Article

The 5 Principles of Good Governance

Following a number of high profile corporate failures, the corporate governance arrangements in many large companies have been in the spotlight throughout the first quarter of 2018.  The UK government has reacted by issuing a consultation on further reforms to the corporate governance and corporate insolvency frameworks, designed to target "irresponsible" behaviour by companies and their directors when a business is in or is approaching financial difficulty.

Ultimately the Boards of Directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the Directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. Whilst the formal Corporate Governance Code applies to all listed companies, many local business owners now recognise the benefits of applying the ‘best practice’ set out in the Code, to the systems that direct and control their companies.

There are 5 key principles forming the core for the governance under the Code.  Those companies striving towards ‘best practice’ should consider all of them.

Those wishing to benchmark their company against ‘best practice’ should consider the following 5 key principles, that are the core of corporate governance under the Code:

Leadership: every company should be headed by an effective Board which is collectively responsible for the long-term success of the company. The Board should consist of the correct balance of skills and experience to allow effective operation. A clear division of responsibilities should be in place to ensure that one individual does not have excessive power over decision making.

Effectiveness: in our previous article “ignore board auditing at your company’s peril” we emphasised the requirement for an annual review of the effectiveness of Boards and Committees. This is to ensure that the functions being carried out by Board and Committees are effective.

Accountability: Board reporting should present a fair, balanced and understandable assessment of the company’s position and prospects. Reporting should address the accountability of the Board; address the business risks and viability; and communicate performance and outcomes in the context of the company’s business model and strategy. The Audit Committee is particularly important, in its consideration of the annual report; principal risks and risk management, internal control systems and how they are monitored.

Remuneration: the company’s remuneration report should be clear and concise. It should be easily identifiable how the remuneration strategy connects to the company strategy and purpose, with an explanation as to why the remuneration policy is best suited for the company. Executive remuneration should be proportional and focused on the long-term.

Relationship with Shareholders: the Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. Shareholders should be encouraged to participate in general meetings as a method of communicating with the Board.  

It is too early to determine whether the government’s consultation will impact all companies, or only listed entities. However strong corporate governance principles and the way in which they are applied should be a key focus for any Board, irrespective of size.