Understanding Corporate Governance

• Corporate governance is the framework through which companies are directed and controlled, as defined by rules, practices, and processes.
• The Cadbury Report of 1992 defines corporate governance as the system by which companies are directed and controlled.
• The core of corporate governance involves the distribution and exercise of power at the top of a company.
• It ensures the company is run in the long-term interest of its owners (shareholders) and stakeholders
• Key principles of good corporate governance include:
  • Accountability of the board to shareholders
  • Transparency in decision-making and disclosures
  • Fairness in treating shareholders (especially minority shareholders)
  • Responsibility to consider stakeholders like employees, customers, suppliers, and the community
• Effective governance balances entrepreneurial leadership with appropriate checks and balances.
• Compliance with laws and ethical standards is essential, but does not guarantee effective governance
• Companies should follow best practices that often go above and beyond legal minimums.

Separation of Ownership and Control

• In modern corporations, shareholders typically do not manage the company day-to-day
• Shareholders elect a board of directors to oversee management.
• The separation of ownership and control can lead to agency problems.
• Agency problems are when managers or directors act in their own interests rather than the shareholders.
• Corporate governance mechanisms such as boards, shareholder rights, and audits exist to mitigate agency problems by aligning the interests of management with those of owners and other stakeholders.
• Good governance provides assurance to investors that the company is well-run and their capital is protected from mismanagement.

Key Participants in Corporate Governance

• Shareholders: Elect the board, possess ultimate authority in major decisions like significant transactions and director appointments at the Annual General Meeting
• Board of Directors: Responsible for governance and oversight, setting strategy and risk appetite, and hiring/firing top management
• Management: Led by the CEO and executive team, runs the company day-to-day and reports to the board
• Stakeholders: Increasingly recognized as important to governance, including employees, customers, suppliers, creditors, regulators, and the community at large
• Section 172 of the Companies Act in the UK requires directors to consider stakeholder interests.

OECD Principles of Corporate Governance

• Internationally recognized guidelines for good governance
• These include:
  • Shareholder rights (protection and facilitation of exercising ownership rights)
  • Equitable treatment of shareholders (especially minority and foreign shareholders)
  • Stakeholder roles (recognizing/cooperating with stakeholders/upholding their legal rights)
  • Disclosure/transparency (timely/accurate disclosure of all material matters)
  • Board responsibilities (duty to guide corporate strategy, monitor management, and be accountable to the company/shareholders)
• The OECD principles have influenced governance codes worldwide.

The UK Corporate Governance Framework

• The UK is often seen as a leader in corporate governance standards
• The cornerstone of UK framework is the UK Corporate Governance Code, published by the Financial Reporting Council (FRC), last updated in 2018
• It sets out best practice principles for companies listed on the London Stock Exchange
• It operates on a "comply or explain" basis (listed companies are expected to comply with the Code’s provisions or explain to shareholders why they have not complied in their annual reports)
• This allows flexibility for companies to deviate from the Code if they have sound reasons, but they must be transparent.
• The UK approach is principles-based as opposed to the more rules-based approach of the U.S. Sarbanes-Oxley Act
• It emphasizes good judgment and customization of governance practices, rather than one-size-fits-all rules
• Main Principles of the UK Corporate Governance Code (2018): Organized into five broad sections:
  • Board Leadership and Company Purpose: emphasized effective/entrepreneurial board, promoting long-term sustainable success, establishing company purpose, values, and strategy, ensuring a framework of controls to assess/manage risk
  • Division of Responsibilities ensure appropriate division in leading the board (Chair) and executive leadership, balanced independent non-executive directors (NEDs) to avoid single individual dominating decision-making
  • Composition, Succession and Evaluation: requires formal, rigorous, transparent procedure for appointments, refreshment, diversity, and annual evaluation of performance
  • Audit, Risk and Internal Control: must establish formal/independent audit and risk management procedures, maintain internal control, manage risks via an Audit Committee, present a fair assessment of company position
  • Remuneration: align directors' pay to long-term success, company strategy and values, set by an independent Remuneration Committee; committees recommended (audit, remuneration, nomination) and must primarily comprise independent NEDs
• The Code stipulates that the audit committee should have at least one member with recent and relevant financial experience.

"Comply or Explain" in action

• Large UK companies typically report full compliance or explain deviations which are scrutinized.
• It relies on active shareholder engagement.
• Shareholders should monitor governance reports and hold boards accountable if explanations are unsatisfactory.
• Institutional investors play a key role through the UK Stewardship Code that promotes actively engaging and voting shares to promote good governance.

Regulatory Enforcement

• The UK Code itself is not law.
• Compliance is effectively required for companies with a premium listing on the London Stock Exchange via the Listing Rules (enforced by the Financial Conduct Authority, FCA)
• The FRC (recently transitioning to a new regulator ARGA) monitors disclosures and can push for better explanations.
• Major governance failures can attract scrutiny from regulators or Parliament (as in the case of Carillion).

Best Practices in Corporate Governance

• Independent Board Leadership the Chairman and CEO roles should be separated to ensure balance of power
• An independent Chair leads the board and ensures its effectiveness in overseeing management
• A Senior Independent Director (SID) is designated to act as an intermediary for shareholders and to lead the evaluation of the Chair.
• A majority of the board (excluding the chair) on a FTSE-listed company is comprises independent non-executive directors to provide outside oversight and diverse perspective
• Board Committees help manage conflicts of interest and adds focus
  • The Audit Committee oversees financial reporting and internal controls, liaises with external auditors, and handles whistleblowing concerns
  • The Remuneration Committee sets executive directors' pay and ensures it is linked to long-term performance to prevent executives from setting their own compensation
  • The Nomination Committee handles board appointments and succession planning, ensuring a robust and merit-based process for bringing in new talent and considering diversity in skillsets and backgrounds
• Transparency and Disclosure good governance requires transparency with shareholders
• Companies should disclose not just financial results, but also their governance practices, principal risks, board and committee activities, and how they have applied the Governance Code
• High transparency builds trust and enables shareholders to make informed decisions or interventions; annual reports contain a corporate governance statement and reports from the Audit and Remuneration Committees in which they explain their work and any deviations from code provisions.
• Boards are accountable to shareholders through the AGM (Annual General Meeting).
• UK listed directors typically stand for re-election annually.
• Institutional investors/pension funds in the UK have guidelines to vote against directors or pay reports if governance is substandard.
• Boards increasingly engage with other stakeholders such as having employee engagement mechanisms at board level (appointing a worker representative director, assigning a NED to liaise with a worker advisory panel, etc.) to gather the employee voice.
• Risk Management leading boards integrate risk management in governance by ensuring the business has processes to identify, assess, and mitigate key financial, operational, strategic, regulatory risks.

Board Effectiveness and Evaluation

• Per the UK Code and FRC guidance, the board must confirm at least annually that internal controls and risk management systems are effective.
• A culture of actively managing risk within a set risk appetite is encouraged.
• Boards periodically evaluate their own performance.
• The UK Code suggests annual board evaluations (external independent evaluation at least every three years for FTSE 350 companies).
• This process identifies areas for improvement in how the board operates, whether the mix of skills is appropriate, and if information to the board is sufficient.
• Boards often publish a summary of evaluation results and actions in the annual report, demonstrating accountability and continuous improvement.
• A high-performing board sets the tone at the top for ethics/corporate culture.
• Best practices include establishing a clear company purpose and values, directors' code of conduct, and policies on ethics, anti-corruption, and whistleblowing.
• The board and especially the Chair and CEO should model these values.
• Frameworks like the UK Bribery Act 2010 mandates strong anti-corruption stances.
• Directors should ensure the company's culture encourages speaking up and does not incentivize misconduct (for example, by balancing performance targets with appropriate risk and behavior goals).

Case Studies

• The Cadbury Report (1992) was initiated to address corporate scandals, recommending independent NEDs, separating chair/CEO roles.
• Subsequent reports developed these recommendations into the UK Corporate Governance Code leading to more transparency and independence of UK boards
• Carillion declared was reckless with hubris and a relentless dash for cash .
• The board of Carillion appeared to follow protocol, but in practice, the non-executive directors failed to challenge aggressive accounting and risky acquisitions by management.
• BHS collapsed in 2016 with a big pension deficit and had inadequate governance (unqualified board, poor due diligence on the buyer), which led to the Wates Corporate Governance Principles (2018).
• Unilever focused on long-term sustainability and stakeholder value
• Polman eliminated quarterly earnings guidance and prioritized ethical and sustainable practices, which aligned with long-term shareholder interests and arguably helped Unilever avoid short-termism.
• Barclays refreshed boards, appointed independent chairs, and strengthened risk committees.
• Good governance is also seen when boards respond to shareholder concerns.
• BP plc froze executive pay and better aligning pay with performance thereafter.
• Ultimately, corporate governance is about vigilance and leadership from the board to ensure the company's prosperity is achieved ethically and sustainably.
• The UK's combination of legal duties, code provisions, and active shareholder engagement forms a comprehensive governance ecosystem that directors must navigate.

UK Company Law and Directors’ Legal Duties

• Directors of UK companies operate under a legal framework based on the Companies Act 2006, which codifies directors’ general duties in law.
• Directors' duties are owed to the company, not to shareholders/other parties.
• Seven general statutory duties for directors exist under sections 171–177 of the Act.
• Duty to Act Within Powers: act in accordance with company constitution/only exercise powers for proper purpose
• Directors should not exceed their authority in charter documents or use authority for ulterior motives (issuing new shares to dilute a shareholder is an improper purpose).
• Duty to Promote the Success of the Company: act in a way that would most likely promote the success of the company for the benefit of its members (shareholders) as a whole
• Directors must consider likely consequences of decisions, interests of the company's employees, relationships with suppliers and more, considering that stakeholder and ethical considerations into directors' legal duties.
• Larger companies must publish a Section 172 statement about how they have fulfilled this duty. Duty to Exercise Independent Judgment: use their own judgment and not simply follow instructions unless authorized, not act as puppets, and even nominee directors must vote in the company’s best interest.
• Duty to Exercise Reasonable Care, Skill, and Diligence is to perform their role with the care and skill and diligence expected from a reasonably diligent person with the general knowledge, skill, plus the general knowledge, skill the director actually has as minimum standard.
• Duty to Avoid Conflicts of Interest applies to avoid situations where there is conflict, can be allowed only if the board authorises it/the company constitution permits that
• Director duties here are expected to proactive manage their conflicts, often by disclosing, and recusal from discussion/voting when a conflict arises.
• Duty Not to Accept Benefits from Third Parties dictates that directors must not accept one due to their position - an anti-bribery rule; decline/seek approval for most value gifts.
• Duty to Declare Interest in Proposed Transaction or Arrangement dictates declaring nature/extent of that interest is must to other directors before company enters transaction (duty of disclosure for them).
• Enforcements of these general duties, includes legal routes with director.
• Non-executive directors (NEDs) have the same duties as executive directors.

Director General Obligations

• Act with care, skill, diligence, and in the best interests of the company.
• What constitutes reasonable care/skill is in relation to the role of NED’s and that expects them to monitor papers
• Board should refer Companies Bill 2006 for specific requirements.

Director Legal Responsibilities

• To follow Act and regulation in legal and regulation
• A company's Articles of Association may impose specific requirements.
• Failure to follow an Act and Legal Requirement or Fiduciary could be a violation of rights.
• The statutory duties generally reflect the older fiduciary duties developed by courts.

Wrongful Trading

• Directors have a duty to consider creditors’ interests in times of financial distress

Directors Duty (Insolvency trading)

• If the company goes into insolvent liquidation, the directors have a duty to minimise creditor loss, and a liquidator can seek.
• They are known as wrongful trading.

Company Director Disqualification Act

• Directors are banned if proven with misconduct.
• This includes the involvement of fraud, negligence or breach of duties, and for example the Carillion executives faced disqualification for investigations
• These disqualifications range up to 15 years, and breaches can lead to regulators seeking them.

Bribery Act 2010

• A far-reaching anti-corruption law.
• Criminal liabilities for failing to prevent bribery.
• A director should be aware of this act, and may face fine and imprisonment if breaches
• Health & Safety and Environmental Law state the company can be penalized if its an offense, or with consent.
• Best practice is treating safety/environment as key, so key responsibilities, for employees and director.
• Cyber security, data protection, price collusion and reporting/market regulations are to be aware of and compliant of.
• Tax is important, and directors should take initiative

Director Regulatory Environment

• A director is not expected to be a lawyer, but they are expected to understand the legal environment, and to seek advice
• Ignorance will not release as director
• Inform the director about regulations

In summary, the regulators is broad.

• Lawyers can advise of potential breaches, so seek one if in doubt. Therefore, a conscience director will be informed.

Regulations and Codes (UK)

• FRC: sets Governance of corporate standards and reviews accounting reports related to public. It is evolving into a stronger Audit, Reporting and Governance Authority (ARGA). The FRC/ARGA also enforces accounting standards and can sanction auditors or companies for poor financial reporting. Directors of public companies, especially Audit Committee chairs, may interact with FRC inquiries on corporate reporting quality.
• FCA: fines the company (or in same cases directors for breaches) for filings. The FCA’s Senior Managers & Certification Regime (SMCR) in the financial services sector assigns specific responsibilities to senior executives and directors, making them personally accountable for failures in their area.
• The FCA in Senior Managers and certification Regime has control in the Senior Sector, and will make executives accountable
• London Stock Exchange Rules pre approvals.
• Industry Regulators with independent chair review and govern the industry
• Governance Codes and Standards with Wates Principles
• International Regulation: multinational regulations require international board direction
• Environmental, Social and Governance; need to have ESG measures. Regulators and stock exchanges increasingly require disclosure on ESG matters. In the UK, large companies must report their greenhouse gas emissions and climate-related risks (TCFD-aligned reporting is mandatory for premium listed companies and large private companies)

Legal Framework for Regulation in UK

• Directors must work with the Company Secretary
• To be aware of laws and to know what to follow.

Best Practice Law Risk Management

• Induction: do training from new appointments
• Seek professional advice: especially when decision matters, for significant matter, get out the advisor
• Establish compliance and report what occurred
• Have D&O to protect fraud and criminal activity
• Conflict: keep a list of conflict and recuse your actions
• Document discussion and the board minutes

Example of Personal Responsibility

• Keep expense low.

High Level Regulatory Framework

• Act honestly, diligently, and with common sense in the company’s interests.
• If in doubt, ask or step aside.

Real World

• Director Duties Action: If a director doesn't account for profits made, the actions will have consequences for breaching duty, etc
• The collapse with wrongful trading saw action be needed in Carillion, and saw Rolls Royce having to make changes with ethics
• While individual liberty laws do not apply, it is hard if they occur
• The FRC has fined for Sports Direct for breaching requirements. The message to directors: ensure transparency or face sanctions
• Historically the director must be involved and act against it
• The director should report that something did not look good
• To ensure those with responsbility have transparency

Director Role

• Board core responsibility is direction , oversight , and accountability

A Board Will

• Set what happens strategically with what it can do
• Decide new markets and the board approval is for all
• Ensure they are safe the interest is with the shareholders

Responsibility of the Board

• The management oversees, monitories, manages and has accountability
• Ethics stand high, compliances are within law, adequate are in check
• The goal is to promote success, and setting aims and the resource
• the board are is nose in, but fingers out from tasks as directors oversee

Management v Director

• Governance is about a direct focus, direct and execute is teams focus.
• The board has a hierarchy to it.
• The code says this needs to be emphasised and what they should be unfettered of.
• In achieve the executive needs to have a direct report balance

Director types

• Executive: the ceo and so on
• Non executive is not the ceo. NED's provide an independent outside perspective, to challenge and support the executives, and to ensure the company is being run in the long-term interests of shareholders and stakeholders. The UK’s Higgs Report (2003) summarized NEDs’ role as: to contribute to strategic planning, to scrutinize the performance of management in meeting agreed goals and objectives, and to monitor the reporting of performance"
• Neds act as 3rd party
• To scrutiny and provide a balanced approach
• Ensure adequate management
• A subset is independent director, who is free of director relationships. The UK Code requires at least half the board (excluding the chair) of FTSE 350 companies to be independent NEDs ensure judgment.
• Independence should have judgment. Extended NED beyond 9 is seen as less indepedence.
• The Senior independent director is independent to act, where the chair is absent.
• Someone not appointed may act as a shadow director to keep from evading responsibility . The company had assigned fiduciary duties too.

The Board

• The chair heads and sets the tone. They also have a role in representing with regulators or the company
• The ceo does some things also
• Non ex directors do committee, audits and so on and will be with strength expertsie
• If separate its chaited by NEDS
• There is a company secretary
• They help with the administration. In UK public companies, having a qualified company secretary is a legal requirement. They arrange meetings, circulate papers, take minutes, and advise the board on procedural matters and governance developments

Board Actions

• Monthly or Quarterly to effectively prepare for preparation
• Effective : Good preparation
• Make sure the actions that occur are noted
• Board paper must be provided
• Each area must be noted.
• The secretary (delegate takes notes
• Directors dissent is always noted.

What Makes a Board

• Board should manage well
• Has set it, it has
• Have it all with 2 parties and no dominance. Encourage open and healthy scepticism
• It has diversity with knowledge
• Size to support for support
• Plan succession
• Dissent and actions noted
• Make sure to provide time and training. Mentor helpful in the beginning.

What Makes A High Board

• Has it set it has it has
• Have it all with 2 parties and no dominance
• It is diversity with knowledge
• Size to support for for support
• Plan succession
• It is all with committee
• Delegate but have structure
• They have some rules

Main Things

• Paper must be not too long/ too technical in details
• Time management
• Have time for discussion with each party
• Education for new people to educate board
• Site for visit
• Trusts.

External Factors

• Good to have these, so this is a board plan Good Board does not Groupthink"

• The goal and to remember responsibility and not neglect any and

• Board performance , the high board helps in any scenario.

• Understand their role

• Manage risk and be fair in what occurs.

• Keep the action of check.

Good Ethics

• A top board is the goal of good business. Board also can encourage it and to see there are no bad actions
• Board dynamic needs to be good or business may suffer, Have strong power of chairman .
• In short, the overall and high action is all the help.
• To ensure to have good ethics is the goal ,to have a positive workplace.
• Unilever's worked as per listed in the information.
• RBS shows if does not have banking experts can lead to problems, and not understanding risks will cause banks to restructure.
• Uber's example show good lead means good business.
• The board can lead good with amazing scenario, because this helps the process succeed and be achieved and for to achieve more

Good

• BHS (2016) collapse with a big pension deficit and had inadequate governance
• As listed above this could be all it takes to help create a good environment and workplace
• High power of the senior role. Maintain dialogue with major shareholders is useful. If there is a concern about strategy or governance, then management can request a meeting
• Compliance and the main is key with what was stated.

Conclusion

• Boards need care and responsibilsity and must have all help with a good working structure with employees ,and the direction of business
• Boards are vigilance