Corporate Governance in the United Kingdom

Introduction

Corporate governance concerns the system by which companies are directed and controlled. In the United Kingdom, corporate governance is regulated through a combination of legislation, regulation, and voluntary codes of practice. The primary instrument is the UK Corporate Governance Code, which applies to companies with a premium listing of equity shares on the London Stock Exchange. The Code operates on a comply or explain basis, providing flexibility for companies to adopt alternative arrangements suited to their circumstances while maintaining accountability to shareholders.

The UK Corporate Governance Code

The UK Corporate Governance Code was first published in 1992 following the report of the Cadbury Committee, which was established in response to concerns about corporate failures and the lack of transparency in board practices. The Code has been revised periodically, most recently in 2024, to reflect evolving expectations of corporate behaviour.

The 2024 Code is organised around four principles: board leadership and company purpose, emphasising the board’s responsibility for the long-term sustainable success of the company and its engagement with stakeholders; division of responsibilities, requiring a clear division between the roles of chair and chief executive, a sufficient number of non-executive directors, and the separation of the roles of chair and senior independent director; composition, succession, and evaluation, requiring formal and transparent procedures for board appointments, regular board evaluations, and succession planning; and audit, risk, and internal control, requiring robust internal controls and the establishment of audit and risk committees.

Comply or Explain

The comply or explain principle is the foundation of the UK approach to corporate governance. Companies are not required to comply with every provision of the Code; instead, they must report on how they have applied the Code’s principles and either confirm that they have complied with its provisions or explain why they have not.

The comply or explain approach recognises that one size does not fit all and that companies may have legitimate reasons for departing from the Code’s provisions. The explanation must be meaningful and informative, setting out the alternative approach adopted and the reasons for it. Shareholders are expected to engage with companies that depart from the Code and to hold them to account through the exercise of voting rights.

Board Composition

The Code requires that the board have an appropriate combination of executive directors (who manage the company’s day-to-day operations) and non-executive directors (who provide independent oversight and challenge). At least half the board (excluding the chair) should be independent non-executive directors.

The roles of chair and chief executive must be held by different individuals, avoiding the concentration of power in a single person. The chair is responsible for the effectiveness of the board and for ensuring that directors receive accurate and timely information. The senior independent director provides a channel for shareholder concerns that cannot be resolved through the chair or chief executive.

Audit Committees

The Code requires that the board establish an audit committee composed of independent non-executive directors. The audit committee is responsible for: monitoring the integrity of the company’s financial statements; reviewing the company’s internal financial controls and risk management systems; overseeing the relationship with the external auditor, including the appointment, remuneration, and independence of the auditor; and reviewing the effectiveness of the internal audit function.

The audit committee must have at least three members (or two for smaller companies), all of whom must be independent non-executive directors. At least one member must have recent and relevant financial experience. The committee reports to the board on its activities and makes recommendations on the appointment and removal of the external auditor.

Remuneration

The Code requires that the board establish a remuneration committee composed of independent non-executive directors. The remuneration committee is responsible for setting the remuneration of the chair, the chief executive, and other executive directors, including pension and other benefits.

The Code provides that remuneration should be designed to promote the long-term success of the company and should be aligned with the company’s purpose and values. Performance-related elements should be transparent, stretching, and rigorously applied. The committee must exercise independent judgment and avoid conflicts of interest, particularly in setting its own remuneration.

Stakeholder Engagement

The Companies Act 2006 section 172 requires directors to have regard to the interests of employees, suppliers, customers, and the community, as well as shareholders. The Code reinforces this by requiring the board to understand the views of stakeholders and to explain how stakeholder interests have been considered in board decisions.

The UK Stewardship Code, published by the Financial Reporting Council, sets standards for institutional investors and asset managers on how they should engage with the companies in which they invest. The Stewardship Code promotes effective dialogue between companies and their shareholders, enabling investors to hold boards to account on governance matters.

Enforcement and Sanctions

The UK Corporate Governance Code is not legally binding. Compliance is enforced through the Listing Rules of the Financial Conduct Authority, which require premium-listed companies to include a statement in their annual report explaining how they have applied the Code and whether they have complied with its provisions. The Financial Reporting Council monitors compliance and may take action against companies that fail to provide meaningful explanations for departures.

Conclusion

Corporate governance in the United Kingdom is characterised by a flexible, principles-based approach centred on the UK Corporate Governance Code. The comply or explain mechanism provides companies with flexibility while maintaining accountability to shareholders. The Code’s provisions on board composition, audit committees, remuneration, and stakeholder engagement reflect best practice and contribute to the effectiveness and integrity of UK corporate governance.