UK Corporate Governance Code (July 2018)
Corporate governance is the system by which companies are directed and controlled. The UK is a global leader in corporate governance, with the UK Corporate Governance Code (‘The Code’) setting out how premium listed companies can achieve sustainable success over the long term. The Institute of Directors recognises that effective corporate governance is essential to long term wealth creation by UK companies.
The development of the Code
The development of a formalised Corporate Governance Code in the UK was a response to a series of corporate scandals and failures during the 1980s which were ultimately caused by powerful individual directors not being challenged or restrained by their boards.
The first Code was published in 1992 by the Cadbury Committee, but is now maintained by the Financial Reporting Council (FRC). The Code has undergone a series of updates in response to the changing business environment – the latest edition of the Code was published in July 2018.
The UK Corporate Governance Code is not law, therefore compliance is not compulsory. The FRC asks companies to ‘comply or explain’ – either follow the Code or explain why they do not.
The Code speaks a lot of sense on how a company should be directed. Because of this, the Code isn’t followed only by the premium listed companies to which it directly applies, but also by many smaller companies keen to follow best practice.
In 2018, the UK Corporate Governance Code for premium listed companies was complemented by the Wates Principles for the governance of large private companies. Continuing examples of corporate failure – such as Carillion and BHS – demonstrate why effective corporate governance matters to business owners, employees and stakeholders.
The UK Corporate Governance Code (July 2018 edition)
The UK Corporate Governance Code is not especially long and is easy to understand. All readers of this factsheet are encouraged to download a copy of the full Code from the FRC website.
The Code comprises a series of key Principles each served by a sub-series of Provisions. The Provisions are the practical steps required to adhere to the Principles.
The Principles concern the following areas of board activity:
- Board leadership and company purpose
- Division of board responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
The Code uses clear and exact language – It makes sense to quote the Principles as written, with due acknowledgement to the Financial Reporting Council.
Principles for board leadership and company purpose
A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.
D. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.
E. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.
Principles for the division of board responsibilities
F. The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information.
G. The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business.
H. Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.
I. The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently.
Principles for composition, evaluation and succession
J. Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
K. The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed.
L. Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.
Principles for audit, risk and internal control
M. The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements.
N. The board should present a fair, balanced and understandable assessment of the company’s position and prospects.
O. The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives.
Principles for remuneration
P. Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.
Q. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome.
R. Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.
The IoD and corporate governance
The IoD’s mission under Royal Charter is to help make better directors – in the certain belief that this produces businesses which are both successful and responsible.
The IoD realises its mission through two activities:
- Direct involvement in the development of company directors
- To advocate on behalf of responsible company directors, explaining the benefits of entrepreneurial activity to the government and nation.
The IoD offers to help develop both individual directors and entire boards.
The IoD In-House Training scheme can assess a board’s development, compliance with best practice, and provide a bespoke solution for any work required.
Individual directors (including non-members) can benefit from the IoD’s Open Courses which cover key subjects such as the strategic direction of a business.
The IoD also provides study programmes which award a formal qualification. The senior qualification is IoD Chartered Director (CDir), which is awarded under the IoD’s own Royal Charter.
The IoD engages with the UK Government at the highest level on behalf of its members and the wider body of company directors. Advocacy is conducted both by the IoD Director General and the IoD Policy Unit.
The IoD also makes regular appearances in the media to put the case for responsible business. In the context of corporate governance, the IoD often explains how a failed or struggling business has not followed the UK Corporate Governance Code.
To better understand the views of IoD members in an everchanging business environment, the IoD takes regular soundings from its members. The key instrument for this purpose is the IoD Policy Voice Survey – all IoD members are encouraged to make themselves heard by joining Policy Voice.
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