Corporate Governance 101: What You Need to Know

Corporate governance is one of those areas of business management and leadership that can seem particularly daunting for directors and senior staff who are engaging with company boards for the first time.

It doesn’t have to be though. When you’ve got the right knowledge behind you, it’s much easier to tackle.

Here’s our guide to the fundamentals of corporate governance. By the end of it, you should have a good idea about what corporate governance actually is, the role of a company board and their relationship to it, and an idea of what’s in the UK’s most influential best practice guide to corporate governance.

What is Corporate Governance?

Corporate governance describes the sets of structures, processes and rules that influence the way a company is managed. It is one part of a series of elements that make up the complex way that businesses and organisations are managed on a day-to-day basis.

The Cadbury Committee, which created the first version of the UK Corporate Governance Code in 1992 describes it as ‘the system by which companies are directed and controlled.’ According to the committee, ‘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.’

To understand the importance of corporate governance we need to understand the parts that make up the operating structures of companies, as well as looking in closer details at the Code that informs what companies should be doing in order to be abiding by best practice corporate governance principles.

Shareholders and corporate governance

So, how does the way a company is structured affect the way that it’s governed?

That’s a big question, but it’s easiest to see the role that corporate governance plays in an organisation when looking at private sector companies and the way that they’re structured.

Here, shareholders each hold a stake or ‘share’ in the ownership of the company. By holding a share in the company, the shareholder is entitled to a share of any profits that are made. Having a share entitles a shareholder to having a say on the way that a company is managed too.

Shareholders will elect a board of directors, whose job it is to observe and oversee the management of the company, set the strategic direction of it and report back to the shareholders about how this is being done. In others, it’s their responsibility to perform the corporate governance of the organisation. This will include things like finding the right people to lead the company, reviewing and signing off on company accounts, objectives and strategy, setting the pay of senior employees and ensuring that legal reporting and compliance is followed.

The Board of Directors and corporate governance

The role of a board is to oversee the strategic management of a company. Naturally, this means that it will work closely with senior staff at the company. The CEO (Chief Operating Officer) and other senior, top-level managers at an organisation will usually work closely with the board of directors.

In fact, the main role of a board of directors when it comes to corporate governance is to balance the needs of a wide range of stakeholders with those of the organisation.

Members of a board can be elected from inside or outside of a company. Members of a board gathered from inside the company are usually people like the company founders, owners or major shareholders and other senior executives.

External board members are usually people that are valued by the shareholders  for their expertise of running similar companies, or of their knowledge of a particular subject or business area.

According to Investopedia, independent board members are seen as a useful asset to have on a board as they help to reduce the concentration of power in an organisation – a tricky thing to manage when it comes to corporate governance. Independent board members are also seen as a useful way to better align the interests of shareholders with internal board members too.

Often, organisations will include a mixture of directors from both inside and outside in order to ensure a wide range of experience, expertise and specialist knowledge and different perspectives.

The principles of Corporate Governance

As a phrase, corporate governance is a bit of an ambiguous term that doesn’t really get to the heart of what the subject is about. Yes, corporate governance is about governing an organisation in the right way, but it takes the form of a lot more than just that. It’s about helping an organisation live up to its values, realise its integrity and achieve its objectives, at the same time as ensuring that it stays within the boundaries of the law and best practice when it comes to its internal and external behaviour. That’s an awful lot to be covered in one short phrase.

In the UK, the legal responsibilities of companies and organisations when it comes to corporate governance are laid down in the Companies Act 2006. This piece of legislation lays down the responsibilities that organisations are expected to follow when it comes to corporate decision-making and what will happen if the rules are not followed.

The Companies Act 2006 is a pretty intimidating document, and it’s not the most accessible if you’re coming into corporate governance for the first time and you don’t have a legal background or a technical business background. But luckily, other public bodies have produced guidance about the act should be interpreted.

This guidance usually takes the form of ‘codes’: specific advice based on the way that particular types of organisations should be implementing corporate governance.

The UK Corporate Governance Code

That’s where the UK Corporate Governance Code comes in.

Created by the Financial Reporting Council, the UK Corporate Governance Code provides a guide to the key ways in which boards in the UK should behave and how they should manage an organisation.

It is made up of a set of principles – important themes that define the scope of corporate governance. These principles have further ‘provisions’: the nitty-gritty detail of the specific actions the board needs to perform to abide by the spirit of the code.

In the UK, all organisations that have a premium listing of equity shares in the country are legally required to demonstrate how they have applied its principles and complied with its provisions, in their annual report and accounts. This is called the ‘comply or explain’ approach to corporate governance reporting.

As the CIPD outlines, organisations that have a different structure of listing, like AIM-listed companies, or that are smaller or held privately might follow different codes like the QCA or the Wates Corporate Governance Principles.

That said, the UK Corporate Governance Code is by itself the most widely followed governance Code in the country. Here’s a summary of its key principles and the ideas that lie behind them:

Board leadership and company purpose

This section provides advice on how the board should approach leadership and aligning this with the purpose, values and aims of the company.

• Successful companies are led by effective boards that promote long-term, sustainable success. This creates value for shareholders and wider society.
• The board is responsible for embodying the values, purpose and strategy of the organisation. It should make sure that these elements and the culture of the company are properly aligned. Directors need to lead by example, act with integrity and promote the culture they want to see by living it.
• The board needs to establish a system for allocating resources, measuring company performance and assessing and managing risk.
• The board needs to promote shareholder and stakeholder engagement.
• The board is responsible for making sure that company policies are aligned with company values. It should create an environment where the workforce is able to raise matters of concern easily.

Division of responsibilities

This section looks at how responsibilities are divided within the board itself in order to promote best practice corporate governance.

• A chair will lead the board. They are responsible for ensuring that the board is as effective as possible when it comes to leading the company. They must show objective judgment and promote openness, tolerance and debate. They should ensure good relations and communication between board members and that the information everyone has is accurate and produced on time.
• There needs to be a combination of executive and non-executive directors on the board, so that no one person or party dominates. The responsibilities of the leadership board and the executive leadership of the business need to be clearly divided.
• Non-executive directors need to devote enough time to meet their board responsibilities. They should provide constructive criticism, guidance and advice and hold management to account.

Composition, succession and evaluation

This principle examines the diversity of boards, the need to put succession plans in place in case of a member leaving, and how the effectiveness of the board will be evaluated.

• Board appointments need to follow a formal, rigorous and transparent process, promoting merit and diversity, and be based on objective criteria. There should be a plan of what to do when board members leave.
• The board should have a mixture of expertise and membership should be updated regularly.
• Boards should annually evaluate their diversity and composition, as well their contribution towards helping a business achieve its goals. They should look at their effectiveness on a collective, as well as an individual level.

Audit, risk and internal control

This section explores the specific audit, risk and control processes that boards will need to ensure are in operation at a company.

• Formal and transparent policies and procedures should exist that protect the independence and effectiveness of audits.
• The board should offer an honest and balanced assessment of the company’s situation.
• The board should conduct risk management and create procedures to facilitate this.

Remuneration

The last principle explores how boards decide how much executive staff are paid and covers the values and spirit that they are expected to abide by when deciding this.

• Remuneration must be used to advance the organisation’s overall strategy and to support long-term, sustainable success. Executive pay must be linked to the purpose and values of a company, along with the achievement of long-term goals.
• No director should be involved in deciding their own remuneration. A transparent, formal procedure must be developed.
• The board should use independent judgement when deciding remuneration, considering company and individual performance.

Employee Voice

With more interest being paid towards the gender pay gap and the rights of workers in recent years, there has been a move to engage ordinary employees of an organisation in corporate governance, empowering their voices. It’s a section that recognises the essential role that employees play in making an organisation what it is and seeks to enshrine it in corporate governance.

The particular elements that have been added ask boards to show how their organisation is improving the voice of employees at a board level by doing one or more of these things:

• Adding an employee director (referred to as a worker on the board)
• Creating an employee advisory committee (or a stakeholder committee)
• Giving a non-executive director responsibility for employee issues

Corporate Governance qualifications

So, after having read the above, it’s clear that there’s a lot for board members and directors to learn about corporate governance and how to ensure that companies are being managed according to best practice. But how can you improve your skills and knowledge of corporate governance, without being thrown in at the deep end?

There’s a simple answer: study a course in the subject!

The Corporate Governance Institute offers a range of dedicated qualifications in corporate governance, designed to help directors and board members enhance their corporate governance expertise.

One of the UK’s leading corporate governance professional membership organisations, the Corporate Governance Institute has been helping professionals maintain best practice when it comes to corporate governance for a number of years.

At ICS Learn, we offer two of the most popular courses offered by the body: the Diploma in Corporate Governance and the Diploma in ESG.

Diploma in Corporate Governance

This course is perfect if you're a current director, aspiring director or a professional who engages with corporate governance regularly.

It's a comprehensive qualification, designed to give you an understanding of best practice corporate governance and how to engage with board structures effectively, from scratch.

By studying it, you'll master the essential elements of corporate governance, gaining expertise in key concepts, benefits, regulation, sectoral codes and global trends that you can put to use in your own role straight away.

Diploma in ESG

This course is perfect if you're a current director, aspiring director, or a board member looking to understand the unique opportunities that Environmental, Social and Corporate Governance provides for your organisation.

It's focused on equipping you with the right skills and tools to be able to apply relevant ESG frameworks to your own organisation. By the end of the qualification, you'll be able to confidently build, apply and maintain ESG strategy across your whole organisation.

Build your Corporate Governance confidence

There’s an awful lot to get your head around when it comes to corporate governance, but don’t worry. There’s also a lot of guidance that you can consult too: whether it’s dedicated guides, websites or other mentors. We hope this small blog has been useful for helping you improve your understanding of the core principles of corporate governance.

Advance your career with a corporate governance qualification that you can study 100% online, from anywhere. Download your free CGI course guide today.