UK CORPORATE GOVERNANCE CODE

(To familiarize with the best practices on Corporate Governance & Corporate Laws)

INTRODUCTION:

The UK Corporate Governance Code (also known as”Combined Code”) is a set of principles of corporate governance aimed at companies listed on the London Stock Exchange. It is supervised by the Financial Reporting Council and its importance derives from the Financial Services Authority’s Listing Rules.

All the UK reports and codes, including this Code have taken the ‘comply or explain’ approach. Although only quoted companies (those with a premium listing on the London Stock Exchange, whether they are incorporated in the UK or elsewhere) are obliged to report how they apply the Code principles and whether they comply with the Code provisions and, where they do not, explain their departures from them. The Code has also had a very noticeable and a wider impact on governance of organizations outside the commercial corporate sector where parallel codes of governance are emerging. For a quoted company reporting on its application of the Code is one of its continuing obligations under the Listing Rules published by the UK Listing Authority (UKLA). If quoted companies ignore the Code, then there will be penalties under the Listing Rules.

THE PURPOSE OF THE CODE

The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company which is depend on the composition, formation and implementation of board, its committees and policies. The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. The committees of board play a material role in corporate decision making.

THE MAIN PRINCIPLES OF THE CODE:

The Code is divided into main principles, supporting principles and provisions. For both main principles and supporting principles a company has to state how it applies those principles. In relation to the Code provisions a company has to state whether they comply with the provisions or – where they do not – give an explanation. It is the Code provisions that contain the detail on matters such as separation of the role of chairman and chief executive, the ratio of non-executive directors and the composition of the main board committees.

The first principle of the Code states that: “Every company should be headed by an effective board”. The board’s effectiveness is widely regarded as a prerequisite for sustained corporate success. The quality and effectiveness of directors determines the quality and effectiveness of the board. Formal processes for appointment, induction and development should be adopted. Effectiveness of the board and its individual members has to be assessed. The Code states that no one individual should have unfettered powers of decision-making. It sets out how this can be avoided by splitting the roles of chairman and chief executive, and specifies what the role of the chairman should be. The Code offers valuable guidance on the ratio of non-executive to executive directors and definitions of independence

A – Leadership

1. The role of the board
   Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.

2. Division of responsibilities
   There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

3. The chairman
   The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.

4. Non-executive directors
   As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

B – Effectiveness

1. The composition of the board: The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

2. Appointments to the board: There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.

3. Commitment: All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

4. Development: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

5. Information and support: The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

6. Evaluation: The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

7. Re-election: All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

C – Accountability

1. Financial and business reporting: The board should present a balanced and understandable assessment of the company’s position and prospects.

2. Risk management and internal control: The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

3. Audit committee and auditors: The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

D – Remuneration

1. The level and components of remuneration Levels of remuneration should be sufficient to attract retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

2. Procedure There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

E – Relations with shareholders

1. Dialogue with shareholders: There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

2. Constructive use of the AGM: The board should use the AGM to communicate with investors and to encourage their participation

Conclusion:

1. The chairman is responsible for leadership of the board and ensuring its effectiveness the same shall be adopted in India as well.

2. There shall be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision. In India, it is advisable to have a charter on roles and responsibilities of committees.

3. Annual Report of UK companies shall includes a statement of how the board operates, including a high level statement of which types of decisions are to be taken by the board and which are to be delegated to management and it shall be adopted in India.