Protecting your investment – and your shareholders’ rights
“The effectiveness with which boards discharge their responsibilities determines Britain’s competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance” – The 1992 Cadbury Report on corporate governance
The UK’s code of corporate governance is arguably the global gold standard. In fact, it has been adopted as a model by most European countries.
Yet the UK’s Combined Code – the result of years of negotiation and dialogue with business on the ideal contours of corporate governance – makes no claim to the weight of law. While the 2006 Companies Act lays out the legal requirements on listed businesses, the Code is rather a guide to governance best practice.
In some cases such as executive remuneration, voluntary disclosures within the Combined Code have become formal regulation. Where good practice recommendations have morphed into law, penalties are stiff enough to guarantee investors’ rights. The Financial Services Authority (FSA), for instance, has adopted an aggressive approach to suspected financial wrongdoing. In 2007, the regulator made two arrests as part of a crackdown on ‘boiler room’ scams involving the sale of worthless shares to private investors, and early in 2008 launched its first criminal prosecution for insider dealing.
“The more ingrained the system of corporate governance in a business community, the less the need for detailed regulation to ensure effective compliance with good standards of business behaviour,” according to the Financial Reporting Council.
In contrast, the Combined Code’s aim is to identify best practice – but to leave companies to adopt a different approach more appropriate to their corporate culture and organisation. It acknowledges the full diversity of companies listed in the UK, and the influence of factors including the firm’s size, ownership structure and business model.
“It covers issues you wouldn’t legislate for but which should be encouraged as good practice,” says Chris Hodge of the Financial Reporting Council. “They’re issues companies can’t ignore. They need to be addressed – but not necessarily via legislation.”
- Hence the Combined Code’s “comply or explain” approach.
Hodge explains: “‘Comply or explain’ is exactly what it’s intended to be – things you’d consider to be good practice but not necessarily for regulation. There will always be instances where it’s better to do something different. Take training for new directors as an example. It would be nonsense to specify exactly which training.”
Does that mean the Combined Code is vague on how companies should be run? Not at all.
The Code recommends single-management boards comprising a separate chief executive and chair, with collective board responsibility and a strong role for non-executive directors who should ideally comprise half the directors. The emphasis is on directors acting objectively in the interests of the company. Among its other recommendations is the introduction of transparent processes for appointing directors, with shareholder ratification, and independent, rigorous audit and remuneration committees.
The UK’s regulatory premise is that good governance promotes and protects shareholder rights – that a company’s relationship is not with the regulator but with its shareholders. That’s why it gives shareholders not only voting rights but also rights to information that allow them to hold the company to account. Unlike regulators, who are less likely to allow exceptions, shareholders can take a practical approach to what is in the best interests of the company.
Shareholders, for instance, appoint and dismiss individual directors. By law, they’re entitled to advance notice of the resolutions they’ll be asked to vote on at the annual general meeting. They’re also given an advisory vote on directors’ remuneration.