Legal Matters Q&A: Corporate Governance

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Daniel Burns, Partner and Head of Company Commercial, answers some common questions about Corporate Governance that all business leaders should know.

 

Q1:         What is Corporate Governance?

A:           A definition was helpfully provided by Cadbury Report, titled Financial Aspects of Corporate Governance issued in 1992: “Corporate governance is the system by which companies are directed and controlled”.

 

Q2          What does it mean to me?

A:            Anyone who has an interest in or works for a limited company will be familiar broadly with the idea that shareholders and directors are responsible for the direction and control of the company. However, there is often confusion as to who is responsible for what aspect of the company’s direction and control, especially in owner-managed companies where the directors and shareholders are same people ‘wearing different hats’.

 

Q3          What is the directors’ role in corporate governance?

A:            The role of director is complex from a legal perspective and potentially onerous in terms of statutory duties and obligations. However, simply put from a corporate governance perspective, boards of directors are responsible for the governance of their companies. The responsibilities include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.

 

Q4          What is the shareholders’ role in corporate governance?

A:            From a corporate governance perspective, the role of shareholder (whilst wearing his or her ‘shareholders hat’ rather than as a director) is fairly limited, and is primarily to appoint the directors and the auditors and to satisfy themselves that an appropriate structure is in place. In smaller private companies it is usually desirable to have a shareholders’ agreement in place, which regulates the dealing of shareholders as between themselves, and often contains specific provisions regarding the appointment of directors and may identify matters that require the unanimous consent of shareholders, for example significant acquisitions, borrowing or entry into material contracts.

 

Q5          Why think about corporate governance in my business?

A:            Even in smaller owner managed business, applying good corporate governance principles is likely to improve decision making by providing guidelines, checks and balances for the directors the management team. Improved decision making is likely to reduce risk for shareholders and other stakeholders, including employees, trading partners such as suppliers and customers and HMRC. More importantly, sound decision making should lead to increased profitability.

 

Q6          How do I implement good corporate governance principles in my business?

A:            Companies whose shares can be bought and sold by the public on the London Stock Exchange are required to run their businesses in accordance with the UK Corporate Governance Code, however the requirements of the Code are not suitable for smaller private companies. A set of corporate governance principles for larger private companies (the Wates Principles) was issued in December 2018. Smaller private companies may wish to consider using the Wates Principles as framework for their own corporate governance regime. Greater detail as to how these may be applied is available in the Wates Principles document published by the Financial Reporting Council, however the headline principles are:

  1. Purpose and Leadership
  2. Board Composition
  3. Director Responsibilities
  4. Opportunity and Risk
  5. Remuneration
  6. Stakeholder relationships and engagement

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.