The UK Corporate Governance Code

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Features of the UK Corporate Governance Code

The following guidance exists:

Board

The company should have an effective board (with a balance of skills, experience, independence and knowledge) that meets regularly. 

The revised 2018 Code emphasises the importance of positive relationships between the company, its shareholders and its stakeholders.

Chairman and Chief Executive Officer (CEO)

The positions of the Chairman (person responsible for leadership and board effectiveness) and the CEO (the person in charge of running the company) should be separated

This is to ensure that no one individual has too much power within the company. 

The Chairman should be independent on appointment.

NON-EXECUTIVE DIRECTORS

Whilst company law refers only to “directors” in general, two types of directors have emerged.  

Those who are involved in the day-to-day execution of management are known as executive directors and those who primarily only attend board meetings are known as non-executive directors.

Non-executive directors should provide a balancing influence and play a key role in reducing conflicts of interest between management and shareholders.

The UK’s Higgs report provide a useful summary of the role of non-executive summary.

  1. Strategy 

    – setting direction

  2. Performance 

    – should scrutinize the performance of management in meetings goals and objectives

  3. Risk 

    – should ensure that risk management is robust

NEDs should as far as possible be ‘independent’ and must not:

  • have been an employee of the company in the last five years

  • have had a material business interest in the company for the last three years either directly or indirectly

  • participate in the company’s share options, performance-related pay scheme or pension schemes

  • have close family ties with company directors or senior employees

  • serve as a NED for more than nine years with the same company

  • hold cross directorship (i.e. two or more directors sit on the board of the same third party company) or have significant links with other directors through involvement in other organisations.

Typical recommendations include:

  • At least half of the board should comprise independent NEDs. 

    A smaller company should have at least two independent NEDs.

  • One of the NEDs should be appointed the ‘senior independent director’.

REMUNERATION COMMITTEES

Director’s remuneration should be set via a “remuneration committee” consisting of independent non-executives (at least 3 for FTSE 350 companies and at least 2 for smaller listed companies) .  

The Chairman can be a member but cannot chair the committee. 

The chair must have been a committee member for at least 12 months.

The revised 2018 Code states that there should be clear reporting on remuneration and how it helps the organisation to achieve its strategy and long-term success and its alignment to workforce remuneration.

Due to directors being paid large salaries etc for a number of years (and being seen as major corporate abuse) The Greenbury committee in the UK set out principles to demonstrate what a good remuneration policy should look like:

  1. Directors remuneration should be set by independent members of the board

  2. Bonuses etc relate to measurable performance or enhance share value

  3. Full transparency of directors remuneration

The committee also has to take into account the wider picture.

So, for example the package will need to attract, retain and motivate directors of sufficient quality.

A significant proportion of director’s pay should be performance related.

There is also a balance between this and the shareholders interests.

The committee also has to consider:

  • The different levels of management/directorship

  • The ability for managers to leave

  • Individual performance

  • Overall organisational performance

AUDIT COMMITTEES

An audit committee of independent non-executive directors (at least three for FTSE 350 companies and at least two for smaller listed companies) who are responsible for monitoring and reviewing the company’s financial controls and the integrity of the financial statements.

Audit committees are very significant due to their responsibilities for supervising and offering an overall review. 

They should have close interest in the work of the internal audit.

The board should review the effectiveness of risk management and internal controls at least annually and report to shareholders covering all material controls.

The benefits of an effective audit committee, as highlighted by the Cadbury committee:

  • Improve the quality of financial reporting, by reviewing the financial statements

  • Reduce opportunity for fraud by creating a climate of discipline and control

  • Enable the non-executive to play a positive role by giving an independent judgment

  • Help the finance director, by providing the forum to raise concern in situations that otherwise may be difficult

  • Strengthen the position of the external auditor but providing a channel of communication and forum for issue of concern

  • Provide a framework within which the external auditor can assert their independence in the event of a dispute

  • Strengthen the position of the internal auditor

  • Increase public confidence and credibility in the financial statements

The UK Corporate Governance Code includes the following parts with relation to the functions of the audit committee:

  • To liase with external audit

  • To supervise internal audit

  • To review the annual accounts

PUBLIC OVERSIGHT

  • The public is a legitimate stakeholder, thus it has the right to know how a particular company is being governed.  

    One can also mention that the public has the right to be involved in the governance process of companies.  

    The most obvious means of public oversight of corporate governance is via the publication of Annual Reports and Accounts.  

    Companies should also discuss their plans with their representatives of various stakeholder groups including journalists and local politicians.

RELATIONS WITH SHAREHOLDERS

  • There should be a dialogue with shareholders based on the mutual understanding of objective.

  • The board has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

  • The Annual General Meeting (AGM) has a key role in this.

NOMINATION COMMITTEE

  • A nomination committee should be in place for appointing board members and making recommendations to the board. 

    It should consist of a majority of non-executive directors.

    This is to provide some independence from the current board members and to ensure that all appointments are based on merit and suitability and that the composition of the board is balanced.

    A nomination committee should be responsible for finding suitable applicants to fill board vacancies and recommending them to the board for approval.

The 'UK Corporate Governance Code' requires listed companies to include in their accounts a narrative statement of how they applied the principles set out in the code and also a statement as to whether or not they complied throughout the accounting period with the provisions set out in the code.

Listed companies that do not comply must give reasons for non-compliance.

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