Development of Corporate Governance in the UK

The word ‘corporate governance’ barely existed 30 years back in the United Kingdom. It is regarded as the overall framework in which a company work. It is considered as the aspect of a business that holds the balance between the social and economic aim of a corporation. The corporate government structure helps to promote the appropriate utilization of the resources and the optimum results from such resources. The aim is to align the factors of the resources, like the human resource, corporation and the society, and derive the benefits from them. The present UK Corporate Governance Code is not still not regarded as a proper legislation, alike the previous Combined Code for it was not enacted by the Parliament. The Financial Reporting Council, which is the committees that represent business and financial interests, passed it. The Corporate Governance Code is invoked to the companies that are listed on the London Stock Exchange so that the companies can follow a definite code of conduct for their governance. The failure to comply with the guidelines of the Code would bring consequences to the enlisted companies, as they would be show-caused for their non-compliance. The standard of governance have risen since in its inception in the early 1990s. The paper strives to analyse the evolution of Corporate Governance and its present effectiveness in the UK.

The concept of Corporate Governance arose in the United Kingdom in the early 1990s and faced scandalous events that led to its collapse as well. The series of regulatory failures led Sir Adrian Cadbury form a committee who aimed to review the failed British Corporate governance system and recommend improvements and changes that would reinstate the confidence and faith of the investors and financers on the British companies. Sir Adrian Cadbury put forwarded a foreword to Stijn Claessens’ paper, ‘Corporate Governance and Development’ describing that corporate governance require to ‘align’ the interest of the individuals, corporations and society; a definition that appropriately resonates in present world of corporate governance. The failure of the then corporate governance started in the early 1990s along with the critical report of Sir Adrian Cadbury, comprising of the financial aspects of what corporate governance ought to be. The report or the ‘Cadbury Code’ aimed at the companies that were enlisted under the London Stock Exchange and their corporate ethics and conduct was accepted by the Stock Exchange and was developed into the Combined Code of Corporate Governance in 1988.

Cadbury Committee

The Cadbury Committee included the Stock Exchange, Accountancy profession and the Financial Reporting Council. This committee was formed due to the Maxwell scandal where Mr. Maxwell, the director was held to be insufficient or incapable for the position. When in 1971, Mr. Maxwell was assigned the position, he did not have a legislation to follow and carry out the director’s duty or a regulation that would dismiss from the director’s position. The mismanagement led to the missing for 550 million pounds. Subsequently in the Hampel Report and the Greenbury Report, the issues of the corporate governance was raised and the committee placed certain recommendations by citing principles of better governance and not just mere regulations and guidelines. In 1988, the Cadbury, Hampel and Greenbury Committee reports altogether formed the backbone of the Combined Code of Corporate Governance. By the year 2003, provisions on payments, internal management, and risk control and auditing was added to the Combined Code. The Company Act was enacted around this time, which allowed the companies to be more flexible for choosing their way of operation. Written directives approved by the shareholders now acts as an alternative to holding general meetings as earlier, saves time. Companies could make use of electronic method keep record of its transactions. Sharing and circulation of resolutions and directives have been easier by way of electronic mail or website, with the permission of the shareholder.

The banking crisis and the nationalization of certain banks in 2008 made the government ask Sir David Walker for investing in a separate corporate governance, which made the Financial Reporting Council revise and amend the Combined Code. They came out with a new version of the corporate governance regulation and guideline known as the UK Corporate Governance Code. The Walker Report made 39 recommendations for the new corporate governance code. Some of which were finally approved to get their place among the Financial Report Council’s 2010 Code of Corporate Governance while the others are still referred to as good example of better corporate governance. This was a conscious effort to improve and enhance the pre-existing code for providing a better guideline for the participants of the affairs of the company.

Different board and committee structures were formed, improved internal management and other effective way to perfect the policies of good governance for the listed public liability companies. Different individuals, having different job roles, occupied the position of the Chairman and the Managing Director. However, the same person could hold both the positions with sufficient justification. Similar instance occurred in the case of Polly Peck in which Asid Nadir held all the power in his own hand and naturally, it turned to excessive dominance, corruption and abuse of power. This paved by the way for the Polly Peck Scandal. In this case, Asid Nadir, the Chief Director of an electronics multinational company was held accused of theft of £34 million. This scandal paved the way for the introduction of three non-executive directors in a company by the Cadbury Committee.

Walker Report

The non-executive directors were considered to be the solution to the problems and scandals of the corporate management by the Cadbury Committee. Therefore, various reforms and recommendations were suggested for the post of non-executive directors. They are to be independent and have an amicable relationship with the directors for governing the company better.

There are significant changes UK Corporate Governance Code has undergone. Few of them are:

1. New principles that includes the positions of non-executives in developing and challenging the strategy.
2. Amendments in order to extant principles such as the boards’ responsibility of considering the advantages of gender or other aspects while the appointments are made.
3. Amendments to Code provisions which involves new proposal of the yearly re-election of all directors.
4. Every organization holding a premium listing in regard of the London Stock exchange.

It is important to mention and note, that a new section that considers the particular principle by comparing with the previous reading of code. Therefore, it is the new Code that identifies that the “non-compliance” that is noted can be explained if through other manner corporate governance is reached. Hence, it is important for the company to explain the grounds for any non-compliance to the shareholders “clearly and carefully”. Additionally, it should incorporate other aspects of the Code, such as its practice and principle. The new Code would involve different perspective while considering the remuneration and therefore, the executive remuneration needs to be prepared in long-term developments. The chairman as well needs to ensure and be well aware.

The Corporate Governance Code of 2018 has been published by the Financial Reporting Council or the FRC and is designed to bring transparency and integrity by setting standards of repute in the governance of corporate affairs. The code has been brought to effect for the premium listed companies from 1^st of January, 2019. The policy is an upgraded and revised version of the earlier policy formulated in 2016 and retains most of the basic characteristics of the 2016 code. However, the newer code has led emphasis in the development of positive relationship among incorporations and companies with the share holders, stakeholders and other partners. A clear strategy has been laid out to align the corporations with clear purpose in accordance with a healthy corporate culture. The code also lays emphasis on the compositional structure of the board and emphasizes on the diversity of the board. The code has also taken adequate care to look into the provisions of remuneration which is proportionate and sustains long term success.

The Corporate Governance Code of 2018 has been kept short and crisp and consists of 18 principles supplemented by 41 corresponding provisions which have been segregated in five sections to bring in clarity and ease of governance in the corporate institutions. The five sections include, a) Board leadership and company purpose, b) Division of responsibilities, c) Composition, success and evaluation. c) Auditing, Risk and control are included within the framework of the new code.

The Polly Peck Scandal

The new code of 2018 lays stress on the application of the principles laid down in the framework and provides provisions are to be complied with failing which would require adequate explanation.  The new code has been formulated based on the consultation with the Financial Reporting Council and certain changes were proposed yet not all amendments were made in the new report and the rest was developed according to old code of 2016. The proposal to relax exemptions of companies excluded by the FTSE 350 has been relaxed. The proposal to consider the factors that determine the director’s independence has not been changed and the proposal of allotting an independent company chair throughout their tenure without appointing an individual has also not been considered.

The new code of 2018 has adopted much of its previous frame work in formulating the guidelines for the composition of the board and maintaining its diversity. A brief look at the structure will give an insight into the board composition according to the Corporate Governance Code of 2018.

• Independence of Chair: The provisions for holding the chair of a company has been laid down with the respect to the conditions that the chair should not remain in post for more than nine years starting from the date of their first appointment to the board. However, the period can be extended to facilitate governance and succession planning and handing over of responsibility.
• Independence of the director: The companies not within the purview of FTSE350 will need to ensure that at least half of the composition of the board should be independent excluding the chair. This aligns the non FTSE350 companies with the companies within the FTSE 350.
• Annual re-appointment: The directors of the non FTSE350 companies will be entitled to annual reappointment or re election thus bringing these companies within the framework that is similar to FTSE 350 companies.
• Diversity in the board: Appointment of board members and senior management positions should promote and encourage diversity with respect to social, gender, and ethnic backgrounds. The annual report should be describe with clarity the actions and initiatives that are taken by the nomination committeeto maintain diversity in the board.

As per the current market scenario of corporate governance in UK, if 20% or higher share of the votes of the stakeholders are against a board recommended resolution, in that case, the organisation should:

• The discretionary committee in UK has argued that the companies should provide an explanation regarding the actions that the board intends to take for consulting with the stakeholders while announcing the voting results so that the board can understand the reasons that led to the results
• As per the committee decisions, in a span of 6 months after the vote, the board have to post an update
• Include a finalised summary within the annual report or during the next meeting provide an explanatory note to the resolutions

The body of the corporate body must take steps for understanding the views of the other stakeholders of the company along with highlighting in their annual reports how the matters as well as the interests of the identified in the Companies Act 2006, section 172 have been reflected in the decision making as well as the board discussions. The committee have also emphasised that engagement mechanisms of the board should be kept under review in order to let them remain effective.

An amalgamation of the various methods should be chosen by the company for accumulation of the perception of the employee base. Those methods are as follows:

• A capable director have to be appointed
• A formal advisory panel have to be selected for the workforce or else a non-executive director have to be chosen

In case if one of these methods is not chosen by the company, what alternative methods the company choses, have to be explained and also explain why the alternative methods are effective.

As argued by the corporate governance council, the promotion of the principle of sustainable success of the organisation is associated with the aspect of generation of value for the shareholders as also contributing to the wider society. The board of corporate companies feels that this in turn helped in the generation of criticism at the time of the FRC consultation based on the reinterpretation of the Companies Act 2006, section 172. Which makes no relevant reference towards contributing to the wider society. Hence, the new code thus states in detail that nothing in it is intended to interpret the director’s duties’ statutory statement in the same Act.

Non-executive Directors

The FRC council’s governance code of 2018 is a shorter as well as sharper version of the 2016 code. The board has communicated that in the provisions as well as corresponding provisions, the aspects of audit, risk and related control as well as remuneration have been highlighted in detail. So far as the changes in the auditory control is concerned, it is recommended by the advisory committee, in the new code that the chair of the company outside FTSE 350 might not hold the membership to the audit committee of the organisation.

The new remuneration norms suggest that prior to being appointed as the chairperson of the remuneration committee, the appointee should have a membership career of at least 12 years with the committee. There should also be a broader remit of the remuneration committee including review of workforce remuneration as well as related policies along with alignment of the rewards and incentives with the culture. The holding period for minimum vesting as well as post vesting of executive share awards is enhanced from 3 to 5 years in order to encourage longer term outcomes. Lastly, the remuneration schemes as well as policies should give discretion to the boards for overriding the formulaic outcomes.

Conclusion

The Code has an extensive beneficial effect on the companies and its investors. It acknowledges better governance standards where the companies comply with the regulations. The code has undoubtedly provided positive changes by guiding the companies to adopt good governance. Although as argued by many that the Code is quite detailed and not so flexible for implementing effective corporate governance, yet such arguments have not been paid attention by the companies at present. However, it is true that the code is extremely lengthy and contains took much of details yet does not cover several parts that do not interest the financers and investors. Additionally, as the code is not a legislation, it still faces challenges as to having the binding force of a legislation. Company, many a times, escapes by way of the fact that the Code is not enforceable. Nonetheless, the new code has been formulated based on the consultation with the Financial Reporting Council and certain changes were proposed yet not all amendments were made in the new report and the rest was developed according to old code of 2016.  The code of corporate governance by its improvements and modifications have been trying to provide the best possible example of good governance in the UK.

References

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