Key Principles of the UKCGC

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.”

1. Corporate governance controls – the definition of corporate governance would be profoundly different in my opinion if it didn’t make the point that corporate governance is there to control as well as direct. As previously indicated, many commentators wrongly interpret governance as being purely about compliance. It is true that a governance system should ensure that an organisation is able to comply with the principles that it has signed up to. This however is just a first step. Good governance should also drive performance and anticipate and manage strategic risks. It should control the environment the organisation is operating in. Sir Adrian states that; “It is for boards to set internal control policies and to assure themselves that they are working as they should.”  The Cadbury report of 1992 states in relation to the role of boards: “They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance.” Corporate governance moves organisations from conformance to performance.
2. The board should satisfy themselves that an appropriate governance structure is in place – in his book ‘Corporate Governance and Chairmanship’ Sir Adrian Cadbury poses this question: “To whom does the board owe its duty?” The answer he gives is as follows: “The simple answer to this question is that boards owe their duty to their shareholders.”  In further examining a company’s contract with society and the corporate social responsibility of organisations, Sir Cadbury determines that; “The primary level [of company responsibility] comprises the company’s responsibilities to meet its material obligations to shareholders… The sanctions against failure to match up to these relatively easily defined and measured responsibilities are provided by competition and by the law.” The 2009 King III Report, one of the leading authorities on the importance of corporate social responsibility in governance says this of stakeholders; “A stakeholder-inclusive corporate governance approach recognises that a company has many stakeholders that can affect the company in the achievement of its strategy and long-term sustained growth.” The final part of the definition that I want to focus on is the fact that there is a purpose to the governance structure. Boards need to find the appropriate structure to satisfy all its responsibilities and stakeholders.

 

The Cadbury Report was not the first governance code, nor was it unique in the aspects of its collation. Indeed, the fact that it is derived from consolidating the best practice of many organisations governance would suggest it couldn’t be unique. But having reviewed codes from the private and voluntary sectors and across many international jurisdictions, it clearly has had and continues to have a significant influence on their development.

 

The UK Corporate Governance Code, last updated in 2014, has embodied much of that first ‘Report of the Committee on The Financial Aspects of Corporate Governance’ chaired by Sir Adrian Cadbury which again demonstrates its critical importance to this day.

 

A brief examination of its main principles helps us to frame our understanding of the key elements that every organisation should pursue in their endeavours to achieve high standards in corporate governance. Some of these are:

 

A)        The relationship between the chair and CEO is crucial to the success of any organisation and having clear boundaries and expectations for the board and executive team are the alpha and omega of governance. Getting that relationship right is a precursor to getting the relationship right between the board and the executive team. As the Cadbury Report stated: “Every public company should be headed by an effective board which can both lead and control the business.”  It goes on further to state that: “Tests of board effectiveness include the way in which the members of the board as a whole work together under the chairman…”

 

B)        The board must be effective which means it needs to balanced, recruited effectively, able to reflect on its own performance whilst discharging its duties and responsibilities. Board members have to be able to work effectively as a team where the sum of the skills, experience and knowledge is greater than any individual board member. This helps to navigate through the agendas designed to manage risk, challenge the executive and be custodians of the vision at each board meeting.

 

C)        With the ever-increasing interests of a variety of stakeholders, every organisation has a responsibility to be open and transparent in its reporting. A timely reminder of the current language of the UK Corporate Governance Code of 2014 is found in the original Cadbury Report: “We recommend that boards should pay particular attention to their duty to present a balanced and understandable assessment of their company’s position.” Balance requires that setbacks should be dealt with as well as successes, while the need for the report to be readily understood emphasises that words are as important as figures.

 

D)       It was a report in 1932 by Berle and Means that articulated the components of the divorce of ownership from control and all students of governance will have discussed agency theory. The importance of setting the remuneration protocols cannot be underestimated. The Cadbury Report stated and the principle is still relevant that: “The overriding principle in respect of board remuneration is that of openness.” Executive director’s remuneration was a critical component of the review started in 1991 and the conclusion is that remuneration should be designed to promote the long-term success of the company and any performance related elements should be transparent.

 

E)         The final element is ensuring that stakeholders are empowered through the practices and communication with the all stakeholders. The board should keep in touch with their stakeholders with the aim of satisfying their interests.

 

As a leading name in the field of corporate governance, Sir Adrian Cadbury certainly left us with principles that will continue to influence the area for decades to come. Notwithstanding the numerous reports that have been published since the Cadbury Code in 1992, his method of consolidating all codes and giving corporate governance a real presence is something that has ensured a legacy will continue. Moving forward, I’m sure that wherever corporate governance is discussed, taught or debated, the name Sir Adrian Cadbury will feature!

 

Until next time…