Achieving long-term company success requires effective and prudent management achieved through corporate governance. The United Kingdom’s code of corporate governance outlines aspects of operative board practice based on good governance principles such as leadership, transparency, accountability, integrity, and entity sustainability in the long term (Financial Reporting Council, 2016 pg. 1). As part of best practice merit and a legislative framework, the code aims to attain high standards of corporate governance with internal flexibility mechanisms that allow adaptation to specific circumstances. Financial Reporting Council (2016 pg.5) states that the company’s board and its committees ought to have an adequate balance of competence and company information to implement duties appropriately. Although the United Kingdom code of corporate governance provides a basis for achieving an appropriate standard of governance, the role of committees such as the appointments committee and succession planning and steward committee, and committees of investors underscores its ultimate success.
Appointments committee and succession planning
The United Kingdom Corporate Governance Code calls for establishment of a nomination committee by the board to develop adequate plans for orderly succession during senior managerial and board positions handover. According to Financial Reporting Council (2018, pg.8), the committee should have majorly sovereign non-executive directors appointed through external search consultancy and open advertising. By not being a member of the executive team management, non-executive directors give an unbiased opinion devoid of conflict of interest in managing daily company operations (Kishore, 2017 pg.28). They, therefore, provide a fresh outlook to organizations through offering guidance and connections. Kishore (2017, pg. 28) however argues that authors have stated a shift to independent directors erodes the influence of minority shareholders and results in the distinction between control and ownership. A model where directors are significant shareholders in a company hence their interests and that of the company are interconnected.
The successions committee also ensures board chairs are in a managerial post for a period not exceeding nine years from the initial appointment date to the board, with directors subject to yearly re-elections. An effective succession plan entails developing diversity in the board and developing accompanying papers outlining directors’ specific contributions. This protects firms from staggered boards where elections of directors cover multiple years. Adams, Hermalin, and Weisbach (2010 pg.83) argue that staggering boards serve to shield management making takeovers problematic and therefore undermining principles of corporate governance. Annual elections are an effective tool for appropriate standards of governance.
Steward Committee and Committees of Investors
In the United Kingdom corporate governance code, the steward committee and committee of investors are intent on meeting medium to long term assets return of clients and company shareholders. Through constructive dialogue and supportive engagements derived from an understanding of their business environment, the corporate value of a firm is enhanced and aligns with management strategies. Investors’ stewardship actions and the principle of collective management have been instrumental in achieving high governance standards and promoting long-term investment (Financial Reporting Council, 2018 pg. 1). Investors should therefore strive for constructive engagements and build discussions with firms regarding departure from stipulated practice.
The evolution of behavior codes emanated from institutional Shareholders’ Agencies and has led to the development of the United Kingdom Stewardship Code. This addresses the concerns regarding the lack of interest from shareholders in the corporate world (Organization for Economic Co-operation and Development, 2011 pg.37). However, OECD (2011, pg.37) states that the stewardship code faced backlash as aspects of conflict of interest have been weakly addressed yet they are common in nature, hence addressing it would be appropriate. Furthermore, the code does not clearly state the role and jurisdiction of the committees of investors with aspects such as the committee aim and its relation to organization expenditure needs lacking an elaboration. According to Mintz (2009, pg.2), such roles should be defined in a committee charter specifying risk parameters, management recruitment, and termination and should be agreed by the board of directors.
In summary, the United Kingdom code of corporate governance is an important framework for obtaining an appropriate standard of governance. Through the role of the appointments committee and succession planning, adequate plans for orderly succession during senior managerial and board positions handover are developed. The appointment of sovereign non-executive directors allows for giving an unbiased opinion devoid of conflict of interest in managing daily company operations. Availability of successions committees facilitates annual elections for board directors, protecting firms from staggering boards that serve to shield management, making takeovers problematic and therefore undermining principles of corporate governance. Steward committee and a committee of investors are intent on meeting medium to long term assets return of clients and company shareholders through value addition of corporate firms. However, the stewardship code faced backlash as aspects of conflict of interest have been weakly addressed yet they are common in nature. Furthermore, the code does not clearly state the role and jurisdiction of the committees of investors with aspects such as the committee aim and its relation to organization expenditure needs lacking an elaboration.
Bibliography
Adams, R.B., Hermalin, B.E. and Weisbach, M.S. (2010). The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey. Journal of Economic Literature, [online] 48(1), pp.58–107. Available at: https://www.jstor.org/stable/40651578?seq=1.
Financial Reporting Council (2016). Code Corporate Governance Financial Reporting Council The UK Corporate Governance Code. [online] Available at: https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf.
FRC (2018). THE UK CORPORATE GOVERNANCE CODE. [online] Available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK Corporate-Governance-Code-FINAL.PDF.
Kishore, K., 2017. Independent Directors and Corporate Governance: A Comparative Study of Indian and UK Provisions. IUP Journal of Corporate Governance, 16(1).
Mintz, J. (2009). The Roles and Responsibilities of Investment Committees of Not-For-Profit Organizations. [online] Available at: https://www.macfound.org/media/article_pdfs/articleoninvestmentcommitteesrev4.pdf.
Organisation for Economic Co-operation and Development (2011). The Role of Institutional Investors in Promoting Good Corporate Governance. [online] Available at: https://www.oecd.org/daf/ca/49081553.pdf.
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