The UK Corporate Governance Code (UKCG Code), (formerly the Combined Code) sets out standards of good practice in relation to leadership and effectiveness of a board of directors, remuneration, accountability, and relations with shareholders.
The UKCG Code is based on the following underlying principles of good governance:
- probity, and
- the need to focus on the sustainable success of an entity over the longer term
The first version of the UKCG Code was produced in 1992 by the Cadbury Committee. Its paragraph 2.5 is still the classic definition of the context of the UKCG Code:
'Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.'
How does the UKCG Code work?
The UKCG Code is divided into five sections:
- Section A: Leadership - dealing with the role of the board, chair, the chief executive officer (the CEO) and non-executive directors (NEDs)
- Section B: Effectiveness - dealing with board composition, board appointments, independence of NEDs, directors’ time commitments, induction and continuous development, board evaluations and support
- Section C: Accountability - dealing with financial reporting, internal control and risk management
- Section D: Remuneration - dealing principally with the remuneration of executive directors and the principles to be applied by remuneration committees
- Section E: Relations with Shareholders - dealing with constructive engagement with shareholders and the annual general meeting (the AGM)
Compliance with the UKCG Code
All listed companies are required under the Listing Rules (Listing Rules) of the Financial Conduct Authority (FCA) either to comply with the provisions of the UKCG Code or to explain to shareholders why they have not done so.
A company with a premium listing of equity shares must include in its annual financial report:
- a statement of how it has applied the main principles of the UKCG Code, in a manner that enables shareholders to evaluate how they have been applied
- a statement as to whether or not the listed company has complied throughout the accounting period with all relevant UKCG Code provisions, setting out the provisions, if any, it has not complied with, the period of non-compliance and the company’s reasons for non-compliance
If the principles of good governance can be achieved by other means, then it is acceptable not to follow the principles of the Code. However, the reasons for departing from the UKCG Code must be explained fully to the shareholders.
Future developments in corporate governance
In November 2016 the government published a Green Paper on corporate governance reform to seek views on three areas where the government is considering updating the UK’s corporate governance framework:
- executive pay
- strengthening the employee, customer and supplier voice
- extending some of the features of the corporate governance regime to large private companies
The government is inviting responses to the Green Paper by 17 February 2017.
To obtain legal advice on corporate governance issues, please search for a corporate law solicitor on Solicitors Guru.