The UK Corporate Governance code, formerly known as the Combined Code (from here on referred to as "the Code") is a part of UK company law with a set of principles of good corporate governance aimed at companies listed on the London Stock Exchange. It is overseen by the Financial Reporting Council and its importance derives from the Financial Conduct Authority's Listing Rules. The Listing Rules themselves are given statutory authority under the Financial Services and Markets Act 2000 and require that public listed companies disclose how they have complied with the code, and explain where they have not applied the code in what the code refers to as 'comply or explain'. Private companies are also encouraged to conform; however there is no requirement for disclosure of compliance in private company accounts. The Code adopts a principles-based approach in the sense that it provides general guidelines of best practice. This contrasts with a rules-based approach which rigidly defines exact provisions that must be adhered to. In 2017, it was announced that the Financial Reporting Council would amend the Code to require companies to "comply or explain" with a requirement to have elected employee representatives on company boards.
In July 2018, the Financial Reporting Council released the new 2018 UK Corporate Governance Code, which is designed to build on the relationships between companies, shareholders and stakeholders and make them key to long-term sustainable growth of the UK economy.
Origins
The Code is essentially a consolidation and refinement of a number of different reports and codes concerning opinions on good corporate governance. The first step on the road to the initial iteration of the code was the publication of the Cadbury Report in 1992. Produced by a committee chaired by Sir Adrian Cadbury, the Report was a response to major corporate scandals associated with governance failures in the UK. The committee was formed in 1991 after Polly Peck, a major UK company, went insolvent after years of falsifying financial reports. Initially limited to preventing financial fraud, when BCCI and Robert Maxwell scandals took place, Cadbury's remit was expanded to corporate governance generally. Hence the final report covered financial, auditing and corporate governance matters, and made the following three basic recommendations:
the CEO and chairman of companies should be separated ensuring the absence of CEO duality boards should have at least three non-executive directors, two of whom should have no financial or personal ties to executives each board should have an audit committee composed of non-executive directors
These recommendations were initially highly controversial, although they did no more than reflect the contemporary "best practice", and urged that these practices be spread across listed companies. At the same time it was emphasised by Cadbury that there was no such thing as "one size fits all". In 1994, the principles were appended to the Listing Rules of the London Stock Exchange, and it was stipulated that companies need not comply with the principles, but had to explain to the stock market why not if they did not.
Before long, a further committee chaired by chairman of Marks & Spencer Sir Richard Greenbury was set up as a 'study group' on executive compensation. It responded to public anger, and some vague statements by the Prime Minister John Major that regulation might be necessary, over spiralling executive pay, particularly in public utilities that had been privatised. In July 1995 the Greenbury Report was published. This recommended some further changes to the existing principles in the Cadbury Code:
each board should have a remuneration committee composed without executive directors, but possibly the chairman directors should have long term performance related pay, which should be disclosed in the company accounts and contracts renewable each year
Greenbury recommended that progress be reviewed every three years and so in 1998 Sir Ronald Hampel, who was chairman and managing director of ICI plc, chaired a third committee. The ensuing Hampel Report suggested that all the Cadbury and Greenbury principles be consolidated into a "Combined Code". It added that,
the Chairman of the board should be seen as the "leader" of the non-executive directors institutional investors should consider voting the shares they held at meetings, though rejected compulsory voting all kinds of remuneration including pensions should be disclosed.