Corporate governance is rarely out of the business headlines. In spite of 25 years of an evolving corporate governance framework for UK listed companies, in the wake of any high profile collapse or breach, the finger of blame inevitably tends to etch out terms such as ‘management failure’, ‘domineering bosses’ or ‘toxic company culture’.
The UK’s FRC has published proposals for a streamlined Combined Code. One of the FRC’s key considerations was to attain an appropriate balance between principles, provisions and guidance, while retaining the Combined Code’s perceived strengths, particularly its ‘comply or explain’ approach.
In the UK, ‘comply or explain’ works satisfactorily as long as it is used responsibly. Among large, listed companies, most comply with provisions fully or ‘explain’ with regard to just one or two provisions. It is important when companies choose to explain that they make clear how they are applying the principle, the reason for the departure and whether it is likely to be temporary or not.
For boards to be effective, both individual and collective engagement – or how well they bring their collective experience and expertise to bear – are vital. That will include how well the board provides both challenge and support to the executive team. Perceptions of independence are important, particularly when it comes to complying with provisions within the Combined Code. However, independence of mind is really critical – board members must have the courage to ask difficult questions in a constructive manner.
Boards must make sure that they not only look good on paper, but that they operate effectively in practice. Disclosures in the annual report, should provide the starting point for effective engagement by leading investors with the board. A continually evolving corporate governance framework, with a strong focus on the stewardship code for investors as well as the national governance code, should assist in clarifying how this objective can be achieved.
This blog is an excerpt of an article “Evolving a corporate governance role that’s fit for purpose” which appears in the Winter 2018 edition of Board Agenda. The full article can be found here.