The UK Corporate Governance code, formerly known as the Combined Code (from here on referred to as "the Code") is a part of

UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary lega ...

with a set of principles of good

corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...

aimed at companies listed on the

London Stock Exchange London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St P ...

. It is overseen by the

Financial Reporting Council The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...

and its importance derives from the Financial Conduct Authority's

Listing Rules The Listing Rules (LR) are a set of regulations applicable to any company listed on a United Kingdom stock exchange, subject to the oversight of the Financial Conduct Authority (FCA). The Listing Rules set out mandatory standards for any company wi ...

. The Listing Rules themselves are given statutory authority under the

Financial Services and Markets Act 2000 The Financial Services and Markets Act 2000c 8 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority (FSA) as a regulator for insurance, investment business and banking, and the Financial Ombudsman Serv ...

and require that public listed companies disclose how they have complied with the code, and explain where they have not applied the code in what the code refers to as 'comply or explain'. Private companies are also encouraged to conform; however there is no requirement for disclosure of compliance in private company accounts. The Code adopts a principles-based approach in the sense that it provides general guidelines of best practice. This contrasts with a rules-based approach which rigidly defines exact provisions that must be adhered to. In 2017, it was announced that the

would amend the Code to require companies to "comply or explain" with a requirement to have elected employee representatives on company boards. In July 2018, the Financial Reporting Council released the new 2018 UK Corporate Governance Code, which is designed to build on the relationships between companies, shareholders and stakeholders and make them key to long-term

sustainable growth Sustainable development is an organizing principle for meeting human development goals while also sustaining the ability of natural systems to provide the natural resources and ecosystem services on which the economy and society depend. The desi ...

of the UK economy.

Origins

The Code is essentially a consolidation and refinement of a number of different reports and codes concerning opinions on good corporate governance. The first step on the road to the initial iteration of the code was the publication of the

Cadbury Report The Cadbury Report, titled ''Financial Aspects of Corporate Governance'', is a report issued by "The Committee on the Financial Aspects of Corporate Governance" chaired by Sir Adrian Cadbury, chairman of Cadbury, that sets out recommendations on ...

in 1992. Produced by a committee chaired by Sir Adrian Cadbury, the Report was a response to major corporate scandals associated with governance failures in the UK. The committee was formed in 1991 after

Polly Peck Polly Peck International (PPI) was a small British textile company which expanded rapidly in the 1980s and became a constituent of the FTSE 100 Index before collapsing in 1991 with debts of £1.3bn, eventually leading to the flight of its CEO, ...

, a major UK company, went insolvent after years of falsifying financial reports. Initially limited to preventing financial fraud, when BCCI and

Robert Maxwell Ian Robert Maxwell (born Ján Ludvík Hyman Binyamin Hoch; 10 June 1923 – 5 November 1991) was a Czechoslovak-born British media proprietor, member of parliament (MP), suspected spy, and fraudster. Early in his life, Maxwell escaped from ...

scandals took place, Cadbury's remit was expanded to corporate governance generally. Hence the final report covered financial, auditing and corporate governance matters, and made the following three basic recommendations: *the CEO and Chairman of companies should be separated ensuring the absence of CEO duality *boards should have at least three non-executive directors, two of whom should have no financial or personal ties to executives *each board should have an audit committee composed of non-executive directors These recommendations were initially highly controversial, although they did no more than reflect the contemporary "best practice", and urged that these practices be spread across listed companies. At the same time it was emphasised by Cadbury that there was no such thing as "one size fits all". In 1994, the principles were appended to the

of the

, and it was stipulated that companies need not comply with the principles, but had to explain to the stock market why not if they did not. Before long, a further committee chaired by chairman of

Marks & Spencer Marks and Spencer Group plc (commonly abbreviated to M&S and colloquially known as Marks's or Marks & Sparks) is a major British multinational retailer with headquarters in Paddington, London that specialises in selling clothing, beauty, home ...

Sir Richard Greenbury was set up as a 'study group' on

executive compensation Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, varia ...

. It responded to public anger, and some vague statements by the Prime Minister John Major that regulation might be necessary, over spiralling

executive pay Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, variab ...

, particularly in public utilities that had been

privatised Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...

. In July 1995 the Greenbury Report was published. This recommended some further changes to the existing principles in the Cadbury Code: *each board should have a remuneration committee composed without executive directors, but possibly the chairman *directors should have long term performance related pay, which should be disclosed in the company accounts and contracts renewable each year Greenbury recommended that progress be reviewed every three years and so in 1998 Sir Ronald Hampel, who was chairman and managing director of ICI plc, chaired a third committee. The ensuing

Hampel Report The Hampel Report was designed to be a revision of the corporate governance system in the UK. The remit of the committee was to review the Code laid down by the Cadbury Report (now found in the Combined Code). It asked whether the code's original p ...

suggested that all the Cadbury and Greenbury principles be consolidated into a "Combined Code". It added that, *the Chairman of the board should be seen as the "leader" of the non-executive directors *institutional investors should consider voting the shares they held at meetings, though rejected compulsory voting *all kinds of remuneration including pensions should be disclosed. It rejected the idea that had been touted that the UK should follow the German two-tier board structure, or reforms in the EU Draft Fifth Directive on Company Law. A further mini-report was produced the following year by the Turnbull Committee which recommended directors be responsible for internal financial and auditing controls. A number of other reports were issued through the next decade, particularly including the Higgs review, from Derek Higgs focusing on what non-executive directors should do, and responding to the problems thrown up by the collapse of

Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...

in the US.

Paul Myners Paul Myners, Baron Myners, (1 April 1948 – 16 January 2022) was a British businessman and politician. In October 2008 he was elevated to the House of Lords as a life peer and was appointed City Minister in the Labour Government of Gordon B ...

also completed two major reviews of the role of

institutional investors An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linke ...

for the Treasury, whose principles were also found in the Combined Code. Shortly following the collapse of

Northern Rock Northern Rock, formerly the Northern Rock Building Society, was a British bank. Based at Regent Centre in Newcastle upon Tyne, United Kingdom, Northern Rock was originally a building society. It demutualised and became Northern Rock bank i ...

and the

Financial Crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...

, the Walker Review produced a report focused on the banking industry, but also with recommendations for all companies. In 2010, a new Stewardship Code was issued by the

, along with a new version of the UK Corporate Governance Code, hence separating the issues from one another.

Section A: Leadership

Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision. 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.

Section B: Effectiveness

The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. All directors should be able to allocate sufficient time to the company to discharge their responsibilities All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

Section C: Accountability

The board should present a balanced and understandable assessment of the company’s position and prospects. The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems. The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditor.

Section D: Remuneration

Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

Section E: Relations with Shareholders

There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should use the AGM to communicate with investors and to encourage their participation.

Schedules

;Schedule A: The design of performance-related remuneration for executive directors This goes into more detail about the problem of director pay. ;Schedule B: Disclosure of corporate governance arrangements This sets out a checklist of which duties must be complied with (or explained) under Listing Rule 9.8.6. It makes clear what obligations there are, and that everything should be posted on the company's website.

Compliance

In its 2007 response to a Financial Reporting Council consultation paper in July 2007 Pensions & Investment Research Consultants Ltd (a commercial proxy advisory service) reported that only 33% of listed companies were fully compliant with all of the Codes provisions. Spread over all the rules, this is not necessarily a poor response, and indications are that compliance has been climbing. PIRC maintains that poor compliance correlates to poor business performance, and at any rate a key provision such as separating the CEO from the Chair had an 88.4% compliance rate. The question thrown up by the Code's approach is the tension between wanting to maintain "flexibility" and achieve consistency. The tension is between an aversion to "one size fits all" solutions, which may not be right for everyone, and practices which are in general agreement to be tried, tested and successful. If companies find that non-compliance works for them, and shareholders agree, they will not be punished by an exodus of investors. So the chief method for accountability is meant to be through the

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...

, rather than through

law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...

. An additional reason for a Code, was the original concern of the

, that companies faced with minimum standards in law would comply merely with the letter and not the spirit of the rules.para 1.10 of the Cadbury Report The Financial Services Authority has recently proposed to abandon a requirement to state compliance with the principles (under LR 9.8.6(5)), rather than the rules in detail themselves.

Notes

References

*S Arcot and V Bruno, ‘In Letter but not in spirit: An Analysis of Corporate Governance in the UK’ (2006
SSRN
*S Arcot and V Bruno, 'One Size Does Not Fit All, After All: Evidence from Corporate Governance' (2007
SSRN
* Alan Dignam, 'A Principled Approach to Self-regulation? The Report of the Hampel Committee on Corporate Governance' 998Company Lawyer 140 *E McGaughey, 'Votes at Work in Britain: Shareholder Monopolisation and the ‘Single Channel’' (2017
46(4) Industrial Law Journal 444

External links

Full text UK Corporate Governance Code 2018

Earlier revisions and consultation papers
* The Financial Services Authority

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pdf format
under which there is an obligation to comply with the Combined Code, or explain why it is not complied with, under LR 9.8.6(6). * The

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