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Showing posts from February, 2014

THE CADBURY CODE -- A BLESSING OR A CURSE?

It is now more than 20 years since the Cadbury Committee's Code of Best Practice, commonly known as theCadbury Code, has been published. While at first its focus was on financial fraud as a reaction to corporate scandals such as Coloroll and Poly Peck, its remit was extended after the Robert Maxwell and BCCI scandals. A common feature of most of these scandals was a domineering chief executive officer (CEO) combined with a weak board of directors.

This kind of problem is commonly referred to in the academic literature as the principal-agent problem. This problem arises in widely held firms that are owned by many small shareholders who tend to be passive and who tend not to get involved in the running of the firms they have invested in. This problem is effectively caused by conflicts of interests between the managers (the agents) and the shareholders (the principals). While the managers are expected to run the firm in the interest of the shareholders, they may prefer to pursue th…