1.

A history of corporate governance in the UK

Before we discuss the principles of the UK Corporate Governance Code (formerly
known as The Combined Code on Corporate Governance) in detail, it is useful to
provide a short history of corporate governance in the UK.
As a result of several accounting scandals in the 1980s and 1990s, such as (Mirror
Group, BCCI and Polly Peck), the Cadbury committee produced a report entitled
Financial Aspects of Corporate Governance.
In 1995, the Greenbury report added a set of principles on the remuneration of
executive directors. The Hampel report in 1998 brought the Cadbury and
Greenbury reports together to form the first Combined Code. In 1999, Turnbull
produced a report relating to risk management and internal control which
ultimately resulted in the Financial Reporting Council (FRC) providing guidance
for directors on how to comply with internal control provisions in the Combined
Code. In 2002, the Higgs report (Review of the Role and Effectiveness of Non-
executive Directors) was commissioned to produce a single comprehensive code,
which was refined by the FRC to produce the Combined Code. This evolved into
the UK Corporate Governance Code that is with us today.
Also in 2002, the Smith report resulted in recommendations on audit committees.
This has evolved into the current FRC's Guidance on Audit Committees, which
supplements its UK Corporate Governance Code. Having concluded during its
2009 review that a major reason for corporate governance failings was a lack
of interaction between the boards of listed companies and shareholders, the FRC
deemed it necessary to also publish a UK Stewardship Code in July 2010. This
Stewardship Code provides guidance on good practice for investors and separates
out the principles and provisions relevant to institutional shareholders. July 2018
brought with it a substantial rewrite of the Code, featuring new principles and
provisions in a number of areas.

2. 'Comply or explain'
The UK Corporate Governance Code is structured into a set of broad principles
and more specific provisions, which seek to apply those principles. Companies are
only required to apply the principles and are permitted to depart from the specific
provisions. However, if they do depart from the specific provisions then they must
explain why they have done this. This is known as the 'comply or explain'
basis, according to which a board must either comply with the specific provisions,
or explain why they have not. The board can only choose not to comply with a
provision if they believe that doing so would have failed to apply the broad
principle, ie if not complying results in a better application of the principle.
The reasons for not complying with a specific provision should be clearly and fully
explained to the shareholders. Any explanation must include details of how actual
practices are consistent with the overall principle to which a provision related.