What is a Code of Governance in the UK?
A Code of Governance is a set of rules decided by an organisation that outlines their:
- Company Structure.
- Roles and Responsibilities of their Board Members, Executive Directors and Senior Leaders.
- Processes for issues, namely what gets the Board’s attention.
- The ESG goals and core values of the organisation.
This document is usually used to help welcome a new CEO or introduce a new Board Member to the culture of the organisation.
What was the Cadbury Report?
The necessity for a Code of Governance for every company was first discussed in the early 1990s after concerns about financial reporting and accountability. The Committee on the Financial Aspects of Corporate Governance published a report in 1992 which was dubbed the Cadbury Report after Sir Adrian Cadbury who chaired the committee.
The report outlined good governance practices as well as introduced the principle of “comply or explain”. This means a company can either comply with the Corporate Governance Code or publicly explain why they choose not to. This allows the market to choose whether or not to comply with the Code, and rejects the notion that one size of governance fits all.
The Cadbury Report made several recommendations:
- The role of the CEO and the Chairperson should be separated.
- Boards should have at least 3 non-executive Directors, 2 of which should be independent.
- An Audit Committee for the Board should be composed of non-executive Directors.
What is the UK’s Corporate Governance Code?
The UK government has continued to build upon the principles first put forward in the Cadbury Report. In 1995, the Greenbury Report suggested amendments such as:
- Each Board should have an remunerations committee, which excludes Executive Directors.
- Directors' pay should be related to long term performance, which should be disclosed in the company’s accounts and contracts which should be renewable each year.
Then in 1998, the Hampel Report suggested the two reports, Cadbury and Greenbury, could be combined to form a code. This code also suggested the following additions:
- The Chairman of the Board is the leader of the non-executive Directors.
- Recommendation that institutional investors utilise their votes on Boards.
- All remunerations, including pensions, should be disclosed.
Following the Enron Scandal, in 2003 the Higgs Review was published, focusing on the role of the non-executive Directors. Then after the 2008 financial crisis, the Walker Review offered new recommendations for the banking industry. This all culminated in the separation of financial review and corporate governance with two new codes: the Stewardship Code, which focused on financial reporting, and the Corporate Governance Code.
The Corporate Governance Code has been updated several times, the latest of which was in 2018 and divided into 5 sections: leadership, effectiveness, accountability, remuneration and relationship with shareholders.
- A Board should look to the future of the organisation.
- There should be a clear hierarchy and division of responsibilities at the most senior executive level.
- No one person should have unrestricted power of decisions.
- The Chairperson is responsible for the leadership of the Board.
- Non-executive Directors should question strategy to ensure effectiveness.
- Board Members need to be aware of and possess the skills, knowledge and experience required for them to govern effectively.
- There needs to be a formal process with all due diligence exercised when selecting new Board Members or CEO.
- Directors should ensure they have the time to dedicate themselves to the company.
- Directors should be welcomed in a professional manner, and given regular training.
- The processes should ensure the Board is made aware of issues promptly and with sufficient information so as to carry out their duties.
- There should be a thorough annual evaluation of the Board, as well as all its committees and Members.
- All Directors should be submitted for re-election at regular intervals.
- The Board should produce a comprehensible balanced audit of the company’s situation and future.
- The Board should be sound in their risk management and internal processes.
- The Board should produce their own Code of Conduct in relation to risk management, internal processes, corporate reporting, internal control principles and for maintaining their own relationship with an external auditor. These should hold transparency in its highest regard.
- The remuneration should attract talent but not pay excessively.
- A significant portion of Executive Directors’ remuneration should be structured so as to link to individual or company performance.
- There should be a formal process to determine the pay of individual Directors which excludes said Director.
- Relations With Shareholders:
- There needs to be open communication with shareholders to ensure that there is a mutual understanding of objectives.
- There needs to be an AGM during which the investors are encouraged to participate and be a part of the discussions.
How Can Convene Help You Improve Your Governance Processes?
A Board Portal is a major step in the direction of good governance. Convene’s software has features like meeting minutes templates, note-taking and agenda-building, which make auditing easy. This will ensure accountability, sound financial management, transparency, and efficiency.
Convene’s features help with the before, the during and the after, so you can have a stress-free Board meeting and focus on governing effectively! We even help to facilitate eAGMs because during this pandemic it can be difficult to all safely organise a large-scale meeting in person.