Corporate Governance

Corporate Governance is the system of rules, practices, and processes by which a company is directed and controlled. It provides the framework for attaining a company's objectives and encompasses virtually every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

At its core, corporate governance is about balancing the interests of a company's many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

In the United Kingdom, the concept is not merely a box-ticking exercise but a fundamental component of sustainable commercial success. Good governance contributes to investor confidence, fosters long-term value creation, and strengthens a company's reputation. It is the bedrock upon which trust is built, ensuring that the organisation is managed ethically and for the benefit of all stakeholders, not just a select few.

This glossary page provides a comprehensive overview of corporate governance within the UK context, exploring its key principles, the regulatory framework, the roles of those involved, and its evolution in response to contemporary challenges.

The UK Corporate Governance Framework

The UK's approach to corporate governance is respected globally and is primarily principles-based rather than rules-based. This is encapsulated in the 'comply or explain' model, which offers a degree of flexibility while demanding a high level of transparency.

The Financial Reporting Council (FRC)

The Financial Reporting Council (FRC) is the UK's independent regulator responsible for promoting transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work. Its mission is to serve the public interest by setting high standards of corporate governance, reporting, and audit and by holding to account those responsible for delivering them.

The 'Comply or Explain' Principle

A cornerstone of the UK framework, the 'comply or explain' principle is a nuanced and effective approach. Companies are expected to abide by the principles and provisions of the UK Corporate Governance Code. However, if they choose to depart from a specific provision, they must provide a clear, well-reasoned, and transparent explanation in their annual report for why the deviation is appropriate in their particular circumstances.

This approach avoids a rigid, one-size-fits-all set of rules, acknowledging that different strategies may be suitable for different companies. It places the onus on the board to think critically about its governance practices and on shareholders to scrutinise the explanations provided, fostering a more meaningful dialogue between them.

The UK Corporate Governance Code (2018)

The primary document outlining best practice in the UK is the UK Corporate Governance Code, most recently updated in 2018. The Code is not a rigid set of rules but a guide to high-quality governance. It applies to all companies with a premium listing on the London Stock Exchange, regardless of where they are incorporated.

The Code is structured around five core sections, each containing a set of principles and more detailed provisions:

  1. Board Leadership and Company Purpose: This section emphasises the need for an effective board that is collectively responsible for the long-term sustainable success of the company. It stresses the importance of establishing a clear company purpose, values, and strategy, and ensuring that its culture is aligned with them.

  2. Division of Responsibilities: This focuses on ensuring there is a clear division of responsibilities at the head of the company. It calls for a separation of the roles of the Chair and the Chief Executive. The Chair is responsible for leadership of the board of directors, while the CEO is responsible for running the company's business.

  3. Composition, Succession and Evaluation: An effective board requires a balance of skills, experience, independence, and knowledge. This section deals with the composition of the board, the role of non-executive directors (NEDs), and the importance of regular board evaluations to assess effectiveness. It also highlights the need for orderly succession planning and promoting diversity.

  4. Audit, Risk and Internal Control: This is a critical area focused on financial and business risks. The board is responsible for presenting a fair, balanced, and understandable assessment of the company's position and prospects. It must establish formal and transparent arrangements for corporate reporting and risk management, and maintain an effective internal control system. This is typically overseen by the Audit Committee.

  5. Remuneration: The Code aims to ensure that executive remuneration is aligned with company purpose and values, and is clearly linked to the successful delivery of the company's long-term strategy. It promotes transparency and accountability in how directors are rewarded, with oversight provided by a Remuneration Committee.

The Pillars of Good Corporate Governance

While the Code provides the structure, the practice of good governance rests on several universally accepted principles or pillars.

1. Accountability

Accountability is the acknowledgement and assumption of responsibility for actions, decisions, and policies. In a corporate context, the board of directors is accountable to the shareholders for the company's performance. Management is accountable to the board. This pillar ensures that there are clear lines of responsibility throughout the organisation and that mechanisms are in place to hold individuals and groups to account.

2. Transparency

Transparency refers to the open and timely disclosure of information about the company's performance, financial position, and governance practices. It means making information available to stakeholders in a way that is clear, accessible, and understandable. In the UK, this is primarily achieved through the annual report and accounts, which must provide a true and fair view of the company's state of affairs.

3. Fairness

Fairness involves treating all stakeholders, including minority shareholders, employees, customers, and suppliers, equitably. It means that the rights of various groups are respected and balanced. For example, all shareholders should receive equal consideration for their interests, and there should be effective redress for any violations of their rights.

4. Responsibility

Corporate responsibility means the board must act with integrity and be cognisant of its legal and ethical obligations. It involves a commitment to managing the company in a way that is ethically sound and considers the social, environmental, and economic impact of its operations. This aligns closely with the modern emphasis on Environmental, Social, and Governance (ESG) factors.

Key Roles and Responsibilities in Governance

Effective corporate governance is implemented by people. Understanding the distinct roles within the corporate structure is essential.

  • The Board of Directors: The board is the ultimate decision-making body of the company. It is collectively responsible for setting the company's strategic direction, overseeing its management, and ensuring it meets its obligations to shareholders and stakeholders.

  • The Chair: The Chair leads the board, ensuring its effectiveness and setting its agenda. They are responsible for creating a culture of openness and debate, and for ensuring that all directors, particularly non-executive directors, contribute fully.

  • The Chief Executive Officer (CEO): The CEO is responsible for the day-to-day management of the company and for implementing the strategy agreed by the board. They lead the executive team and are the primary link between management and the board.

  • Non-Executive Directors (NEDs): NEDs bring external perspective, independence, and constructive challenge to the board's decision-making process. They scrutinise the performance of management and play a key role on board committees, such as the Audit, Remuneration, and Nomination committees.

  • The Company Secretary: The Company Secretary plays a pivotal role in governance. They are responsible for advising the board on all governance matters, ensuring compliance with laws and regulations, facilitating communication between the board and shareholders, and managing board meetings and records.

Contemporary Issues and the Evolution of Governance

Corporate governance is not static; it evolves to meet new challenges and societal expectations. Several key trends are shaping the modern governance landscape in the UK.

Environmental, Social, and Governance (ESG)

There is a growing recognition that long-term value creation is intrinsically linked to a company's performance on ESG matters. Investors and stakeholders now demand that boards integrate climate change, social impact, and ethical considerations into their core strategy and risk management frameworks. The UK government and regulators are increasingly mandating climate-related financial disclosures, pushing ESG from a peripheral concern to a central board-level responsibility.

Stakeholder vs. Shareholder Primacy

The traditional model of shareholder primacy, where the board's primary duty is to maximise shareholder returns, is being challenged. The concept of stakeholder capitalism, which argues that companies should serve the interests of all stakeholders (employees, customers, suppliers, community), is gaining traction. Section 172 of the Companies Act 2006 legally requires directors to act in a way they consider would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard for a range of stakeholder interests.

Diversity and Inclusion

Board diversity, in terms of gender, ethnicity, cognitive background, and experience, is now seen as a crucial driver of effective governance. A diverse board is better equipped to understand its customer base, mitigate groupthink, and navigate complex challenges. UK bodies like the Parker Review (ethnic diversity) and the FTSE Women Leaders Review have set targets and recommendations to improve diversity at the highest levels of British business.

The Role of Technology in Governance

The digital transformation has profound implications for governance. On one hand, it presents significant risks, such as cybersecurity threats, which boards must be equipped to oversee. On the other hand, technology offers powerful tools to enhance governance.

Modern board management software, such as board portals, is instrumental in this. These platforms assist boards by:

  • Enhancing Security: Providing a secure, encrypted environment for sharing highly sensitive board materials, protecting against data breaches.

  • Improving Efficiency: Streamlining the creation and distribution of board packs, facilitating meeting scheduling, and enabling digital minute-taking.

  • Facilitating Better Decision-Making: Ensuring all directors have real-time access to the same, up-to-date information, creating a single source of truth.

  • Supporting Compliance: Creating a clear, auditable trail of decisions, approvals, and document access, which is invaluable for regulatory compliance and governance reviews.

By leveraging such technology, boards can dedicate more time to strategic discussion and oversight, and less to administrative burdens, thereby strengthening their overall governance effectiveness.

Conclusion

Corporate governance in the UK is a dynamic and sophisticated framework designed to foster trust, accountability, and long-term sustainable success. It is built on the principles of transparency and fairness, guided by the UK Corporate Governance Code, and implemented through the diligent work of boards and their advisors.

For any organisation, embracing the spirit of good governance is not a matter of compliance but a strategic imperative. It underpins a company's resilience, its reputation, and its ability to create value for shareholders and society alike. As the business world continues to evolve, a strong foundation in corporate governance will remain the most critical asset for any company navigating the complexities of the 21st century.

Frequently Asked Questions (FAQ)

Q1: Is the UK Corporate Governance Code mandatory?

A: The UK Corporate Governance Code is not a piece of legislation and is therefore not mandatory in a legal sense. However, it operates on a 'comply or explain' basis for companies with a premium listing on the London Stock Exchange. This means these companies must report on how they have applied the Code's principles and either confirm they have complied with its provisions or provide a detailed, cogent explanation for any areas of non-compliance. The Listing Rules require this disclosure, so for these companies, adherence is a regulatory requirement.

Q2: What is the difference between corporate governance and management?

A: The simplest distinction is that the board governs and management runs the company.

  • Corporate Governance is the framework and oversight structure established by the board of directors. It involves setting the company's strategic direction, defining its values, overseeing the executive team, managing risk, and ensuring accountability to shareholders and stakeholders. It is about 'doing the right things'.

  • Management is the operational process of running the business on a day-to-day basis to achieve the strategic goals set by the board. It involves executing plans, managing resources, directing employees, and handling daily operations. It is about 'doing things right'.

Q3: Who is ultimately responsible for corporate governance in a company?

A: The board of directors is collectively and ultimately responsible for the corporate governance of the company. While management implements policies and the Company Secretary provides guidance, the board holds the final responsibility for ensuring the company is directed and controlled effectively. They are accountable to the company's shareholders for this oversight and for the long-term sustainable success of the organisation.