate of breaches of trust during the 1980s by British civil servants led to prosecutions under the Official Secrets Acts for unauthorised disclosure of official information, and in 1989 these Acts were amended.

  In the 1960s and 1970s some instances of corruption in English local government had occurred, particularly over the awarding of contracts for public building works, which spread to central government. A Royal Commission on Standards on Conduct in Public Life, under the chairmanship of Lord Salmon, reported in 1976, but its recommendations remained largely unimplemented. The Nolan Committee on Standards in Public Life, in its First Report of 1995, included a review of the loopholes in the UK Prevention of Corruption Acts identified by the Salmon Committee, recommending that the Law Commission might rationalise the law on corruption.


  Ethics is the positive side of seeking to uphold standards of conduct and behaviour in public life and relies in its modern form upon seven key elements, as follows.

3.1  Codes of conduct and laws

  Traditionally, the UK has relied upon self-regulatory codes to govern conduct in government and business. However, moves are in progress to modernise corruption laws, and possibly to create a new statutory offence, "misuse of public office." These modern developments are set out below.

Codes of conduct

 (i)   Central Government

  Codes of conduct have existed in the UK for decades to set standards in public, business and professional life. The Treasury and Civil Service Committee of the House of Commons was well advanced in proposing changes to the Civil Service Code when the Nolan Committee issued its First Report in 1995: the Nolan recommendations were integrated into the new Civil Service Code. The 1990s Code is more decentralised than before, with the Cabinet Office setting the guidelines and departments of state supplying the details.

  In the UK, codes of conduct have been extended throughout the government and two new ones have been introduced post-Nolan for MPs and for Ministers, to replace old Conduct and Procedures for Ministers Guidelines.

 (ii)   Local Government

  At local government level in respect of elected members or councillors the Nolan Committee (in its Report into Standards of Conduct in Local Government, Third Report, 1997) recommended a radical new ethical framework whereby Parliament approves a statement of the "General Principles of Conduct for Local Councillors'" and a "Model Code of Conduct for Local Councillors", both prepared by local government representatives and also approved by Parliament. The Committee proposed that each local authority should adopt a local code of conduct which would incorporate the general principles and achieve the same effect as the approved model code. This would give each local authority responsibility to adopt a code within the national framework, which would meet local needs, and would provide consistency in codes for local authorities.

  The Committee also recommended Local Government Tribunals in England, Scotland and Wales, each as an independent arbiter with the power to hear appeals from councillors and to require a local authority to alter its code of conduct when necessary. However, since the Nolan Committee's Third Report of 1997 devolution of certain powers to Assemblies in Scotland and Wales has been voted with a Scotland Bill now having been prepared. Devolution means that careful thought must now be given as to how an ethical framework will be implemented in Scotland and Wales.

  Regarding local government officials the Nolan Committee decided against a formal framework similar to that of local councillors. Instead, it proposed that the work done by the Local Government Management Board and by individual local authorities in establishing codes of conduct for officers should be built upon. The Nolan Committee called for clear routes for staff working within local authorities to confidentially voice any concerns, as well as a publicised complaints system for people who receive services from a contractor to the local authority.

  Another key cause of concern identified by the Nolan Committee in local government was the potential for improper behaviour if the normal professional relationship between the councillor (the elected member/politician) and officer (the official) became unsatisfactory—to quote, "too cosy or too combative". The Committee recommended that a formal protocol setting out the relationship between members and officers should be adopted throughout local government.

  In April 1998 the Local Government Minister announced a consultative paper setting out the government's plan to introduce a national framework for codes of conduct for local government. This document, entitled Modernising Local Government—a New Ethical Framework—follows the Nolan Committee recommendations for tough new standards of conduct applicable to both elected members and officers.

Laws and proposed laws in the UK in respect of anti-corruption and misuse of public office

 (i)   Updating the offence of corruption

  In response to its own and OECD initiatives, the UK is reforming its Prevention of Corruption Acts. Britain is well advanced amongst OECD member nations in meeting the organisation's criteria in this respect. In 1996 the Home Office published a consultation paper on the law relating to the bribery of MPs. This matter is also being considered by the House of Commons (Joint) Committee on Standards and Privileges. It is unclear, however, whether an MP would be prosecuted under the Prevention of Corruption Acts or disciplined under parliamentary law.

  In March 1997 the Law Commission published draft proposals in the form of a consultation paper for a modern law on bribery which in turn follows a 1976 recommendation of the Royal Commission on Standards in Public Life (the Salmon Commission). In the light of modern developments such as the privatisation of public functions, the Law Commission proposed the abolition of the distinction between a public and private organisation but, does not deal with the bribery of an MP, so as to avoid duplication of effort.

  In June 1997 the Home Secretary announced his intention to take forward the Law Commission's proposals for a new offence of corruption covering both public and private sectors and to legislate to bring the bribery of MPs in respect of their official parliamentary duties within the scope of statute law once the reports of relevant Parliamentary Committees had been considered. These proposals are deemed to be more effective against bribery and corruption in a wider range of circumstances.

  In 1998 the Law Commission published its Report and Bill for the reform and modernisation of offences contained in the Prevention of Corruption Acts and the common-law offence of bribery. The proposals call for the replacement of the existing law by a modern statute creating four new offences:

    —  corruptly conferring, or offering or agreeing to confer, an advantage;

    —  corruptly obtaining, soliciting or agreeing to obtain, an advantage;

    —  corrupt performance by an agent of his or her function as an agent;

    —  receipt by an agent of a benefit which consists of, or is derived from, an advantage which the agent knows or believes to have been corruptly obtained. (The term "agent" is anyone who has agreed to perform functions, whether for another person or for the public, or both).

 (ii)   Proposal for a new offence: misuse of public office

  In 1997 the Nolan Committee proposed a new offence, "misuse of public office". This would cover serious misconduct other than bribery or corruption. The Committee did not envisage frequent prosecutions. Nonetheless it felt it important that such an offence should exist to fill the gap in existing law, signal clearly the special terms on which all public offices are held and achieve consistency across all public bodies. The new offence would apply to Ministers and civil servants, local government councillors and officers, the police, magistrates and the judiciary and to non-departmental public bodies. It is even envisaged that the offence might apply to other bodies which the Nolan Committee considered in its Second Report—institutions of further and higher education, and possibly fully privatised companies such as the utilities.

  This new offence develops the existing common-law offence of "misuse in a public office," under which prosecutions are still made. However, in its consultation paper on corruption the Law Commission noted that this offence was "wide-ranging and ill-defined." It involves, for example, dishonesty which extends beyond misconduct in a public office. The proposed new offence would give a clearer indication of the circumstances in which an offence might occur. The Nolan Committee recommended that consent to bring criminal proceedings under this new law should be vested in the Director of Public Prosecutions. The only defence against criminal proceedings should be that the office-holder has acted in good faith.

 (iii)   Official Secrets Acts 1911-1989

  We noted earlier that in 1989 UK Official Secrets Acts were amended, particularly the offence relating to the unauthorised disclosure of official information or leakage of government information.

 (iv)   Other laws affecting conduct and behaviour in the public and private sectors

  Company law covers the role and duties of company directors. There is also a law relating to insider dealing. In March 1998 the Minister for Trade and Industry announced a wide-ranging three-year review of company law to consider whether the law on directors' duties should be amended to take a range of stakeholder interests into account. Many aspects of directors' duties are embedded in good practice and the self-regulatory system of corporate governance, namely the Hampel Committee's Voluntary Code and Principles (set out in Section 4.5).

3.2  Institutional changes/reforms


  To be effective, codes and laws need to be properly regulated and overseen. In the UK a new Office—that of Parliamentary Commissioner for Standards—has been introduced at national level. This body is separate from Parliament but co-operates with it to advise Members of the House of Commons who have dilemmas about procedures or conduct. Sir Gordon Downey, the first Parliamentary Commissioner

  Improved declaration and registration of Members' interests have been devised as part of the new ethical framework for Parliament. The Parliamentary Commissioner for Standards advises Members of the House of Commons about any uncertainties or concerns they may have in respect of the new procedures for declaration and registration.

  Another development at parliamentary level has been to rename the House of Commons Privileges Committee the "Committee on Standards and Privileges" to extend the Committee's remit to oversee the work of the Parliamentary Commissioner for Standards. The Committee also considers any matters relating to the conduct of Members, including specific complaints about alleged breaches in any code of conduct which have been drawn to its attention by the Parliamentary Commissioner. These improvements to parliamentary procedures have been made as a result of the Nolan Committee's First Report of 1995 and Parliament's response to it.


  Institutional changes and reforms in the Departments of State at central government level post-Nolan include the appeal process, whereby the Civil Service Commissioners provide the ultimate appeal for a civil servant who has a dilemma relating to propriety or ethical standards.

  Ministers are bound by parliamentary procedures and the revised Code for Ministers. In addition, consideration is being given as to whether Ministers facing conflicts of interest and other ethical dilemmas should be advised by an "Ethics Counsellor". The role of Sir Gordon Downey might be extended. Alternatively, a separate post of "Ethics Counsellor to Ministers' might be created.

Local government

  At local government level, the Nolan Committee in its Third Report (1997) recommended that councils should set up a Standards Committee, composed of senior local government councillors, to examine allegations of misconduct by councillors and to recommend disciplinary action. Greater clarity was needed at local level not only in respect of local authority codes of conduct but also in regard to the rules of registration and declaration of interests and action to be taken by councillors when faced with a potential conflict. If a councillor failed to abide by these rules the Nolan Committee proposed that the Standards Committee would be able to recommend to the full Council that the councillor should comply or be disciplined. The government's consultation paper Modernising Local Government proposes the setting-up of a new independent Standards Board to investigate allegations of malpractice and misconduct, on the lines of the Nolan Committee's proposals.

  Another key concern was abuse of the planning process and the granting of planning permission for new buildings. The recommendations relating to codes of conduct and conflicts of interest at local level are considered to be of particular importance in their application to this.

  An appropriate ethical framework means devising codes or laws which can be implemented with the resources available. These should not be too complicated or detailed. Similarly, institutions such as an Office of the Standards Commissioner, or committees and/or formal procedures for whistle-blowing, need to be simple and clear. The Nolan Committee has warned that:

    —  attempting to enforce good conduct through detailed rules can itself contribute to wrongdoing, especially if the rules are based on the presumption that people will naturally misbehave; and

    —  a lack of clarity and consistency in rules and procedures is unhelpful.

    —  awareness of the codes or laws needs to be part of any ethical process.

3.3  Audit, public accountability and openness

  Financial audit of central and local government is crucial to ethical government. Indeed, so many cases of misconduct in public and business life stem from opportunities to "get rich quick". At central level the National Audit Office, under the Comptroller and Auditor General, fulfils the external monitoring role. Select Committees of Parliament in the UK also provide external accountability and report upon the performance of executive departments of state. In addition, departments of state each have an internal accounting officer.

  Open government in the UK at central government level is upheld by the Code of Practice on Access to Government Information rather than a statute law. However, the government favours freedom of information legislation and a White Paper, Your Right to Know (1997), was published as a step towards introducing this.

  At local government level the Audit Commission undertakes the role of external audit and, unlike central government, a statute law provides access to information. However, new rules on openness to allow planning agreements to be subject to discussion by elected members of the local authority and the public have been recommended by the Nolan Committee.

3.4  Guiding principles and motivation to encourage good conduct

  An ethical framework alone cannot yield good conduct but needs underlying principles to underpin behaviour throughout an organisation. Seven Key principles of public life were advanced in 1995 by the Nolan Committee in its First Report. These were carried forward in 1997 to local government in England, Scotland and Wales but, as noted earlier, devolution will require their clarification in Scotland and Wales. The seven guiding principles were:


  Holders of public office should act solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.


  Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might seek to influence them in the performance of their official duties.


  In carrying out public business, including making public appointments, awarding contracts or recommending individuals for rewards and benefits, holder of public office should make choices on merit.


  Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.


  Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons and restrict information only when the wider public interest clearly demands.


  Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.


  Holders of public office should promote and support these principles by leadership and example.

  Ethical conduct also requires motivation and example: the development of the will of individuals who wish to serve the public and/or their shareholders, employees and clients with integrity and to make sacrifices, where relevant, in the public interest. Suitable personnel management policies and their implementation can help to uphold morale and develop motivation, but leadership and example from the top are prerequisites. Ethics in public, business and professional life is the antipathy of self-interest, greed, corruption and selfishness.

3.5  Education and training for public life

  Education and training can instil an understanding of why ethical conduct is necessary to promote sound government and business practices, to prevent corruption and to make staff aware of codes and laws and of the consequences if they do not follow good practice.

  Centre for Business and Public Sector Ethics in Cambridge has concentrated, as a national and international leader, on developing, through research, curricula course materials for higher education and for training and policy advice. Indeed, Dr Rosamund Thomas gave detailed written evidence at the request of the Nolan Committee to its first inquiry into Standards of Conduct in Public Life and also to the Cadbury Committee on Corporate Governance. The Centre has created a research method to analyse ethical issues in theory and practice, culminating in a series of books originated in association with universities and practitioners worldwide. The books are entitled "Teaching Ethics" and can serve as core ethics texts for emerging courses in public and business administration.

  Besides Centre for Business and Public Sector Ethics, British universities are beginning to teach ethics as a modern subject and there are now other research centres in Business Ethics in at least ten universities. The British Civil Service too, is introducing certain elements of ethics onto its courses.

3.6  Democratic trends involving the views of the public

  The extent of the public's role in creating ethical government and an ethical society depends on a country's democratic or non-democratic status. In a number of Western democracies, including the UK, Canada and Spain, a loss of trust in those in public positions rather than endemic corruption has been the cause of modern reforms to strengthen government.

  During its three enquiries the Nolan Committee placed press advertisements asking members of the public to write to the Committee with their concerns about standards in public life. Its seven principles, outlined in 3.4 above, therefore take into account the views of the British public and their calls for greater integrity, honesty and openness in public life.

3.7  Culture and values

  Ethics reflects the culture, values and norms of a society which may be synthesised into codes of conduct, laws and principles governing behaviour.

  In the UK an ethical foreign policy has been formulated more overtly than in the past by the Labour government which came to power in 1997. Yet ethical dilemmas face all countries and have to be resolved: Can a reduction in the trade of arms be upheld when many countries are competing towards greater export sales and increased trade? Can environmental conservation and the protection of endangered species and forests be adhered to, in the spirit and practice of the Rio treaties on environmental conservation, signed by many nations, against pressures for development to create enriched markets or personal gain? Can violence in society be minimised when global drug-trafficking is taking place and individual and organised crime are proceeding apace, alongside new developments in electronic and IT communications?

  These ethical dilemmas confront many nations. Appreciating the culture and values of one's country and seeking to uphold them through ethical policies and anti-corruption laws—as well as grappling with the dilemmas and pressures which arise—are all part of the process of ethics in public life and corporate governance.


  Corporate governance is concerned with how companies are governed, how executive actions are supervised and how a company is accountable to regulations imposed on it by law or other commitments to stakeholders. This section looks at current issues in corporate governance in the UK. There are common themes in how questions of ethics and standards of conduct are dealt with in public service and private business. Traditionally the UK approach in both areas has been one of self-regulation by commonly agreed codes and standards rather than by statute. This still holds good for the time being but, as indicated in the following sections, there is a growing tendency to consider the introduction of laws and regulations. This can be seen not only as a response to perceived failures in the self-regulatory approach but also in the greater influence of the European Union and the introduction of continental European ideas of more formal codes and regulations into the UK.

4.1  The London Stock Exchange

  The London Stock Exchange is the UK's major stock exchange and one of the top three exchanges globally. It provides an essential marketplace where companies can raise finance for expansion and investors can share in their growth. By the end of 1996 there were 2,704 companies in the main market (known as the Official List)—2,171 British, 533 international and 252 on the Alternative Investment Market (AIM), which is for smaller, young and fast-growing companies. In 1986 the London Stock Exchange became a private limited company under the Companies Act 1985 and in 1991 the Exchange replaced the governing Council of the Exchange with a Board of Directors drawn from its customer and user base.

  The London Stock Exchange regulates both capital and trading markets. It fulfils this role by assessing applications of companies wishing to join the market and monitoring listed companies' compliance with the rules. The requirements for listing on the Exchange are contained in the "Yellow Book". The Stock Exchange also supervises the conduct of the 300 member firms which deal on its markets.

  Regulation by the London Stock Exchange takes six forms:

    —  it acts as the Recognised Investment Exchange;

    —  it acts as the Competent Authority for Listing;

    —  it creates the rules of the Exchange;

    —  it monitors members' compliance with the rules and vets new applicants;

    —  it regulates companies' compliance with continuing obligations; and

    —  it investigates abuse of its markets.

  The "Big Bang" in 1986 brought about wide-ranging changes in the rules of the Stock Exchange, such as the abolition of the system of minimum commission and the rules concerning membership. There were changes also in the UK's system of regulating investment business, with the introduction in 1986 of a new regulatory system under the Financial Services Act. The Stock Exchange has always been responsible for overall regulation of its member firms, but the Act added a new statutory dimension, designed to protect investors. It divided responsibility for regulation and supervision of the securities market into two: the supervision of an investment business's conduct in its relation with its clients and the regulation and operation of the marketplace. A new organisation—the Securities Association (now the Securities and Futures Authority, or SFA)—was created to take on the first of these roles, and has been recognised as a Self-Regulating Organisation (SRO) under the Act.

  The Stock Exchange still regulates the operation of the marketplace as a Recognised Investment Exchange (RIE). In order to carry out business on the London Stock Exchange today a firm must have authorisation from an SRO as well as membership of the Exchange.

  As the UK's Competent Authority for Listing, the Stock Exchange also regulates listed companies.

  The number of private shareholders in the UK fluctuated during the 1990s, but the former government's privatisation programme—including British Gas, the Trustee Savings Bank and British Telecom—together with the tax encouragement given to employee shareownership, led to increases in the number of private, as distinct from institutional, investors, Sixty per cent of shares in listed UK companies are held by UK institutions—pension funds, insurance companies and unit and investment trusts. Of the remaining forty per cent, about half are owned by individuals in the UK and half by those overseas (mainly institutions). Discussion of the role of shareholders in corporate governance, therefore, mainly concerns the institutions particularly those in the UK.

4.2  The Cadbury Committee on Corporate Governance

  The Cadbury Committee was a private-sector initiative, set up in the early 1990s under the chairmanship of Sir Adrian Cadbury. The ensuing Cadbury Code is now a benchmark of corporate governance in the UK and internationally.

  The Cadbury recommendations were publicly endorsed in the UK and incorporated in the Stock Exchange Listing Rules. The Cadbury Code defined "corporate governance" as "the system by which companies are directed and controlled". It put the directors and shareholders of a company at the centre of any discussion on corporate governance.

  It has been pointed out this is a restrictive definition of corporate governance and it excludes many activities involved in managing a company. Bodies such as the Institute of Directors argue that UK business has been excessively regulated for many years and that over-zealous implementation of the Cadbury Code only adds to this burden.

4.3  The Greenbury Committee on Director's Remuneration

  The Cadbury Report was a response to corporate failures in the UK at that time. The Greenbury Report addressed the issue of directors' pay. There was a widespread public perception that directors, in particular of newly privatised utilities, were paying themselves large, unjustified salaries and bonuses. The report was intended to tackle this issue and re-establish public confidence in business. Both the Cadbury and Greenbury Reports were responses to things which appeared to have gone wrong. Both Committees concentrated largely on the prevention of abuse.

  The main aim of the Greenbury Committee, chaired by Sir Richard Greenbury, was not to control directors' pay (although some believe there is such a need), but to disclose it fully. The new corporate governance requirements for full disclosure of directors' salaries and for a remuneration committee mean that companies' annual reports now include more information on these areas. In the main, the larger listed companies have implemented both codes fully, while smaller companies find it harder to comply.

4.4  The Committee on Corporate Governance (the Hampel Committee)

  In 1995 the Committee on Corporate Governance, under the chairmanship of Sir Ronald Hampel, was established on the initiative of the Chairman of the Financing Reporting Council. This followed the recommendations of the Cadbury and Greenbury Committees that a new committee should review the implementation of their findings. Among the Committee's sponsors are the London Stock Exchange, the Confederation of British Industry and the Institute of Director's, as well as the National Association of Pension Funds.

  The Committee's remit was agreed with the sponsor organisations, as follows: "The Committee will seek to promote high standards of corporate governance in the interests of investor protection and in order to preserve and enhance the standing of companies listed on the Stock Exchange. The Committee's remit will extend to listed companies only."

  The Committee will conduct a review of the Cadbury Code, and:

    —  keep under review the role of executive and non-executive directors—recognising the need for Board cohesion and the common legal responsibilities of all directors;

    —  be prepared to pursue any relevant matters from the report of the Study Group on Directors' Remuneration, chaired by Sir Richard Greenbury;

    —  address as necessary the role of shareholders in corporate governance; and

    —  address as necessary the role of auditors in corporate governance.

  While there is evidence that the Cadbury Code led to higher standards of governance and greater awareness of their importance, there has been a lack of guiding principles behind the rules, and heavy emphasis on management accountability rather than business prosperity. Both the Preliminary Report (1997) and the Report (1998) of the Committee on Corporate Governance seek to correct this imbalance.

4.5  The principles of corporate governance

  In its report, the Hampel Committee identified broad principles applying to four areas of corporate governance: (A) directors; (B) directors' remuneration; (C) shareholders and (D) accountability and audit.

 (A)   Directors

  1.  The Board: Every listed company should be headed by an effective Board, which should lead and control the company.

  2.  Chairman and Chief Executive Officer: There are two key tasks at the top of every public company—the running of the Board and executive responsibility for the running of the company's business. A decision to combine these roles should be publicly explained.

  3.  Board Balance: The Board should include a balance of executive and non-executive directors (including independent non-executives), such that no individual or small group of individuals can dominate the Board's decision-taking.

  4.  Supply of Information: The Board should be supplied in a timely fashion with information in a form and of a quality appropriate to enable it to discharge its duties.

  5.  Appointments to the Board: There should be a formal and transparent procedure for the appointment of new directors to the Board.

  6.  Re-election: All directors should be required to submit themselves for re-election at regular intervals, and at least every three years.

(B)   Directors' Remuneration

  1.  The Level and Make-up of Remuneration: Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully. The component parts of remuneration should be structured so as to link rewards to corporate and individual performance.

  2.  Procedure: Companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual executive directors. No director should be involved in fixing his or her own remuneration.

  3.  Disclosure: The company's annual report should contain a statement of remuneration policy and details of the remuneration of each director.

(C)   Shareholders

  1.  Shareholder Voting: Institutional shareholders have a responsibility to make considered use of their votes.

  2.  Dialogue between Companies and Investors: Companies and institutional shareholders should each be ready, where practicable, to enter into a dialogue based on the mutual understanding of objectives.

  3.  Evaluation of Governance Disclosures: When evaluating companies' governance arrangements, institutional investors and their advisers should give due weight to all relevant factors drawn to their attention.

  4.  The Annual General Meeting (AGM): Companies should use the AGM to communicate with private investors and encourage their participation.

(D)   Accountability and Audit

  1.  Financial Reporting: The Board should present a balanced and understandable assessment of the company's position and prospects.

  2.  Internal Control: The Board should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets.

  3.  Relationship with the Auditors: The Board should establish formal and transparent arrangements for maintaining an appropriate relationship with the company's auditors.

  4.  External Auditors: The external auditors should independently report to shareholders in accordance with statutory and professional requirements and independently assure the Board on the discharge of their responsibilities under (d) and (d)2 above, in accordance with professional guidance.

  Auditors have a dual responsibility: public reporting—to shareholders, on the statutory financial statements and on other matters required by the Stock Exchange Listing Rules, and private reporting—to directors, on operational and other matters.

  There are noticeable differences between the principles of public life recommended by the Nolan Committee and the above principles of corporate governance. The Nolan Committee concentrated on principles such as selflessness, integrity and honesty. By contrast, the principles underlying corporate governance focus narrowly on the role and responsibilities of company directors and good management practice. Indeed, the section on the need for standards of conduct contained in the earlier Cadbury Report was omitted from the Hampel Committee's Report. There is common agreement, however, that over-detailed and excessive regulation does not create ethical conduct.

4.6  The duties of company directors

  The Hampel Committee sets out in its Report the duties of executive and non-executive directors as being:

    —  to act in good faith in the interests of the company and for a proper purpose;

    —  to exercise care and skill (derived from common law);

    —  to recognise that their duties are owed to the company, ie the shareholders.

4.7  Audit, accountability and openness/disclosure

  Most of the Cadbury recommendations were well received and acted upon by the accountancy profession, the Auditing Practices Board and the Accounting Standards Board. However, the primary responsibility for good corporate governance rests with the directors. The statutory role of the auditors is to give the shareholders independent and objective assurance of the reliability of the financial statement and other information provided by the company. In addition, both the Cadbury and Hampel Committees made recommendations in the area of internal audit and controls.

4.8  Training

  The Hampel Report recommends that directors should be trained in their responsibilities, particularly as regards relevant new laws, regulations and commercial risks.

  No specific reference was made, however, to training directors in business ethics and/or standards of conduct in business life. UK business schools have responded to this by devising and marketing new training programmes for company directors.

4.9  Implementation of corporate governance

  The Hampel Report will now be put to the London Stock Exchange, which will have to consolidate the Hampel, Greenbury and Cadbury Codes in its Listing Rules.

  The Hampel Committee on Corporate Governance in the UK warns that it is not just a matter of prescribing particular corporate structures and complying with a number of detailed rules. Nor is it a matter of "box-ticking" components of the Cadbury Code. Indeed, the Committee notes that it would not be difficult for "lazy or unscrupulous directors—or shareholders—to arrange matters so that the letter of every governance rule was complied with, but not the substance." Furthermore, the Committee believes that the requirement to disclose details of individual directors' remuneration has been more intrusive in the UK than in other countries, discouraging those overseas from accepting appointments to the Boards of UK companies.

  The true safeguard for good corporate governance, the Committee urges, is the application of independent judgement by experienced and qualified individuals—executive and non-executive Directors, shareholders and auditors.

  It could be said that education and training in these aspects of judgement and business ethics are required also. Business ethics covers wider matters of conflicts of interest, the stakeholder principle and culture and values in a business corporation.

  In the UK, the business-government interface, including conflicts of interest, needs further consideration, as does the stakeholder principle. The Federal Government of Canada has an Ethics Counsellor to Ministers—including the Prime Minister—who provides guidance and advice to new and existing Ministers on potential and actual conflicts of interest. The UK is considering the appropriateness of an Ethics Counsellor to Ministers, but no decision had yet been taken. It is clear that the Hampel Committee needs to address wider issues of conflicts of interest and business ethics. However, the Hampel Committee saw no need for a permanent Committee on Corporate Governance, which contrasts with the role of the independent permanent Committee on Standards in Public Life.

4.10  The Nolan and Hampel Reports compared

  There are noticeable differences between the reforms for ethics and governance in public life and those in business life. This distinction stems perhaps from the culture of service traditionally built into public life. As mentioned before, the Nolan Committee concentrated on positive guiding principles such as selflessness, integrity and honesty, whereas the principles of corporate governance focus mainly on the roles and responsibilities of company directors and good management practice.

  Although the Hampel Report seeks to correct the imbalance between business prosperity and accountability, work still needs to be done to emphasise broad principles of business ethics and standards of conduct in corporate life.

  The Hampel Report received some criticism for concentrating too narrowly on business prosperity and taking too little account of other stakeholders' concerns. In 3.1 (iv) we noted that the government had announced a three-year review of company law. Even though the government may wish to persevere with self-regulation in the form of the Hampel Committee's voluntary Code and a set of principles, rather than corporate governance legislation (ie statutory requirements), the eventual reform of company law will bring about other changes in directors' duties.


  The UK financial services industry has been governed since 1986 by a number of principal regulators created by the Financial Services Act of that year. Despite the strengths of this Act with regard to the supervision and protection of investors, it created a complicated and duplicative system for the regulation of financial services which has attracted some criticism. The UK is now establishing a unitary system of regulation of financial services and banking organisations, the Financial Services Authority (FSA). Additionally, amendments are being proposed to the Bank of England Bill to alter the supervision of banking organisations.

  The FSA currently recognises a number of principal regulators in the financial industry:

    —  the Securities and Futures Authority (SFA) regulates firms involved in the securities and future sectors of financial services

    —  the Personal Investment Authority (PIA) regulates independent financial advisers and smaller life companies dealing with personal life and pensions

    —  the Investments Management Regulatory Organisation (IMRO) regulates Fund Managers

  The SFA is responsible for regulating firms involved in dealing or advising in securities or derivatives—that is, shares, funds, traded options and financial and commodities futures on metals, oil, cereals and so on. Its regulatory process consists of:

    —  authorisation; the vetting of a firm to ensure it is suitable to conduct investment business

    —  investor protection policy; the relationship between regulated firms and their investors is of key interest to the SFA. Rules are developed to govern the conduct of business between both parties

    —  financial risk; the financial health of a firm is a cornerstone of the regulatory regime

    —  surveillance; routine inspections of firms made without warning to check on their compliance rules, and the monitoring of trading patterns to watch for irregularities

    —  investigation; where a serious breach of rules is suspected, a more focused investigation ensues—sometimes involving other UK and overseas regulatory bodies —  prosecution; serious breaches of the rules are considered at a more formal level and sometimes by an SFA tribunal. Penalties range from a warning to a fine, constraint on trading, or deauthorisation, and individuals can be disciplined.

  Where a customer—that is, an investor—is unable to resolve a dispute, the SFA Complaints Bureau will attempt to resolve it, and arbitration procedures are also available. An independent Complaints Commissioner oversees the work of the Complaints Bureau.


  Standards of conduct and work in the professions such as law, accountancy, investment and banking are maintained and regulated by professional bodies. These are self-regulating voluntary bodies run by their members. Many of them were established in the last century in order to serve as a way of certifying quality of service and to give the public an informed view of the standards they could expect. They provide training, examinations and lifelong regulation of standards through membership. They also provide a link between the government, the public and business. Professional bodies play a significant role in shaping new legislation through providing expert comment on drafts. Although they are voluntary bodies the regulatory role of some of them is recognised in legislation. The example of the Law Society is used here to illustrate professional regulation and standards.

  The Law Society is the professional body for solicitors in England and Wales. It is an independent body, and membership is voluntary, although all solicitors come under its jurisdiction. The Society seeks to enhance the status of the legal profession by controlling and setting standards for solicitors. It has various powers and duties, consolidated in the Solicitors Act 1974 (as amended by the Administration of Justice Act 1985 and the Courts and Legal Services Act 1990).

  The Law Society exercises its statutory functions, which include:

    —  education and training (including post-qualification continuing education);

    —  ethics and guidance/advice on conduct;

    —  remuneration (the issuing of Remuneration Certificates);

    —  records (keeping the Roll and the issuing of Practising Certificates to Solicitors)

  Solicitors have certain responsibilities to their clients, which include a "duty of care". The Law Society has an Office for the Supervision of Solicitors through which complaints can be made, if this and other duties of solicitors are felt to have been breached.

  One of the responsibilities of the Law Society is to take action against an offending solicitor.


  Codes, rather than statute law, have been characteristic of the UK's dealings with many aspects of government, business and professional behaviour.

  There is common agreement in the UK that over-detailed rules and excessive regulations do not create ethical conduct. The rock on which good conduct may be built in any fast-moving society includes ethical principles (not simply good practice, principles or laws) to uphold standards and the will of individuals to create not only trust in a government, company or profession, but also a worthy and compassionate society.

  Finally, it must be stressed that most of those who serve in public life and direct companies in the UK operate to high standards. However, there have been instances of corruption and misconduct. No country can afford to be complacement in these matters, and with fast-moving changes—such as privatisation and building societies converting to banks, as well as instant global communications—new safeguards for ethical conduct have to be devised, implemented, revised and upheld.


Books, Papers and Letters

  Thomas, Rosamund, Espionage and Secrecy: The Official Secrets Acts of the United Kingdom 1911-1989 (Routledge, 1991; to be reprinted by Ethics International Press, 1999).

  Thomas, Rosamund (ed.) Government Ethics (Ethics International Press, 2nd edn. 1996)

  Thomas, Rosamund, "Ethics, Government and Modern Society: Cross-Cultural Influences", paper presented to the Conference of the International Ethics Network, Brisbane, Australia, August 1996

  Thomas, Rosamund (ed.) Environmental Ethics (Ethics International Press, 1996)

  Wilson, Howard (Ethics Counsellor to Ministers of the Federal Government of Canada), letter to the Centre for Business Public Sector Ethics, Cambridge, 26 May 1997

Official Documents

  Committee on Corporate Governance (Hampel Committee), Preliminary Report (London: Gee Publishing, 1997)

  Committee on Corporate Governance (Hampel Committee), Report (London: Gee Publishing, 1998)

  Committee on Standards in Public Life, Standards in Public Life: First Report of the Committee on Standards in Public Life (Nolan Committee)

  Report Cm 2850-1

  Transcripts and Oral Evidence Cm 2850-11

  (London: Stationery Office, 1995)

  Committee on Standards in Public Life (Nolan Committee), Local Public Spending Bodies: Second Report of the Committee on Standards in Public Life

  Report Cm 3270-1

  Transcript and Oral Evidence Cm 3270-11

  (London: Stationery Office, 1996)

  Committee on Standards in Public Life (Nolan Committee), Standards of Conduct in Local Government in England, Scotland and Wales: Third Report of the Committee on Standards in Public Life

  Report Cm 3702-1

  Transcripts and Oral Evidence Cm 3702-1

  (London: Stationery Office)

  Committee on Standards in Public Life (Nolan Committee), "Misuse of Public Office: A New Offence?": A Consultation Paper (London: Stationery Office)

  Department of the Environment, Transport and the Regions, Consultation Document: Modernising Local Government—a New Ethical Framework (London: Department of the Environment, 1998)

  Financial Services Authority, Financial Services Authority: An Outline (London: Financial Services Authority, 1997)

  Home Office, Clarification of the Law Relating to the Bribery of Members of Parliament: A Discussion Paper (London: Stationery Office, 1996)

  House of Lords Select Committee on the Public Service, Special Report with Evidence HL Paper 68, Session 1996-97 (London: Stationery Office)

  Institute of Directors, Guidelines on Legal Responsibilities of Company Directors (London: Institute of Directors)

  Institute of Directors, Response to the Preliminary report of the Committee on Corporate Governance (London: Institute of Directors, 1997)

  Law Commission, Legislating the Criminal Code: Corruption: A Consultation Paper (1997) No 145 (London: Stationery Office, 1997)

  Law Commission, Legislating the Criminal Code: Corruption (1998) No. 248. HC 254 (London: Stationery Office, 1998)

  London Stock Exchange, Annual Report 1997: Access to Central Markets (London: Stock Exchange)

  London Stock Exchange: A History of the London Stock Exchange & London Stock Exchange: Fact File 1997 (London: Stock Exchange)

  Royal Commission on Standards of Conduct in Public Life, Report, Cmnd 6524 (London: HMSO, 1976)

  Securities and Futures Authority, Annual Report 1997: An Outline of the SFA (London: Securities and Futures Authority, 1998)


  The Financial Times, 4 March 1998

  The Times, 29 July 1997

  The Times, 6 August 1997

  The Times, 13 October 1997

  The Times, 29 January 1998

  The Times, 3 March 1998

  The Times, 5 March 1998

  The Times, 14 April 1998


  Centre for Business and Public Sector Ethics, Cambridge (UK)

  Lilac Place

  Champneys Walk


  CB3 9AW

  Telephone +44 (0)1223 357458

  Fax +44 (0)1223 303598

  Committee on Corporate Governance (Hampel Committee)

  Gee Publishing Ltd

  100 Avenue Road

  London NW3 3PG

  Telephone (UK only) Freephone 0345 573113; overseas +44(0)171 393 7666

  Fax +44 (0)171 393 7463

  Committee on Standards in Public Life (the Nolan, now the Neill Committee)

  See the Stationery Office Books

  Department of the Environment, Transport and the Regions (free literature)

  PO Box 236


  West Yorkshire LS23 7NB

  Telephone +44 (0)870 1226 236 or +44 (0)171 390 3000

  Fax +44 (0)870 1226 237

  Ethics International Press Ltd

  Active Business Centre

  St Andrews Castle

  St Andrews Street South

  Bury St Edmunds

  Suffolk IP33 3PH

  Telephone + 44 (0)1223 357458

  Fax +44 (0)1223 303598

  Ethics International Press Ltd publishes the "Teaching Ethics" book series for Centre for Business and Public Sector Ethics

  The Financial Services Authority (FSA)

  Gavrelle House

  2-14 Bunhill Row

  London EC1Y 8RA

  Telephone +44(0)171 638 1240

  Fax +44 (0)171 382 5900

  House of Commons and House of Lords

  See The Stationery Office Books

  Institute of Directors

  116 Pall Mall

  London SW1Y 5ED

  Telephone +44 (0)171 839 1233

  Fax +44 (0)171 930 1949

  The Law Society

  113 Chancery Lane

  London WC2A 1PL

  Library and Information Services:

  Telephone +44(0)171 320 5946

  Fax +44 (0)171 831 1687

  London Stock Exchange Ltd

  London EC2N 1HP

  Telephone +44 (0)171 797 1000

  Fax +44(0)171 797 4190

  Office of the Parliamentary Commissioner for Standards

  See The Stationery Office Books

  The Securities and Futures Authority

  Cottons Centre

  Cottons Lane

  London SE1 2QB

  Telephone +44 (0)171 378 9000

  Fax +44 (0)171 403 7569

  The Stationery Office Books

  PO Box 276

  Lonodn SW8 5DT

  Telephone +44 (0)171 873 9090

  Fax +44(0)171 873 0011

  In addition, most chartered UK Bodies have their own rules and regulations to guide, educate, train and supervise the conduct of the particular profession. Enquiries should be made to the relevant chartered body, eg the Institute of Chartered Accountants.

   (Please note that the addresses and telephone numbers of the organisations are printed as they were listed in the document. The details have not been checked by the International Development Committee).


Accounting Standards Board

  The Accounting Standards Board (ASB) is the organisation with primary responsibility for issuing accounting standards in the United Kingdom. It also publishes exposure drafts and discussion papers.

Auditing Practices Board

  The Auditing Practices Board (APB) is responsible for setting the auditing standards which all auditors are expected to comply with. The Board is currently made up of, controlled and financed by the professional bodies, with the public interest represented by the Department of Trade and Industry albeit in a non-voting role. The APB may become more independent of the professions after a forthcoming review.

Building Societies

  The first building societies were established in the last century. They are mutual savings and loans organisations whose primary function is lending for the housing market. Members make contributions to a fund from which any of them may borrow for the purpose of purchasing a home.

Cabinet Office

  The Cabinet Office assists the Prime Minister and the Government collectively in the formation, implementation and presentation of government policy. The head of the Cabinet Office (the Cabinet Secretary) is also head of the Home Civil Service.

Civil Service Commissioners

  An independent body responsible for the recruitment of staff for the Civil Service in the UK and which ensures that selection is made on the basis of merit by means of fair and open competition.

Common Law/Student Law

  The law in England and Wales is a combination of common law or "customary law" and statute law. Common law has developed over hundreds of years through the decisions of the courts in individual cases. Statute laws are laws which are passed by Parliament and which may overrule the common law. (European Law may overrule law in the UK in certain areas).

Director of Public Prosecution (DPP)

  Head of the Crown Prosecution Service, which is the national prosecution service delivered locally throughout England and Wales. Its role is to assess and implement criminal proceedings initiated by the police force and to prepare and implement the prosecution case. The DPP is responsible to the Attorney General who is a Government Minister.

Executive/Non-Executive Directors

  An executive director has a seat and a vote on the board of a company and is also an employee of the company. A non-executive director also has a seat and a vote but plays no part in the day to day running of the company.

Financial Reporting Council

  Established in May 1990, the Financial Reporting Council provides guidance on priorities and broad policy issues in financial reporting to the Accounting Standards Board and the Financial Reporting Review Panel (see below).

Financial Services Authority

  The Financial Services Authority was launched in October 1997 by the new labour Government as a single regulator for the UK financial market to supercede the large number of regulatory bodies which had come into being after the 1986 Financial Services Act. The FSA supervises banks and other financial institutions, and protects the consumer by the regulation of investment companies.

Home Secretary

  The Home Secretary is the Government Minister in charge of the Home Office which deals with internal affairs in England and Wales not covered by other government departments, principally the maintenance of law and order including the court system, the police, and the prison and probation services. It also deals with immigration and nationality issues, and public safety.

House of Commons

  The lower (but de facto more effective) chamber of the parliament of the United Kingdom which consists wholly of elected representatives of the electorate who debate and vote on new legislation and where the government can be subjected to questioning over its policies. (The upper chamber is the House of Lords).

Law Commission

  The Law Commission is an independent body of legal specialists established in 1965 (along with a similar Commission for Scotland) to keep the laws of England and Wales under review and to propose reforms where appropriate.

Non-Departmental Public Bodies

  Publicly appointed and funded bodies with specific functions but which are not directly controlled by a government department.

OECD (Organisation for Economic Co-operation and Development)

  As association of western states established in 1961 as a successor to the Organisation for European Economic Co-operation (OEEC), which had played an important role in the post-war reconstruction of Europe. The OECD's objectives are to maximise economic growth while maintaining financial stability, and to expand international trade.

QC (Queen's (or King's) Counsel)

  QCs are barristers appointed counsel to the crown; they take precedence over ordinary barristers, and wear a silk instead of a plain gown.

Select Parliamentary Committees

  A group of Members of Parliament selected from all major parties for the purpose of monitoring the performance and conduct of individual government ministries.

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Prepared 5 April 2001