What’s in a Code?

A code of corporate governance is a set of principles and guidelines around best practice in corporate governance that companies are encouraged to follow. The format, content and principles of the codes in the U.K. and many internationally have been influenced by the 1992 Cadbury Report. Produced by a committee chaired by Sir Adrian Cadbury, The Cadbury Report was in part a response to corporate scandals linked to failures in corporate governance. The committee was formed after the Polly Peck scandal in 1991 and its remit expanded as a result of BCCI and Robert Maxwell scandals that came soon after.

What is Corporate Governance?

Definition 1:
“The system by which companies are directed and controlled.” Cadbury 1992

Definition 2:
“Corporate governance is therefore about what the board of a company does and how it sets the values of the company, and is to be distinguished from the day to day operational management of the company by full-time executives.” UK corporate Governance Code 2014

As the definitions suggest, governance is about systems, boards and what they do. A more detailed look at various codes of governance will demonstrate that they identify three keys areas:

1. What does a good system of governance look like? What is an appropriate governance structure of the board and the committees? What are the rules and regulations that an organisation must adhere to? (Resources)

2. What makes a competent board and how should it be composed? We should also consider recruitment, induction and training and the impact to be made by having diversity in skills and experience. (Competency)

3. Finally, what the board spends it time doing is critical – what it focuses its attention on and how, risk assessment, financial scrutiny and strategic input. (Execution)

Once an organisation has adopted a code, it then commits to the principles outlined in the code. An external stakeholder can rest assured that best practice is being followed. If an organisation chooses not to follow a particular aspect of a code, it doesn’t necessarily mean that overall governance is flawed, but they will be required to explain why they have not applied the code in that area. This ‘comply and explain’ or ‘apply and explain’ approach complements the principle based approach that is adopted in the UK towards corporate governance.

Basic Principles

In examining the Cadbury Code further, we find three fundamental principles that are common to what we consider to be good governance in the UK namely:

1. The role of the CEO and Chairman should be separated,
2. Boards should have at least 3 non-executives,
3. Boards should have audit and remuneration committees.

This establishes the principle that organisations are led by boards and the board itself is led by a chairman. The CEO is responsible for running the organisation. The role of the board should be strategic but by the engagement of sub-committees, an organisation can make use of individuals who do not have a conflict of interest when helping to monitor the performance, assess risk and ensure the achievement of the longer term objectives of a company.

The United States has adopted the Sarbanes Oxley Act 2005 which takes a rules based approach. The 1994 King Report on Corporate Governance issued in South Africa deserves a mention here in that it integrates governance and corporate social responsibility like no other code.

Codes of Governance

Listed below are a number of codes of governance each having a focus on the particular sector that they aim to regulate. The list below is not comprehensive but does demonstrate the breadth of coverage of this important area.

• Good Governance – A Code for the Voluntary and Community Sector (First published 2005) – revised October 2010
• The UK Corporate Governance Code (First Published 1992) – revised September 2014
• Excellence in Governance (First Published 1995) – revised February 2015 – Housing
• The Good Governance Standard for Public Services (First Published January 2005)
• NHS Foundation Trust Code of Governance (First Published 2006) – revised March 2010
• Voluntary Code of Governance for the Sport and Recreation Sector (First published 2011)
• Corporate Governance The Code of best practice for Consumer Co-operative Societies (First published 1995) – revised May 2005
• Guide for members of Higher Education Governing Bodies in the UK (First Published 2004) – revised February 2009
• The Governors Guide to the Law – revised May 2012 – Schools

Good governance principles are the same regardless of the sector and there will be common elements in all of these codes. Whether it is the private, public or voluntary sector, governance starts with the leadership and the systems and processes that the leaders have at their disposal to govern. The common elements that these codes encompass are useful for any organisation that is interested in applying best practice across sectors. The three areas considered in the introduction makes for a useful framework, they are reproduced here for clarity.

1. Resources – to describe structures and processes
2. Competency – to describe skills and expertise of the board
3. Execution – to describe the activities of the board

I developed the governance forum governance code to help organisations tackle the key areas of corporate governance. The summary version of this code is outlined below:

Resources

1. The board must be effective in leading the organisation and have an appropriate constitutional framework with the essential functions recorded in its terms of reference.

2. Information provided to the board should be accurate and timely.

3. There should be a comprehensive, accessible list of essential governance documentation.

4. All board members (you) should be aware of the key indicators.

Competency

5. The organisation should ensure that its board and committees are balanced.

6. Board members should adhere to a code of conduct displaying integrity and high standards of probity.

7. Boards should ensure there is a robust, formal and rigorous process for appointment, induction and training.

8. The board should undertake a robust process for the evaluation of its own performance and that of each board member.

Execution

9. The board should establish a sound decision-making framework and ensure that it identifies its risk appetite.

10. The board should present an open, balanced and understandable statement of the company’s position.

11. The board should monitor the performance of the organisation in line with the vision.

12. Board members should act as ambassadors for the organisation, engaging with its stakeholders.

 

So, in reviewing your governance, find and adopt a governance code applicable to your sector. This will ensure you have guidelines and principles that are sure to help you continue to govern your organisation well!

For more information about the governance forum, including board appraisals, board away days and bespoke services please visit www.thegovernanceforum.com or call 0845 505 1875. You can also contact us to purchase ‘The Little Book of Governance’ for a more detailed version of the governance forum Governance Code or other books in the TGF ‘Little Book Series’. Follow on Twitter @TheGovForum.

 

Until next time…