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Corporate Governance for Unlisted Companies

There has just been published a new “Corporate Governance Guidance and Principles for Unlisted Companies in the UK”.

The title is a bit of a mouthful but it is nevertheless a very worthwhile voluntary code which should be read by everyone running or investing in a business.  Much of it is basic common sense but well run companies tend to do much better than those which are badly run.

The report is worthy of detailed study but for those who do not have time to read it in full, the fourteen principles are as follows:-

Principle 1: Shareholders should establish an appropriate constitutional and governance framework for the company.

Principle 2: Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of the corporate strategy. However, an interim step on the road to an effective (and independent) board may be the creation of an advisory board.

Principle 3: The size and composition of the board should reflect the scale and complexity of the company’s activities.

Principle 4: The board should meet sufficiently regularly to discharge its duties, and be supplied in a timely manner with appropriate information.

Principle 5: Levels of remuneration should be sufficient to attract, retain, and motivate executives and non-executives of the quality required to run the company successfully.

Principle 6: The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.

Principle 7: There should be a dialogue between the board and the shareholders based on a mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally.

Principle 8: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

Principle 9: Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance.  

Principle 10: There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business. No one individual should have unfettered powers of decision.

Principle 11: All boards should contain directors with a sufficient mix of competencies and experiences.  No single person (or small group of individuals) should dominate the board’s decision-making.

Principle 12: The board should establish appropriate board committees in order to allow a more effective discharge of its duties.

Principle 13: The board should undertake a periodic appraisal of its own performance and that of each individual director.

Principle 14: The board should present a balanced and understandable assessment of the company’s position and prospects for external stakeholders, and establish a suitable programme of stakeholder engagement.

Most businesses pay some degree of lip services to these basic principles but they are frequently observed “in the breach rather than the observance”.  Anyone wishing to improve the performance of their business would do well to start here.

For further information, please contact Sandy Finlayson on 0131 226 8202.

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