A corporate governance code is a guide for board members and directors, setting out how they should approach governance in their organisation.
Corporate governance codes are relatively recent in modern business. Most of the prominent examples only took shape from the late 1990s.
And while it’s nice to think they came about out of a proactive desire for more honest business, most were reactive – being crafted to ensure that previous scandals and errors wouldn’t happen again.
Nevertheless, they are now a core feature of modern corporate governance, and you should know what they’re about.
What is a corporate governance code?
It is a set of principles for the best practice in corporate governance. A cross between a guidebook and a rulebook; it usually recommends how directors and executives should handle governance.
Corporate governance codes vary across borders, so it’s important to remember that their recommendations depend on a particular country’s legal and business context.
What does a corporate governance code cover?
In general, these codes are checklists for corporate governance professionals, allowing them to track their progress in:
- Leadership and a board’s responsibilities to the company
- Effectiveness, incorporating skillset matches, time management etc.
- Remuneration explicitly ensuring that it conforms to industry standards
- Relationships with shareholders
Why are corporate governance codes important?
They are essential because they are becoming the universal benchmark of corporate governance standards, against which it’s easy for stakeholders to highlight good behaviour and expose errors.
Good corporate governance is more important now than ever because:
- Government and stakeholder pressure to do well is mounting. The price for falling short is rising.
- Legislation mandating corporate governance is being expanded and is increasingly cross-border in focus, especially in the European Union.
- Investors want clarity and safety in this turbulent economic time.
- The rise in the importance of Environmental, Social and Corporate governance (ESG) demonstrates that the world values corporate integrity and wants to maintain that priority in future.
So, if the concept is important, then the code that guides it is important too.
What are some good examples of corporate governance codes?
The UK example is a global benchmark, without a doubt.
Coming into being in 1998, it may not have been a world-first in corporate governance standard-setting (the US had begun work on this in the 1970s). Still, it was a milestone in modern oversight, and other countries such as India and Australia have copied the template since.
The UK Corporate Governance Code
By the early 90s, Britain had gone through multiple large-scale governance scandals. A government report recommended the establishment of a corporate governance code, which would form a part of UK company law and be overseen by the Financial Reporting Council (FRC).
The code has now been in operation for over two decades.
Pivotally, it was the first code to introduce the “comply or explain” concept, which has been copied in other codes since.
“Comply or explain” means companies have two choices when it comes to following the corporate governance code:
- Just follow it
- If not, then explain why
Lawmakers have designed the code to strengthen compliance standards and increase transparency in corporate governance across Britain.
For and against corporate governance codes
No major jurisdiction with a corporate governance code plans to do away with them any time soon. In fact, some countries – like the UK – continuously make plans to strengthen them, and plug perceived gaps in company law.
The codes do have their criticism, however.
For example, professor of corporate law at Cambridge University Brian Cheffins recently wrote a Financial Times opinion piece calling for the complete abolition of the UK code.
His main reasoning was that the code’s positive aspects could be achieved in other ways, and the damaging elements harmed business. More specifically:
- Much of the UK code is irrelevant
- ‘Comply or explain’ doesn’t work
- It doesn’t encourage protection for stakeholders
- Policymakers don’t engage
While criticism like this is not unheard of, the chances of it altering the dominance of corporate governance codes are minimal. So boards should expect them to stay and get more challenging as time goes on.
A corporate governance code combines hard and soft law that functions as a standards book for boards. Their importance is increasing, as is their prevalence, so board members should be familiar with the codes in the countries they work.