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What is good corporate governance?

Key requirements

There is no 'one size fits all' governance model. Governance structures and practices should be individually tailored to the organisation. There may be legal and regulatory requirements, mandatory and optional practices prescribed by national governance principles and practices which are required by the environments that the organisation operates in.

The FRC's UK Corporate Governance Code states that the main principles of corporate governance in the UK are:

  1. Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.

  2. 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 company’s business. No one individual should have unfettered powers of decision.

  3. The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.

  4. As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

  5. 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.

  6. There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.

  7. All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

  8. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

  9. 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.

  10. The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

  11. All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

  12. The board should present a fair, balanced and understandable assessment of the company’s position and prospects.

  13. The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

  14. The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

  15. Executive directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied.

  16. 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.

  17. 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.

  18. The board should use general meetings to communicate with investors and to encourage their participation.

Comply or explain

The UK Corporate Governance Code operates on the basis of the 'comply or explain' principle and is regularly reviewed in consultation with companies and investors. Listed companies are required to report on how they have applied the main principles of the Code. They must confirm either that they have complied with the Code's provisions or where they have not complied, provide an explanation.

You may find that even if your company is not listed, it has adopted parts of the code as good practice. This is known as a voluntary approach, which differs from compulsory approaches you may see in other countries, or other branches of your company. You will need to know if/ where your company is listed to ensure you review the right governance requirements.

In summary

Corporate governance is about the way in which boards oversee the running of an organisation, and how board members are in turn accountable to the organisation’s stakeholders. This has implications for the organisation’s behaviour towards its employees, shareholders, customers and other stakeholders.

  • Good corporate governance plays a vital role in underpinning the integrity and efficiency of the organisation and the wider community in which it operates.
  • Poor corporate governance weakens a company’s potential and at worst can pave the way for financial difficulties and even fraud.

This also means there is no universal approach to internal audit assurance and consultancy.

Next: How to audit corporate governance

Content reviewed: 19 May 2017
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