The UK has a highly developed and well-respected system of corporate governance regulation. This system of regulation embodies what is often called a ‘shareholder-led’, rather than a ‘principles-based’ approach, in which emphasis is placed on the rights and duties of shareholders.
The regulatory framework in the UK consists of a variety of statutes and codes of practice, the most important of which are the recently revised ‘UK Corporate Governance Code’, and the new ‘UK Stewardship Code’:
*The 2010 UK Corporate Governance Code
In 2010 the Combined Code on Corporate Governance was revised and renamed the UK Corporate Governance Code. A major influence on the revisions to the code was the Walker Review, which focused particularly on corporate governance in the banking sector, in the aftermath of the economic crisis in 2009. The code was developed, and is overseen by, the UK’s Financial Reporting Council. Under the UK’s Listing Rules, which have statutory authority, public listed companies must either comply with the code, or explain why they have not done so.
The UK Corporate Governance Code has five main sections, which are briefly summarised here:
Section A: Leadership
Companies should be headed by an effective board, with a mixture of executive and non-executive directors, each with specific responsibilities.
Section B: Effectiveness
The board of directors should have the appropriate balance of skills, experience, independence and knowledge. There should be rigorous procedures for the appointment and evaluation of directors.
Section C: Accountability
The board should present a balanced and understandable assessment of the company’s position and prospects.
Section D: Remuneration
Directors’ pay should be sufficient to attract sufficiently qualified candidates, but should not be more than is necessary for this purpose. Remuneration policy should be determined according to formal, transparent rules.
Section E: Relations with Shareholders
There should be a dialogue with shareholders based on the mutual understanding of objectives, both at the Annual General Meeting, and elsewhere.
*UK Stewardship Code
In July 2010 the Financial Reporting Council published the UK Stewardship Code. This code complements the UK Corporate Governance Code, being directed primarily at investors. The design of this code was also influenced by the 2009 Walker Review.
The Stewardship Code sets out eight principles of good practice regarding engagement between institutional investors and companies. The Principles include:
1) Investors should publicly disclose their policy on how they discharge their stewardship responsibilities
2) Investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
*UK Company Law
UK company law sets out many rules on corporate governance. It includes rules on the board of directors (a unitary board is required), directors powers and duties, accountability for financial reporting, and on meetings and resolutions.
In particular, according to the Companies Act 2006, directors have fiduciary duties to act, in good faith, in the best interests of the company, to avoid conflicts of interest, and a number of other duties.
There are also non-legal guidelines issued by bodies that represent institutional investors, such as the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF) and the Pensions & Investment Research Consultants (PIRC). These guidelines apply to all listed companies and institutional investors may oppose corporate actions that contravene them.