What is Corporate Governance? (UK)

In this article we will explore governance, one of the three pillars of ESG. It will include definitions, FAQs, and advice on how to improve governance practices.

What does corporate governance mean?

Corporate governance refers to the systems and processes that ensure a company is well-managed. This includes ethics and transparency.

Governance is one of the three pillars of Environmental, Social, and Governance (ESG). It is a critical aspect of business operations amid growing expectations within the business community and among ethical investors.

What are the different types of governance?

This article discusses corporate governance, the framework that helps companies operate well. But “governance” has many different meanings across various fields. Other types of governance include climate governance, cultural, information, political, technology and transnational.

Why is corporate governance important for UK businesses?

Regulatory compliance

UK businesses must follow a range of statutory regulations. These include the Modern Slavery Act and the Companies Act. The regulations demand governance practices that ensure compliance and promote transparency and accountability.

Reputation protection

Good governance helps protect a company against costly legal and reputational damage. This is because governance helps maintain ethical standards, transparency and accountability. It also boosts crisis management, limiting the negative impact of certain events.

Investor expectations

Investors are increasingly demanding good corporate governance from companies they invest in. A company's corporate governance impacts performance, transparency, and risk management. All of these are pivotal concerns for shareholders.

What is the UK Corporate Governance Code?

The UK Corporate Governance Code is a set of principles and best practices designed to promote good governance in UK-listed companies. It is published by the Financial Reporting Council (FRC) and provides guidance on key areas such as board composition, remuneration, risk management, and stakeholder engagement.

Business leaders should stay informed about Corporate Governance Codes issued by the FRC. The 2024 Code will apply to financial years beginning on or after 1 January 2025.

Examples of good corporate governance

Governance is a broad concept that covers general approaches to running a company, as well as specific systems or processes. That is why examples of good governance practices may help contextualise it. Below are some of these examples – please note not all of these will be appropriate for every company.

Corporate Governance FAQs

How can UK businesses improve their governance?

UK businesses can improve their governance by conducting a thorough assessment of their current practices to identify areas for improvement.

A clear governance framework should also be developed outlining the roles and responsibilities of board members, executives, and other stakeholders.

Further progress comes through regular reporting on ESG performance, which helps companies demonstrate their ongoing commitment to sustainability and transparency.

Additionally, seeking external advice from governance experts or consultants can provide valuable guidance and support.

Who is responsible for corporate governance?

The board of directors is primarily responsible for corporate governance. They oversee the company's operations, ensure compliance with laws and regulations, and protect shareholders' interests.

How does Corporate Governance impact a company's performance?

All companies are different, and countless factors may impact their overall performance. However, good corporate governance can lead to better decision-making, improved risk management, and a more substantial reputation, ultimately enhancing the company's financial performance and sustainability.

What are the most common governance challenges?

Common challenges relating to corporate governance include conflicts of interest, difficulties balancing the needs of different stakeholders, ensuring board diversity, managing executive compensation and staying compliant with industry regulations.

How do you measure corporate governance?

Focusing on improving governance is one thing, but how do you know if it is making a difference? Measuring corporate governance is key to its long-term success. In simple terms, this involves evaluating factors like:

• Compliance with governance codes and frameworks,
• Financial performance metrics (such as return on investment),
• Stakeholder feedback (such as survey responses),
• Risk management and incident reporting,
• Ethical violations, including their frequency and severity, and
• ESG ratings (such as sustainability reporting).

The most appropriate metrics will naturally vary depending on the company's industry.

Is corporate governance mandatory in the UK?

While not mandatory, adopting strong corporate governance practices is generally considered best practice and is often expected of listed companies, both by investors and customers.