Corporate governance is the ‘G’ in ESG (Environment, Social, and Corporate Governance). It is arguably the most important component because having good corporate governance means a company has the framework in place to build great environmental and social strategies. In this article, we explain what good corporate governance is and provide five tips on how your organisation can achieve it.

What is corporate governance?

Corporate governance refers to best practices regarding board leadership in a company. It is governed by the UK Corporate Governance Code. The 2024 Code is divided into four sections, namely: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration. It provides a codified framework to ensure everyone on the board understands the collective duties and responsibilities required to foster the long-term, sustainable success of the company.

What are the principles of the Corporate Governance Code?

The Code outlines the following principles:

• Leadership and Mission: Every company is expected to possess a proficient and innovative board, collectively accountable for ensuring the company’s sustained success over the long term. The board is tasked with defining the company’s purpose, values, and strategic direction.
• Division of Roles: The board should comprise of an appropriate mix of executive and independent non-executive directors, with clearly defined responsibilities distinguishing the board’s leadership (the chair) from the company’s executive leadership.
• Composition, Succession, and Assessment: To ensure a suitable equilibrium of skills, experience, and knowledge, board members should be appointed and evaluated through a formal and transparent process.
• Audit, Risk, and Internal Control: The board is required to provide an equitable, well-rounded, and comprehensible evaluation of the company’s current status and future prospects. Formal and transparent policies must be established to ensure the effectiveness of external and internal audit processes, as well as risk management.
• Remuneration: The remuneration of executive directors should be geared towards fostering the company’s long-term sustainability, aligning with its purpose and values.

The Financial Reporting Council (FRC) oversees the maintenance of the Code, which integrates a collection of corporate governance principles.

Is applying the Corporate Governance Code a legal requirement?

The Code applies to all companies listed on the London Stock Exchange. However, good corporate governance principles provide a solid framework for sustainable growth, ensuring a company is attractive to consumers, suppliers, and investors. Therefore, investing in corporate governance and following the Code makes excellent business sense.

What is the difference between the Corporate Governance Code and the Listing Rules?

The Listing Rules are published by the Financial Conduct Authority (FCA) and are part of the FCA Handbook. They lay down minimum requirements for the admission of securities to the Official List (listing), the content, scrutiny, and publication of listing details, and the ongoing obligations of issuers after the shares have been listed.

The Financial Services and Markets Act 2000 provides for the Listing Rules, which underpin the Corporate Governance Code.

How are employees given a ‘voice’ under the Corporate Governance Code 2018?

Under the 2018 version of the Corporate Governance Code, companies must demonstrate how they are giving employees’ “the ability of employees to express their views, opinions, concerns and suggestions, and for these to influence decisions at work”.

The Code provides three models in which to facilitate employee voice:

• Giving a non-executive director responsibility over workforce issues.
• Establishing a workforce director (so-called ‘worker on the board’).
• Establishing an employee advisory committee (or broader stakeholder committee).

In addition, the 2018 Code provides for the following requirements:

• Compulsory criteria for disclosing the pay differences between chief executives and employees and justification for such differences.
• Obligations for directors of large companies to articulate how their actions align with the welfare of both employees and shareholders.
• Establishment of a Remuneration Committee to assess remuneration throughout the broader workforce, showcasing employee involvement in the evaluation process. Metrics should also be in place to show how internal and external measures are being used to set the level of executives’ pay.

How can a company achieve good corporate governance?

Below are five ways you can ensure your business can reap the benefits of excellent corporate governance:

• Diversify your board: Without diverse backgrounds, skills, and personalities, it becomes difficult for members to challenge the status quo and come up with creative ideas and solutions. If you feel your board is becoming too comfortable, you need to shake it up to ensure it is a challenging, dynamic, and respectful environment.
• Ensure auditor independence: A significant part of great corporate governance is transparency, which is vital when it comes to finances. Protect the independence of your organisation’s auditors so investors and shareholders can trust the accuracy of its financial reporting.
• Have the right policies: As a minimum, your company should have accessible, easy to read policies covering the appointment of directors, the composition of the board, year on year financials, directors and executive remuneration, the conduct of board meetings and decision-making processes, shareholders’ rights, and whistleblowing.
• Have a Shareholders’ Agreement: This provides a framework for the management of shares in a company, for example, how they are sold, and the type of shares offered. A Shareholders’ Agreement sits alongside the company’s Articles of Association and also provides a basis for other documentation, such as a Director’s Service Agreement and employee share option schemes.
• Proactively manage risks: Having a comprehensive risk register and risk management policies will ensure shareholders and investors have confidence knowing that all new projects and initiatives have been carefully considered as well as mitigations implemented to manage identified risks.

To find out more about how our team can assist you with creating a corporate governance framework that will mitigate risks and help you reach your growth targets, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only.  It is not, and should not be taken as, legal advice.  If you require any further information in relation to this article, please contact 43Legal.