Corporate Governance and Stewardship
High quality corporate governance contributes to long-term company performance. The UK has excellent standards of corporate governance, which makes the UK equity market attractive to new investment.
The UK Corporate Governance Code 2016 (PDF) 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'. Choosing to explain where a company does not comply enhances transparency for shareholders and wider stakeholders as well as recognising that one type of approach does not necessarily fit all companies.
The Code sets out good practice covering issues such as board composition and effectiveness, the role of board committees, risk management, remuneration and relations with shareholders.
Premium listed companies are required under the Financial Conduct Authority (FCA) Listing Rules either to comply with the provisions of the Code or explain to investors reasons for not doing so. This approach allows shareholders to consider the explanation and discuss this with the company where necessary. If shareholders are not content, or they consider that the explanation is unsatisfactory, they can use their rights – including the power to appoint and remove directors – to hold the company to account.
The 'comply or explain' approach offers flexibility and means that it is possible to expect more demanding standards than can be achieved through legislation. 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 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.
To support the UK Corporate Governance Code investors are encouraged to commit to the principles of the UK Stewardship Code 2012 (PDF). This 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 UK 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. The FRC has recently revised its assessment of compliance with the UK Stewardship Code.
Both Codes are updated periodically 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 April 2016 and the most recent UK Stewardship Code was published in September 2012. The FRC is currently undertaking a review of the UK Corporate Governance Code and a formal consultation is expected towards the end of 2017. A detailed consultation on revisions to the UK Stewardship Code will follow in 2018.