The 5 factors that contribute to effective corporate governance

On 20th March, NEDonBoard hosted its annual conference. We had the pleasure to be joined by Jeremy Small as a keynote speaker who addressed the audience on the importance of effective corporate governance and the role of the NED sitting in the boardroom.

Corporate governance is the structure and processes designed to create long-term value. The effectiveness of an organisation’s corporate governance can be attributed to the 5 main factors:

1. The Corporate Governance Code

The UK Corporate Governance Code has evolved from its original formulation produced in 1992 by the Cadbury Committee. While the 1992 edition of the code was quite succinct and focused on control and accountability, the current version is much broader. But failures and scandals have continued while the Code has been meaningfully strengthened. As the Carillion’s collapse illustrates, a company can have an extremely sophisticated governance but things may still go wrong. Compliance with the Corporate Governance Code is not sufficient. There are other factors contributing to effective corporate governance.

2. Behaviour and culture

3. Skills, experience, integrity

4. A clear understanding of what the NED role entails

5. A reminder of the directors’ statutory duties

The NED should not only follow the provisions of the Corporate Governance Code. He/she must remain focused on the directors’ statutory duties, which are defined in the Company Act 2006. The duties of directors apply to all directors, not only non-executive and include notably:

  • Section 172: Duty to promote the success of the company
  • Section 173: Duty to exercise independent judgment
  • Section 174: Duty to exercise reasonable care, skill and diligence
  • Section 175: Duty to avoid conflicts of interest

It is easy for NEDs to overlook the above requirements by being busy performing “ticking the box” exercises to comply with the corporate governance rules. NEDs who really understand the business of a company are very well placed to conduct their role effectively and to help the company achieve effective governance.

 

NEDonBoard is looking forward to receiving your comments: in your opinion, what are the factors contributing to an effective corporate governance?

 

Laura Marianello and Elise Perraud on behalf of NEDonBoard

 

Laura Marianello is one of NEDonBoard’s ambassadors. If you would like to know more about the NEDonBoard ambassador programme, please contact elise.perraud@nedonboard.com.

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