Corporate governance is necessary for the effective, entrepreneurial and prudent management that can deliver the long-term success of an organisation.
Effective governance involves supervising the management of a company and managing risks so that business is done competently, with integrity and with due regard to the interests of all stakeholders. It embraces regulation, structure, good practice and board ability.
In the UK, the Companies Act 2006 is the overarching legislation which sets out the legal requirements for corporate decision making, and the consequences of getting it wrong.
UK Corporate Governance Code
The UK Corporate Governance Code (the Code) then sets out standard of good practice aims to achieve more open and rigorous procedures, and requires all companies with a premium listing of equity shares in the UK to report on their application of the Code in their annual report and accounts.
Financial Reporting Council
The Financial Reporting Council (FRC) monitors the Code and publishes an annual report on it’s impact and implementation. The FRC requires listed companies to disclose how they have applied the principles and whether they have complied with the provisions – a ‘comply or explain’ approach.
The Code provides a guide to key components of effective board practice including:
- Leadership: every company should have an effective board which is collectively responsible for the long term success of the company.
- Effectiveness: the board should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to carry out their duties effectively.
- Accountability: the board should present a fair, balanced and understandable assessment of the company’s position and prospects
- Remuneration: executive directors’ remuneration should aim to promote the long term success of the company and performance related elements should be transparent.
- Relations with shareholders: there should be a dialogue with shareholders based on the mutual understanding of objectives.
Following an inquiry in 2016 into the governance of UK companies, and extensive consultation, the current Code was published in 2018. It includes significant changes to how boards measure and understand workforce issues, including a new requirement that boards demonstrate how the organisation is improving employee voice at board level. Organisations are now required to illustrate how they’re applying one or more of the below models:
- Giving a non-executive director responsibility over workforce issues
- Establishing a workforce director (so-called ‘worker on the board’)
- Establishing an employee advisory committee (or broader stakeholder committee).
The updated Code also includes:
- Mandatory requirements for the reporting of pay ratios between chief executives and workers, include justification of the difference in pay
- Requirements for directors of organisations to set out how they are acting in the interests of employees and shareholders.
- A new public register of listed companies that have faced significant shareholder opposition to executive pay packages.
- A new requirement that the Remuneration Committee review pay across the wider workforce. Illustrate how employees have been engaged throughout the process. In addition, they must illustrate internal and external measures used to measure the appropriateness of executive pay.
Corporate governance is important as it fosters cooperation internally and promotes the image of the company to its stakeholders. Since its introduction, the Code has contributed to an improved framework in the UK. This encourages discussions internally, with stakeholders, and promotes ethical business practices.