CORPORATE GOVERNANCE REVIEW

Consultancy

Historic Context

The Enron scandal of 2001 and the consequent demise of the global accounting practice of Andersens shone a bright spotlight on corporate incompetence.  In the UK post the Robert Maxwell case, the Cadbury Report of 1992 was the first corporate governance code.  This was followed by the Greenbury, Hampel and Turnbull reports and the Higgs Review of 2003.

In August 2003 a new Combined Code of Corporate Governance was adopted by the London Stock Exchange, drawing together the previous reports and reviews. Further refinement of the Combined Code took place in June 2006 and in June 2010, in response to the Financial Crisis, the Financial Reporting Council issued The UK Corporate Governance Code placing increased emphasis on The Board’s oversight of Risk and asking FTSE 350 companies to carry out an external evaluation of the Board’s and individual Director’s performance. Most recently the UK Corporate Governance Code was updated in September 2012 placing emphasis on Board skills and diversity and asking that the external audit function in FTSE 350 companies be tendered every 10 years.

In all cases the Code is not compulsory but listed companies must “comply or explain” in their Annual Report on how they have applied the Code. While applying to listed companies, the Code still provides a useful framework against which to measure governance within unlisted companies. Earlier this year the Institute of Directors, in association with the European Confederation of Directors’ Associations, published Corporate Governance Guidance and Principles for Unlisted Companies.

Definition

The first version of the UK Code on Corporate Governance was produced in 1992 by the Cadbury Committee. Its paragraph 2.5 is still the classic definition of Corporate Governance:

Corporate Governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.

Perhaps because of the occurrences which led to the establishment of governance codes – fraud and corporate incompetence – there is a sense that corporate governance is all about systems to control and protect but in fact this is not the case. Corporate governance provides a robust framework for building shareholder value.

Corporate Governance Framework

In broad terms there are two aspects to a robust governance framework. The first focuses on documents and policies aimed at protecting the company’s assets. The second focuses more on business development and building shareholder value.

Governance Framework I – Protection and Control

  • Company Law
  • Memorandum and Articles
  • Shareholders Agreement
  • Statement of Reserved Matters
  • Internal Controls
  • Risk Register
  • Compliance Assurance

Governance Framework II – Building Shareholder Value

  • Vision, Mission and Values
  • Organisational Strategy
  • Delegation to and Monitoring Management
  • Managing Stakeholder Relationships
  • Director / Board Effectiveness

Brendan Mullan

Email: enquiries@virtusconsultancy.com

 

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