Out-Law / Your Daily Need-To-Know

The development of the UK Corporate Governance Code

Out-Law Guide | 05 Jul 2007 | 9:01 am | 2 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated.  It is part of a series on corporate governance . Governance is a word that barely existed 30 years ago. Now it is in...

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

Governance is a word that barely existed 30 years ago. Now it is in common use not just in companies but also in charities, universities, local authorities and National Health Trusts. It has become a shorthand for the way an organisation is run, with particular emphasis on its accountability, integrity and risk management.

The ‘revolution’ started in the early 1990s with the groundbreaking report from Sir Adrian Cadbury on the financial aspects of corporate governance, which produced a two-page code of best practice. Aimed at listed companies and looking especially at standards of corporate behaviour and ethics, the ‘Cadbury Code’ was gradually adopted by the City and the Stock Exchange as a benchmark of good boardroom practice and, in 1998, after further reports from two more City grandees, it evolved into the Combined Code on Corporate Governance.

Continuing shareholder disquiet over perceived shortcomings in corporate structures and their ability to respond to poor performance, as well as threats of legislation if the corporate sector failed to put its house in order, brought more reviews of corporate governance – and more revisions to the Code. By 2003, sections had been added on remuneration, risk management, internal control and audit committees.

In 2008, the banking crisis and the effective nationalisation of several UK banks led the government to ask Sir David Walker to look specifically at corporate governance in UK banks and other large financial institutions. (See: The Walker Report, an OUT-LAW guide below.) That was closely followed by a more general review of the Code by the FRC, the body established by government with the task, among other things, of overseeing the operation of the Code. A new version duly came out, this time with a new title – the UK Corporate Governance Code. It applies to company accounting periods beginning on or after 29 June 2010.

Is all this attention on governance good for business, in the hard, commercial sense? Views differ. Several surveys have claimed that companies with better corporate governance are more profitable; sceptics have countered that it is only the more successful companies that can afford the time and effort to make sure they follow best practice. There is no doubt, however, that the demand of shareholders and other stakeholders for good governance is strong and continuing. Investors, regulators, government and assorted pressure groups are all increasingly likely to condemn a business that fails to follow the ‘rules’. The business case for good corporate governance is, therefore, not difficult to build.

The Walker Report

With a career spanning the Treasury, the Bank of England, a City regulator and UK and US banks, Sir David Walker was perhaps a natural choice to review corporate governance in the light of the 2008 banking crisis. The question he sought to answer was this: if different banks were operating in the same areas and under the same regulators, why did some fail and some survive – what differences in their governance led to such different results?

More specifically, Walker was asked to look at:

  • how to improve risk management at board level;
  • whether incentive and bonus schemes encourage risk taking;
  • the right balance of skills, experience and independence on a board of directors;
  • the role of institutional shareholders in talking to and monitoring boards of directors.

The 2009 Walker Report made 39 recommendations for better governance. It’s important to remember that they were aimed at banks, large insurance companies and other financial institutions. Some are relevant for companies in other sectors and therefore feature in the FRC’s UK Corporate Governance Code from June 2010; others will act as examples of best practice in particular cases.

See also: The reach of the UK Corporate Governance Code