Corporate Governance

United Kingdom

Roya Valiyeva

Table of contents

The development of corporate governance in the UK

The development of UK Corporate Governance Code

The Main Principles of the Code ‘Comply or Explain’ method UK vs US Conclusion

The development of corporate governance in the UK

The development of corporate governance inthe UK has its roots in a series of corporatecollapses and scandals in the late 1980s andearly 1990s. The UK business community recognised the needto put its house in order. This led to the setting upIn 1991 of a committee chaired by Sir AdrianCadbury which issued a series of recommendations– known as the Cadbury Report in 1992.

The development of UK Corporate Governance Code

The recommendations in the Cadbury Report have beenadded to at regular intervals since 1992. In 1995 aseparate report set out recommendations on theremuneration of directors, and in 1998 the two reportswere brought together in a single code (known initially asthe Combined Code and now as the UK CorporateGovernance Code). In 1999 separate guidance was issuedto directors on how to develop risk management andinternal control systems, which has subsequently beenupdated.

The Main Principles of the Code

Section A: Leadership• Every company should be headed by an effective

board which is collectively responsible for the long-term success of the company.

• 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.

The Main Principles of the Code

Section B: EffectivenessThe board and its committees should have theappropriate balance of skills, experience,independence and knowledge of the companyto enable them to discharge their respectiveduties and responsibilities effectively.

The Main Principles of the Code

Section C: AccountabilityThe board should present a fair, balanced andunderstandable assessment of the company’sposition and prospects.

The Main Principles of the Code

Section D: RemunerationThere should be a formal and transparentprocedure for developing policy on executiveremuneration and for fixing the remunerationpackages of individual directors. No directorshould be involved in deciding his or her ownremuneration.

The Main Principles of the Code

Section E: Relations with shareholdersThere should be a dialogue with shareholders basedon the mutual understanding of objectives. The

boardas a whole has responsibility for ensuring that asatisfactory dialogue with shareholders takes place.The board should use general meetings tocommunicate with investors and to encouragetheir participation.

Comply or Explain

Comply or explain is a regulatory approach usedin the United Kingdom, Germany,the Netherlands andother countries in the field of corporate governanceand financial supervision. Government regulators setout a code, which listed companies may either complywith, or if they do not comply, explain publicly whythey do not. The purpose of "comply or explain" is to"let the market decide" whether a set of standards isappropriate for individual companies.

UK vs USA

The foundation and basic framework of UK and UScorporate governance practices are similar in manyrespects. Both government emphasize the rights ofshareholders to vote on major company decisionsand to elect a board of directors that sets thepolicy and direction of the company. UK and USlaws also have a fundamental goal of protectinginvestors and providing certainty and uniformity inapplying securities and corporate governance laws.

UK vs USA

Governance structures The governance structures of UK and US

companies are similar in most material respects. The boards of directors in both countries are elected by the shareholders (with limited exceptions) and are generally responsible for setting the policy and direction of the company. Both UK and US companies operate under a unitary board structure.

UK vs USA

Unlike the UK, the US has not adopted acorporate governance code. Instead, corporategovernance requirements are imposed primarily by various state and federal corporate andsecurities laws, including the common law. In the UK and the US, compensation may includecash and equity. Unlike UK companies, UScompanies may make equity awards to bothexecutive and non-executive directors.

Conclusion

In an effort to think about the future of corporategovernance and the board of directors, it is neededto start with what is expected from board to dotoday, how they function and how they relate toshareholders — not only the legal rules but also theaspirational “best practices” that influencecorporate and director behavior.