What is the corporate governance code?
Corporations and shareholders across the globe have concerns about good corporate governance and the types of best practices that support good governance. Each country has its own laws and regulatory practices that ensure protection for shareholders and stakeholders.
The corporate governance code applies to corporations that are incorporated in the United Kingdom and that are registered on the London Stock Exchange. Overseas corporations that are listed on the Main Market must disclose the substantial ways in which their corporate governance practices are different than the practices outlined in the corporate governance code.
The principle behind the corporate governance code is to demonstrate to shareholders and stakeholders how the corporation applied the main principles of the code. In addition, corporations that are subject to the code must confirm that they've fully complied with the provisions of the code. Companies that can't or won't comply with the code's provisions must provide a reasonable explanation of why they haven't complied with the code.
The requirements of the corporate governance code are strikingly similar to those of the Annual Corporate Report that the United States requires.
Something that is helpful in complying with the corporate governance code in the United Kingdom, the Annual Corporate Report in the United States and general best practices for good corporate governance in all other areas of the world is using a board portal system and other types of governance software solutions to support good corporate governance worldwide. Boards and Leadership Collaboration by Diligent Corporation is a suite of software solutions that supports all aspects of good governance. Diligent Corporation is an industry leader in governance software and continues to innovate solutions for corporations around the globe.
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What is the corporate governance code?
The corporate governance code is a framework of principles, guidelines, and best practices that govern the operations and behavior of corporations. It sets out standards for transparency, accountability, and responsibility, aiming to ensure that companies operate ethically, efficiently, and in the best interest of stakeholders.
Using best practices as its foundation, the corporate governance code outlines the standards for the expectations for corporate boards in protecting shareholder investments. The code refers to standards for good practices relating to:
- Board composition
- Board development
- Remuneration
- Accountability
- Audit
- Shareholder relations
By adhering to the principles outlined in the code, organizations can enhance trust, mitigate risks, and foster sustainable long-term growth.
Five pillars of good corporate governance make up the corporate governance code
Much like the pillars of good corporate governance in the United States, the corporate governance code in the United Kingdom comprises the pillars of leadership, effectiveness, accountability, remuneration and shareholder relationships.
Pillar 1: Leadership
The code requires companies to ensure to shareholders that they have an effective board of directors that's capable of providing excellence in board leadership. Boards of directors are collectively responsible for the short- and long-term success of the corporations they serve.
Strong leadership requires corporations to have a clear division of the responsibilities between board directors and executives. Boards are responsible for strategic planning and oversight, and the executives are responsible for the day-to-day responsibilities of running the company. The board chair is responsible for the board's leadership and the chair must ensure that the board operates as efficiently as possible in relation to all of their board duties and responsibilities.
Non-executive board directors should constructively challenge the board and help to develop successful proposals for strategy. The code expressly states that no single person should have total decision-making power on a board.
Pillar 2: Effectiveness
The code requires corporate boards to ensure that they have a composition that encompasses the appropriate balance of skills, experience, independence and knowledge of the company so that they're able to perform their duties and responsibilities effectively:
- Boards are required to develop a formal, rigorous and transparent process for appointing new board directors.
- Before accepting a position on a board of directors, nominees should ensure that they have sufficient time to fulfill their board duties and responsibilities.
- Boards should avail their board directors of a comprehensive board orientation and onboarding process. In addition, boards should provide regular opportunities for board director training and education.
- Management should provide accurate information to the board that has the appropriate form and quality so that the board can fulfill its duties in a timely manner.
- Boards should also conduct rigorous annual self-evaluations for the board, individual directors and significant committees, with the goal of improving their performance. All board directors should be subject to regular elections as long as they continue to perform satisfactorily.
Pillar 3: Accountability
The board is wholly accountable for the actions and decisions of the company. The board should make annual disclosures to shareholders that represent a fair, accurate and comprehensive assessment of the corporation's positions and corporate outlook.
The board is additionally responsible for assessing the nature and extent of risks it is willing to take to achieve its strategic plans. Boards should participate in sound risk management and internal control systems.
Boards should also establish formal procedures for corporate reporting, risk management reporting and internal control principles. Procedures should include details of relationships between the company and the internal and external auditors.
Pillar 4: Remuneration
The United Kingdom favors remuneration packages that are designed to promote the long-term success of the company and that are directly aligned with performance. Remuneration should sufficiently challenge executives, be transparent and be rigorously applied.
The company should have a formal, transparent process for developing remuneration policies and setting remuneration packages. Directors shouldn't be involved in setting their own pay.
Pillar 5: Shareholder relationships
Boards should utilize their annual general meetings to communicate and engage with investors on their objectives and strategic planning. The board should ensure that communications with shareholders are satisfactory.
These pillars are considered the minimum for the basics of good governance. Corporations are encouraged to add their own best practices as they develop them and learn from other corporations around the world.
Does the corporate governance code have a bearing in the United States?
The corporate governance code is not applicable in the United States. The closest equivalent to the corporate governance code is the Annual Corporate Governance Report, which is required by listed companies in the United States.
Best practices for good corporate governance are evolving all over the world. We've covered the corporate governance code for the US and UK, but there are specific corporate governance codes for regions all across the world, from Germany to Japan. As the market evolves, it's prudent for all nations to continue to develop best practices for good corporate governance and to share information about regulations and practices with each other. This is especially important as the marketplace becomes increasingly globalist in focus.
