(b) In order to ensure the effective corporate governance framework necessary to promote confidence in corporate reporting and governance, it has been deemed necessary to set out defined rules and regulations, including voluntary codes. One such code is the UK Corporate Governance Code, which was issued in May 2010 and replaced the Combined Code On Corporate Governance. The code is produced and overseen by the Financial Reporting Council (FRC), an independent regulator charged with that duty.
All companies incorporated in the United Kingdom that are listed on the main market of the London Stock Exchange must comply with its Listing Rules, which require them to account for the application of the code.
The code adopts a principles approach in that it sets out what are considered best practices for running companies rather than imposing strict rules that must be adhered to. As a consequence it establishes what is known as the ‘comply or explain’ approach and companies that are subject to its operation must comply with its rules and general principles, or explain why they have not complied with them. Whilst listed companies are expected to comply with the Code’s provisions most of the time, it is recognised that departure from its provisions may be justified in particular circumstances. Every company must review each provision carefully and give a considered explanation if it departs from the code provisions.
The Code establishes principles of corporate governance, under five broad areas:
– leadership;
– effectiveness;
– accountability;
– remuneration;
– relationships with shareholders.
Each area of the code establishes principles and guidelines for the companies that come under its rule.
It also focuses attention on the role of institutional investors, whose passivity has been much criticised in the past. This aspect of corporate governance will be dealt with in a separate code relating to corporate stewardship, and will cease to apply in the Code when this comes into effect. |
