The difference between corporate governance in the UK and the US

Corporate governance is a complex issue that sparks debate among organisations worldwide.

What is the best way to protect shareholders and consumers from corporate ineffectiveness and malfeasance?

Some countries manage this issue better than others, and the UK is often referred to as a positive example.

The US system is more problematic.

Corporate governance in the UK and the US have fundamental practical and philosophical differences.

The UK model is principles-based and often praised for its effectiveness, while the US rules-based model invites criticism for being unnecessarily complicated and punitive.

Below are some of the critical differences.

This model is a comply or explain system that is more flexible in its approach than the US and treats some companies differently. Instead, it considers each entity’s specific circumstances when enforcing certain provisions.

For instance, companies differ in ownership structure, size, geography, etc. As a result, the UK tailors governance arrangements to fit a company’s unique design.

If a company departs from Code 2018, the guiding light for UK corporations, it must explain why its choices are a better way to meet high governance standards.

This system acknowledges that there is more than one way to reach the same aim: ethical and workable governance standards.

Members of the European Union consider the UK an example of effective corporate governance largely because of board standards.

These standards remove conflicts of interest and allow the public a clear view of company operations and management.

Corporations have a single board of directors with a separate chairman and CEO, executive and independent directors, annual reviews, enforced shareholder rights, appointment and salary transparency, and independent audit committees. 

The US corporate governance system has some similarities to the UK model but takes a different approach to enforcement.

The US bases its system on the 1933 and 1934 Securities Acts (deemed necessary in the wake of the Stock Market crash of 1929), Securities and Exchange Commission (SEC) regulations, and individual state laws. 

Delaware’s laws are the most important since more than 50% of US corporations are incorporated there due to the state’s favourable business climate.

Other federal agencies also impact US corporate governance, including the Federal Reserve and FCC.

This tapestry of laws and regulations makes compliance more difficult since federal and state laws are often incompatible.

Even the different federal agencies may offer contradictory guidelines.

To complicate things further, the NYSE and NASDAQ have particular requirements for corporations to trade on their exchanges.

In all cases, the laws are complex and require expert legal guidance to navigate. Corporations almost inevitably run afoul of some law or agency, creating an “us vs. them” mentality.

US corporations have a board of directors with a chairperson; the CEO may also serve.

However, in some cases, the Chair is the CEO, which can cause a severe conflict of interest.

For example, the board decides the CEO’s remuneration, allowing some Chairs to help set their own salaries.

Since companies are supposed to act in the best interest of the shareholders, this dual role needs to be revised. 

The UK model has fewer rules and regulations and focuses on governance principles. This means that the code is open to a degree of interpretation.

While this approach may seem more likely to be abused, the reality is different. 

For instance, the Code 2018 emphasises board diversity and responsibility as it creates attitudes and practices for the entire company.

This general guidance helped companies such as De la Rue, a UK entity that produces passports and banknotes, put together an award-winning board.

They were praised for having all directors actively participate in management by encouraging debate and attention to future success. 

The Parker Review Committee has recently recommended that by 2027, the largest UK private companies have a self-identified ethnic minority member on their board, set a target number for ethnic diversity among their executive teams, and prepare a yearly report on their progress.

These are recommendations, and compliance is optional, but expectations for change are high.

In the US, public and regulatory agencies see optional guidelines as less effective.

Specific rules and regulations followed by stiff penalties for non-compliance are the norm.

In fact, some shareholders might question the effectiveness of a board that “caved” to change without being forced. 

In 2022, the SEC fined corporations a record amount for violations: $6.4 billion in civil penalties, with JP Morgan and Ernst and Young LLP being two of the hardest-hit business entities.

These increased fines demonstrate the adversarial relationship that US corporate governance relies on.

UK corporate governance has its share of issues. Still, its philosophy-based and flexible attitude toward enforcement seems more effective than the US model, which is a maze of regulations, multiple agencies, and corporate punishments.