What is the principle of corporate governance?

 

Corporate governance refers to the systems by which corporations are directed and controlled, in order to achieve their objectives for the benefit of their shareholders.

It emerged in response to perceived inadequacies in the regulatory systems of companies, both in terms of internal procedures and external regulatory requirements.

What does corporate governance focus on?

Corporate governance includes not only external regulation, such as legislation, but also the company's processes, customs and policies.

Corporate governance also looks at the relationship between the company and its shareholders and aims to ensure that the company respects the rights of its shareholders.

Corporate governance includes the relationships between different groups of shareholders. This is why the voting and decision-making aspects of corporate governance are so important. The Companies Act 2006 sets out the requirements for valid meetings and important decision-making procedures.

Why the shift towards corporate governance?

The OECD Principles of Corporate Governance provide best practice recommendations on corporate governance. These principles are well respected worldwide. They are widely used as a benchmark for standard setting for company regulation in different countries.

Whilst corporate governance can seem very theoretical, it is relevant to all UK companies. A commercial lawyer can explain how these principles are enacted in UK legislation, especially the provisions of the Companies Act 2006.

With shareholders and investors becoming increasingly concerned about corporate governance, a commercial lawyer can ensure that your company is adapting to these priorities.

The UK Corporate Governance Code

In the UK, the Cadbury Report was a major instigator of the shift towards focusing on corporate governance. The UK Corporate Governance Code is now the major set of rules and guidelines on corporate governance in the UK.

The Code is published by the Financial Reporting Council (FRC). It sets out standards of good practice for listed companies in order to further effective corporate governance by UK companies.

Some of the major recommendations of the Code include:

 

  • Having transparency on appointments and remuneration of the board
  • Having a separate Chairman and Chief Executive
  • Having a balance of executive and non-executive directors
  • Having independent audit committees
  • Encouraging shareholder participation
  • Ensuring shareholder rights are respected

A company and commercial solicitor can explain the benefits of the principles set out in the Code. Often, whilst compliance with the Code might cause some initial disruption to the company, the end result can be a better functioning company.

Are you running a business and need advice on how to implement corporate governance policies? Contact Law can put you in touch with a specialist company and commercial solicitor to advise you on the least disruptive method. Please call us on 0800 1777 162 or complete the web form above.

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