CORPORATE GOVERNANCE REFORM

UNITED KINGDOM

1992 - 2024
STATUTE

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2006 Companies CA 2006 codifies and replaces certain common law duties of directors (CA
Act (CA) 2006, section 170(3)) (see ‘Common law’). The statutory duties of directors
under CA 2006 are as follows:
• to act within powers (ie, in accordance with the company’s constitution)
to promote the success of the company
• to exercise independent judgement
• to exercise reasonable care, skill and diligence
• to avoid conflicts of interest
• not to accept benefits from third parties
• to declare any interest in a proposed transaction or arrangement with the
company
COMMON LAW

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Common Company directors have a range of fiduciary, or common law, duties derived
Law from a long line of case law dating back to the early nineteenth century.
These fiduciary duties include a requirement:
• to exercise skill and care;
• to act in good faith in the best interests of the company;
• to act within the powers conferred by the company’s constitution and to
exercise these powers for proper purposes;
• not to fetter discretion;
• to avoid interests that conflict with those of the company and to avoid
duties that conflict with the director’s duties to the company;
• not to make a secret profit; and
• to keep the affairs of the company confidential.
LISTING REGIME

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Listing • The Listing, Prospectus, Disclosure Guidance and Transparency Rules (the
Regime LPDT Rules) play a significant part in regulating UK-listed companies.
• They form part of the Financial Conduct Authority’s (FCA) Handbook,
which contains the rules and guidance made under FSMA 2000, the
principal statute relating to financial services in the United Kingdom
• They provide guidance on obligations with which a UK-listed company
must comply to maintain its listing on the stock exchange.
CORPORATE GOVERNANCE CODE

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2010 Code • The UK Corporate Governance Code (the Code) represents key corporate
governance recommendations of best practice for companies.
• The Financial Reporting Council (FRC) first published the Code on 28 May
2010 when it superseded the existing Combined Code on Corporate
Governance (Combined Code).
• A new version of the Code was published in September 2012, applying to
accounting periods beginning on or after 1 October 2012, a further
revised version was published in September 2014 applying to accounting
periods beginning on or after 1 October 2014 and the most recent version
was issued in April 2016 applying to accounting periods beginning on or
after 17 June 2016.
CORPORATE GOVERNANCE CODE

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2010 Code • The Code is divided into main principles, supporting principles and
provisions.
• The Code does not have statutory force, rather it establishes principles of
good governance and provides recommendations and guidance.
• However, companies with a premium listing of equity shares incorporated
either in the UK or overseas are required to include a statement in their
annual financial report that explains how the company has applied the
main principles of the Code, in a manner that would enable shareholders
to evaluate how the principles have been applied
• Such companies must also set out in the annual financial report if they
have complied with all the provisions of the Code over the course of the
accounting period and give reasons for any non-compliance (the ‘comply
or explain’ regime)
CORPORATE GOVERNANCE CODE

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2010 Code Some of the crucial principles and provisions that the Code encompasses are:
• effective board management in the long-term interests of the company;
• definitions of the role of the board, the chairman and the non-­executive
directors of a company;
• the separation of the roles of the chairman and the chief executive officer
of a company;
• the role of the chairman in leading the board and ensuring effectiveness;
• the role of non-executive directors in constructively challenging strategy
and scrutinising performance;
• the composition of the board;
• open and rigorous procedures for the appointment of directors from a
wide pool of candidates, with due regard for the benefits of diversity;
• formal evaluation of the performance of boards, committees and
individual directors, along with provision for the induction and
professional development of non-executive directors;
CORPORATE GOVERNANCE CODE

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2010 The Code • the number of independent non-executive directors that a company must
have on its board;
• close relationships between the chairman, the senior independent
director, non-executive directors and major shareholders of a company;
• the role of a company’s audit committee in monitoring the integrity of its
financial reporting, reinforcing the independence of the external auditor
and reviewing the management of financial and other risks;
• the composition of the board to be such that it has a balance of skills,
experience, independence and knowledge of the company; and
• the requirement for all directors to allocate sufficient time to the
company to discharge their responsibilities effectively.
CORPORATE GOVERNANCE CODE UPDATE

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2012 Update of • Guidance on audit committees and board diversity was expanded
Combined • Revisions include audit committees having to disclose information to
Code shareholders on how they have discharged their responsibilities and how
they have assessed the external audit’s effectiveness
• Also, companies need to explain their policies on boardroom diversity
CORPORATE GOVERNANCE CODE UPDATE

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2012 Kay Review • Reviewed the extent to which UK equity markets were providing
adequate support to British business for the UK to gain and maintain
competitive advantage in global markets
• Highlighted a lack of trust and an ongoing short-term culture as root
problems within the UK financial services sector
CORPORATE GOVERNANCE CODE UPDATE

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2014 Update of • Viability statement’ provision added
Combined • Guidance on executive compensation reworked.
Code • Companies were expected to indicate their response to sizeable dissenting
votes on shareholder resolutions.
CORPORATE GOVERNANCE CODE UPDATE

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2016 Update of • Revised audit committee provisions on membership qualifications and
Combined appointment of external auditors.
Code
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for board leadership and company purpose
version of • A successful company is led by an effective and entrepreneurial board,
Combined whose role is to promote the long-term sustainable success of the
Code company, generating value for shareholders and contributing to wider
society.
• The board should establish the company’s purpose, values and strategy,
and satisfy itself that these and its culture are aligned. All directors must
act with integrity, lead by example, and promote the desired culture.
• The board should ensure that the necessary resources are in place for the
company to meet its objectives and measure performance against them.
The board should also establish a framework of prudent and effective
controls, which enable risk to be assessed and managed.
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for board leadership and company purpose
version of • For the company to meet its responsibilities to shareholders and
Combined stakeholders, the board should ensure effective engagement with, and
Code encourage participation from, these parties.
• The board should ensure that workforce policies and practices are
consistent with the company’s values and support its long-term
sustainable success. The workforce should be able to raise any matters of
concern.
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for the division of board responsibilities
version of • The chair leads the board and is responsible for its overall effectiveness in
Combined directing the company. They should demonstrate objective judgement
Code throughout their tenure and promote a culture of openness and debate.
In addition, the chair facilitates constructive board relations and the
effective contribution of all non-executive directors, and ensures that
directors receive accurate, timely and clear information.
• The board should include an appropriate combination of executive and
non-executive (and, in particular, independent non-executive) directors,
such that no one individual or small group of individuals dominates the
board’s decision-making. There should be a clear division of
responsibilities between the leadership of the board and the executive
leadership of the company’s business.
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for the division of board responsibilities
version of • Non-executive directors should have sufficient time to meet their board
Combined responsibilities. They should provide constructive challenge, strategic
Code guidance, offer specialist advice and hold management to account.
• The board, supported by the company secretary, should ensure that it has
the policies, processes, information, time and resources it needs to
function effectively and efficiently.
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for composition, evaluation and succession
version of • Appointments to the board should be subject to a formal, rigorous and
Combined transparent procedure, and an effective succession plan should be
Code maintained for board and senior management. Both appointments and
succession plans should be based on merit and objective criteria and,
within this context, should promote diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths.
• The board and its committees should have a combination of skills,
experience and knowledge. Consideration should be given to the length
of service of the board as a whole and membership regularly refreshed.
• Annual evaluation of the board should consider its composition, diversity
and how effectively members work together to achieve objectives.
Individual evaluation should demonstrate whether each director
continues to contribute effectively.
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for audit, risk and internal control
version of • The board should establish formal and transparent policies and
Combined procedures to ensure the independence and effectiveness of internal and
Code external audit functions and satisfy itself on the integrity of financial and
narrative statements.
• The board should present a fair, balanced and understandable
assessment of the company’s position and prospects.
• The board should establish procedures to manage risk, oversee the
internal control framework, and determine the nature and extent of the
principal risks the company is willing to take to achieve its long-term
strategic objectives.
CORPORATE GOVERNANCE CODE UPDATE

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2018 Revised Principles for remuneration
version of • Remuneration policies and practices should be designed to support
Combined strategy and promote long-term sustainable success. Executive
Code remuneration should be aligned to company purpose and values and be
clearly linked to the successful delivery of the company’s long-term
strategy.
• A formal and transparent procedure for developing policy on executive
remuneration and determining director and senior management
remuneration should be established. No director should be involved in
deciding their own remuneration outcome.
• Directors should exercise independent judgement and discretion when
authorising remuneration outcomes, taking account of company and
individual performance, and wider circumstances.
CORPORATE GOVERNANCE CODE UPDATE

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2024 Revised • Structure of Combined Code unchanged from 2018 but changes to
version of content
Combined • Additional disclosure requirements introduced for annual report and
Code accounts and the need for a declaration by the board as to the
effectiveness of those controls.
• A new Principle has been included to encourage companies to report on
outcomes and activities.
STEWARDSHIP CODE

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2010 Stewardship • The Stewardship Code is applicable to those firms who manage assets
Code on behalf of institutional shareholders, including pension funds,
insurance companies, investment trusts and other collective investment
vehicles.
• The Stewardship Code requires institutional investors to be transparent
about their investment processes, engagement with investee
companies and voting at shareholders' meetings
7 key principles – institutional investors should
1. Publicly disclose their policy on how they will discharge their
stewardship responsibilities.
2. Have a robust policy on managing conflicts of interest in relation to
stewardship and this policy should be publicly disclosed.
3. Monitor their investee companies
STEWARDSHIP CODE

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2010 Stewardship 4. Establish clear guidelines on when and how they will escalate their
Code activities as a method of protecting and enhancing shareholder value.
5. Be willing to act collectively with other investors where appropriate.
6. Have a clear policy on voting and disclosure of voting activity.
7. Report periodically on their stewardship and voting activities.
• In 2016, the FRC introduced a tiering system, whereby signatories to the
Stewardship Code are categorised according to the quality of their statements,
in an effort to improve standards of reporting against the seven principles.
CITY CODE ON TAKEOVERS AND MERGERS

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2006 Takeover • Regulates takeovers and mergers of certain companies
Code • Consists of six general principles that set out the standards of behaviour
expected of companies engaged in a merger or takeover and 38 rules
(with accompanying notes) that expand on the general principles and
provide detailed guidance on the conduct of takeovers and mergers.
• Has statutory force and the Panel on Takeovers and Mergers (the
Takeover Panel) has statutory powers in respect of transactions to which
the Takeover Code applies
INSTITUTIONAL INVESTOR GUIDELINES

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Institutional • Bodies representing institutional investors, most notably the Association
Investor of British Insurers (ABI) and the Pensions and Lifetime Savings
Guidelines Association (until October 2015 known as the National Association of
Pension Funds (NAPF)), issue guidelines to their members advising them
how to vote in relation to certain resolutions proposed by companies
• This includes how to vote if chairman not sufficiently independent, not
sufficient non-executive directors, not gap between CEO and chair, if
remuneration, audit etc. committees not properly constituted
ARTICLES OF ASSOCIATION

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Articles of • A company’s articles of association will contain provisions as to what its
Association directors may and may not do in respect of the company.
• Directors who do not comply with the provisions of their company’s
articles of association may be in breach of their statutory duty to act
within their powers under CA 2006, section 171.
• A company may place additional corporate governance requirements on
the board of directors, beyond the scope of CA 2006 and the statutory
framework.
CONTEXT

COMPLY OR EXPLAIN
• From the beginning of the process of corporate governance reform in the UK, a voluntary
approach of ‘comply or explain’ has been chosen. This approach is to apply in spirit not just in
letter
• This has been in keeping with the preferred approach of company law in the UK, which is one
of self-regulation of the City of London financial institutions, as expressed in the Financial
Services Act 1986 (Farrar and Hannigan, 1998).
• The Cadbury Report emphasized the importance of adopting an approach that encouraged
compliance with a voluntary code of best practice.
• This contrasts the legalistic approach of many other countries that uses legislation e.g. US
Sarbanes-Oxley Act 2002
CONTEXT

APPLICATION TO SMALL BUSINESS

• Combined Code recognises small business has more difficulty in compliance
• Those who cannot comply should provide reasons (comply or explain)
CONTEXT

EXTENT OF SUPPORT
• What is level of support among investors, shareholders, managers in UK business?
RANK INITIATIVE AVERAGE RESPONSE
1 Appointment of non-executive directors Strong agreement
2 Splitting of Chairman / CEO roles Strong agreement
3 Appointment of audit committees Strong agreement
4 Removing 3 year rolling contracts for executive directors Strong agreement
5 Directors who produce deliberately misleading information made personally liable Strong agreement
6 Establishment of remuneration committees Strong agreement
7 Increased role of audit committee Strong agreement
8 Restrictions on contract severance compensation for directors Strong agreement
9 Increased voting rights for shareholders Strong agreement
CONTEXT

EXTENT OF SUPPORT
• What is level of support among investors, shareholders, managers in UK business?
RANK INITIATIVE AVERAGE RESPONSE
10 Increased disclosure of internal control measures Agreement
11 Training programs for newly appointed directors Agreement
12 Enhanced shareholder powers Agreement
13 Declaration of voting policy by institutional investors Agreement
14 Greater transparency in proxy voting by institutional investors Some agreement
15 Restrictions on executive directors remuneration Some disagreement
16 Limitations on proxy voting by institutional investors Strong disagreement
CURRENT ISSUES

Holding companies to account

• Demand for corporate governance reform to require directors to sign off on companies’ internal
controls and make an annual statement about their effectiveness.
• Idea loosely modelled on the US’s Sarbanes-Oxley Act, introduced after the failure of energy
group Enron two decades ago
• Opposition from business due to compliance costs.
• Reform not yet legislated and proposal to make further changes to internal control rules of
Combined Code also not happened
• Government also planned to increase the number of public interest entities (PIEs), which are
subject to stricter audit and governance standards, from about 2,000 to as many as 4,000. The
latest proposals would classify only about 600 extra larger companies as PIEs
CURRENT ISSUES

Overhaul of audit sector

• Plans to overhaul the audit sector centred on two elements: diluting the Big Four (KPMG, EY,
PWC, DT) market dominance and improving the quality of auditors’ work.
• Big 4 have successfully resisted calls to have their audit arms split from their consulting
operations. Instead, they have agreed with the regulator to a voluntary “operational separation”
by 2024 to boost audit independence. This required the firms to end cross-subsidies from
advisory to audit and to ensure that auditors were paying a market rate for any expertise they
buy in from their consultant colleagues.
• Big 4 remain dominant in the audit sector — checking the books of 98 of the FTSE 100 as of
August 2023, according to Adviser Rankings.
• A plan to force the biggest listed companies to give at least part of their audit work to smaller
accountancies remains up in the air because implementing the changes would require as yet
unpublished legislation.
CURRENT ISSUES

• To improve audit quality, the FRC has increased its staffing and toughened its sanctions for
substandard work.
• A £21mn fine for KPMG’s failings at Carillion and a £15mn penalty for Deloitte’s work at
former FTSE 100 software group Autonomy were the heftiest in a slew of sanctions.
• Run-of-the-mill supervision has also become tougher, with the FRC pointing to improving
scores in annual inspections as evidence that its approach has led to better audits
• The regulator’s stricter approach has led auditors to charge more for their work, contributing to
a sharp rise in audit fee income at the big firms — 34 per cent in the past five years — even as
they have cut client numbers to reduce regulatory risk.
CURRENT ISSUES

Replacement of FRC by ARGA

• Financial Reporting Council (FRC), independent UK corporate governance regulator funded by
audit profession and in place since 2001, criticised for poor performance, especially since
collapse of Carillion in 2018
• Under current rules, FRC is powerless to intervene unless a company director happens to be a
chartered accountant.
• Govt planned to replace this with Audit Reporting and Governance Authority (ARGA) funded
by government for more effective oversight of auditors in UK.
• This requires enabling legislation which was to be in place in 2019 but this has been delayed
and will likely happen in 2024 or 2025.
CURRENT ISSUES

Brexit
• UK exited EU in 2016
• Majority of English company law is not derived from EU law. The Companies Act 2006 is the
core legislation affecting the incorporation and operation of UK companies.
• Some parts of the Companies Act 2006 have been derived from EU Directives but these do not
relate to corporate governance
CORPORATE GOVERNANCE CODE HISTORY

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1992 Cadbury • Response to abuse of power that occurred in Maxwell case.
Report • View that corporate governance in UK basically OK but need to make
some things that were implicit, explicit.
• Produced report and Code of Best Practice
• 3 general areas - Board of Directors, auditing, and shareholders
• BoD most critical CG mechanism, requiring constant monitoring &
assessment
• Essential role of auditing & accounting
• Focus on institutional investors as most important group of
shareholders
CORPORATE GOVERNANCE CODE HISTORY

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1995 Greenbury • Response to public and shareholder concern on director remuneration.
Report Case cited of remuneration of Directors of British Gas
• The report recognized the importance for companies of offering salaries
that were high enough to attract directors of adequate calibre, capable of
running large, multi- national organizations.
• However, the report also highlighted deep concerns with directors’ pay
packages, especially in relation to share options and other additional
sources of remuneration.
CORPORATE GOVERNANCE CODE HISTORY

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1998 Hampel • Took all issues of previous reports and produced Combined Code
Report • Emphasized the need to maintain a principles-based, voluntary approach
to corporate governance rather than a more regulated and possibly
superficial approach.
• the Chairman of the board should be seen as the "leader" of the non-
executive directors
• institutional investors should consider voting the shares they held at
meetings, though rejected compulsory voting
• all kinds of remuneration including pensions should be disclosed.
CORPORATE GOVERNANCE CODE HISTORY

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1998 Combined Section A: Leadership
Code • Every company should be headed by an effective board which is
collectively responsible for the long-term success of the company.
• There should be a clear division of responsibilities at the head of the
company between the running of the board and the executive
responsibility for the running of the company's business. No one
individual should have unfettered powers of decision.
• The chairman is responsible for leadership of the board and ensuring its
effectiveness on all aspects of its role.
• As part of their role as members of a unitary board, non-executive
directors should constructively challenge and help develop proposals on
strategy
CORPORATE GOVERNANCE CODE HISTORY

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1998 Combined Section B: Effectiveness
Code • The board and its committees should have the appropriate balance of
skills, experience, independence and knowledge of the company to
enable them to discharge their respective duties and responsibilities
effectively.
• There should be a formal, rigorous and transparent procedure for the
appointment of new directors to the board.
• All directors should be able to allocate sufficient time to the company to
discharge their responsibilities All directors should receive induction on
joining the board and should regularly update and refresh their skills and
knowledge.
• The board should be supplied in a timely manner with information in a
form and of a quality appropriate to enable it to discharge its duties.
• The board should undertake a formal and rigorous annual evaluation of its
own performance and that of its committees and individual directors.
• All directors should be submitted for re-election at regular intervals,
subject to continued satisfactory performance.
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1998 Combined Section C: Accountability
Code • The board should present a balanced and understandable assessment of
the company's position and prospects.
• The board is responsible for determining the nature and extent of the
significant risks it is willing to take in achieving its strategic objectives. The
board should maintain sound risk management and internal control
systems.
• The board should establish formal and transparent arrangements for
considering how they should apply the corporate reporting and risk
management and internal control principles and for maintaining an
appropriate relationship with the company's auditor.
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1998 Combined Section D: Remuneration
Code • Levels of remuneration should be sufficient to attract, retain and motivate
directors of the quality required to run the company successfully, but a
company should avoid paying more than is necessary for this purpose.
• A significant proportion of executive directors’ remuneration should be
structured to link rewards to corporate and individual performance.
• There should be a formal and transparent procedure for developing
policy on executive remuneration and for fixing the remuneration
packages of individual directors. No director should be involved in
deciding his or her own remuneration.
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1998 Combined Section E: Relations with Shareholders
Code • There should be a dialogue with shareholders based on the mutual
understanding of objectives. The whole board has responsibility for
ensuring that a satisfactory dialogue with shareholders takes place.
• The board should use the AGM to communicate with investors and to
encourage their participation
CORPORATE GOVERNANCE CODE HISTORY

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1999 Turnbull • Focused on internal controls
Report • provided an explicit framework for reference, on which companies and
boards could model their individual systems of internal control.
• The framework was not meant to be prescriptive, given the problems of
providing a common framework to companies in diverse industries that
face an innumerable series of different risks and uncertainties.
• The aim was to provide companies with general guidance on how to
develop and maintain their internal control systems and not to specify
the details of such a system.
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2003 Higgs • The fall of Enron spurred the UK and other countries into re-evaluating
Report corporate governance issues, such as the role and effectiveness of non-
executive directors.
• Enron’s non-executive directors were ineffective in performing their
corporate governance role of monitoring the company’s directors and
were subject to conflicts of interest.
• Higgs made recommendations for changes to the Combined Code. This
included a greater proportion of non-executive directors on boards (at
least half of the board) and more apt remuneration for non-executive
directors.
• The report also concluded that stronger links needed to be established
between non-executive directors and companies’ principal shareholders.
CORPORATE GOVERNANCE CODE HISTORY

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2003 Smith • Examined role of audit committee in light of Enron scandal, as the failure
Report of the audit committee and internal audit function were one of the
principal causes of the company’s collapse.
• Recommended improvements in functioning of audit committees
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2003 Tyson • Recommendations on appointment, development of Non-Executive
Report Directors and broadening boardroom diversity as too many BoD ”pale,
male and stale”
• Included training programmes, monitoring
CORPORATE GOVERNANCE CODE HISTORY

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2003 Redraft of Reforms included
Combined • at least half the board of directors should comprise independent non-
Code executive directors;
• a company’s chief executive should not become chairman of the same
company, except in exceptional circumstances;
• the board’s chairman should be independent at appointment;
• a Senior Independent Director (SID) should be appointed to be available
to the company’s shareholders, if they have unresolved concerns;
• boards should undertake a formal and rigorous evaluation of their own
performance, considering especially the performance and effectiveness of
its committees and individual directors;
• institutional investors should avoid box ticking when assessing investee
companies’ corporate governance
CORPORATE GOVERNANCE CODE HISTORY

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2003 Redraft of • companies should adopt rigorous, formal and transparent procedures
Combined when recruiting new directors;
Code • non-executive directors should only be reappointed after six years of
service, following ‘a particularly rigorous review’;
• non-executive directors can only continue after nine years’ service
following annual re-elections and should be considered no longer
independent;
• boards should not agree to a full-time executive director accepting more
than one non-executive directorship, or chairmanship, in a Top 100
company.
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2008 Update of • Remove the restriction on an individual chairing more than one FTSE 100
Combined company
Code • For listed companies below the FTSE 350, allow the company chairman to
be a member, but not chair, of the audit committee provided he or she
was considered independent on appointment
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2009 Walker • Undertaken in reaction to banking crisis of 2008
Review • Examined corporate governance in UK banking industry
• Made 39 recommendations covering board size, composition and
qualification; functioning of the board and evaluation of performance;
role of institutional shareholders; risk governance; and remuneration.
• Combined Code seen as fit for purpose and comply or explain seen as still
most effective method means of improving CG
• Need for improved risk management by BoD; more long-term approach
by institutional investors; improvements in structuring remuneration
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2010 Combined • Principles/supporting principles were added or reworked dealing with the
Code roles of the chair and non- executive directors, the composition of the
board, the commitment level of directors, board resources, the board’s
responsibility for risk management and gender diversity.
• Provisions were added dealing with board chairs, external evaluations of
the board and the annual election of directors for FTSE 350 companies.