UK Corporate Governance Code and Self-Regulation: An Evaluation

This essay provides a critical evaluation of the UK Corporate Governance Code and its role in corporate governance and globalization, specifically assessing the efficacy of self-regulation compared to governmental intervention. It explores the historical development of the UK Corporate Codes, highlighting significant changes in British corporate governance. The essay delves into the implementation of the UK Combined Code of Corporate Governance principles, referencing key reports from the Bullock, Cadbury, Hampel, and Greenbury Committees. It defines self-regulation and mandatory regulations, discussing the advantages and disadvantages of each approach in the context of corporate governance. The essay examines the evolution of the UK Corporate Governance Code, including the Cadbury Report and its impact on establishing standards for corporate ethics and behavior. It also addresses the roles of various committees and reports in shaping corporate governance practices, and analyzes the principles of accountability, leadership, effectiveness, remuneration, and shareholder relations within the Code. The essay further considers the influence of political and economic developments, such as the Thatcher government's policies, on the evolution of corporate governance in the UK.

Running head: CORPORATE GOVERNANACE AND GLOBALIZATION
Corporate Governance and Globalization
Name of the Student
Name of the University
Author Note

1CORPORATE GOVERNANACE AND GLOBALIZATION
Corporate Governance is the system of practices, processes and rules by which control is
exercised over the corporate firms. An effective corporate governance framework ensure striking
balance between the interest of the several company stakeholders which includes management,
shareholders, financiers, suppliers, customers, shareholders, government and the community.
The notion of corporate governance is framed within the ‘self-discipline or self-regulation’
discipline phenomenon which refers to a system wherein corporations adopt ethical rules or
conduct to which such companies adhere while carrying out the business activity. The essay shall
provide a critical evaluation of the statement that the UK Corporate governance code and its
predecessors exemplify the efficacy of self-regulation as opposed to direct governmental
intervention in the context of implementation of the corporate principles under “the Code”. The
essay shall outline the historical background in which the UK Corporate Codes have been
developed highlighting the drastic changes that changed the nature of corporate governance in
Britain (Code 2010). While assessing the efficacy of the implementation of the UK Combined
Code of Corporate Governance principles, the essay shall also discuss about the three essential
reports by the Bullock, Cadbury, Hampel and Greenbury Committee wherein recommendations
have been made with respect to its effective implementation of the corporate governance
principles.
To understand definition of self-regulation, it is important to understand the meaning of
regulation. Regulation refers to the act in which an institution or an individual is regulated. There
are three essential elements of regulation, namely, legislation, enforcement and adjudication.
Firstly, legislation refers to the definition of the rules and enforcement implies that necessary
actions shall be undertaken against infringers of such rules (Soltani and Maupetit 2015). Lastly,
adjudication refers to a situation where it is determined if the legal rules have been violated and

2CORPORATE GOVERNANACE AND GLOBALIZATION
if necessary measures have been initiated against such contravention. In other words, self-
regulation may be defined as the delegation of public policy chores to private actors in an
institutional form with the objective where the players (participants) within the industry shall
regulate the industry (market) (Kaufmann 2017). On the contrary, mandatory regulations refer to
regulations or rules that are intended to carry out a particular piece of legislation and are usually
enforced by a regulatory agency that is mandated to uphold the provisions of the legislation.
The concept of corporate governance is distinct from the control and command model as
it is comprises companies that are allowed to structure and design their own practices within
particular boundaries. Elmagrhi, Ntim and Wang (2016) states that while various aspects of
corporate governance have become subjected to mandatory regulation, other legal jurisdictions
have selected to adopt partially mandatory structures by enabling companies to make choices
regarding their governance but mandating disclosure obligations upon the companies with
respect to such choices. The question that arises under such circumstances is whether a wholly
voluntary or mandatory or some compromise with respect to the governance regime shall be
most favorable.
According to Du Plessis, Hargovan and Harris (2018), as a response to this question,
supporters of free market may argue that a mandatory regime might not be necessary if advanced
corporate governance practices are desired and advantageous to investors, then, the competitive
firms shall implement such practices immediately as well as effectively. On the contrary,
Dimopoulos and Wagner (2016) believe that the advocates for the investors may argue that a
voluntary regime might not be sufficient. This is because in case of voluntary regime there is no
assurance that all the firms would implement the reforms that are necessary to provide the
investors with adequate checks on board control and management. In this regard, mandatory

3CORPORATE GOVERNANACE AND GLOBALIZATION
rules become necessary to safeguard investors, thereby, building confidence in the capital
markets. Therefore, Keay (2014) states that an optimal regime may be defined as a regime that
considers the expenses and benefits of all the stakeholders especially the investors and issuers.
The pros and cons of self-regulation and mandatory regulation is associated with
accountability of governance regime and the corresponding costs or compliance. In case of a
mandatory structure, a high level of compliance is likely to ensure high level of compliance at
lower cost compared to a complete mandatory regime. Rose (2016) states even if a wholly
mandatory structure may ensure better compliance, its expenses are likely to be much higher.
Under such circumstances, it can be said that a regime that is partially mandatory reduces
expense but encourage high level of compliance is considered optimal.
The establishment of corporate governance code in the UK can be traced back to the
1990s after landmark report from Sir Adrian Cadbury on financial aspects of corporate
governance that issued the code of best practice (Cadbury 2015). The ‘Cadbury Code’ aimed at
listed companies, especially at its standards of corporate ethics and behavior. It set a benchmark
of good boardroom practice, evolving into the Combined Code on Corporate Governance (Price
et al. 2018). Due to persisting shareholder unrest regarding the deficiencies within corporate
structures and their incompetency along with the threats of legislation in case of failure of the
corporate sector, the corporate governance was subjected to further reviews. Thereafter,
provisions were incorporated with respect to risk management, remuneration, audit committees
and internal control. Eventually, after several reviews, a new version of corporate governance
was issued known as ‘UK Corporate Governance Code’ that was applicable to companies on or
after June 29, 2010.

4CORPORATE GOVERNANACE AND GLOBALIZATION
The Code comprises five sections namely, Accountability, leadership, effectiveness,
remuneration and relations with Shareholders. Each of the sections includes Main Principles,
Supporting Principles along with Code provisions. The main principles stipulate broad theories
or rules while the supporting principles and other provisions expand on the main principles.
While the Main Principles within the Code is considered as fundamental to the Code and its
implementation is upon the Board to determine, as they must ensure that its application complies
with the Code. Further, the Code does not form any strict set of rules as the Supporting
Principles have been incorporated to provide the companies with the flexibility to select methods
of their choice with respect to the implementation of such principles (Devine and Shrives 2017).
The Bullock Report inquiry committee initiated the first research into the corporate
governance in the UK. Bain and Band (2016) states that the establishment of the Bullock
Committee of Inquiry on Industrial Democracy resulted from a series of political and economic
developments that took place in the 1950s. The Committee emphasized on the definition of
‘industrial democracy’ that considered the representation of employees on the boards of directors
of the companies for which such employees. This definition portrayed the realities of political
debate regarding industrial democracy that has been dragged into the arena of public as well as
parliamentary debate. The Commission has put forward four sets of proposals, which aims at
harmonizing various provisions of member states for employee representation on a supervisory
board.
In 1979, the Thatcher government transformed British industrial relations and restrained
union power. The government hardly consulted the trade union and their influence declined in
part as an outcome of the abandonment of the income policies along with the incline in the
unemployment rate. Page and Spira (2016) believes that the broadening of privatization of the

5CORPORATE GOVERNANACE AND GLOBALIZATION
major utilities have changed the balance of the mixed economy. The government claimed that it
cannot remain, as a universal provider for long rather more should be left to the voluntary sector,
market and self-help. The replacement of dependency culture with an enterprise culture that was
introduced by Thatcher was subjected to several criticisms as people favored a more equal
society that ensures collective welfare more than Thatcher’s perspective of people responsible
for their own good. Thatcher was criticized for wiping out approximately 15 percent of Britain’s
industrial base and replaced it with her dogmatic monetarism (Jessop 2015)
Nevertheless, successive defeats in general election gradually convinced Labor to accept
most of the new settlement. Since the complete denial of the policies in the 1983 general
election, Labor firmly accepted the tranches of Thatcher’s policies. According to Scharpf (2018),
privatization did not feature in the Conservative election campaign and by mid 1980, the
economic policy of Conservative government was based on few essential principles. Firstly, the
macro-economic strategy focused more on controlling inflation instead of ensuring full
employment as the government was simply responsible for keeping the inflation low and not to
increase growth through demand management.
Secondly, balance of power pertaining to industrial relations was shifted in favor of
employers significantly. During the general election in 1983, trade unions operated within a
tighter legal framework that ended requirement for pre-strike ballots and ending the union
membership requirement as a pre-condition of employment within a specific industry. The
unions are held liable for damages that are incurred during the illegal strikes. Thirdly, industrial
policy was abandoned and the state was subjected to the control of certain nationalized
industries. According to Zalata and Roberts (2016), Thatcher had an industrial strategy to make
Britain a destination for Japan car companies and shift focus of the economy towards financial

6CORPORATE GOVERNANACE AND GLOBALIZATION
services from manufacturing. Consequently, growth had been affected due to weak trade unions
that could not guarantee an incline in the wage in pace with inflation. The investment and
innovation in Britain have been significantly affected adversely while incompetency in
manufacturing has caused the city to be dependent on the de-regulated City.
Several attempts have been made to improve corporate governance in different nations
resulting in numerous semi-voluntary codes of conduct and other related legislative measures.
UK is an example of a country that has led to better corporate governance in listed companies
during 1990s and 2000s. As it is believed that the adoption of corporate governance practice is
significant for maintaining relationship between shareholders and managers for achieving better
corporate behavioral standards (Devine and Shrives 2017). The issues related to managerial
transparency, accountability and regulation have been intricate and is subjected to further
assessment. The publication of the Cadbury Report [1992] has proved to be crucial in
developing number of corporate governance codes universally. The voluntary adoption of the
corporate governance recommendations and the use of the ‘explain or comply’ principle is
marked as a significant achievement of the Cadbury Report [1992].
During early 1990s, the reputation of the London as financial centre would have
suffered dramatically due to high level of director malfeasance, corporate fraud for which a
private sector initiative made by the Financial Reporting Council, the London Stock Exchange
[LSE] established a committee to review the Financial Aspects of Corporate Governance. The
Cadbury Report 1992 was adopted with an objective to provide a code of best practice. The
report recognized three themes to fortify the unitary board system of all listed companies and
summarize its recommendations in the form of code of best practice (Cadbury 2015). The three
themes include the responsibilities and structure of boards of directors, the right and

7CORPORATE GOVERNANACE AND GLOBALIZATION
responsibilities of shareholder and the role of auditors. It also provides recommendations to the
accountancy profession.
Although the recommendations ensured good corporate governance but the
recommendations did not apply globally. The recommendations stated that all quoted companies
must comply with the best practice as stipulated in the Code. The Code must be accepted
voluntarily but companies must explain in their annual report and accounts the extent to which
they had adhered to the code and reasons for non-compliance, if any, of the code. One of the
recommendations state that audit committee is crucial for the board committee and the directors
shall be responsible for risk management to the shareholders. The adoption of the
recommendations in the Report was made to develop a board comprising partial directors that are
acting in the best interests of the company (Veldman and Willmott 2016).
During the early 1990s, institutional investors were concerned about failure of
remuneration packages to provide an appropriate incentive for directors. The Greenbury
Committee issued a code of best practice with respect to remuneration of the directors. It
recommended that all the listed companies in the UK must comply with it. The Greenbury
Report also recommended including the director’s remuneration in the annual account and
report. This was adopted as it would ensure extent of the compliance by the company with the
Greenbury recommendations with respect to the remuneration committees and must justify in
case of non-compliance. The Greenbury Committee recommended that a remuneration
committee must determine the remuneration of the executive directors and the committee must
include non-executive directors, to ensure that executive directors do not stipulate his or her own
remuneration.

8CORPORATE GOVERNANACE AND GLOBALIZATION
Further, the Hampel Committee was established in 1996 to continue with the review of
corporate governance practices in the UK after the publication of the Cadbury and Greenbury
Committee Reports. The report of this committee was adopted to restrict the regulatory burden
on the companies and that principles are preferable than rules as it would enable the companies
to select the most appropriate corporate governance depending on the circumstances of
individual companies. This report was introduced to ensure that good corporate governance can
ensure positive contribution unlike the other two reports that was concerned about the deterrence
of abuses. This committee firmly supported the shareholder view of corporate governance
according to which the directors are primarily responsible towards the shareholders and must aim
at enhancing the value of the shareholder’s investment over time but the directors are not
responsible towards any other stakeholders.
In 2003, the Higgs Report was issued with the objective to make the role of the non-
executive directors (NEDs) more effective. As per the recommendations made in the Report, the
board comprising the directors and the NEDs must be collectively accountable for promoting the
success of the company by directing the affairs of the company (Chambers 2017).
After the publication of the Hampel Report, it was decided that the accepted best practice
and principles of Greenbury, Cadbury and Hampel must be combined together into a single
code. The Combined Code was established that set out principles of good corporate governance.
It was included within the UK Listing Rules, however, it is a principle-based document that does
not stipulate any perspective rule that should be complied with by the companies (Dedman
2016). Nevertheless, the companies must make disclosure about non-compliance and provide
reasons for the same stipulating the ‘comply or explain’ rule.

9CORPORATE GOVERNANACE AND GLOBALIZATION
This ‘comply or explain rule’ approach with the Combined Code implies that listed
companies are not obligated to adhere to or comply with all the provisions set out in the Code. It
is often identified that under certain circumstances, departures from the Code might become
appropriate in case of which, companies must provide reasons for such non-compliance. Further,
the institutional investor states that such reasons must be convincing if the companies wish to
win support of the shareholders. Nevertheless, the UK Combined Code was updated in 2016 and
is designed to comply with EU regulations on statutory audit. The ‘comply or explain’ approach
is said to provide flexibility to a company to adopt the governance structure that is more effective
to carry out the operation that is likely to lead to better governance consequences.
The ‘comply or explain’ approach states that regulator specifies a set of codes and
principles that acts as norms or guidelines for all companies, however, given that compliance is
not mandatory, companies may deviate from any particular principle or code giving reasons to
the regulator for such deviation (Keay 2014). In case of deviation, penalty is imposed upon the
regulator. This comply-or-explain approach is adopted to provide flexibility to the company
enabling them adopt a governance structure appropriate for carrying out the operations of the
business.
Du Plessis, Hargovan and Harris (2018) states that this poses a serious question with
respect to efficacy in self-regulation in the context of corporate governance as if company
deviates from any prescribed rules, the company must provide an explanation for doing the same
which acts as a deterrence for the company. This is because the company shall comply with the
rules that ensure effective corporate governance and prior to non-compliance; the company shall
have to be prepared to provide a justified explanation for the same. Moreover, the justification
must be such that it is reasonable for the shareholders to accept such justification for non-

10CORPORATE GOVERNANACE AND GLOBALIZATION
compliance. Shrives and Brennan (2015) argues that in case of UK, the combined code on
corporate governance provides provisions for ensuring that the companies comply them and have
an effective corporate governance framework in place. However, the regulator permits the
companies to deviate from such code and adopt a corporate governance structure that is most
suited to the business operations depending upon its circumstances.
Further, it is further argued that the business conditions for companies are not the same
and may vary from one business situation to another based on their individual size and intricacies
associated with it. Under such circumstances, in case of justification given for non-compliance
will also vary, making the application of the corporate governance principles more complicated
and inconvenient in its implementation. Therefore, it would be more appropriate to have a
uniform set of rules applicable to every business operations. This is because, given the distinct
business conditions, the different business organizations will deal with such situations differently
creating a chaos and irregularity. In case the companies become self-regulatory, they might not
take into consideration the interest of all the stakeholders of the company.
As mentioned earlier, that the combination of the Greenbury, Hampel and Cadbury
report has led to the establishment of the Combined Code of corporate governance and which
ensures that the companies must make disclosure about non-compliance of any stipulated
provisions within the Code. In case the companies become self-regulatory, it might not make any
disclosure or merely ignore the interest of the company and earn personal profits. However,
Davies (2016) states the fact that self-regulatory companies might not ensure best interest of the
company including the shareholders and all its stakeholders does not imply that permitting the
companies to adopt desirable governance structure would not be appropriate. The effectiveness
of the comply-or-explain approach relies critically on the sufficiency of the explanations that is

11CORPORATE GOVERNANACE AND GLOBALIZATION
provided by companies on non-compliance. Therefore, departing from the ‘uniform standards’
and enabling business adopt corporate governance structure as per the needs of the company
operations would be better provided such deviation from the particular codes and principles is
justified effectively. Nevertheless, it is assumed that the managers, in particular, while deviating
from specified codes are doing so in the best interest of the shareholders.

12CORPORATE GOVERNANACE AND GLOBALIZATION
References
Aguilera, R.V., Judge, W.Q. and Terjesen, S.A., 2018. Corporate governance
deviance. Academy of Management Review, 43(1), pp.87-109.
Bain, N. and Band, D., 2016. Winning ways through corporate governance. Springer.
Cadbury, A., 2015. The Financial Aspects of Corporate Governance.
Chambers, A., 2017. Chambers' Corporate Governance Handbook. Bloomsbury Publishing.
Code, U.C.G., 2010. The UK corporate governance code. Financial Reporting Council, London.
Davies, A., 2016. Best practice in corporate governance: Building reputation and sustainable
success. Routledge.
Davies, A., 2016. The globalisation of corporate governance: The challenge of clashing cultures.
Routledge.
Dedman, E., 2016. CEO succession in the UK: An analysis of the effect of censuring the CEO-
to-chair move in the Combined Code on Corporate Governance 2003. The British Accounting
Review, 48(3), pp.359-378.
Devine, A. and Shrives, P., 2017. Insights into corporate governance and risk. The Routledge
Companion to Accounting and Risk, p.28.
Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover Decisions.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate
governance. Cambridge University Press.

13CORPORATE GOVERNANACE AND GLOBALIZATION
Elmagrhi, M.H., Ntim, C.G. and Wang, Y., 2016. Antecedents of voluntary corporate
governance disclosure: A post-2007/08 financial crisis evidence from the influential UK
Combined Code. Corporate Governance, 16(3), pp.507-538.
Jessop, B., 2015. Margaret Thatcher and Thatcherism: Dead but not buried. British
Politics, 10(1), pp.16-30.
Kaufmann, W., 2017. Going by the book: The problem of regulatory unreasonableness.
Routledge.
Keay, A., 2014. Comply or explain in corporate governance codes: in need of greater regulatory
oversight?. Legal Studies, 34(2), pp.279-304.
Page, M. and Spira, L.F., 2016. Corporate governance as custodianship of the business
model. Journal of Management & Governance, 20(2), pp.213-228.
Price, M., Harvey, C., Maclean, M. and Campbell, D., 2018. From Cadbury to Kay: discourse,
intertextuality and the evolution of UK corporate governance. Accounting, Auditing &
Accountability Journal.
Rose, C., 2016. Firm performance and comply or explain disclosure in corporate
governance. European Management Journal, 34(3), pp.202-222.
Scharpf, F.W., 2018. Games real actors play: Actor-centered institutionalism in policy research.
Routledge.
Shrives, P.J. and Brennan, N.M., 2015. A typology for exploring the quality of explanations for
non-compliance with UK corporate governance regulations. The British Accounting
Review, 47(1), pp.85-99.

14CORPORATE GOVERNANACE AND GLOBALIZATION
Soltani, B. and Maupetit, C., 2015. Importance of core values of ethics, integrity and
accountability in the European corporate governance codes. Journal of Management &
Governance, 19(2), pp.259-284.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices.
Oxford University Press, USA.
Veldman, J. and Willmott, H., 2016. The cultural grammar of governance: The UK Code of
Corporate Governance, reflexivity, and the limits of ‘soft’regulation. human relations, 69(3),
pp.581-603.
Zalata, A. and Roberts, C., 2016. Internal corporate governance and classification shifting
practices: An analysis of UK corporate behavior. Journal of Accounting, Auditing &
Finance, 31(1), pp.51-78.