UK Corporate Governance Code

Provided by Business Information Service

10th April 2013
The origins of the Code
The purpose of the Code
Main principles of the UK Corporate Governance Code

The origins of the Code

The origins of the current Code stem from the report of the Committee on the Financial Aspects
of Corporate Governance (the Cadbury Report, 1992) to which was attached a Code of Best
Practice. This was further developed through a series of re-workings including those of the
Greenbury Committee, which made recommendations on executive pay and a Code of Best
Practice.
It was then decided that previous governance recommendations should be reviewed and brought
together in a single code. The work was carried out under the chairmanship of Sir Ronald
Hampel and culminated in the Final Report: Committee on Corporate Governance with its
Combined Code on Corporate Governance in 1998.
In 2002 Derek Higgs was asked to report on the role and effectiveness of non-executive
directors. His report, published in January 2003, suggested amendments to the Combined Code.
At the same time a committee under Sir Robert Smith reported on guidance for audit committees.
The revised Combined Code which was issued in July 2003 by the Financial Reporting Council
(FRC) took into account both reports. The 2003 Code has been updated at regular intervals since
then, and in 2010 was given a new title, the UK Corporate Governance Code.

The purpose of the Code

The purpose of corporate governance is to facilitate effective, entrepreneurial and
prudent management that can deliver the long-term success of the company.
All the UK reports and codes, including the 2012 Code have taken the comply or explain
approach. Although only quoted companies (those with a premium listing on the London Stock
Exchange, whether they are incorporated in the UK or elsewhere) are obliged to report how they
apply the Code principles and whether they comply with the Code provisions and, where they do
not, explain their departures from them. The Code has had a noticeable wider impact on
governance of organisations outside the commercial corporate sector where parallel codes of
governance are emerging. For a quoted company reporting on its application of the Code is one
of its continuing obligations under the Listing Rules published by the UK Listing Authority

(UKLA). If quoted companies ignore the Code, then there will be penalties under the Listing
Rules.
The Code is divided into main principles, supporting principles and provisions. For both main
principles and supporting principles a company has to state how it applies those principles. In
relation to the Code provisions a company has to state whether they comply with the provisions
or where they do not give an explanation. It is the Code provisions that contain the detail on
matters such as separation of the role of chairman and chief executive, the ratio of non-executive
directors and the composition of the main board committees.
The first principle of the Code states that: Every company should be headed by an effective
board. The boards effectiveness is widely regarded as a prerequisite for sustained corporate
success. The quality and effectiveness of directors determines the quality and effectiveness of the
board. Formal processes for appointment, induction and development should be adopted.
Effectiveness of the board and its individual members has to be assessed. The Code states that no
one individual should have unfettered powers of decision-making. It sets out how this can be
avoided by splitting the roles of chairman and chief executive, and specifies what the role of the
chairman should be. The Code offers valuable guidance on the ratio of non-executive to
executive directors and definitions of independence.
The text of the Code can be found at the FRCs website (www.frc.org.uk) and we do not set it out
in full here. Because for many non-quoted companies and other organisations the main principles
of the Code form a useful starting point for reviewing their governance structures and processes,
these are set out below.

Main principles of the UK Corporate Governance Code

A - Leadership
1. The role of the board
Every company should be headed by an effective board which is collectively responsible for the
long-term success of the company.
2. Division of responsibilities
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 companys business.
No one individual should have unfettered powers of decision.
3. The chairman
The chairman is responsible for leadership of the board and ensuring its effectiveness on all
aspects of its role.
4. Non-executive directors
As part of their role as members of a unitary board, non-executive directors should
constructively challenge and help develop proposals on strategy.

B - Effectiveness
1. The composition of the board 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.
2. Appointments to the board There should be a formal, rigorous and transparent procedure
for the appointment of new directors to the board.
3. Commitment All directors should be able to allocate sufficient time to the company to
discharge their responsibilities effectively.
4. Development All directors should receive induction on joining the board and should
regularly update and refresh their skills and knowledge.
5. Information and support 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.
6. Evaluation The board should undertake a formal and rigorous annual evaluation of its
own performance and that of its committees and individual directors.
7. Re-election All directors should be submitted for re-election at regular intervals, subject
to continued satisfactory performance.

C - Accountability
1. Financial and business reporting The board should present a balanced and understandable
assessment of the companys position and prospects.
2. Risk management and internal control 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.
3. Audit committee and auditors 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 companys auditors.

D - Remuneration
1. The level and components of remuneration 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 so as to
link rewards to corporate and individual performance.

2. Procedure 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.

E - Relations with shareholders

1. Dialogue with shareholders There should be a dialogue with shareholders based on the
mutual understanding of objectives. The board as a whole has responsibility for ensuring
that a satisfactory dialogue with shareholders takes place.
2. Constructive use of the AGM The board should use the AGM to communicate with
investors and to encourage their participation.

Corp governance code WIKI

The UK Corporate Governance Code (from here on referred to as "the Code") is a

set of principles of good corporate governance aimed at companies listed on the
London Stock Exchange. It is overseen by the Financial Reporting Council and its
importance derives from the Financial Conduct Authority's Listing Rules. The Listing
Rules themselves are given statutory authority under the Financial Services and
Markets Act 2000[1] and require that public listed companies disclose how they have
complied with the code, and explain where they have not applied the code - in what
the code refers to as 'comply or explain'.[2] Private companies are also encouraged
to conform; however there is no requirement for disclosure of compliance in private
company accounts. The Code adopts a principles-based approach in the sense that
it provides general guidelines of best practice. This contrasts with a rules-based
approach which rigidly defines exact provisions that must be adhered to.

Origins
The Code is essentially a consolidation and refinement of a number of different reports and codes
concerning opinions on good corporate governance. The first step on the road to the initial
iteration of the code was the publication of the Cadbury Report in 1992. Produced by a
committee chaired by Sir Adrian Cadbury, the Report was a response to major corporate scandals
associated with governance failures in the UK. The committee was formed in 1991 after Polly
Peck, a major UK company, went insolvent after years of falsifying financial reports. Initially
limited to preventing financial fraud, when BCCI and Robert Maxwell scandals took place,
Cadbury's remit was expanded to corporate governance generally. Hence the final report covered
financial, auditing and corporate governance matters, and made the following three basic
recommendations:

the CEO and Chairman of companies should be separated

boards should have at least three non-executive directors, two of whom should have no
financial or personal ties to executives

each board should have an audit committee composed of non-executive directors

These recommendations were initially highly controversial, although they did no more than
reflect the contemporary "best practice", and urged that these practices be spread across listed
companies. At the same time it was emphasised by Cadbury that there was no such thing as "one
size fits all".[3] In 1994, the principles were appended to the Listing Rules of the London Stock
Exchange, and it was stipulated that companies need not comply with the principles, but had to
explain to the stock market why not if they did not.
Before long, a further committee chaired by chairman of Marks & Spencer Sir Richard
Greenbury was set up as a 'study group' on executive compensation. It responded to public anger,
and some vague statements by the Prime Minister John Major that regulation might be necessary,
over spiralling executive pay, particularly in public utilities that had been privatised. In 1996 the
Greenbury Report was published. This recommended some further changes to the existing
principles in the Cadbury Code:

each board should have a remuneration committee composed without executive directors,
but possibly the chairman

directors should have long term performance related pay, which should be disclosed in
the company accounts and contracts renewable each year

Greenbury recommended that progress be reviewed every three years and so in 1998 Sir Ronald
Hampel, who was chairman and managing director of ICI plc, chaired a third committee. The
ensuing Hampel Report suggested that all the Cadbury and Greenbury principles be consolidated
into a "Combined Code". It added that,

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.

It rejected the idea that had been touted that the UK should follow the German two-tier board
structure, or reforms in the EU Draft Fifth Directive on Company Law.[4] A further mini-report
was produced the following year by the Turnbull Committee which recommended directors be
responsible for internal financial and auditing controls. A number of other reports were issued
through the next decade, particularly including the Higgs review, from Derek Higgs focusing on
what non-executive directors should do, and responding to the problems thrown up by the

collapse of Enron in the US. Paul Myners also completed two major reviews of the role of
institutional investors for the Treasury, whose principles were also found in the Combined Code.
Shortly following the collapse of Northern Rock and the Financial Crisis, the Walker Review
produced a report focused on the banking industry, but also with recommendations for all
companies.[5] In 2010, a new Stewardship Code was issued by the Financial Reporting Council,
along with a new version of the UK Corporate Governance Code, hence separating the issues
from one another.
Compliance

In its 2007 response to a Financial Reporting Council consultation paper in July 2007 Pensions
& Investment Research Consultants Ltd (a commercial proxy advisory service) reported that
only 33% of listed companies were fully compliant with all of the Codes provisions.[6] Spread
over all the rules, this is not necessarily a poor response, and indications are that compliance has
been climbing. PIRC maintains that poor compliance correlates to poor business performance,
and at any rate a key provision such as separating the CEO from the Chair had an 88.4%
compliance rate.
The question thrown up by the Code's approach is the tension between wanting to maintain
"flexibility" and achieve consistency. The tension is between an aversion to "one size fits all"
solutions, which may not be right for everyone, and practices which are in general agreement to
be tried, tested and successful.[7] If companies find that non-compliance works for them, and
shareholders agree, they will not be punished by an exodus of investors. So the chief method for
accountability is meant to be through the market, rather than through law.
An additional reason for a Code, was the original concern of the Cadbury Report, that companies
faced with minimum standards in law would comply merely with the letter and not the spirit of
the rules.[8]
The Financial Services Authority has recently[when?] proposed to abandon a requirement to state
compliance with the principles (under LR 9.8.6(5)), rather than the rules in detail themselves.