The UK Corporate Governance code, formerly known as the Combined Code (from here on referred to as "the Code") is a part of
UK company law
The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...
with a set of principles of good
corporate governance
Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...
aimed at companies listed on the
London Stock Exchange
London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Pau ...
. It is overseen by the
Financial Reporting Council
The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...
and its importance derives from the
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
's
Listing Rules
The Listing Rules (LR) are a set of regulations applicable to any company listed on a United Kingdom stock exchange, subject to the oversight of the Financial Conduct Authority (FCA). The Listing Rules set out mandatory standards for any company wi ...
. The Listing Rules themselves are given statutory authority under the
Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000c 8 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority (FSA) as a regulator for insurance, investment business and banking, and the Financial Ombudsman Serv ...
and require that public listed companies disclose how they have complied with the code, and explain where they have not applied the code in what the code refers to as 'comply or explain'. Private companies are also encouraged to conform; however there is no requirement for disclosure of compliance in private company accounts. The Code adopts a principles-based approach in the sense that it provides general guidelines of best practice. This contrasts with a rules-based approach which rigidly defines exact provisions that must be adhered to. In 2017, it was announced that the
Financial Reporting Council
The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...
would amend the Code to require companies to "comply or explain" with a requirement to have elected employee representatives on company boards.
In July 2018, the Financial Reporting Council released the new 2018 UK Corporate Governance Code, which is designed to build on the relationships between companies, shareholders and stakeholders and make them key to long-term
sustainable growth
Sustainable development is an organizing principle for meeting human development goals while also sustaining the ability of natural systems to provide the natural resources and ecosystem services on which the economy and society depend. The desi ...
of the UK economy.
Origins
The Code is essentially a consolidation and refinement of a number of different reports and codes concerning opinions on good corporate governance. The first step on the road to the initial iteration of the code was the publication of the
Cadbury Report
The Cadbury Report, titled ''Financial Aspects of Corporate Governance'', is a report issued by "The Committee on the Financial Aspects of Corporate Governance" chaired by Sir Adrian Cadbury, chairman of Cadbury, that sets out recommendations on ...
in 1992. Produced by a committee chaired by
Sir Adrian Cadbury
Sir George Adrian Hayhurst Cadbury, (15 April 1929 – 3 September 2015) was an English businessman who served as the chairman of Cadbury, Cadbury and Cadbury Schweppes for 24 years. He was also a British Olympic rowing (sport), rower. Cadbury ...
, the Report was a response to major corporate scandals associated with governance failures in the UK. The committee was formed in 1991 after
Polly Peck
Polly Peck International (PPI) was a small British textile company which expanded rapidly in the 1980s and became a constituent of the FTSE 100 Index before collapsing in 1991 with debts of £1.3bn, eventually leading to the flight of its CEO, ...
, a major UK company, went insolvent after years of falsifying financial reports. Initially limited to preventing financial fraud, when
BCCI
The Board of Control for Cricket in India (BCCI) is the national governing body for cricket in India. Its headquarters are situated at Cricket centre, Wankhede Stadium in Mumbai. The BCCI is the richest governing body of cricket in the worl ...
and
Robert Maxwell
Ian Robert Maxwell (born Ján Ludvík Hyman Binyamin Hoch; 10 June 1923 – 5 November 1991) was a Czechoslovak-born British media proprietor, member of parliament (MP), suspected spy, and fraudster.
Early in his life, Maxwell escaped from N ...
scandals took place, Cadbury's remit was expanded to corporate governance generally. Hence the final report covered financial, auditing and corporate governance matters, and made the following three basic recommendations:
*the CEO and Chairman of companies should be separated ensuring the absence of CEO duality
*boards should have at least three non-executive directors, two of whom should have no financial or personal ties to executives
*each board should have an audit committee composed of non-executive directors
These recommendations were initially highly controversial, although they did no more than reflect the contemporary "best practice", and urged that these practices be spread across listed companies. At the same time it was emphasised by Cadbury that there was no such thing as "one size fits all". In 1994, the principles were appended to the
Listing Rules
The Listing Rules (LR) are a set of regulations applicable to any company listed on a United Kingdom stock exchange, subject to the oversight of the Financial Conduct Authority (FCA). The Listing Rules set out mandatory standards for any company wi ...
of the
London Stock Exchange
London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Pau ...
, and it was stipulated that companies need not comply with the principles, but had to explain to the stock market why not if they did not.
Before long, a further committee chaired by chairman of
Marks & Spencer
Marks and Spencer Group plc (commonly abbreviated to M&S and colloquially known as Marks's or Marks & Sparks) is a major British multinational retailer with headquarters in Paddington, London that specialises in selling clothing, beauty, home ...
Sir Richard Greenbury
Sir Richard Greenbury (31 July 1936 – 27 September 2017) was an English businessman, and chairman and chief executive of the British retailer Marks and Spencer from 1988 to 1999. During his tenure, the company continued to grow until its profi ...
was set up as a 'study group' on
executive compensation
Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, varia ...
. It responded to public anger, and some vague statements by the Prime Minister
John Major
Sir John Major (born 29 March 1943) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997, and as Member of Parliament ...
that regulation might be necessary, over spiralling
executive pay
Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, variab ...
, particularly in public utilities that had been
privatised
Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
. In July 1995 the
Greenbury Report
The Greenbury Report released in 1995 was the product of a committee established under the auspices of the United Kingdom Confederation of British Industry. The committee was formed at the behest of the President of the Board of Trade, Michael Hese ...
was published. This recommended some further changes to the existing principles in the Cadbury Code:
*each board should have a remuneration committee composed without executive directors, but possibly the chairman
*directors should have long term performance related pay, which should be disclosed in the company accounts and contracts renewable each year
Greenbury recommended that progress be reviewed every three years and so in 1998
Sir Ronald Hampel, who was chairman and managing director of
ICI plc, chaired a third committee. The ensuing
Hampel Report
The Hampel Report was designed to be a revision of the corporate governance system in the UK. The remit of the committee was to review the Code laid down by the Cadbury Report (now found in the Combined Code). It asked whether the code's original p ...
suggested that all the Cadbury and Greenbury principles be consolidated into a "Combined Code". It added that,
*the Chairman of the board should be seen as the "leader" of the non-executive directors
*institutional investors should consider voting the shares they held at meetings, though rejected compulsory voting
*all kinds of remuneration including pensions should be disclosed.
It rejected the idea that had been touted that the UK should follow the German two-tier board structure, or reforms in the EU Draft Fifth Directive on Company Law. A further mini-report was produced the following year by the Turnbull Committee which recommended directors be responsible for internal financial and auditing controls. A number of other reports were issued through the next decade, particularly including the
Higgs review, from
Derek Higgs
Sir Derek Alan Higgs (3 April 1944 – 28 April 2008) was an English businessman and merchant banker. He was knighted in 2004. His father, Alan Higgs, was a multimillionaire through property businesses in the Midlands.
Early life
Sir Derek was ...
focusing on what non-executive directors should do, and responding to the problems thrown up by the collapse of
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. ...
in the US.
Paul Myners
Paul Myners, Baron Myners, (1 April 1948 – 16 January 2022) was a British businessman and politician. In October 2008 he was elevated to the House of Lords as a life peer and was appointed City Minister in the Labour Government of Gordon B ...
also completed two major reviews of the role of
institutional investors
An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linke ...
for the Treasury, whose principles were also found in the Combined Code. Shortly following the collapse of
Northern Rock
Northern Rock, formerly the Northern Rock Building Society, was a British bank. Based at Regent Centre in Newcastle upon Tyne, United Kingdom, Northern Rock was originally a building society. It demutualised and became Northern Rock bank i ...
and the
Financial Crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
, the
Walker Review produced a report focused on the banking industry, but also with recommendations for all companies. In 2010, a new
Stewardship Code was issued by the
Financial Reporting Council
The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...
, along with a new version of the UK Corporate Governance Code, hence separating the issues from one another.
Contents
Section A: Leadership
Every company should be headed by an effective board which is collectively
responsible for the long-term success of the company.
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.
The chairman is responsible for leadership of the board and ensuring its
effectiveness on all aspects of its role.
As part of their role as members of a unitary board, non-executive directors
should constructively challenge and help develop proposals on strategy.
Section B: Effectiveness
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.
There should be a formal, rigorous and transparent procedure for the
appointment of new directors to the board.
All directors should be able to allocate sufficient time to the company to
discharge their responsibilities
All directors should receive induction on joining the board and should regularly
update and refresh their skills and knowledge.
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.
The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
All directors should be submitted for re-election at regular intervals, subject to
continued satisfactory performance.
Section C: Accountability
The board should present a balanced and understandable assessment of the
company’s position and prospects.
The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.
The board should establish formal and transparent arrangements for
considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditor.
Section D: Remuneration
Levels of remuneration should be sufficient to attract, retain and motivate
directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.
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.
Section E: Relations with Shareholders
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.
The board should use the AGM to communicate with investors and to
encourage their participation.
Schedules
;Schedule A: The design of performance-related remuneration for executive directors
This goes into more detail about the problem of director pay.
;Schedule B: Disclosure of corporate governance arrangements
This sets out a checklist of which duties must be complied with (or explained) under Listing Rule 9.8.6. It makes clear what obligations there are, and that everything should be posted on the company's website.
Compliance
In its 2007 response to a Financial Reporting Council consultation paper in July 2007
Pensions & Investment Research Consultants Ltd (a commercial proxy advisory service) reported that only 33% of listed companies were fully compliant with all of the Codes provisions. Spread over all the rules, this is not necessarily a poor response, and indications are that compliance has been climbing. PIRC maintains that poor compliance correlates to poor business performance, and at any rate a key provision such as separating the CEO from the Chair had an 88.4% compliance rate.
The question thrown up by the Code's approach is the tension between wanting to maintain "flexibility" and achieve consistency. The tension is between an aversion to "one size fits all" solutions, which may not be right for everyone, and practices which are in general agreement to be tried, tested and successful. If companies find that non-compliance works for them, and shareholders agree, they will not be punished by an exodus of investors. So the chief method for accountability is meant to be through the
market
Market is a term used to describe concepts such as:
*Market (economics), system in which parties engage in transactions according to supply and demand
*Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, an ...
, rather than through
law
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
.
An additional reason for a Code, was the original concern of the
Cadbury Report
The Cadbury Report, titled ''Financial Aspects of Corporate Governance'', is a report issued by "The Committee on the Financial Aspects of Corporate Governance" chaired by Sir Adrian Cadbury, chairman of Cadbury, that sets out recommendations on ...
, that companies faced with minimum standards in law would comply merely with the letter and not the spirit of the rules.
[para 1.10 of the Cadbury Report]
The Financial Services Authority has recently proposed to abandon a requirement to state compliance with the principles (under LR 9.8.6(5)), rather than the rules in detail themselves.
See also
*
Corporate Governance
Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...
*
Corporate Social Responsibility
Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...
*
Stewardship Code
*
Worker representation on corporate boards of directors Worker representation on corporate boards of directors, also known as board-level employee representation (BLER) refers to the right of workers to vote for representatives on a board of directors in corporate law. In 2018, a majority of Organisatio ...
*
UK company law
The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...
*
UK labour law
United Kingdom labour law regulates the relations between workers, employers and trade unions. People at work in the UK can rely upon a minimum charter of employment rights, which are found in Acts of Parliament, Regulations, common law and equit ...
;Company reform reports
*
Greene Committee (1926) Report of the Company Law Amendment Committee (Cmnd 2657, 1926)
*
Cohen Committee
The ''Report of the Committee on Company Law Amendment'' (1945Cm 6659 known best as the "Cohen Report" for short, was a company law reform committee appointed by the United Kingdom Coalition Government, during the Second World War. It was chaired b ...
(1945)
*
Jenkins Committee (1962)
*
Alan Bullock
Alan Louis Charles Bullock, Baron Bullock, (13 December 1914 – 2 February 2004) was a British historian. He is best known for his book '' Hitler: A Study in Tyranny'' (1952), the first comprehensive biography of Adolf Hitler, which influence ...
(1977) ''
Report of the committee of inquiry on industrial democracy'', on worker codetermination
*
Cork Report, ''Insolvency Law and Practice, Report of the Review Committee'' (1982) (Cmnd 8558)
*
Cadbury Report
The Cadbury Report, titled ''Financial Aspects of Corporate Governance'', is a report issued by "The Committee on the Financial Aspects of Corporate Governance" chaired by Sir Adrian Cadbury, chairman of Cadbury, that sets out recommendations on ...
(1992), ''Financial Aspects of Corporate Governance'', on corporate governance generally. Pdf fil
here*
Greenbury Report
The Greenbury Report released in 1995 was the product of a committee established under the auspices of the United Kingdom Confederation of British Industry. The committee was formed at the behest of the President of the Board of Trade, Michael Hese ...
(1995) ''Directors' Remuneration, Report of the Study Group'' Pd
here*
Hampel Report
The Hampel Report was designed to be a revision of the corporate governance system in the UK. The remit of the committee was to review the Code laid down by the Cadbury Report (now found in the Combined Code). It asked whether the code's original p ...
(1998), ''Review of corporate governance since Cadbury''
hereand online with the EGC
*
Turnbull Report
''Internal Control: Guidance for Directors on the Combined Code'' (1999) also known as the "Turnbull Report" was a report drawn up with the London Stock Exchange for listed companies. The committee which wrote the report was chaired by Nigel Turnb ...
(1999) on internal controls to ensure good financial reporting
*
Myners Report
''Institutional Investment in the UK: A Review'' (the ''Myners Report'') was a report to HM Treasury in March 2001 on institutional investors. It was delivered by Paul Myners.
Government was concerned that institutional investors were giving insu ...
(2001), ''Institutional Investment in the United Kingdom: A Review'' on institutional investors, Pdf fil
hereand ''Review of Progress'' Repor
here*
Higgs Report
''Review of the role and effectiveness of non-executive directors'' (or the "Higgs review") was a report chaired by Derek Higgs on corporate governance commissioned by the UK government, published on 20 January 2003. It reviewed the role and effect ...
(2003) ''Review of the role and effectiveness of non-executive directors''. Pd
here*
Smith Report
The Smith Report was a report on corporate governance submitted to the UK government in 2003. It was concerned with the independence of auditors in the wake of the collapse of Arthur Andersen and the Enron scandal in the US in 2002. Its recommen ...
(2003) on auditors. Pd
here
Notes
References
*S Arcot and V Bruno, ‘In Letter but not in spirit: An Analysis of Corporate Governance in the UK’ (2006
SSRN*S Arcot and V Bruno, 'One Size Does Not Fit All, After All: Evidence from Corporate Governance' (2007
SSRN* Alan Dignam, 'A Principled Approach to Self-regulation? The Report of the Hampel Committee on Corporate Governance'
998
Year 998 ( CMXCVIII) was a common year starting on Saturday (link will display the full calendar) of the Julian calendar.
Events
By place
Europe
* Spring – Otto III retakes Rome and restores power in the papal city. Crescenti ...
Company Lawyer 140
*E McGaughey, 'Votes at Work in Britain: Shareholder Monopolisation and the ‘Single Channel’' (2017
46(4) Industrial Law Journal 444
External links
Full text UK Corporate Governance Code 2018Earlier revisions and consultation papers* The Financial Services Authority
Listing Rules
The Listing Rules (LR) are a set of regulations applicable to any company listed on a United Kingdom stock exchange, subject to the oversight of the Financial Conduct Authority (FCA). The Listing Rules set out mandatory standards for any company wi ...
br>
onlineand i
pdf format under which there is an obligation to comply with the Combined Code, or explain why it is not complied with, under LR 9.8.6(6).
* The
Financial Reporting Council
The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...
'
website
{{DEFAULTSORT:Uk Corporate Governance Code
Corporate governance in the United Kingdom
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