Chapter 1 • Introduction
concerned with the role of ‘non-executive’ directors. Non-executive directors do not
work full time in the company, but act solely in the role of director. This contrasts with
‘executive’ directors who are salaried employees. For example, the finance director of
most large companies is a full-time employee. This person is a member of the board
of directors and, as such, takes part in the key decision making at board level. At the
same time, s/he is also responsible for managing the departments of the company that
act on those board decisions as far as finance is concerned.
The view reflected in the Combined Code is that executive directors can become too
embroiled in the day-to-day management of the company to be able to take a broad
view. The Code also reflects the view that, for executive directors, conflicts can
arise between their own interests and those of the shareholders. The advantage of non-
executive directors can be that they are much more independent of the company than
their executive colleagues. The company remunerates non-executive directors for their
work, but this would normally form only a small proportion of their total income. This
gives them an independence that the executive directors may lack. Non-executive
directors are often senior managers in other businesses or people who have had good
experience of such roles.
The Code underwent some minor modifications in 2006.
The Code has the backing of the LSE. This means that companies listed on the LSE
are expected to comply with the requirements of the Code or must give their share-
holders good reason why they do not. Failure to do one or other of these can lead to
the company’s shares being suspended from listing. This is an important sanction
against non-compliant directors because shareholders will put enormous pressure on
directors if the shares become difficult to sell, which would be the result of a suspen-
sion from listing.Degree of compliance with the Combined Code
Research shows that only about one-third of the 350 largest businesses listed on the
LSE claim to follow the Combined Code totally. The remaining two-thirds admit that
they do not fully follow it (Burgess 2006).1.6 Long-term financing of companies
Much of the semi-permanent finance of companies – in a minority of cases all of it – is
provided by shareholders. Many companies have different classes of shares. Most
companies also borrow money on a long-term basis. (Many borrow finance on a short-
term basis as well.) In later chapters we shall examine how and why companies issue
more than one class of share and borrow money; here we confine ourselves to a brief
overview of long-term corporate finance.Ordinary shares
Ordinary sharesare issued by the company to investors who are prepared to expose
themselves to risk in order also to expose themselves to the expectation of high invest-
ment returns, which both intuition and the evidence, which we shall come across later
in the book, tell us is associated with risk. Ordinary shares are frequently referred to
as ‘equities’. It is normal for companies to pay part of their realised profits, after tax,‘
‘