Understanding the UK Corporate Governance Code: navigating accountability and transparency

Stephanie Jones Date published: Oct 31, 23

Corporate governance plays a pivotal role in shaping the ethical framework and operational efficiency of companies, influencing their relationships with shareholders and stakeholders. The UK Corporate Governance Code (the Code) (1) serves as a foundational document in guiding companies towards best practices in governance. The current edition, published in July 2018, has introduced significant changes to emphasize relationships, engagement, corporate culture, and diversity.

Code structure and compliance

The Code is structured into five key sections: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration. It operates on a 'comply or explain' basis, applying to companies with a premium listing on the London Stock Exchange, regardless of their place of incorporation.

The 'comply or explain' regime allows flexibility, recognizing that a one-size-fits-all approach may not be suitable for all companies. It encourages firms to adopt governance arrangements tailored to their circumstances, promoting both short-term and long-term sustainability. Departures from the Code require clear explanations of the chosen alternative and how it upholds high governance standards.

Applicability beyond public companies

While the Code directly applies to premium-listed companies, corporate governance is considered essential for all businesses. In 2018, the UK Government extended governance reporting requirements to the largest private companies. The Wates Principles of Corporate Governance (2) were introduced to support this new mandate, emphasizing the need for appropriate systems, policies, and practices.

Compliance and reporting

Companies must comply with the Code from the date they become premium-listed. The 'comply or explain' approach encourages transparency and accountability. Companies disclose areas of non-compliance and provide reasons along with a timeframe for becoming compliant. This reporting mechanism aims to build trust among investors and stakeholders by showcasing the commitment to high governance standards.

FRC's role and monitoring

The Financial Reporting Council (FRC) oversees the Code's implementation and provides guidance to boards and board committees. Monitoring involves assessing the quality of reporting by selecting a random sample of companies, including both FTSE350 and Small Cap firms. The 2022 review highlighted areas of improvement, such as clearer disclosure of non-compliance reasons and enhanced reporting on governance outcomes.

Upcoming revisions

In response to the government's call to strengthen corporate governance, the FRC is undertaking a revision of the Code (3). The focus areas include providing additional support in weaker reporting ranges, enhancing controls reporting, addressing expanded sustainability and ESG reporting, incorporating provisions for audit tendering, and aligning with legal and regulatory changes outlined in the government response.

FRC guidance for boards and committees

The FRC issues guidance to assist boards and committees in applying the Code effectively. These include the Guidance on Board Effectiveness (4), Guidance on Audit Committees (5), and Guidance on Risk Management, Internal Controls, and Related Financial Business (6). These documents provide practical insights and recommendations for implementing governance principles.

Looking ahead

Corporate governance remains a dynamic and evolving field, with ongoing efforts to enhance transparency, accountability, and ethical practices. The UK Corporate Governance Code serves as a crucial tool in guiding companies toward these objectives. As the FRC continues its review and companies adapt to evolving governance standards, the landscape of corporate governance in the UK is poised for positive transformation.

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References

1. UK Corporate Governance Code: https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/uk-corporate-governance-code/
2. The Wates Corporate Governance Principles for Large Private Companies: https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/the-wates-corporate-governance-principles-for-large-private-companies/
3. FRC Launches Consultation on Revision to the Corporate Governance Code: https://www.frc.org.uk/news-and-events/news/2023/05/frc-launches-consultation-on-revision-to-the-corporate-governance-code/
4. Guidance on Board Effectiveness: https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/uk-corporate-governance-code/#guidance-on-board-effectiveness-737b9aeb
5. Guidance on Audit Committees: https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/uk-corporate-governance-code/#guidance-on-audit-committees-1583543d
6. Guidance on Risk Management, Internal Control and Related Financial and Business Reporting: https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/uk-corporate-governance-code/#guidance-on-risk-management-internal-control-and-related-financial-and-business-reporting-816e589e