What is corporate governance and how has it developed?

Corporate governance is the system by which businesses are directed and controlled.

Modern corporate governance in the UK started with the seminal Cadbury Report (1992). Several high profile company failures – including the BCCI and Maxwell scandals in 1991 – added substance to the argument that free enterprise would be made more stable and secure if common standards of transparency and accountability were followed.

The most important outcome from the Cadbury Report and its successors is the UK Corporate Governance Code, which has undergone several refinements. Since 1992, the UK has become a global leader in corporate governance, advancing ideas such as using non-executive directors to provide constructive challenge to a company’s executive team.

The Code makes a significant contribution to the UK’s reputation as a place where business is conducted under the full protection of law and with regard for best practice. This reputation in turn makes the UK one of the leading global destinations for capital.

The following sections draw attention to key developments in corporate governance.

The UK Corporate Governance Code

The UK Corporate Governance Code is published by the Financial Reporting Council (FRC). The Code sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. The current edition of the Code was published in July 2018. This most recent iteration of the Code has been designed as a “shorter, sharper” definition of a well-run business.

Non Executive Directors

In 2002 Derek Higgs was asked to report on the role and effectiveness of non-executive directors. His report, published in January 2003, suggested amendments to the Combined Code. At the same time a committee under Sir Robert Smith reported on guidance for audit committees. The revised Combined Code which was issued in July 2003 by the Financial Reporting Council (FRC) took into account both reports. The 2003 Code has been updated at regular intervals since then, most recently in October 2012.

Role of the Non Executive Director (IoD Factsheet)
Smith (2003)
Higgs (2003)

The Walker review

Sir David Walker’s report on the governance of banks and other financial institutions was published in November 2009. The report recommended substantial changes to the way the boards of banks and other big financial institutions function in particular through boosting the role of non-executives in the risk and remuneration process. While specifically directed at the financial services sector, there will undoubtedly be pressure for certain proposals to become part of mainstream corporate governance for all quoted companies.

The Walker Review: A review of corporate governance in UK banks and other financial industry entities (HM Treasury)
The Walker Report – final recommendations (HM Treasury)
IoD assessment of the Walker Review (IoD)

Guidance for unlisted companies

The UK Corporate Governance Code applies to large listed companies. Until recently, governance at unlisted private companies large and small was largely overlooked by both governance experts and policy makers.

A governance code for large listed companies will also be beneficial to unlisted companies. In 2010, the IoD published its own guide on how the Corporate Governance Code may be applied by unlisted companies: Corporate Governance guidance for unlisted companies

The key development to be aware of is the publication of the Wates Principles in December 2018. Designed from the ground up, the Wates Corporate Governance Principles For Large Private Companies are the first consistent measure of an unlisted company’s purpose, actions, and impact on both stakeholders and wider society.

Stewardship Code for institutional investors

In 2010 the Financial Reporting Council (FRC) has published the first Stewardship Code for institutional investors, later revised in September 2012. The purpose of the Code is to improve the quality of corporate governance through promoting better dialogue between shareholders and company boards, and more transparency about the way in which investors oversee the companies they own.