LAWS10083 Company law -Corporate Governance., Study notes of Law

Download LAWS10083 Company law -Corporate Governance. and more Study notes Law in PDF only on Docsity! Corporate Governance Concept of corporate governance • Corporate governance is as old as trade; however, the phrase ‘corporate governance’ is relatively new. • There is no single, accepted definition of corporate governance. For instance, it could be defined as the relationships at the top of the firm – the board of directors, the senior managers and the stockholders. • Corporate governance – understood in the broad sense as the system by which companies are directed and controlled – has become in the recent years a key topic for legislation, practice and academia in all modern industrial states. EVENTS LEADING UP TO THE NEW CORPORATE GOVERNANCE CODE 2014  The Companies Act 2006 is currently the main legislation that regulates the corporate governance in the UK. However, apart from the hard law there are also soft law measures – known as Corporate Governance Codes – which contribute to the shaping of the current system.  The first Code on Corporate Governance was the Cadbury Code (1992), under the Chairmanship of Sir Adrian Cadbury. This was followed by the Greenbury Code (1995), under the Chairmanship of Sir Richard Greenbury. The next Code was the Hampel Code (1998). In 1998, these three codes were consolidated into the UK Combined Code.  In 1999 the Turnbull Report was produced.  Subsequent reports followed in 2003: one by Derek Higgs (a banker), the other by Sir Robin Smith and also the Tyson Report was issued. These resulted in the Revised Combined Code 2003.  The Combined Code was reviewed again in 2006 and 2008 and there was also an enquiry into, and resulting report concerning, corporate governance and banks by Sir David Walker: A review of corporate governance in UK banks and other financial industry entities. Final recommendations, 26 November 2009: available at: http://webarchive.nationalarchives.gov.uk/+/http:/www.hmtreasury.gov.uk/d/ walker_review_261109.pdf  The Walker review looked at the failings of corporate governance in banks during the recent problems in the United Kingdom banking system, which was recently exposed.  The 2010 UK Corporate Governance Code was the next in the line of reports and codes (followed by the Codes of 2012, 2014 and the current 2016 Code). The 2016 Code is available at: https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK- CorporateGovernance-Code-April-2016.pdf  Another important report that had impact on corporate governance in the UK is the Kay Review of the UK Equity Markets and Long-Term Decision Making – (to tackle the consequences of the economic crisis)- Final Report, July 2012), available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bi s-12-917-kay-review-of-equity-markets-final-report.pdf  For the up-to-date consultations and revisions to the UK Corporate Governance Code go to: https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK- CorporateGovernance-Code/Consultattions-and-Revisions-to-the-UK-Corporate-G.aspx “COMPLY OR EXPLAIN” RULE  The UK Corporate Governance Code is applicable to a listed company incorporated in the UK, i.e.: a company admitted to the “official list” (s 74 Financial Services and Markets Act 2000), which is maintained by the Financial Conduct Authority (FCA) and trading on the main market of the London Stock Exchange. All companies listed on the official list and are trading on the main markets of the London Stock Exchange must apply the code to the affairs of their company- this is mentioned in the listing rules and the companies act- being both soft and hard law approach.  Difference between premium and normal listing? Listing on the main market (contains the premium market and AIM or listing on the alternative market  The Listing Rules1 of the FCA require such a company to supply a statement detailing whether a company has complied or failed to comply with the provisions set out in the UK Corporate Governance Code (see especially rule 9.8.6(5)).  The statement regarding compliance or reasons for non-compliance must be included in the director’s report (according to s 419A Companies Act 2006). The UK Corporate Governance Code is thus “soft law” and operates on a “comply or explain” basis (see: The UK Corporate Governance Code (April, 2016), p 4).  The companies must either comply with the rules in the code failing to which they must give reasons to explain their non- compliance: this is the soft law effect STRUCTURE OF THE NEW UK CORPORATE GOVERNANCE CODE (2014)  The 2016 Code is a set of non-binding principles identifying objectives for good governance, which are fleshed out later on, and expanded upon. In this way, it is similar to the Takeover Code (although considerably shorter).  The Code consists of principles (main and supporting) and provisions. After setting out the “Main Principles” (pp 5-6), the UK Corporate Governance Code is divided into five sections, which deal with different aspects of corporate governance:  “Section A: Leadership” – refers to having “an effective board”, taking “collective responsibility for the ... [company’s] long-term success”. [Cf s 172 CA 2006] (pp 7-9) NB: The role of non-executive directors (which we looked at in the seminars on directors) is very important. The role of non-executive directors is underlined in the Principle A.4; however, please note that it is apparent throughout the whole 2014 Code. (pp 7-9) Section A4 discusses the role of non-executive directors : “[a]s part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.”(Main Principle) the CA only speaks of the board of directors and the code goes further to distinguish between non- exec directors and executive directors.  “Section B: Effectiveness” – refers to “the board and its committees” having “the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. ” [Cf case