Understanding corporate governance

Posted 07/11/2016 By: Geoff Hazlewood

With the fall out from the BHS failure and concerns over the running of Sports Direct still in the news, Corporate Governance remains a hot topic.The United Kingdom Corporate Governance Code (the “Code”) of the Financial Reporting Council (“FRC”) mainly applies to listed companies and is intended to give investors confidence that the boards of UK companies follow best practice and have accountable and effective leadership.Whilst the Code does not apply to all companies, there can be no harm in considering its provisions and where practical applying some or all of them on a voluntary basis.This will help give confidence to potential investors, funders and trading partners.

The fundamental principle of the Code is that every company should be headed by an effective board who are collectively responsible for the running and long term success of the company.Nonetheless, it is accepted that it is not always possible for directors to have hands on involvement in all aspects of a company’s business and that certain functions need to be delegated to others.

The Code requires listed companies to maintain a formal schedule of matters that should be specifically reserved for the Board.This requirement first appeared following the Cadbury report, partly in response to the Guinness takeover of Distillers when a committee of the Guinness board were found to have been given unfettered authority and ultimately sanctioned an illegal share support operation.Whilst such requirements are not compulsory for unlisted businesses, it is a useful tool and helps formalise the role of the board clarifying for all staff whether formal board approval is required and simplifying the process of delegation.

The Code itself gives no guidance on what matters should be reserved for board approval but the Cadbury report suggested acquisitions and disposals of material assets, major investments and capital projects should be included.The Institute of Chartered Secretaries and Administration does however publish further guidance, including a draft schedule.Clearly each business will be different and careful consideration will be required so as to ensure a balance is struck between sensible delegation without surrendering responsibility and control.Ultimately, responsibility for a company’s activities will rest with the directors but having put in place proper systems and processes will provide evidence that directors are exercising their authority and delegating in a responsible manner.