Commentary | UK Governance Code
UK Governance Code – the next 25 years The UK’s framework for corporate governance is respected worldwide but needs to evolve with changing circumstances Since its inception 25 years ago, the UK Corporate Governance Code has been a major force for good and it makes an important contribution to the high regard in which the UK business framework is held globally, which in turn is a key reason why global investors commit their capital to the UK. In short, the Code has made a significant and important contribution to sustainability in the UK economy and the creation of jobs, growth and prosperity. Nonetheless, after a quarter of a century and with the apparent decline in public trust in business it is time to review the Code and its framework to ensure it is fit for the future. The Cadbury Report was published in 1992 as a response to corporate scandals at the time involving BCCI, Polly Peck and Maxwell, and was followed by the creation of the UK’s Corporate Governance Code. A key aspect of the Code from the onset has been the ‘comply or explain’ approach. This has allowed companies to respond confidently and effectively to evolving market circumstances, because it offers flexibility in how companies apply the principle to their own particular situations and business models. Hard rules don’t cope 10 Ethical Boardroom | Summer 2017
Stephen Haddrill
Chief Executive Officer of the Financial Reporting Council easily with the variety of British business and are inevitably more difficult to change. As well as the ‘comply or explain’ approach, the strength of the unitary board and strong shareholder rights are important planks of the framework. These factors have long delivered economic success and must be preserved. But more can be done. While compliance with the Code’s provisions is high, our monitoring shows that some explanations when boards choose not to follow provisions are of poor quality. We have called on shareholders to challenge companies where they do not believe that explanations given are sufficiently persuasive.
Evolving framework
As we look to the next 25 years, it is important that our framework of corporate governance continues to evolve. The demands on business and the expectations of stakeholders are growing. Inevitably, we are looking at the risks and opportunities presented by Brexit. If we maintain the advantages gained over the last quarter of a century, investors will continue to look to the UK as a destination of choice for their capital. Businesses will continue to see the merit in being listed in
the UK. A proportionate, principles-based framework for corporate governance will help to achieve these outcomes. Codes put forward principles for best practice that make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, on its own, a code does not prevent inappropriate behaviour, strategies or decisions. The commitment of people, particularly the leaders within a business is required. Our report Corporate Culture and the Role of Boards and our work to tier the signatories to the Stewardship Code are good examples of fresh thinking. There are certain principles mentioned earlier that underlie corporate governance in the UK and which we feel must be retained. The law holds all directors equally responsible for the decisions of the board. But their responsibility now needs to be more closely aligned to the broader factors in section 172 of the Companies Act and should be reported on and effectively monitored. Our report on promoting good corporate culture helps them in this regard and sets out several key observations as well as case study examples, some of which I will highlight. In particular, it encourages boards to: ■ Recognise the value of culture A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection www.ethicalboardroom.com
