What is Governance?
What is Corporate Governance and how did it come about?
Corporate governance is a system by which an organisation is directed and controlled, using a process of monitoring and control, to ensure the management runs the organisation in an ethical way, in compliance with all relevant laws and regulations, and in the interests of all stakeholders, to ensure the long-term success of the organisation.
It could be said that Sir Adrian Cadbury is the godfather of corporate governance. The Committee on the Financial Aspects of Corporate Governance was set up in May 1991 by the Financial Reporting Council, the Stock Exchange and the accountancy profession in response to continuing concern about standards of financial reporting and accountability, particularly in light of the BCCI and Maxwell cases of corporate failure. Its subsequent report (published in 1992), became known as the Cadbury Report. In 1998, The Hampel Committee was established to review the extent to which the objectives of the Cadbury and Greenbury Reports were being achieved. The resulting Hampel Report led to the publication, in June 1998, of The Combined Code of Corporate Governance (the Combined Code). In 1999, the Turnbull Committee was established to provide direction on the internal control requirements of the Combined Code, including how to carry out risk management.
In 2003, Sir Derek Higgs was commissioned by the UK Government to review the roles of independent directors and of audit committees. The revised Combined Code published in June 2003 brought in more changes and applied to financial years beginning on or after 1 November 2003. A revised version of the Code was published in September 2012 and applied to financial years commencing on or after 1 October 2012. The changes included better reporting by Audit Committees; confirmation by Boards that the annual report and accounts taken as whole are fair, balanced and understandable; and that companies explain and report on progress with their policies on boardroom diversity. This then became the UK Corporate Code which has seen several revisions, most recently in 2018, and is the Code on which the Code of Good Governance for English Colleges is based. The FRC published guidance alongside the revised Corporate Code, entitled Guide of Board Effectiveness.
What is the purpose of Corporate Governance?
The key function of an effective governance regime, is to:
- eliminate misleading/false financial reporting
- prevent organisations being dominated by a self-seeking Chair/CEO
- reduce the risks of corporate scandals by promoting fairness, responsibility, accountability and transparency as laid out in the Nolan Principles
- protect and give confidence to all stakeholders
- promote effective risk management and keep risk to an acceptable level
- ensure long-term sustainability