The UK Corporate Governance Code (UKCGC)is a comprehensive framework for improving the corporate governance practices and disclosure standards of publicly listed companies in the UK.
The Code is applicable to companies with a premium listing on the London Stock Exchange, regardless of where they are incorporated.
Released by the Financial Reporting Council (FRC) in 2018, the Code provides guidance and best practices for ensuring company oversight, ethical behavior, and responsible decision-making, ultimately aiming to enhance corporate governance performance among UK’s public companies.
The Code’s focus is on leadership at companies that are publicly listed on the LSE.
The “comply or explain” nature of the Code provides flexibility around company context and other bespoke governance practices.
The Code is designed to strengthen governance practices and promote greater transparency (and trust) in the UK’s financial system.
Core Pillars of the UKCGC
The UKCGC focuses on five key categories/topic areas, and it operates on a “comply or explain” basis. The five topic areas are:
Board leadership and company purpose
The division of responsibilities
Board composition, succession, and evaluation
Audit, risk, and internal control
Why is the UK Corporate Governance Code Important?
The UKCGC plays a pivotal role in strengthening the governance practices of publicly listed companies in the UK while promoting greater transparency and trust in the UK financial system. The UKCGC supports the following objectives:
Raising the bar for UK boards
The UKCGC provides explicit expectations and best practices for company leadership. These expectations and disclosure requirements promote transparency and accountability for those with the greatest influence on company direction, decisions, and overall performance.
This raises the bar for UK board performance while ensuring stakeholders have the information they need to hold them accountable to these higher standards of practice.
Improving stakeholder value creation
The UKCGC recognizes the significance of stakeholder relationships in driving corporate success and longevity. It encourages companies to engage with their stakeholders, understand their needs, and consider their interests in decision-making processes.
Encouraging greater responsiveness to the people and organizations a company depends on is thought to promote long-term trust, license to operate, and opportunities to collaborate on shared objectives.
Normalizing ESG as a board responsibility
The UKCGC emphasizes the importance of integrating environmental, social, and governance (ESG) issues into broader governance practices and daily operations, thus normalizing ESG as a critical leadership topic.
It also sets the stage for the UK government’s climate risk disclosure regulations, which ultimately focus on company governance practices as they relate to climate risks.
Who Should Be Concerned About the UK Corporate Governance Code and Why?
The UKCGC is relevant, to varying degrees, to all stakeholders of a publicly listed company on the London Stock Exchange. However, the UKCGC is most relevant to the following company stakeholders:
1. Boards of directors
The UKCGC directly applies to boards of directors, as it guides their roles, responsibilities, and composition. Directors should be concerned about complying with the Code’s principles and provisions to ensure effective governance and to meet the expectations of shareholders and other stakeholders.
2. Company executives and management
Executives and management teams play a crucial role in implementing the principles of the UKCGC in accordance with board directives. They should be concerned about understanding the Code’s specific recommendations and actively embedding them into their daily management practices.
It’s critical for executives and the management team to understand the details of this Code so that they can effectively execute these practices on behalf of the board.
Shareholders have a vested interest in corporate governance practices as they aim to minimize investment risk and meet fiduciary responsibilities. Shareholders, and the broader investment community, should use these standards as a “North Star” of best practices when conducting due diligence or developing a shareholder proposal.
The UKCGC provides a critical frame of reference for those less experienced in assessing corporate governance performance and effective management.
Key Considerations for Compliance with the UKCGC
For pre-IPO and newly listed public companies: Management must ask, do we have formalized policies, practices, and performance measures for company leadership? If not, consider leveraging the UKCGC’s five categories and recommendations to develop governance practices aligned with public market best practices. This will influence perceptions of management effectiveness, company maturity, and associated valuation.
For legacy public companies: Management must ask, do we have a formalized approach for addressing ESG issues such as climate change and diversity, equity, and inclusion (DEI)? If not, consider leveraging the UKCGC to inform how ESG should be integrated into the core governance function and practices, including the heightened expectations surrounding stakeholder value creation and board diversity.
For board advisors: Any advisor or third-party working with Boards should ensure all their counsel aligns with the overarching recommendations from the UKCGC. This will support greater adoption of (and pressures surrounding) recommendations and ensure all advisory aligns with the specific compliance requirements of the London Stock Exchange.
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