Corporate governance
Ideas and opinions about corporate governance are constantly developing, making it difficult to describe what it is and explain how it works. Inevitably, major disruption to the business and economic environment escalates the pace of change and right now there is a great deal going on. This page attempts to summarise the key concepts surrounding corporate governance, drawing attention to some of the changes that are taking place and useful sources of information.
While ‘corporate governance’ primarily refers to organisations with commercial and business operations, in particular limited companies, we use the term in its widest sense and apply it to all types of organisation in the private and public sectors.
Use the links below to navigate between sections of information on this page:
What is corporate governance?
What are the principles of good corporate governance?
Corporate governance in the UK and Ireland
What is Internal Audit’s role in corporate governance?
Corporate Governance Resources
What is corporate governance?
There is no universally accepted definition of corporate governance. A search of the internet and academic texts will reveal a variety of alternatives. We prefer definitions that are concise and straightforward. The 1992 Report of the Committee on the Financial Aspects of Corporate Governance (section 2.5), known as the Cadbury Report, describes corporate governance as the system by which companies are directed and controlled.
The IIA definition of corporate governance, included within the International Standards is similar but adds some components of the system: governance is the combination of processes and structures implemented by the board in order to inform, direct, manage and monitor the activities of the organisation toward the achievement of its objectives.
A more generic statement would be: corporate governance is the direction and control of an organisation for the benefit of its stakeholders.
What are the principles of good corporate governance?
The 1992 Cadbury Report includes a Code of Best Practice for companies, which is built around the principles of accountability, probity and transparency. These principles, along with the concept of equity, became the benchmark for good corporate governance. They were reinforced by the public sector equivalent; the first report on Standards in Public Life published by the 1995 Nolan Committee.
From these foundations other organisations have developed their own ideas of what good corporate governance looks like. The Organisation for Economic and Co-operation and Development (OECD) Principles of Corporate Governance has gained worldwide recognition as an international benchmark for good corporate governance.
The revision of the principles in 2004 takes into account the lessons learnt from a number of governance failures. The OECD has also published a methodology for assessing the implementation of the OECD principles on corporate governance.
The UK Independent Commission for Good Governance in Public Services published a Governance Standard in 2005, which sets out core principles of good corporate governance. The document provides a list of supporting principles and a number of practical applications.
These documents, and others such as the FRC’s Combined Code, show how corporate governance has gradually changed and evolved. Using characteristics from the private and public sectors we have created a generic list of bullet points that describe good corporate governance. No doubt this will continue to change as we go forward.
The tables not only show us that governance is about direction, structure, process and control it also about the behaviour of the people who own and represent the organisation and the relationship that the organisation has with society. Key elements of good corporate governance therefore include honesty and integrity, transparency and openness, responsibility and accountability. Many people believe that organisations have a moral duty to stakeholders: employees, local communities, customers as well shareholders and institutional investors. The subject of sustainability, ethics and corporate responsibility is covered in more detail in our Organisational Context page.
For more information on governance principles the European Corporate Governance Institute (ECGI) provides an index and links to corporate governance codes throughout the world including the UK and Ireland.
Corporate governance in the UK and Ireland
Modern and rapid development of governance in the UK and Ireland began in the early 1990s with the publication of the Cadbury Report 1992, which stressed the need for better reporting, non-executive directors and audit committees. In 1998 The Hampel Committee proposed that the report on directors’ remuneration (Greenbury 1995) be combined with Cadbury giving birth to a Combined Code.
The code sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. Listed companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation. The Financial Reporting Council (FRC) who have had responsibility for the Combined Code issued updates 2003 and 2008. During 2009 the FRC conducted a thorough review of the code to learn the lessons from the financial crisis. The new code, now known as the UK Corporate Governance Code, was published on 1 June 2010 and places greater emphasis on the need for effective risk management.
FRC Guidance for audit committees has kept pace with development of corporate governance in the UK. The guidance referred to as the Smith reports was first issued in 2003 followed by updates in 2008 and 2010.
It is also important to recognise the 2006 UK Companies Act, which provides a regulatory framework in which limited companies must work. The act was brought into force in stages with the final provision made in October 2009. The key provisions relate to directors duties and transparency but also allows companies greater flexibility in how the operate. The Department of Business Enterprise and Regulatory Reform (BERR) has prepared a guide summarising what the Act means for private companies. In the public sector HM Treasury and The Cabinet Office has published a code of governance for UK cenrtal government departments supported by detailed guidance.
The equivalent corporate governance documents in Ireland are the Companies (Auditing and Accounting) Act 2003 and the 2009 revised and updated Code of Practice for the Governance of State Bodies. The Irish Stock Exchange are currently in the process of consulting on the first Irish Coprorate Governance, which is likely to be published towards the end of 2010 or early 2011. In addition the Central Bank of Ireland has published the Corporate Governance Code for Credit Institutions.
We have prepared a chart to showing a timeline and key documents relating to company corporate governance:
What is Internal Audit’s role in corporate governance?
The Definition of Internal Auditing and International Standards identifies that internal audit has a role to play in providing assurance upon and consulting services by evaluating and helping to improve the organisation’s governance processes.
The International Standards make specific reference to assessing and making recommendations to improve:
• Promoting appropriate ethics and values within the organisation;
• Ensuring effective organisational performance management and accountability;
• Communicating risk and control information to appropriate areas of the organisation; and
• Coordinating the activities of and communicating information among the board, external and internal auditors and management.
We have prepared a Good Governance checklist for members to download.
Corporate Governance Resources
Governance resources are available within our Resource Library. Select ‘governance’ from the list of principal keywords to obtain a list of guidance documents, consultation responses, magazine articles and other reference documents.
If you feel we can make useful additions to the page please contact our Technical Manager, Chris.Baker@iia.org.uk