What is corporate governance and how has it developed?

Corporate governance is the system by which businesses are directed and controlled. A key task of any director is to deliver effective governance at their organisation.

Modern corporate governance in the UK started with the seminal Cadbury Report (1992). Several high-profile company failures and scandals in the 1980s and early 1990s – including those at BCCI, Polly Peck and the Maxwell pension fund – added substance to the argument that free enterprise would be made more stable and legitimate 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 Code has become a global leader amongst corporate governance codes, advancing ideas such as splitting the roles of Chair and CEO and using independent 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 on the basis of good governance. This reputation in turn makes the UK one of the leading global destinations for investment 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). he Code sets out standards of good practice in relation to:  Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration. It is applied on the basis of ‘comply or explain’.

A new version of the Code was issued on 22 January 2024, and will apply to financial years beginning on or after 1 January 2025 (provision 29, which includes new reporting obligations, will apply to financial years beginning on or after 1 January 2026). The bulk of changes to the 2024 Code apply to Section 4 (Audit, risk and internal control), including new requirements for audit committees to explain their work in accordance with the FRC’s Audit Committees and the the External Audit: Minimum Standard.

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.

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.

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.

In 2010, the IoD published its own guide on how the Corporate Governance Code may be applied by unlisted companies of all sizes:  Corporate Governance guidance for unlisted companies.

In December 2018, the Wates Principles were published. They provide a framework to help the largest private companies raise their standards of corporate governance by offering a structure for reporting to fulfil their legal requirements and demonstrate good practice.

Stewardship Code for institutional investors

In 2010 the Financial Reporting Council (FRC) published the first ever Stewardship Code for institutional investors.  The latest version was published in 2020. 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 shares in.

UK corporate governance: key features and recent developments

Watch this webinar where Dr. Roger Barker, Director of Policy and Corporate Governance at the Institute of Directors, and Chris Hodge, Senior Advisor to the IoD Centre for Corporate Governance, delve into the foundations and recent developments in UK corporate governance.

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