Out-Law Guide 5 min. read

Relations with shareholders – the UK Corporate Governance Code

This guide is based on UK law as at 1st February 2010, unless otherwise stated.  It is part of a series on corporate governance . Despite some impressions to the contrary, the UK Corporate Code mak...

This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on corporate governance.

Despite some impressions to the contrary, the UK Corporate Code makes it clear that good governance is not a one-way street. Companies and their boards have numerous obligations and duties to shareholders, but there are reciprocal duties owed by the shareholders to the company.

In the interests of good governance, investors should:

  • communicate with directors;
  • “police” boardroom practices – i.e. monitor compliance with the Code.

(Note: the Code does not apply to all companies. See: The reach of the UK Corporate Governance Code, an OUT-LAW guide)


Main principle E.1 says that there should be a dialogue between the board and shareholders ‘based on the mutual understanding of objectives’. Yes, the board has to explain to shareholders what it is about, where it wants to get to and how it is going to meet its aims; but, equally, shareholders must make sure they clearly state their objectives and the timescale in which they want them achieved.

In talking about dialogue with shareholders, the Code refers largely to major investors. There are two reasons for this:

  • the Code originated as a response to pressure from large institutional shareholders for reform of boardroom practice;
  • practicalities dictate that no board is going to spend time or money talking to every shareholder with a few hundred shares; the priority will be investors with a large proportion of the share capital – and in most listed companies these will be pension funds, insurance companies and other investment managers.

While this focus on big investors is natural, perhaps even inevitable, it highlights a potential flaw in the Code. It could be seen as marginalising or ignoring those investors who, though small, still have rights. In many places, the Code openly refers to consultations with ‘major shareholders’. An inconspicuous footnote maintains the legalities by stating: ‘Nothing in these principles or provisions should be taken to override the general requirements of law to treat shareholders equally in access to information.’

It’s a difficult balancing act to maintain, keeping your major shareholders informed of the latest developments and consulting them on major issues of interest without putting them in a privileged position. Confidential briefings for analysts and major shareholders were criticised as being exclusive and unfair to small investors, and are now largely replaced by webcasts that any shareholder can log into, with copies of presentations by the chief executive available on a company’s website.

The reality is that major shareholders will usually make their views known to the board by talking to the chief executive, the chairman or the senior independent director at what may be a regular meeting: the Code encourages non-executive directors to ‘develop an understanding of the views of major shareholders’ through face-to-face contact, briefings with brokers and analysts and surveys of shareholder opinion. Smaller shareholders have the forum of the annual general meeting where, if they are sufficiently vocal, their protests may hit the mass media and so apply pressure to the board in that way.

The Business Review

All companies, public and private, need to produce a Business Review as part of their Directors’ Report. The only exception is for ‘small companies’, which are defined as private companies that can satisfy any two of three conditions on turnover (not more than £5.6m), balance sheet total (not more than £2.8m) and employees (not more than 50). The purpose of the Review is to inform shareholders and help them to assess how the directors have performed their duty to promote the success of the company. (See: Directors' duties, an OUT-LAW guide.)

To that end, the Business Review must contain:

  • a fair review of the company’s business;
  • a description of the principal risks and uncertainties facing the company;
  • a balanced and comprehensive analysis of the development and performance of the business during the year, and its position at the end of the year;
  • to the extent necessary to understand the business, an analysis using financial key performance indicators and other KPIs, particularly those on environmental and employee matters.

A UK listed company (not one whose shares are traded on AIM or PLUS) needs additional disclosures in its Business Review (to the extent they are necessary for an understanding of the business):

  • the main trends and factors likely to affect future development and performance;
  • information about the impact of the business on the environment, plus information on employees and ‘social and community issues’;
  • information about people with whom the company has contractual or other arrangements that are ‘essential’ to the business.

That last point was a late amendment to the Companies Act 2006and at the time came in for criticism from the business world. The government emphasised that it was designed to lead to disclosure of key relationships, such as reliance on a sole supplier or customer where the loss of a contract would have a serious knockon effect. But contracts are not the only target: the government minister made it clear that key employees and even regulators may be essential to a business and could lead to disclosures.

One welcome relief is that no impending development or negotiation needs to be disclosed if that disclosure would be seriously prejudicial to the company. Nor is the Review subject to an audit, although directors will commit a criminal offence if they fail to comply with these requirements.


In assessing a company’s compliance with the corporate governance regime set out in the Code, Section E of its 2008 version urged institutional shareholders to ‘give due weight to all relevant factors drawn to their attention’. They needed to factor into their assessment ‘the size and  complexity of the company and the nature of the risks and challenges it faces’. In other words, they had to adopt a proportionate response and understand the issues and considerations that would have influenced the board. Shareholders were not to adopt a box-ticking approach and ignore the explanations proffered by a board for non-compliance. Rather, they were to give the company their reasoned views if they disagreed and be prepared to enter into a dialogue with the board if differences remain.

Despite these strictures, the 2008–09 financial crisis laid bare continuing concerns on both sides that true engagement between companies and their shareholders was not always achieved. The Walker Report urged compliance with the Statement of Principles issued by the Institutional Shareholders’ Committee in June 2007, upgraded to a code in November 2009 and available at the web address given at the end of this chapter. This sets out best practice for institutional shareholders in respect of their responsibilities to their investee companies. Subject to further discussions with interested parties, this code will replace Section E from June 2010.

In trying to police the board and exert pressure for reform, institutional shareholders need to ensure that they use the considerable voting power they have. There have been several cases where particularly vocal shareholders have failed to vote as a result, it would seem, of difficulties in passing instructions down the line to the nominees or agents who complete the proxy forms or attend the meetings on their behalf. One objective of the company law reform process, which resulted in the Companies Act 2006, was to ‘enhance shareholder engagement’, and to that end the government has taken (but not yet used) the power to compel institutional shareholders to disclose their voting records.

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