Corporate Governance and UK Corporate Governance Code

This essay discusses the concept of corporate governance and the development of the UK Corporate Governance Code. It explores the importance of complying with corporate governance rules and regulations for effective company functioning. The essay also examines the 'comply or explain' approach in the code and other considerations for improving corporate governance.

CORPORATE
GOVERNANCE

TABLE OF CONTENTS
MAIN BODY...................................................................................................................................3

MAIN BODY
Corporate governance is defined as the different types of rules and regulations and other
guidelines which are to be followed by the companies for effective working of company. The
current essay will discuss about the UK Corporate Governance Code and the development of this
code and other related points.
Corporate governance
Corporate governance is referred to as the set of different principles, systems and process
which are applied by the companies in order to govern and control the company. This includes
the different set of rules which are to be followed by the employees working in the company.
The corporate governance ensures that the company is working in ethical and correct manner and
is not using any of the wrong practices1. The major reason for complying with corporate
governance is that this increases the productivity of company and confidence of investor within
the company as they comply with all rules and regulations. For managing of corporate
governance the UK corporate governance code was formulated which governs each and every
company within UK and set principles which the companies need to follow for getting
successful.
Development of code
This code was developed with many efforts and hard work and many different stages and
different types of reports have been used in order to make this code. In the year 1992 the
committee on financial aspect of corporate governance was set up for concerning issues relating
to financial reporting and accountability. This was known as Cadbury report 1992 and it made
three recommendations that is CEO and Chair of company must be separate. Other one was
boards must have at least 3 non- executive directors and last is that each board must have audit
committee. Further in 1994 Greenbury committee was established by Confederation of British
industry. This committee focused on growing concern relating to bonuses and salaries which is
paid by the senior executive2. This committee focused on fact that the remuneration must be
1 Yermack, D., 2017. Corporate governance and blockchains. Review of Finance. 21(1).
pp.7-31.
2 History of the UK Corporate Governance code. 2019. [Online]. Available through: <
https://www.frc.org.uk/directors/corporate-governance-and-stewardship/uk-corporate-
governance-code/history-of-the-uk-corporate-governance-code>

based on the performance of employees only. At last the Hampel committee was established in
order to review the success of both Greenbury and Cadbury report are attained or not.
Comply or explain approach in Code
This is an approach which was first used in UK and it integrates the corporate governance
with the voluntary compliance and the legal rules and obligation specified by law3. This is a
regulatory approach which is being used by companies in order to regulate the financial
supervision and the corporate governance. The purpose of ‘comply or explain’ is to give power
to market to decide whether the standards set are appropriate for individual companies or not and
if not then what measures can be taken.
Prescriptive legislation
The other approach which can be used can be like prescriptive legislation being used in
US. The prescriptive legislations are some rules of conduct which are enforced by the
government and the rules which decide the human behaviour in particular manner. The laws
which are being passed by the legislative branches are prescriptive.
Other consideration
Other consideration for the better corporate governance within the companies is to make
use of different types of strategies. The most common is the providing of remuneration to the
companies. This is best method because this remuneration will motivate and encourage the
people and employees within the company to follow all the principles and rules of corporate
governance. Thus, this method of providing of remuneration will provide more effective and
efficient working of the company4. Another method of improving the corporate governance
within the company is encouraging and influencing shareholder engagement within the working
of company. Thus, this will make sure that shareholders are aware of all the activities which are
undertaken within the company. Also, these stakeholders will make sure that all the rules and
regulations are being followed within the company is the expected manner only.
From the above discussion it is summarised that complying with corporate governance is
very crucial for all companies to follow in effective and efficient manner. The major reason
3 Katmon, N. and Al Farooque, O., 2017. Exploring the impact of internal corporate
governance on the relation between disclosure quality and earnings management in the
UK listed companies. Journal of Business Ethics. 142(2). pp.345-367.
4 Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate
governance. Cambridge University Press.

underlying this fact is that these rules under corporate governance apply to effective working of
company and this fosters the productivity of company. The current essay focused on corporate
governance and the Code of Corporate Governance in UK and how it developed. This
development was studied with help of Cadbury Report, 1992, the Greenbury report 1995 and the
Hampel report 1998. Also, the discussion too places on prescriptive legislation and other
consideration which can help companies in improving corporate governance. These other
considerations were like influencing shareholder engagement within company, remunerating
companies and employees if they follow corporate governance.