Corporate governance is codified best practice about board leadership, with recommendations as to how to manage the direction, control, practices and systems which support the directors’ collective responsibility to promote the long-term sustainable success of the company. 

The UK Corporate Governance Code provides a guide to key components of effective board practice. In 2018 it was refreshed, to place greater emphasis on relationships between companies, shareholders and stakeholders, and to promote the importance of establishing corporate culture that is aligned with business purpose, strategy, promotes integrity and values diversity. 

The principles of the Code are: 

• Board leadership and company purpose: every company should have an effective and entrepreneurial board which is collectively responsible for the long term, sustainable success of the company. The board should establish the company’s purpose, values and strategy.
• Division of responsibilities: the board should have the appropriate combination of executive and independent non-executive directors, with a clear division of responsibilities between leadership of the board (the chair) and the executive leadership of the company.
• Composition, succession and evaluation: the board should have the appropriate balance of skills, experience and knowledge. They should be appointed and evaluated in a formal and transparent way.
• Audit, risk and internal control: the board should present a fair, balanced and understandable assessment of the company's position and prospects, and establish formal and transparent polices to ensure external and internal audit, and risk management are effective.
• Remuneration: executive directors' remuneration should aim to promote the long-term sustainable success of the company, and be aligned to purpose and values.

The 2018 Code includes a new requirement that boards demonstrate how the organisation is improving employee voice at board level. Organisations are now required to illustrate how they’re applying one or more of the below models:

• Giving a non-executive director responsibility over workforce issues
• Establishing a workforce director (so-called 'worker on the board')
• Establishing an employee advisory committee (or broader stakeholder committee).

The 2018 Code also includes:

• Mandatory requirements for the reporting of pay ratios between chief executives and workers, including justification of the difference in pay
• Requirements for directors of all large organisations to set out how they are acting in the interests of employees and shareholders.
• A public register of listed companies that have faced significant shareholder opposition to executive pay packages.
• A new requirement that the Remuneration Committee review pay across the wider workforce, and illustrate how employees have been engaged throughout the process. They must also illustrate how internal and external measures are being used to measure the appropriateness of executive pay.

Corporate governance is important as it helps to foster cooperation internally, provide reassurance to shareholders externally and promote the image of the company to its stakeholders and the public. Since its introduction, the Code has contributed to an improved business and investment framework in the UK. This supports ethical business practices and responsible business. 

Composition of the board

The Code recommends that the board include a balance of executive and non-executive directors, including independent non-executive directors. 

In practice, the size and complexity of the organisation will usually determine the size of the board. In a small company the board may consist of just the managing director (MD) and one other, often the financial officer. In larger organisations it could comprise the chair, chief executive, chief financial officer, other executive directors (EDs) and non-executive directors (NEDs). 

Role of the Board 

As stated in the UK Code, the role of an effective and entrepreneurial board of a successful company is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. 

The other Leadership Principles set out in the UK Code are: 

• The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.
• The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.
• In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.
• The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. 

The role of the chair is to lead and manage the board, to be responsible for setting the board's agenda and to ensure that meetings are conducted properly, order is kept, the agenda is followed, items are discussed and decisions made. 

The UK Code recommends that the chair should be responsible for the leadership of the board and for ensuring effectiveness in all aspects of its role, that the chair should be independent and that a chief executive should not go on to be chair of the company..

The chair has a crucial role in ensuring that the executive directors and non-executive directors work together with a common purpose, using their different skills and competencies, and promoting openness and debate. The Cadbury Review likened the role of the chair to that of an orchestra conductor – striking a balance between focused discussion and general debate for the overall effectiveness of the board.

The executive directors (EDs) will run the company's business and will often be directors of functions such as finance, HR or operations. Much has been written on which functions should be represented at board level and it is for each organisation to decide the composition of its board. However, EDs with certain titles should be aware that they will need to have the required specialist knowledge to carry out those roles.

Non-executive directors (NEDs) have the same duty of care as EDs. So before taking up any director appointment, it's vital to undertake a personal 'due diligence' to understand the company and the expectations placed on NEDs.

A key issue for boards is how they incorporate diverse skills, experience, backgrounds and perspectives into their decision making. 

The board may decide to delegate some of its authority to committees. The committees usually established are:

• Nomination committee.
• Remuneration committee.
• Audit committee.
• Ad hoc/special committees with delegated responsibility for a specific task or part of board activity. Common examples include risk, people and culture, sustainability, or responsible business.

Each committee will have terms of reference and will normally report back to the board at agreed intervals.

Nomination committee

The nomination committee leads the process for new board appointments, ensures plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession. Once the recruitment and selection process is complete, the committee will recommend new appointments to the board to ensure a balanced combination of skills, experience and knowledge. Finally, the board should evaluate its own and individual director’s performance. The FRC’s Guidance on Board Effectiveness gives more detail. 

Many companies use external search firms to assist the committee in its recruitment process; a voluntary code of conduct for these firms was launched in 2011. 

Remuneration committee

The remuneration committee sets the remuneration policies and the level for the EDs and the board chair in line with the company strategy, purpose and values, linked to the successful delivery of the company’s long-term strategy. There are detailed remuneration reporting requirements set out in secondary legislation; shareholders have the right to vote on the remuneration policy. See the CIPD viewpoint on executive pay.

The Code recommends that only NEDs should sit on the committee. 

The committee also considers fair pay and pay reporting across the organisation, taking account of company and individual performance. The committee members should review workforce remuneration and related policies, alignment of incentives and rewards with culture. 

Read our Remuneration Committee report to see how companies can ensure effective governance of people, culture and pay. Most listed companies are advised by external recruitment consultants. 

Audit committee

The committee provides advice to the board on the integrity of the financial and narrative statements, the presentation of a true and fair assessment of the company’s position and prospects, the nature and extent of the principal risks that the company is willing to take and the internal controls in place. 

The Code recommends that at least one member of the audit committee should have recent and relevant financial experience. The FRC's Guidance on Audit Committees gives more detail. 

Contacts

Financial Reporting Council (FRC)

Institute of Directors website - briefings on corporate governance (some briefings are available to IOD members only)

ICAEW (Institute of Chartered Accountants of England & Wales)

ACCA Global 

Chartered Governance Institute   

Useful links:

UK Corporate Governance Code for listed companies 

Charity Governance Code

Code of Conduct for Board Members of Public Bodies 

12 Principles of Governance for all Public Body NEDs  

Books and reports

CHARTERED INSTITUTE OF PERSONNEL AND DEVELOPMENT. (2016) A duty to care? Evidence of the importance of organisational culture to effective governance and leadership. London: CIPD.

SIMPSON, J. and TAYLOR, J.R. (2013) Corporate governance, ethics and CSR. London: Kogan Page

TRICKER, B. (2019) Corporate governance: principles, policies and practices. Oxford: OUP.

Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.

Journal articles

CLARK, E. (2017) Employment practices are a key plank of good corporate governance. People Management (online). 15 November.

OZANNE, S. (2018) Modern slavery act: why corporate accountability is set to rise. People Management (online). 17 October.

ROPER, J. (2019) Can HR measure up? HR Magazine. November. pp16-23. Reviewed in In a Nutshell, issue 93.

ROPER, J. (2020) Rethinking corporate governance after Covid-19. People Management (online). 4 June.

CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.

Members and People Management subscribers can see articles on the People Management website.