What Is Corporate Governance?

What is Corporate Governance?

Every once in a while it is important to go back to basics and remind ourselves as to What is Corporate Governance?  

Here are the 10 primary aspects that define corporate governance, with particular attention to the UK and Ireland. 

  1. The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report issued by “The Committee on the Financial Aspects of Corporate Governance” chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures.

    The central components of this code, the then titled Cadbury Code, are:
  • that there be a clear division of responsibilities at the top, primarily that the position of Chairman of the Board be separated from that of Chief Executive and that there be a strong independent element on the board;
  • that the majority of the Board be comprised of non executive directors;
  • that remuneration committees for Board members be made up in the majority of non-executive directors; and
  • that the Board should appoint an Audit Committee including at least three non-executive directors.

Further details can be found at the Cadbury Report site.

  1. Corporate Governance regulates the relationship between the organisation, shareholders, directors and the executive management team.
  2. The UK Corporate Governance Code, while primarily aimed at publicly listed companies, is a concise summary of governance principles, which is useful to, and can be applied to, all companies.
  3. Governance codes for different sectors may be mandatory or voluntary. For example, the Code of Practice for the Governance of State Bodies (2016) (in Ireland) is mandatory, whereas others, such as  Building for the Future, A Voluntary Regulation Code for Approved Housing Bodies in Ireland https://www.housing.gov.ie/  is voluntary.
  4. “Hard” law, involving legislation and mandatory codes, brings a unilateral set of requirements, with rules that can be enforced by law and for which there are specific consequences for breaches of the rules.
  5. “Soft” law, based on guidance and voluntary codes, has the advantage of flexibility and the ability to deal with unforeseen circumstances that the law cannot anticipate. It provides a conceptual framework for decision-making and resolving issues.
  6. The notion of “comply or explain” means that if a company does not comply with the provisions of the UK Corporate Governance Code it must explain why. If a company has decided that it wants to comply with the Code, however, its broad underlying principles must always be complied with.
  7. The Irish Companies Act 2014 is a consolidation of previous Companies Acts and other, secondary legislation, as well as common law principles.
  8. The focus of the Companies Act 2014 is the simplified private company limited by shares (the LTD company), which is now classed as the model company in Ireland, rather than the PLC as in previous Companies Acts.
  9. The Companies Act 2014 encourages better governance by clarifying penalties and codifying directors duties. It emphasises the accountability of directors. 

The above summary is taken from “A Practical Guide for Company Directors” by David W Duffy, Ireland’s leading practitioner on corporate governance. 

For more information and practical guides for boardroom directors, join as a member of the Corporate Governance Institute

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