When the number of shareholders in a company increases, it is impractical for all individuals to take part in the management and control of the company’s affairs. In order to ensure great company practices, a separation between the shareholders, who own the company, and the directors, who manage it, arises. However, problems begin to occur from this separation as the day-to-day running of a business prevents shareholders to any managerial excesses, this leads to directors having more information. Disclosure requirements are crucial components of governance to ensure that business activities are conducted in an open and transparent manner. ‘Good corporate governance’ within the UK is a system where the board of directors are responsible for the governance of the company, in which shareholders must appoint the directors and auditors to establish a well structured company.
In regards to corporate governance, a debate has centered on the role of board of directors and shareholder engagement in a company following the financial crisis in 2008. Since the crisis, many financial institutions have failed to comply with good corporate governance which has led to reckless actions. To see the improvements in corporate governance, it is important to look into the development of the UK Corporate Governance Code. The company structure in the UK must exercise their duties appropriately and act within the framework of good corporate governance. In 1992, Sir Adrian Cadbury drew up a committee to look into the management of company boards and financial reporting to mitigate corporate governance risks and failures. The committee produced a Code of Corporate Governance composed of non-executive directors associated with audit, nomination committee and remuneration.
In order to set out a good standard, the Cadbury report outlines three principles in which the Code is based on: openness, integrity, and accountability. It is important to note that these principles go together to improve governance. There must be an aspect of openness to gain the confidence of individuals that may have an influence on the success of a company. One of the recommendations made in the report is the approach of being more open in regards to the disclosure of information which contributes to the efficiency of the market economy, allows the board to take action and makes shareholders and others to scrutinise companies effectively.
Secondly, the financial reporting should present a balance of the company’s affairs and being done so with complete honesty. Lastly, the board of directors are accountable to the shareholders, both must act in accordance with their duties to make accountability more effective. The board of directors have an obligation to share information with the shareholders of a company, while shareholders must exercise their responsibilities appropriately as owners.