The implications of Corporate Governance for Organisations

Introduction Corporate governance is concerned with how companies are directed and controlled. The purpose of this chapter is to briefly compare how this is approached in different countries, and to consider in more detail the approach in the UK.

Differing Approaches To Corporate Governance 

UK In the UK there is a mix of legislative (Companies Acts) and institutionally endorsed voluntary codes. Institutional investor input to boards is generally weak, although recent years have seen a greater emphasis on strong non-executives and better corporate reporting.

US In the US there is far more legislation and detailed reporting requirements concerning corporate governance. Major creditors and other company CEO’s are often on the board.

Europe Although European legislation applies within the UK and also throughout the rest of the EU, in other European countries a dual board system is far more common. There is greater stakeholder involvement than in the UK, largely representing the importance of bank rather than equity finance.

Japan In Japan the system works on consensus, with all stakeholders expected to work together in the best interests of the company. A very close relationship exists between the banks and companies, with banks commonly represented on the board of directors.

Corporate governance in the UK

During the 1990’s in the UK, there were three separate committees set up to consider aspects of corporate governances which each produced a report. These were:

  • The Cadbury Report in 1992, which focussed on the control functions of boards and on the role of auditors
  • The Greenbury Report in 1995, which focussed on the setting and disclosure of directors’ remuneration
  • The Hampel Report in 1998, which brought together the previous recommendations and submitted a proposed code to the Stock Exchange which listed companies, should comply with. The Stock Exchange published the final version of its ‘Principles of good governance and code of best practice’ (known as the Combined Code) in June 1998. Listed companies now have to disclose how they have applied the principles and complied with the Code’s provisions in their annual report and accounts. The auditors have to express an opinion on this statement.

The UK Combined Code

There are 45 ‘code provisions’ which include the following:

(A)  Board members

  • the roles of Chair of the Board and Chief Executive should be separated unless the company
  • publicly justifies reasons for not doing so
  • The identification of a senior independent director
  • Not less than one-third of the board comprises non-executive directors
  • The majority of non-executive directors should be independent

(B)  Board structure and function

  • There should be a nominations committee (unless the board is small)
  • The formalisation of the role of Chairman in ensuring that all directors are properly briefed on issues arising at board meetings
  • The audit and remuneration committees must only be of non-executive directors
  • Directors should, at least annually, conduct a review of the effectiveness of the group’s system of internal controls and should report to shareholders that they have done so

(C) Remuneration of directors

  • Performance related elements should form a significant proportion of the total remuneration Package

(D) Conduct of AGMs

  • Announcement of proxy votes at AGMs
  • Unbundling of resolutions
  • sending out the notice of the AGM and the related voting papers at least 20 working days before the meeting

(E) There is also a requirement that companies consider:

  • A reduction of the notice period of directors to one year or less
  • Early termination arrangements
  • The extent to which the principal shareholders should be contacted about directors’ remuneration
  • Whether the remuneration report should be voted on at the AGM

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