Governance Codes #2: Assessing the right model to meet business needs
Updated: Dec 14, 2020
This Governance Series
This is the second in a series of articles focusing on governance and best practice implementation. The ‘G’ in ESG. The focus of this back to basics series is about ensuring good governance that is practical, business enhancing and fits the needs of an organisation. Good governance helps organisations fulfill their purpose and meet obligations, whilst constantly stretching them to do better. Evidence shows that organisations with good governance practices or a wider adoption of ESG generally, perform better and are far more likely to be successful than those who don’t.
In the first article in this series we looked at the questions organisations should be asking themselves before adopting a governance framework. In this article we will look at the various governance codes and principles that are in circulation or in development and their application. We focus primarily on the UK but the basic theory on adoption will apply to other jurisdictions
A Brief History of UK Governance Codes
The growth of corporate governance in the UK, outside of the Companies Acts, stems from the publication of the Cadbury Report in 1992 - The Financial Aspects of Corporate Governance. At the time there was a clear mood for change following corporate scandals surrounding executive pay, corporate financial discrepancies, fraudulent misappropriation of pension funds and circumstances surrounding the failure of BCCI. The report focused on the freedoms for boards to drive companies forward within a framework of effective accountability.
Since then, the Code has been updated several times to remain consistent with the changing business environment, resulting in the 2018 issue of the UK Corporate Governance Code. The Code promotes the importance of establishing a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity. All companies with a premium listing in the UK are required to explain how they have applied the Code in their annual report and accounts. Similarly AIM listed companies are required to report against a recognised code. Most of the AIM listed companies report against the QCA Code. Very many unlisted companies choose to report against the UK Corporate Governance Code to some degree.
In 2018 the UK Government introduced The Companies (Miscellaneous Reporting) Regulations 2018. These require companies of a significant size, which are not currently required to provide a corporate governance statement, to disclose their corporate governance arrangements. This includes which code, if any, they have applied, any deviations from it or if no code has been applied why so and what the alternative governance provisions are. The Wates Principles support this need.
In 2017 two Charity Governance Codes were published and are due to be updated soon. Other institutions such as the IoD and EcoDa have issued codes but there is little evidence of widespread adoption.
So which code or principles should organisations look to reference against, if any? The answer is not necessarily straightforward and, as we have noted in our first article, requires a thorough and careful understanding of the organisation, its size & complexity, purpose, needs and obligations but also the resources available to it and its current governance practices.
So, what are the Codes and what sector are they aimed at?
There is no nationally recognised code or principle that is targeted at and widely adopted by the UK’s largest business sector, the SME. Historically some have adopted the UK Corporate Governance Code to some degree as it is freely available, is the most widely known UK code and seen as the gold standard. However, the UK Corporate Governance Code is intentionally demanding and can impose an unnecessary resource burden and distraction from achieving business purpose to those outside its target audience. The QCA code is not freely available and while the cost is modest the need for payment is seen as a handicap to its wider use as a point of reference.
YouGov conducted a survey of AIM listed companies following the 2018 AIM rule changes, i.e. that they all report against a recognised code.
They found that until they were required to do so, 30% of AIM listed companies had not adopted a recognised code. Just over half conducted a detailed assessment of their governance needs before deciding on a model, while the others largely relied on external recommendation or followed what similar companies to their own were doing.
The YouGov findings tally with our own when giving advice on suitable governance frameworks.
To be practical, business enhancing and suit the organisation’s needs.
To be tailored to an organisations size and stage of development.
To have no adverse impact on resources and current practices that should be dedicated to growth.
To be flexible and not overly burdened with one-size-fits-all prescriptive requirements.
To be easy to understand, to describe and to get buy-in from others.
To allow the user to connect beneficially across their business and with stakeholders.
To allow the user to meaningfully engage with institutional and retail investors.
That organisations like the user use the code or principle and seem to benefit from it.
Like YouGov, we find that while many organisations may not follow a recognised code many already have some established governance practices in place, however successful. A detailed assessment of needs, resources and current practices is therefore essential before implementing or remedying governance frameworks and should be a part of regular review intervals thereafter.
In our next article we’ll be looking at the core components of a governance framework across an organisation.
Governex is an advisory business that helps businesses incorporate governance as well as answering the question of how they make positive contribution to the environment and social issues while meeting the real challenges of delivering on their business objectives and purpose.
We help organisations implement the right shift in focus from a purely financial commitment to include environmental, social and governance commitments (ESG). All in the context of meeting business purpose.
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