With the new UK Corporate Governance Code released in July by the FRC (Financial Reporting Council) we thought that it would be useful to take a wider look at corporate governance.
What is Corporate Governance?
The UK Corporate Governance Code sets the standards of good practice for listed companies and is effective as of the start of 2019 but what exactly is “good practice”?
A good definition is this from the ICAEW (The Institute of Chartered Accountants in England and Wales):
“Corporate governance is about what the board of a company does and how it sets the values of the company, and it is to be distinguished from the day to day operational management of the company by full-time executives.”
Additionally, it is the responsibility of the shareholders to ensure that they appoint appropriate directors and auditors and that they are happy with the governance the board puts in place.
Why is Corporate Governance Important?
To understand why good corporate governance is needed one only needs to look at what happens when it fails. Failures such as at Carillion, Sports Direct and BHS lead to headlines in the media such as “Carillion’s collapse exposes deep corporate governance failings” and “Sports Direct hacked last year, and still hasn’t told its staff of data breach“. On the latter MPs said workers were being treated without dignity or respect.
So poor corporate governance can have a negative impact on employees, an organisations public perception and its share price.
Starting Point On Corporate Governance
For a long time, we have suggested that good corporate governance is more than a narrowly defined set of processes and procedures. To be effective, good corporate governance should be put into a wider context of how an organisation is operated and managed overall.
Without sound management and high levels of employee engagement, good corporate governance cannot truly exist. Indeed, when sound management is absent, organisations frequently miss targets, suffer poor employee engagement and become breeding grounds for poor corporate practices.
Sound Management And Corporate Governance
These statements, we believe, are all key to achieving sound management.
- Provide a clear sense of organisational purpose, vision and values which are well-articulated and communicated.
- Show commitment to high levels of integrity starting at the very top of the organisation.
- Well documented and communicated strategies.
- Clear and reasonable targets for each part of your organisation, and each individual employed.
- Appropriate resources, properly allocated, to achieve the targets without extreme organisational stress
- Good training, leadership and development of staff.
- Top level communications, including self-awareness by the organisation and its management as to what is and is not functioning well.
- Mutual respect.
- High employee engagement, including involvement across the organisation – staff and other stakeholders – in ways which empower to movement in the right direction.
- Play an active part of living and delivering integrity.
What The Corporate Governance Code Contains
As mentioned above the code sets out standards of good practice for listed companies. We were delighted to see a heavy focus on the broader aspects of good governance.
Whilst it may not sound the most riveting of reads, the Code is well worth becoming acquainted with. It is definitely relevant if you are involved in any major organisation – whether you are listed or not. We suggest that even in the public sector and Not for Profit organisations it still warrants having a passing knowledge of the Code.
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- Strategy: “The board should establish the company’s purpose, values and strategy, and satisfy itself these and its culture are aligned.”
- Wider Context: “Companies do not exist in isolation. […]. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. these relationships will be successful and enduring if the are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders.”
- Necessary Resources: “The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them.”
- Effective Stakeholder engagement: “In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.”
- Workforce Policies: “The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success.”
- Employee Engagement: “The board should keep engagement mechanisms under review, so they remain effective.”
- Raising Concerns: “The workforce should be able to raise any matters of concern.”
- Confidentiality and Anonymity: “There should be a means for the workforce to raise concerns in confidence and – if they wish – anonymously.”
In highlighting the above, the Corporate Governance Code has provided a useful outline for a number of areas which organisations will need to embrace in order to lay the foundations for success. Making sure they establish integrity and ethics at their core.
Corporate Governance Code – In a Nutshell
So, to reduce the principles of the Corporate Governance Code further, here’s a good starting point:
“As an organisation, be clear on where you are going. What steps you will all take to get you there? Ensure strong buy-in from your stakeholders and their level of involvement and always ensure you act with the utmost integrity to all.”
Is your organisation satisfying all these tests? Click here to take our quick and easy Governance Calculator to see how common issues might be affecting you.