The purpose of this board briefing is to highlight the need for effective corporate governance and present some of the governance models used by companies.
What is corporate governance?
Corporate governance is the way in which a board of directors ensures that an organisation is run fairly and transparently, and is accountable to all its stakeholders. This can be formalised in a framework of policies and practice which are implemented by management and monitored by the board. A series of corporate scandals and collapses has resulted in an increased focus on corporate governance as a way of ensuring financially sound and ethical business promotion.
Why is corporate governance important?
Sound governance helps business development by:
- Ensuring that the actions of an organisation are legal, and in line with its objectives
- Ensuring the financial probity of the organisation
- Ensuring shareholders, investors, staff, customers and other stakeholders are treated with integrity
- Ensuring the safety of the workforce and of all products
Who is responsible for corporate governance?
Corporate governance is the responsibility of the board.
What models of corporate governance exist?
The purpose of corporate governance is to protect the interests of stakeholders while ensuring the organisation thrives, and the way in which this is achieved can vary greatly.
- In the US, it is common for the CEO of an organisation to also chair the board, while in the UK, the chair tends to be an independent director.
- Some companies have a two-tiered board system whereby an executive board, comprising senior company employees is responsible for the day-to-day running of an organisation, while a non-executive board is responsible for giving strategic leadership and appointing the executive board.
- Other companies have a single-tiered board, which is made up of mostly independent directors who are not employed by the company. However, it should be noted that even independent directors may receive some form of remuneration for their services.
Board members are advised to consult and comply with the code of practice for corporate governance for whichever country in which they operate. Please see the external links section for more information.
The history of corporate governance
In the United Kingdom, corporate governance started to increase in importance in 1992 with the publication of the Cadbury report. Sir Adrian Cadbury chaired a committee on corporate governance which was established by the Financial Reporting Council. The Cadbury report became the standard by which boards improved their transparency and accountability. It contained a code of best practice and notable recommendations include:
- Boards should have at least three non-executive (independent) directors
- Boards should have an audit committee to ensure transparency and accountability
- The roles of chair and chief executive should be held by different people
In 1994, the Nolan Committee was established and was responsible for the development of the seven principles of public life (the Nolan Principles). These are selflessness, integrity, objectivity, accountability, openness, honesty and leadership. In 1995, the Greenbury report amended the Cadbury code of best practice to include a requirement that boards establish a remuneration committee to consider and make recommendations in respect of executive pay.
In 1998, the Hample Committee produced its report on corporate governance. This brought together all the recommendations from the Cadbury and Greenbury reports into a Combined Code of Corporate Governance. In 1999 the Turnbull Report recommended that boards should make an annual statement regarding the effectiveness of internal controls. It further recommended that the board, rather than individual managers, are responsible for risk management and internal controls, and that risk is considered in its entirety and not as a function of just financial reporting.
In 2003, the Higgs Report made further recommendations that non- executive directors should comprise half of board members, have their performance reviewed on an annual basis, not serve more than two three-year terms on a board, and meet as a group at least once a year without the executive directors. Also in 2003, the Smith Review recommended that audit committees should be comprised of at least three non-executive directors, that one of these should have relevant financial experience and all should receive training to ensure they are fully able to undertake their audit roles. These recommendations, along with those from the Turnbull and Higgs reports were integrated into the revised Combined Code on Corporate Governance.
In 2005, a number of representative bodies produced the ‘good governance code for the voluntary and community sector’. The Companies Act was introduced in 2006 and the Combined Code on Corporate Governance was revised in 2008 to take into account these changes. In 2010, the Combined Codes was replaced by the UK Corporate Governance Code, which had an increased focus on the leadership of the board by the chair, and on the recruitment and development of board members. The code was revised in 2012 to reflect the need for greater gender diversity on boards.
Is governance compliance or leadership?
Traditionally governance models focus on compliance and control elements. Many boards operate on the premise that as long as they ensure the company is making money and complying with the law, they are executing their responsibilities as directors. At Leading Governance, we believe that while the compliance side of governance is extremely important, organisations benefit more from having a board which challenges senior management and provides strategic direction to the organisation, as well as ensuring observance of all relevant laws and codes. For this reason, we focus on the leadership side of governance, and aim to help boards become outstanding teams who guide organisations to new successes.
How do I go about ensuring my board is a “leading” board, rather than only a “complying” board?
At Leading Governance we have developed a range of materials to help support you in developing your board. These are based on our governance model, as outlined below
For more detail on each of these elements, please consult the relevant section. If you would like bespoke assistance in developing your board, please contact Leading Governance for more help.
Is this an area of concern for you? Contact Leading Governance for more help.