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Knowledge Base » Business » What is Corporate Governance?

What is Corporate Governance?

Last updated on 25th April 2023

As annual accounts are still the single most reliable source of information about a company’s performance, corporate reporting quality remains a key indicator of a board’s commitment to transparency, and its sense of accountability to stakeholders.

The latest review by Grant Thornton on the quality of these reports on corporate governance and the implementation of the new Corporate Governance Code found that:

  • The average annual report is now 181 pages, up by nine.
  • 63% offer good or detailed disclosure of KPIs, up from 58%.
  • 82% provide good or detailed business model disclosures.
  • Only 50% clearly articulate their company’s purpose.
  • Only 22% companies consider the environment as a principal risk, up from 13%.
  • 35% of companies still have no technical expertise on the board.
  • 63% give little or no information on the skills and experience of their board.
  • 29% give good and detailed reporting on their board gender diversity policy.
  • 64% now mention face-to-face engagement with shareholders, up from 46% in 2018.

What is corporate governance?

Corporate governance has become increasingly important in the world of business, across the public sector, non-profits, education, healthcare and PLCs. There are many responsibilities associated with corporate governance, even though it will vary from company to company.

The Companies Act 2006 is the overarching legislation which sets out the legal requirements for corporate decision-making, and the consequences of getting it wrong. The regulations, policies, procedures, rules and practices that govern, direct and control how an organisation is led and how it can operate are known as Corporate Governance.

The UK Corporate Governance Code, which was previously known as the Combined Code, sets out standards of good practice for listed companies on topics such as board composition and development, remuneration, shareholder relations, accountability and auditing. The UK system of corporate governance is generally seen as an effective model that has influenced many other jurisdictions in Europe and Asia.

The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK, the FRC sets auditing and ethical standards and monitors and enforces audit quality.

Corporate governance setting values of the company

What is the role of corporate governance?

The purpose of corporate governance according to the FRC is “to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company”. Corporate governance is about what the board of a company does and how it sets the values of the company. It is to be distinguished from the day-to-day operational management of the company by full-time executives. Its role is about effectively supervising the management of a company to uphold the company’s integrity, achieve more open and rigorous procedures and ensure legal compliance.

Corporate governance involves:

  • Setting the organisation’s strategy.
  • Putting in place the leadership to implement that strategy.
  • Overseeing the overall management of the organisation.
  • Promoting good relations with stakeholders, including shareholders and employees.
  • Reporting back to the board and/or shareholders.

Corporate governance can be divided into six broad categories, including:

  • Accountability – Leadership, including the board and the senior managers, are individually and collectively accountable for their actions and decisions.
  • Efficiency and effectiveness – Leadership needs to continually monitor its activities and operations to ensure that they are efficient and effective, and that they support the organisation’s mission.
  • Fairness – Corporate governance requires an organisation’s leaders to be honest, faithful, diligent and fair at all times, and be ever mindful of the importance of displaying ethical and virtuous behaviour.
  • Responsibility – Corporate governance requires leaders to be capable, responsible and aware of their obligations and responsibilities.
  • Transparency – Openness and transparency are primary components of good corporate governance. Leadership must report information about the company accurately and in a timely manner.
  • Independence – Independence of the board is important to good corporate governance because it ensures that decision-making is objective and fair.

Is corporate governance important?

Good corporate governance is essential to any effective and well-managed organisation irrespective of whether that organisation is in the private or public sector. Importantly, it defines where accountability lies throughout the organisation, and since it oversees accountability, corporate governance is critical to an organisation.

In companies, the management acts on behalf of the shareholders; in some instances, the board of directors may not act in the shareholders’ best interests, so corporate governance tackles that problem by ensuring the objectives of both the shareholders and the management are in line.

Corporate governance protects a company’s other stakeholders as well. These may include both internal stakeholders such as employees, and external stakeholders such as suppliers and the general public. Corporate governance defines the relationship that companies must have with their stakeholders, and by doing so it establishes that each stakeholder’s rights are clear for companies to fulfil.

Corporate governance also focuses on risk mitigation for companies, ensuring that the risks that companies face are minimal. Compliance with rules and regulations is also a part of a company’s risk management process. By complying with rules and regulations, companies can avoid any unnecessary issues.

Corporate governance lays the foundation for how a company handles its operations, uses its resources, applies innovation and implements corporate strategies. Through these, it also improves a company’s efficiency.

An important area that corporate governance introduces is corporate social responsibility. This enables companies to consider the impact their operations have on the environment and, similarly, it promotes sustainability and social responsibility.

When investors look for companies to invest in, they will always prefer companies with good corporate governance. This way, good corporate governance can attract new investors.

Investing in a company due to good corporate governance

What is a corporate governance report?

All companies with a premium listing of equity shares in the UK are required to explain in their annual report and accounts how they have applied the principles of the Corporate Governance Code and whether they have complied with the provisions, a “comply or explain” approach.

A corporate governance report is also called the annual corporate report. The aim of a corporate governance report is to communicate the company’s corporate governance standards, policies and practices and to provide a true overview of the company’s business model and operations, structure, activities and performance.

The report includes a statement of corporate governance procedures and compliance, information on board composition, statements on the company’s performance, and information about compliance and conformance with best practices for good corporate governance.

Corporate governance reports typically follow this format:

How the board leads the organisation

  • Board membership and directors’ roles – including senior independent director (‘SID’).
  • Setting culture and values of the organisation and tone from the top.
  • Balance between independent non-executive directors (‘iNEDs’) and others.
  • Independence criteria applied to NEDs – including tenure.
  • How the Chair/CEO and board/executive team work together.

The role of the Chair in areas of emphasis under the Corporate Governance Code

  • Achieving a well-functioning board that works as a team, including:
    – Inclusivity – allowing NEDs to provide constructive challenge.
    – Induction and training.
    – Agenda planning.
    – Information provision.
  • How governance was applied to the key activities and developments in the year in all areas.
  • Investor relations.

Board evaluation

  • Insight into the process, outcomes and follow-up in succeeding years.

Nomination committee report

  • Including:
    – Succession planning.
    – Diversity.

Audit committee report

  • Including:
    – Risk appetite and risk management.
    – Fair, balanced and understandable corporate reporting.

The Chair’s introduction to the governance report also commonly summarises the findings of the board evaluation process.

The 2018 Companies (Miscellaneous) Reporting Regulations amended the 2006 Companies Act by adding a number of new disclosure requirements for a company’s annual report, each with different thresholds for compliance. The thresholds apply to individual companies regardless of whether they are part of a larger group.

Any UK companies which have either more than 2,000 employees or a turnover of more than £200 million and a balance sheet total of more than £2 billion must now publish an annual governance statement. Companies already required to report on their governance are excluded, for example, those with a premium or standard listing in the UK, which are already required to publish a corporate governance statement by the UK’s Disclosure Guidance and Transparency Rules.

What is good corporate governance?

Good corporate governance plays a key role in enhancing the integrity and efficiency of companies, as well as the financial markets in which the company operates.

Best practice corporate governance in the United Kingdom is the single board collectively responsible for the long-term success of each company including:

  • A separate chairman and CEO.
  • A balance of executive and independent non-executive directors.
  • Strong, independent audit and remuneration committees.
  • Annual evaluation by the board of its performance.
  • Transparency on appointments and remuneration.
  • Effective rights for shareholders, who are encouraged to engage with the companies in which they invest.

It takes a good and strong board of directors to ensure that good corporate governance practices are followed. Effective boards are open and honest with each other and appreciate that their task is to scrutinise and ask hard questions.

Good governance requires that the board of directors meet regularly, retain control over the business, divide responsibilities clearly, and ensure that risk management is ongoing. Incorporating good corporate governance can help reduce the chances of corruption in the company. Fraud and scandals within a company occur more frequently when directors and executives are not required to follow a formal governance code.

Shareholders in a company

What is bad corporate governance?

One of the most high-profile examples of bad corporate governance is the Maxwell Corporation scandal of the 1990s. Robert Maxwell owned a string of companies, including Macmillan Publishers, the Daily Mirror and New York Daily News. Having taken on large amounts of debt, and following the launch of a string of expensive failures, Maxwell was reduced to moving money between his companies to give the impression they were profitable, repeatedly changing the dates on which they reported earnings, in order to fool auditors. When this wasn’t enough to keep his empire going, he plundered money from the pension fund of the Mirror Group in an attempt to prop up its share price.

With his businesses on the brink of collapse, Maxwell was reported missing from his yacht on 5 November 1991; his body was later discovered in the Atlantic Ocean. When the bankers called in the loans, the fraud was discovered and led to the setting up of a committee to report on the financial aspects of corporate governance. This report is known as the Cadbury Report and it sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures.

Poor corporate governance can lead to issues such as corruption, negligence, fraud and lack of accountability. However, it’s not just scandals that point to governance failures. Restricted business growth, recurring complaints and high levels of waste also highlight lack of control and strategic alignment.

Some of the reasons that can contribute to poor or bad corporate governance may include:

  • Ineffective governance mechanisms, for example, lack of board committees.
  • Non-independent board and audit committee members.
  • Intentional misleading of the board by management to protect themselves after evading and bypassing internal controls.
  • Underqualified board members.
  • Ignorance by regulators, auditors, analysts of the financial results, and red flags.
  • Management who exhibit ineptitude.
  • Disregard of the procedures stipulated in internal regulations.
  • Insufficient attention paid to risk management.
  • Inconsistent distribution of duties and responsibilities.
  • The inefficiency of internal audit.
  • Influencing the external auditors to express an audit opinion inconsistent with reality.
  • Poor ethical leadership.
  • Lack of integrity.
  • Fraud.
  • Corruption.

The effects of bad corporate governance can be devastating for an organisation as it may:

  • Lose shareholder confidence and trust.
  • Have difficulty raising capital.
  • May lead to a lack of risk management.
  • Damage the company’s reputation and image.

For corporations to be successful, they must take steps to ensure their corporate governance systems are strong.

What is corporate governance in healthcare?

Corporate governance in healthcare is the system by which board-led organisations, including Foundation Trusts, are directed and controlled at its most senior levels, in order to achieve its objectives and meet the necessary standards of accountability and probity. Effective corporate governance, along with clinical governance, is essential for a Foundation Trust to achieve its clinical, quality and financial objectives.

Corporate governance in healthcare reflects the Nolan Principles of Conduct in Public Life, and helps to ensure that all staff meet the high standards of accountability and integrity required of NHS employees. The NHS Act 2006 (as amended by the Health and Social Care Act 2012) sets out the legal framework within which Foundation Trusts operate. The Trust’s constitution sets out who can be members of the Foundation Trust and how it should conduct its business. It also regulates how service providers to the NHS act. Guidance for independent service providers of NHS services are detailed in the Standards of corporate governance and financial management 2021.

The core purpose of governance in the NHS is to build public and stakeholder confidence. NHS boards, governing bodies and audit committees have a key role in ensuring that good governance arrangements are in place.

More specifically in healthcare, the role of the board is to:

  • Formulate strategy.
  • Hold the organisation to account for its performance in the delivery of strategy.
  • Ensure accountability.
  • Seek assurance that the systems of control are robust and reliable.
  • Ensure financial stewardship.
  • Maintain risk management.
  • Shape culture.
  • Focus on quality.
  • Engage with key stakeholders.
  • Improve board effectiveness.

The members of NHS boards are:

  • The chair who leads the board and ensures the effectiveness of the board.
  • The chief executive who leads the executive and the organisation.
  • Non-executive director(s) (NED) who bring independence, external skills, perspectives, and challenge.
  • Executive directors who are also employees with a senior role in the NHS.

NHS organisations are required to publish a number of key documents to ensure that the public is aware of the financial and governance arrangements in place. An organisation’s published annual report includes the accounts and the annual governance report.

Healthcare board formulating strategies

What is corporate governance in business?

As companies are owned by shareholders but managed by directors and management teams, there is always a danger that the interests of these stakeholder groups are not aligned, so good corporate governance is essential to minimise and control the risk of potentially damaging conflicts of interest.

Of the millions of registered companies in the UK more than 99% are not listed or quoted on tradable equity markets. Unlike the household names of the FTSE100, Small and Medium Enterprises (SMEs) are not obliged to take mind of any formal corporate governance arrangements, beyond the regulatory requirements of the Companies Act 2006.

The UK Corporate Governance Code contains information and guidance that can be of use for companies outside the equity markets. Its main principles – leadership, effectiveness, accountability, remuneration and relations with shareholders – all have lessons for an SME prepared to adapt them to their need.

There are many responsibilities associated with corporate governance, even though it will vary from company to company, so each company will need to find their own way when it comes to building a governance framework. However, there are some features of the code which are universally applicable. These should include building clear reporting lines and decision-making processes so that there is an understanding of where responsibilities lie. A sound governance system will make the company’s management aware of their duties and encourage them to keep these duties in mind as they make decisions. All levels of an organisation should be clear on what expectations and goals apply to them.

A growing number of companies are becoming more conscious of their public image and the need for ethical behaviour. By practising good corporate governance, a company will become trusted by the public.

In conclusion

There are numerous benefits to good corporate governance, including improved company culture, increased accountability, and the ability to spot potential issues before they occur.

In its Corporate Governance Review 2020, Grant Thornton concluded:

“the best-performing companies are embracing governance activities, not as separate compliance needs, but as business essentials that are fundamentally linked; risks to strategy, strategy to purpose, and reward to what really matters to all.”

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About the author

Evie Lee

Evie Lee

Evie has worked at CPD Online College since August 2021. She is currently doing an apprenticeship in Level 3 Business Administration. Evie's main roles are to upload blog articles and courses to the website. Outside of work, Evie loves horse riding and spending time with her family.

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