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Britain should consider a united code of governance

17 April 2018 by Charles Portsmouth

Britain should consider a united code of governance - Read more

The UK’s divergent codes could learn something from the King Report’s approach

Corporate governance has continued to make headlines in 2018 in the popular press with events such as the insolvency of Carillion and the behavioural issues at Oxfam.

The business press has also been pre-occupied with related commentary, not only on the headline events but on the proposed revisions to the UK Corporate Governance Code, and the implementation of the Code for Sports Governance.

The proposed revisions to the UK Corporate Governance Code come 25 years after its birth in the Cadbury Report.

Subsequently in the UK there has been a proliferation of published governance codes released for differing sectors, such as charities, sports bodies, housing associations and unlisted companies. Each of these codes is promulgated by a different body, such as UK Sport and Sport England, or the Charity Governance Steering Group.

Some of these codes are mandatory and some are voluntary.

Some are based on ‘comply or explain’ – particularly where there is a regulatory requirement to use them, such as the Listing Rules – and some are ‘apply or explain’, whereby entities are encouraged to meet the principles by either applying the recommended practice, explaining what they have done instead or why they have not applied it.

Each code is different in its language, in terms of applying principles and requirements. The Code for Sports Governance identifies five principles of good governance, the Housing Associations Code has nine principles, and the proposed revised UK Corporate Governance Code has seventeen principles.

But none of these various codes with their different principles and multiple definitions necessarily lead to good governance across all sectors.

Currently, the Financial Reporting Council is developing new corporate governance principles for large privately-owned companies, reflecting their possible impact on society and the economy. It is a direct response to failures in the sector and to the government’s green paper and consultation on corporate governance reform.

The difference in approaches and terminology in the various codes in the UK particularly struck me while researching our response to the proposed revision of the UK Corporate Governance Code, and I wonder if there might be a more integrated way of promoting good governance across all sectors of society and the economy.

“King IV seems a more integrated approach to reinforcing governance as a holistic set of arrangements”

As someone interested in governance, I have long been aware of the South African King Report on Corporate Governance, now in its fourth incarnation (King IV). It first come into being, as King I, in 1994, when it only applied to the boards and directors of listed companies, banks, and certain state-owned enterprises.

However, the King Report has transformed itself over the years in a much more integrated manner than has occurred with the UK’s codes.

King IV is the first code that is outcomes-based in setting out what can be achieved if governance principles are implemented effectively. The governance outcomes – an ethical culture, good performance, effective control and legitimacy – encourage organisations to focus on what they want to achieve through implementing the recommended principles and good governance practices.

The outcomes basis aims to reduce a tick-box or ‘mindless compliance’ approach when applying the corporate governance principles. The code requires an ‘apply and explain’ approach, not the ‘apply or explain’ which was required by King III.

This means that applying the principles is assumed and entities now need to explain how they have implemented the practices to pursue the governance principles and outcomes, in a way that is practical for their organisation.

The 17 principles set out in King IV build on and reinforce each other and they are supported by 208 practices that assist in achieving the outcomes.

It ‘aspires to apply to all organisations, regardless of their form of incorporation’ and sets out detailed sector supplements covering municipalities, non-profit organisations, retirement funds, small and medium enterprises and state-owned entities.

To my mind, King IV encourages a thoughtful approach to applying both the principles and the practices in the particular circumstances of an organisation. It seeks to achieve an optimal level of governance, while taking into account the size, resources and complexity of each organisation, such that the principles are applied and the governance outcome is ultimately achieved.

As such, King IV seems a more integrated approach to reinforcing governance as a holistic set of arrangements that concerns itself with ethical leadership, attitude, mind-set and behaviour across all of society and the economy, regardless of entity.

Perhaps the UK could learn from this approach by developing a comprehensive, integrated approach to replace our own plethora of corporate governance codes?

Charles Portsmouth is a director in the Moore Stephens governance risk & assurance group

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