Corporate governance requirements are the rules and practices that guide how a company is run. For company directors, understanding these requirements is important for building trust with investors, making sure they follow the law, and protecting everyone involved in the company.
In this article, we’ll provide a clear guide to help company directors understand their responsibilities and the key principles of good corporate governance.
Table of Contents
- What is corporate governance?
- What are the 3 key principles of corporate governance?
- What is the role of company directors in maintaining and promoting good corporate governance practices?
- What are the legal duties of company directors?
- What is the UK Corporate Governance Code?
- What are the Wates Principles?
- How does the UK Corporate Governance Code apply to different types of companies?
- What are the reporting obligations for company directors?
- How often should directors review their governance practices?
- How can SMEs implement effective corporate governance practices?
- What are the consequences of non-compliance with corporate governance requirements?
- How can a solicitor support directors with corporate governance?
What is corporate governance?
Corporate governance is the framework of rules and practices that guide how a company is managed and controlled. It involves making sure that a company operates transparently, ethically, and following the law, while balancing the interests of shareholders, management, and other stakeholders.
What are the 3 key principles of corporate governance?
The 3 key principles of corporate governance are:
Accountability
Integrity
Trust
These values are the pillars of good governance and help businesses drive long-term investments, maintain financial stability, and uphold business integrity.
What is the role of company directors in maintaining and promoting good corporate governance practices?
The role of company directors in maintaining and promoting good corporate governance practices involves ensuring the company is managed ethically, transparently, and in compliance with laws and regulations.
Directors are responsible for:
Setting the company’s direction by establishing strategies and goals;
Monitoring the performance of the management team and making sure they act in the company’s best interest;
Communicating important information to shareholders and holding management accountable;
Making decisions impartially and without personal conflicts of interest;
Being transparent about the company’s activities, including financial performance, risks, and conflicts of interest.
In carrying out these responsibilities, directors can make sure the company operates smoothly, gains investor confidence, and achieves long-term success.
What are the legal duties of company directors?
Under the Companies Act 2006, the legal duties of directors are to:
Act Within Powers: Directors must comply with the company’s Articles of Association and use their powers only for their intended purposes;
Promote the Success of the Company: Directors should act in a way that they genuinely believe will most likely promote the success of the company for the benefit of its members;
Exercise Independent Judgment: Directors must make their own decisions and not let others control their decision-making power;
Exercise Reasonable Care, Skill, and Diligence: Directors must perform their duties to the best of their abilities to operate the company successfully;
Avoid Conflicts of Interest: Directors must avoid situations where their interests conflict with the company’s and make any potential conflicts of interest known as per the company’s Articles of Association;
Not Accept Benefits from Third Parties: Directors should not accept any benefits from third parties that could influence their decisions;
Declare Interest in Proposed Transactions or Arrangements: Directors must make it known if they stand to benefit personally from a transaction the company will make.
What is the UK Corporate Governance Code?
The UK Corporate Governance Code is a set of guidelines for companies to make sure they are run effectively and responsibly.
The Financial Reporting Council maintains the code, which outlines best practices for board composition, accountability, risk management, and stakeholder relations.
What are the Wates Principles?
The Wates Principles are a set of voluntary corporate governance guidelines specifically designed for large private companies in the UK.
The six Wates Principles are:
Purpose and leadership
Board composition
Director responsibilities
Opportunity and risk
Remuneration
Stakeholder relationships and engagements.
The Wates Principles are designed to improve corporate governance practices in large private companies, which traditionally may not have been subject to the same level of scrutiny as publicly listed companies.
Companies that choose to adopt the Wates Principles should:
Document how they apply each of the principles and disclose this in their annual reports;
Review and adapt their governance practices to ensure they remain effective;
Engage with stakeholders to understand their views and make sure the company’s governance practices meet their expectations.
How does the UK Corporate Governance Code apply to different types of companies?
The UK Corporate Governance Code applies to limited companies on the London Stock Exchange. They must follow the Code and explain any deviations in their annual reports, a practice known as “comply or explain.”
Most private companies don’t have to follow the Code directly. However, large private companies meeting certain thresholds (such as having over 2,000 employees or a turnover of more than £200 million and a balance sheet of more than £2 billion) must disclose their governance provisions to the Financial Reporting Council under The Companies (Miscellaneous Reporting) Regulations 2018. The Wates Principles above provide a structured approach to do this.
Small and medium-sized enterprises (SMEs) don’t have a specific code to follow. Rather, corporate governance focuses more on improving business efficiency over monitoring management actions.
What are the reporting obligations for company directors?
Directors must prepare and file:
Annual accounts that give a true and fair view of the company’s financial position;
An annual confirmation statement to confirm the company’s details are up to date;
An annual corporation tax return;
A director’s report detailing the company’s performance and any significant events as part of the annual accounts;
Directors must also report any significant changes (such as changes in directors, registered office, or share capital) to Companies House and ensure that the company maintains accurate statutory registers.
For listed companies, directors must report on how the company has applied the principles and provisions of the UK Corporate Governance Code.
How often should directors review their governance practices?
Directors should review their governance practices regularly to ensure they remain compliant with legal requirements and adapt to changes in the business environment.
This may be annually, quarterly, on an ongoing basis, or following significant events such as mergers, acquisitions, or major changes in the business environment.
How can SMEs implement effective corporate governance practices?
Effective corporate governance in SMEs helps in managing risks, ensuring compliance, and building trust with stakeholders. SMEs can implement robust corporate governance practices by:
Clearly outlining the roles and responsibilities of directors, managers, and employees;
Having a diverse board with a mix of skills and experiences relevant to the business;
Creating a code of conduct that outlines expected behaviours and ethical standards;
Implementing internal controls to monitor and manage risks;
Regularly reporting on financial performance and other key aspects of the business;
Maintaining open and honest communication with stakeholders;
Scheduling regular board meetings with clear agendas and detailed minutes;
Regularly reviewing the performance of the board and management team;
Conducting regular risk assessments;
Having a crisis management plan in place to respond to unexpected events;
Staying up-to-date with changes in laws and regulations that affect the business, like employment law and industry-specific requirements.
What are the consequences of non-compliance with corporate governance requirements?
Regulatory bodies like Companies House and the Financial Conduct Authority can impose fines for failing to file required documents or other compliance breaches.
Further, directors can be disqualified from acting as directors for up to 15 years under the Company Directors Disqualification Act 1986 if they are found unfit to manage a company.
In some circumstances, directors may be held personally liable for the company’s debts or stakeholders may bring legal action against them for breach of their duties, which could result in compensation payments or other penalties.
How can a solicitor support directors with corporate governance?
Corporate solicitors help directors understand and comply with the regulations and laws applicable to their business, including the Companies Act 2006 and the UK Corporate Governance Code.
Further, they can assist in drafting, reviewing, and updating company policies, Articles of Association, and Shareholder Agreements to provide a clear framework for governance and decision-making.
In short, by partnering with a knowledgeable solicitor, directors can navigate the complexities of corporate governance with confidence and ensure their company operates efficiently and ethically.
At Lawhive, our network of experienced corporate lawyers is dedicated to supporting directors with all aspects of corporate governance.
Contact us today to schedule a free case evaluation and receive a no-obligation quote for our services.