Corporate governance practices in different countries are influenced and determined by an uneven mix of law, regulation, culture and custom. The following overview highlights a number of areas where these influences manifest themselves most strongly. Each section below highlights the features and practices that make corporate governance in the UK different from that of other countries. Here you will find information about how British boards are typically constituted, requirements for audit committees, the breadth of shareholder rights on offer, the role of investors in corporate governance, and much else besides.
UK shareholders enjoy more rights than investors in many other jurisdictions. There is a universal one-share, one-vote standard, shareholders may put forward their own resolutions and nominate candidates at annual general shareholder meetings (AGMs), and they enjoy an annual advisory vote on excutive remuneration policy (the so-called 'say-on-pay' vote). Shareholders also enjoy preemptive rights over new share issues and may themselves convene AGMs.
UK implementation of the European Union's Statutory Audit Directive, in the UKLA's Listing Rules, imposes a requirement, for all companies whose securities are traded on a regulated market in the EU to have an audit committee (or equivalent body). The Listing Rules include details of the minimum functions of the audit committee. The Combined Code also includes provisions on the composition and role of the audit committee and these are fully compatible with the Listing Rule requirements. The Combined Code recommends audit committees be comprised of at least three members, all of whom should be independent non-executive directors and one of whom should have recent and relevant financial experience.
Takeovers in UK are regulated by the takeover panel (Panel on Takeovers and Mergers), a quasi-public body that adjudicates disputes during takeovers. The UK does not allow many structural takeover defenses that are common elsewhere.
Boards of Directors
UK listed boards combine executives and independent, non-executive directors (NEDs). The Combined Code recommends that at least half the board, excluding the chairman, comprises independent NEDs. The Code also recommends that there is a clear division of responsibilities at the head of the company and so practically all boards separate the roles of chairman and chief executive. Many boards have also appointed a "senior independent director" in addition to the chairman, whose role is, among other things, to act as an additional channel of communication between the board and shareholders. Most boards maintain an audit committee, a remuneration (compensation) committee and a nomination committee.
The UK has become known as a leader in the "comply or explain" corporate governance regime. Beginning with the Cadbury Code in 1992, these recommendations have been added to at regular intervals since that date. In 1995 the Greenbury Report set out recommendations on the remuneration of directors. In 1998 the Cadbury and Greenbury Reports were brought together by the Hampel Report and the Combined Code was issued. In 1999 the Turnbull Guidance on internal control was issued for directors. Following the Enron and WorldCom scandals the Combined Code was updated in 2003 to include the recommendations of the Higgs Report on non-executive directors and the Smith Report on audit committees. Further small amendments have been made to the Combined Code in 2006 and 2008, but the "comply or explain" regime has been retained throughout.
Executive pay remains a topic of considerable debate in the UK. Investors, led by the NAPF and the ABI, keep close watch on pay schemes that exceed accepted norms. Share option schemes are common, as are restricted share unit schemes. Service contracts for chief executives are also watched to ensure that payouts on departure do not exceed one year's remuneration. Shareholder votes against 'say on pay' resolutions have been rare: but are becoming increasingly common in the current economic climate when so-called "rewards for failure" are being heavily criticised.
Role of Institutional Investors
While share-ownership is not highly concentrated (ownership stakes of more than 5 percent of listed companies are uncommon), institutional investors play a large role in their ongoing discussions with management. Many investors follow the lead of the Association of British Insurers (ABI) and National Association of Pension Funds (NAPF), who both produce guidance for UK boardrooms. Institutional engagement has increased in recent years, however it remains behind the scenes more often than in the press. Since the credit criris, there has been some criticism that shareholders could have done more to prevent abuses by holding management to account.
UK Governance Links
Investors and Advocates
- National Association of Pension Funds (NAPF) Governance Page
- ABI IVIS Corporate Governance Page
- Railpen Investments Corporate Governance Page
- Hermes Corporate Governance Page
- Foreign & Colonial (F&C) Corporate Governance Page
- Governance for Owners
- Tomorrow's Company