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Corporate Governance and Stewardship

High quality corporate governance helps to underpin long-term company performance. The UK has some of the highest standards of corporate governance in the world, which makes the UK market attractive to new investment.

The  UK Corporate Governance Code has been instrumental in spreading best boardroom practice throughout the listed sector since it was first issued in 1992. It operates on the principle of 'comply or explain'. It sets out good practice covering issues such as board composition and effectiveness, the role of board committees, risk management, remuneration and relations with shareholders.

Listed companies are required under the Financial Conduct Authority Listing Rules either to comply with the provisions of the Code or explain to investors in their next annual report why they have not done so. If shareholders are not content  they should engage with the company. If this is unsatisfactory, they can use their rights, including the power to appoint and remove directors, to hold the company to account.

There are a number of advantages to the 'comply or explain' approach. Its inherent flexibility means that it is possible to set more demanding standards than can be done through hard rules. Experience has shown that the vast majority of companies attain these standards. In addition, requiring companies to report to shareholders rather than regulators means that the decision on whether a company's governance is adequate is taken by those in whose interest the board is meant to act.

In addition to the UK Corporate Governance Code the FRC publishes a series of guidance notes intended to assist companies address specific aspects of governance and accountability. They cover board effectiveness, the role of audit committees and risk management, internal control and  assessing and reporting on whether the business is a going concern.

In turn, investors are encouraged to commit to the principles of the  UK Stewardship Code. This Code sets standards for investors for monitoring and engaging with the companies they own and aims to improve the quality of dialogue between investors and companies to help improve long-term risk-adjusted returns to shareholders.

The Stewardship Code sets out a number of areas of good practice to which the FRC believes institutional investors should aspire and also operates on a ‘comply or explain’ basis. The FCA requires UK authorised asset managers to report on whether or not they apply the Code. In a similar way to the UK Corporate Governance Code, the UK Stewardship Code aims to make investors more accountable to their clients and beneficiaries, as well as helping companies.

A detailed explanation of the code-based approach, and how it fits into the UK's overall regulatory framework, can be found in  UK Approach to Corporate Governance.

Both Codes are normally updated every two years to ensure they stay relevant. Any changes are subject to extensive consultation and dialogue with the market. The most recent UK Corporate Governance Code was published in September 2014 and the most recent UK Stewardship Code was published in September 2012.

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