Review of the Effectiveness of the Combined Code: Call for Evidence Comment to the Financial Reporting Council
    
    The following comments are an academic’s1 point of view to some aspects embedded within the Combined Code on Corporate Governance. The main areas commented upon include (1) how to improve the Comply or Explain approach, (2) recommendations on the presence of non-executive board members and financial experts on the board of directors and (3) research recommendations on how to further understand the nature of financial reporting disclosures particularly in the business review section of the annual report.
    
    Yafele, A. 2009
                                                                
     The Author is a Ph.D researcher at Bournemouth University specialising study on the Disclosure of Key  Performance Indicators in Annual reports of UK Private and Public Listed companies.  Please direct all  correspondence to: Aylwin Yafele, Bournemouth University, The Business School Incorporating the  Department of Law, Centre for Finance and Risk, Dorset House, Talbot Campus, Poole, BH12 5BB.  E‐mail  ayafele@bournemouth.ac.uk, Tel 01202 965039. 
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    Financial Reporting Council Comment Comply or Explain “The Comply or Explain approach has a number of theoretical advantages over the traditional regulation. It allows boards a degree of flexibility in designing their governance arrangements, and it enables shareholders to judge whether those arrangements will make it more likely that the board will act in their long-term interest.” The policy is effective and flexible only up to the extent to which management are willing to disclose certain information which might otherwise be viewed as material by shareholders. Research on the effectiveness of information encapsulated in annual reports
    
    from the investors’ point of view is essential. Currently shareholders can only express their dissatisfaction on corporate governance arrangements to the individual business entities concerned; however it may be in the public interest for such opinions to be incorporated in policy hence an area of further research. Research of that nature allows for progression towards equilibrium in the supply and demand of information from the perspectives of both the firms who disseminate the information and investors who are the information consumers respectively. I however appreciate that it is impossible to suffice in entirety the needs of suppliers and consumers of information alike. A suggestion is the application of parameters and conditions that regulate the flexibility of reporters of information who may otherwise take advantage and/or create loopholes thus withholding certain material information for example where companies express concern on the involvement of investors in corporate governance matters. Due to the dire economic ambience, it is widespread to identify with a more vigilant investor who will demand immense information from managers who are essentially agents of
    
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    their wealth. Regulatory reviews such as the amendment of FRS 29 (Financial Instruments: Disclosures)2 are most welcome although further recurrent research is imperative.
    
    Aspects of Good Corporate Governance For those companies with larger resourcing, it may be reasonable to have provisions within section A.33 of the Combined Code on Corporate Governance to increase the effectiveness of disclosures. While some studies have posited that the proportion of nonexecutive directors does not explain the extent of information disclosure for example Ho and Wong (2001)4, however some report a positive association between the variable and information disclosure for example Haniffa and Cooke (2002)5, Cheng and Courtney (2006)6, Eng and Mak (2003)7, Chen and Jaggi (2000)8. It may be argued that companies with a large proportion of non-executive directors possibly bring conflicts and consequently reducing the level of disclosure as suggested by Chaganti (1985)9. Firms with a fair proportion of non-executive directors may be viewed in positive light by shareholders in terms of independence and accountability. Tauringana and Mangena (2009)10 in their research on the extent of KPIs reporting in the UK Media sector found the proportion of non-executive directors to be significantly negatively associated with the level of disclosure. Judging by the varying research outcomes, this is an area in need of further
                                                                
     Accounting Standards Board May 2009 Amendments to FRS 29; Improving disclosures about financial  instruments.  3  Board balance and independence.  4  Research entitled (1) A Study of Corporate Disclosure Practice and Effectiveness in Hong Kong; (2) A Study of  the relationship between Corporate Governance Structures and the Extent of Voluntary Disclosure.  5  Research entitled Culture, Corporate Governance and Disclosure in Malaysian Corporations.  6  Research entitled Board Composition, Regulatory Regime and Voluntary Disclosure.  7  Research entitled Corporate Governance and Voluntary Disclosure. 
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     Research entitled Association Between Independent Non‐Executive Directors, Family Control and  Financial Disclosures in Hong Kong 
     Research entitled Corporate Board Size, Composition and Corporate Failures in Retailing Industry.   Research entitled The Influence of the Business Review on Key Performance Indicators’ Reporting in the UK  Media Sector 
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    research in the UK. An interim provision should be placed in the Code on Corporate governance mandating companies to have at least a non-executive director on the board. I recommend that policy should encourage an increased quantity of independent and non-executive board members; caution must be exercised on the proportion of financial experts on the board of directors subject to variables such as company size, board size and industry. Previous research on finance experts on the board of directors includes their impact on fraud reporting and the timeliness of annual reports by Abbot et al., (2000)11 and Tauringana et al., (2008)12 respectively. The suggestion is that a higher proportion of
    
    financial experts would pressurize management to release the annual report early. Several researchers for example Abbot et al., (2004)13; Bedard et al., (2004)14; Davidson et al., (2004)15; DeFond et al., (2005)16; Krishnan & Visvanathan (2007)17 and Chan & Li (2008)18 have backed this notion. It may be further suggested that the board of directors are also very instrumental in the construction of the financial report hence it is important to have finance experts on that board. Finance experts on the audit committee and on the board of directors may be perceived as backers of disclosure transparency.
    
    Disclosures
                                                                
     Research entitled The Effects of the Audit Committee Activity and Independence on Corporate Fraud.   Research entitled Corporate Governance, Dual Language Reporting and the Timeliness of Annual Reports on  the Nairobi Stock Exchange.  13  Research entitled Audit Committee Characteristics and Restatements  14  Research entitled The Effect of Audit Committee Expertise, Independence and Activity on Aggressive  Earnings Management    15  Research entitled Words, Pictures and Intangibles in the Corporate Report    16  Research entitled Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?     17  Research entitled Reporting Internal Control Deficiencies in the Post‐Sarbanes ‐ Oxley Era: The Role of  Auditors and Corporate Governance    18  Research entitled Audit Committee and Firm Value: Evidence on Outside Top Executives as Expert‐ Independent Directors   
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    In order to augment the usefulness of disclosures, it is important to understand the drivers of such disclosures particularly for items such as key performance indicators (KPIs). Possible KPI disclosure influencing factors that should be investigated in order to understand their nature include among other variables; company specific characteristics19, corporate governance mechanisms20, ownership structure21 and capital market variables22. KPIs are unique because they are the management’s perspective of the critical success factors of business entities. It is also essential to investigate from the investors’ point of view what they would like to know about companies in order to reach information equilibrium with the aid of policy by regulating bodies. Further research is therefore required in order to enhance the optimum quantity, quality and usefulness disclosures.
    
                                                                
     For example company size, gearing and profitability.   For example the proportion of non‐executive directors, frequency of board meetings and proportion of  finance experts on the board.  21  For example directors share ownership.  22  For example positive or negative market return, trading volume and expected share price performance. 
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