It involves balancing the interests of various stakeholders, such as shareholders, employees, customers, suppliers, regulators, and the community. Corporate governance also aims to ensure accountability, transparency, fairness and ethical conduct in the company’s operations and decision-making.
The main source of corporate governance guidance is the UK Corporate Governance Code, which applies to companies with a premium listing on the London Stock Exchange. Unlisted companies may choose to follow the Code, but it is not a requirement. The Code operates on a ‘comply or explain’ basis, meaning that companies must either follow the principles and provisions of the Code or explain why they have deviated from them in their annual report.
The Code is divided into five sections, covering the following governance aspects:
- Board leadership and company purpose: This section sets out the role and responsibilities of the board, the chair, the chief executive, and the company secretary. It also emphasises the importance of having a clear purpose, values, and strategy, and engaging effectively with stakeholders.
- Division of responsibilities: This section deals with the composition and structure of the board, the separation of powers between the chair and the chief executive, the role of non-executive directors and the independence of the board.
- Composition, succession and evaluation: This section covers the appointment, reappointment, removal, and diversity of board members, as well as the evaluation of their performance and effectiveness.
- Audit, risk and internal control: This section outlines the responsibilities of the board and the audit committee in relation to the financial reporting, internal control, risk management and external audit of the company.
- Remuneration: This section sets out the principles and provisions for determining and disclosing the remuneration policy and practices of the company, and ensuring alignment with the company’s purpose, values, strategy, and long-term success.
Directors of UK companies have a legal duty to act in the best interests of the company and its members, as well as to consider various other factors, such as the long-term consequences of their decisions, the interests of employees, the impact on the environment and the reputation of the company.
Directors should also be aware of the relevant regulations and standards that apply to their company, which include the UK Listing Rules and the UK Stewardship Code. These standards provide further details and requirements on specific aspects of corporate governance, such as shareholder engagement, audit quality, remuneration structures and board diversity.
Corporate governance is not a one-size-fits-all concept, and directors should exercise their judgement and discretion in applying the principles and provisions of the Code to their company’s specific circumstances and needs. However, directors should also be prepared to explain and justify their decisions to their shareholders and other stakeholders and demonstrate how they have contributed to the success and sustainability of the company. By doing so, directors can enhance the trust and confidence of the market and society in their company and its governance.
The current Code was published in 2018. Following a limited consultation which focused on a specific number of changes, there was an update to the 2018 Code in January 2024. The key changes can be read here and will be in effect from 1 January 2025.
If you have queries on directorships or your duties as a director, please contact Katie Holden, Company Secretarial Senior Manager.
