ICLG - Corporate Governance Laws and Regulations - United Kingdom Chapter covers common issues in corporate governance laws and regulations – including in management bodies, shareholders & other stakeholders, transparency & reporting, and corporate social responsibility.
1.1 What are the main corporate entities to be discussed?
The main corporate entities discussed in this chapter are UK public limited companies, whose equity securities are admitted to the premium listing segment of the Official List of the Financial Conduct Authority (“FCA”) and to the London Stock Exchange’s main market for listed securities. Such companies are subject to the highest standards of corporate governance in the UK.
Please note, reforms of the Listing Regime in the UK are expected to take place later in 2024 (see question 1.3 below for more details). If, and when, these changes come into effect, the two existing segments of the Official List (premium and standard) will be collapsed into a single category (segment) for equity shares of commercial companies (“ESCC”), whose rules will be based mainly on the current premium segment rules; however, with some requirements dropped or simplified. All existing premium-listed companies will be automatically “mapped” to the ESCC category.
1.2 What are the main legislative, regulatory and other sources regulating corporate governance practices?
The UK’s corporate governance framework is underpinned by a combination of key statutory legislation, capital markets regulation, governance codes, investor expectations and best practice guidance.
The Companies Act, 2006 (“Companies Act”) is the primary legislation for all UK companies and provides fundamental governance requirements, including those relating to general directors’ duties and powers, the preparation and content of a company’s annual report and accounts, the appointment and removal of directors, capital maintenance principles, shareholder rights and fundamental company matters that require shareholder approval.
Also of primary importance is the company’s constitutional document, known as its “articles of association”, which set out the main body of rules governing how the company regulates its affairs, subject to the Companies Act and common law. The articles of association form a statutory contract between the company and its shareholders (also referred to as “members”) and cover matters including the operation of the board and shareholders’ meetings.
Other UK legislation governing the directors’ conduct and governance is also relevant, including law and regulation relating to insolvency, employees, health and safety, the environment and human rights matters.
Capital markets regulation imposes additional governance requirements on publicly traded companies. Premium-listed companies must comply with the Listing Rules and Listing Principles issued by the FCA, including the Premium Listing Rules and Premium Listing Principles, which impose enhanced continuing obligations for companies that exceed EU-based minimum requirements. Consequently, the Premium Listing framework sets a higher standard of corporate governance for premium-listed companies and affords their shareholders greater protection. Listed companies must also comply with the FCA’s Disclosure Guidance and Transparency Rules (“DTRs”), which include requirements concerning the composition and function of the audit committee, the corporate governance statement included in the directors’ report (see question 5.2 below) and other disclosure requirements and guidance. Premium-listed companies are also subject to disclosure requirements under the UK Market Abuse Regulation (“UK MAR”) and the UK Prospectus Regulation.
The UK Corporate Governance Code, 2018 (“CG Code”) is a non-statutory code of best practice governance principles, maintained by the Financial Reporting Council (“FRC”). Pursuant to the Listing Rules, premium-listed companies are required to include a statement in their annual reports explaining whether they have complied with the CG Code during the relevant accounting period and, if they have not, they must explain their non-compliance. This is known as the “comply or explain” approach, which is a fundamental feature of UK corporate governance and is intended to provide companies with a flexible means to adhere to best practice principles to the extent that they are appropriate to their own circumstances and to explain, where applicable, why they are not. The UK Corporate Governance Code, 2024 will replace the CG Code for financial years beginning on or after 1 January, 2025 – see question 1.3 below for more details.
The UK Stewardship Code, 2020, published by the FRC in 2019, sets out a framework of stewardship principles for asset managers, asset owners and service providers (such as proxy advisors, data and research providers) and comprises a set of “apply and explain” principles designed to encourage participants to engage actively in the management of investee companies in order to improve long-term returns to clients and beneficiaries. Compliance with the UK Stewardship Code is voluntary and signatories to it must prepare a Stewardship Report explaining how the principles have been applied in the previous 12 months.
The City Code on Takeovers and Mergers (the “Takeover Code”) is also relevant to the UK’s corporate governance framework by providing rules and principles that govern the conduct of takeover or merger transactions. It seeks to ensure that the target’s shareholders are treated fairly, whilst promoting the integrity of the financial markets.
Companies should also pay due consideration to the recommendations and best practice policy guidelines developed by a range of industry and shareholder advisory groups, such as the Investment Association, the Pre-Emption Group, Glass Lewis, Institutional Share Services (“ISS”) and the Pensions and Lifetime Savings Association (“PLSA”). These investor bodies publish non-binding guidance and voting recommendations on various governance issues and have significant influence over the shareholder community when making strategic investment decisions or when voting on company matters.
Finally, boards are becoming increasingly sensitive to consumer and wider societal expectations, including environmental, social and governance (“ESG”) matters, when governing and managing the company’s affairs and in reporting.
1.3 What are the current topical issues, developments, trends and challenges in corporate governance?
The UK’s corporate governance landscape is constantly evolving. A number of developments in this area are currently in process and are expected to take effect in due course, although they may be affected by the UK general election on 4 July, 2024. Some of the most topical areas include the following:
Listing Regime reforms. Reform of the listing regime in the UK is expected to take place in late 2024. The premium and standard segments will merge into one segment for equity shares of commercial companies (i.e. non-investment companies) (ESCC) whose rules will be based mainly on the current premium segment rules. The changes will result in a new “UK Listing Rules” sourcebook (“UKLR”). The FCA has consulted on new draft rules that will apply to companies in the new ESCC category including amended Listing Principles, transitional provisions and rules relating to SPACs and overseas companies. The final rules are expected to be published “at the start of the second half of 2024” and to come into effect a few weeks later. Five new listing categories will be created: ESCC; shell companies; transition; secondary listings; and non-equity shares and non-voting equity shares. The FCA will notify companies in advance of the category it proposes to move them to. Existing premium segment companies will automatically be “mapped” to the ESCC. They will mostly experience de-regulatory changes, although they will need to modify their systems and controls, particularly around significant transactions and related party transactions (“RPTs”).
ESG reporting and transition planning. ESG-related requirements applicable to UK companies have grown exponentially in number and scope in recent years, and reporting requirements are expected to continue to strengthen, particularly in light of the recently released disclosure frameworks by: (i) the UK Transition Plan Taskforce (“TPT”); and (ii) the International Sustainability Standards Board (“ISSB”), in the form of two sustainability reporting standards, IFRS S1 and S2 (which build on the foundation of the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”)). The Government has committed to endorse the ISSB’s standards through the creation of the UK Sustainability Reporting Standards (“UK SRS”), which should form the basis of mandatory disclosure requirements that are likely to be applied to listed companies (as well as asset managers and regulated asset owners) and large non-listed companies.
Corporate transparency. The Government has embarked upon a legislative package of reforms aimed at improving corporate transparency and tackling the abuse of UK corporate structures to facilitate economic crime. This is largely contained in the Economic Crime and Corporate Transparency Act, 2023, which was passed in October, 2023 and is being implemented in the UK in stages. It will result in various changes to the company incorporation and administration regime. The reforms are designed to allow the UK’s Companies Registry (“Companies House”) to play a greater role in tackling economic crime and safeguarding national security whilst meeting the demands of an increasingly digitalised UK economy. The reforms include changing the role and strengthening the powers of Companies House, various changes to the company administration regime, requiring directors and other persons submitting company filings to have their identity verified and enhancing data sharing powers to allow relevant information to be legitimately passed on to law enforcement and other public and regulatory bodies. Other related measures also aimed at tackling economic crime in the UK include the Economic Crime (Transparency and Enforcement) Act, 2022, which expands the use of “unexplained wealth orders” and requires overseas entities that are owners or leaseholders of land in the UK to register at Companies House and provide information about their beneficial owners.
Reforms of the UK’s corporate governance and audit regimes. The Government has been considering reforms relating to numerous areas including directors, auditors, shareholders and the audit regulator, all of which were designed to restore confidence and trust in the UK’s audit and corporate governance regimes following the collapse of some significant corporates. New corporate reporting requirements were due to come into effect on 1 January 2025 for premium-listed companies, which included reforms to strengthen a company’s internal control framework, to place stronger disclosure and attestation requirements on directors in relation to dividends and capital maintenance, to require directors of listed companies to make an annual resilience statement and to report on their approach to seeking internal and external assurance of the information they report to shareholders. In October, 2023, the day before these regulations were due to pass into law, they were withdrawn by the Government citing a need to “cut red tape” for business. This move reflected a general change in approach by the Government, designed to help improve the competitiveness of the UK as a place to do business. Plans to create a more powerful audit regulator, the Audit, Reporting and Governance Authority (“ARGA”) as a successor to the FRC have also been delayed indefinitely.
UK Corporate Governance Code 2024. Proposals to update and amend the CG Code were put out for consultation by the FRC in May, 2023. The FRC had been asked by the Government to amend the CG Code to strengthen the provisions around internal control standards and to strengthen malus and clawback arrangements in executive directors’ remuneration arrangements. The FRC’s initial proposals covered much more than just those areas. The withdrawal of the corporate reporting regulations, referred to above, however, had a knock-on effect on the FRC’s proposals. In November, 2023, the FRC announced that only its proposals aimed at reducing duplication across reporting standards and ensuring internal control standards are “targeted and proportionate” would be taken forward. This change of approach again reflected the shift in focus to economic competitiveness from the Government. The 2024 Corporate Governance Code was published in February this year and comes into effect for financial years beginning on or after 1 January, 2025 (apart from Provision 29, which comes in on 1 January, 2026).
The UK Stewardship Code. A fundamental review of the UK Stewardship Code was announced by the FRC in November 2023 to ensure it supports growth and the UK’s competitiveness. The FRC is seeking views from all stakeholders on whether the Code, in its current format, is being used by asset managers, asset owners and other signatories to the Code in a manner that drives better stewardship outcomes from engagement with issuers across all asset classes. A targeted outreach programme, focused around the four main groups affected by the Code – issuers, asset managers, asset owners and service providers – has been carried out by the FRC. A public consultation on proposed changes is expected later this year, with a revised Code likely to be published in early 2025.
Non-financial information review. A Government Call for Evidence issued in May, 2023 asked for examples of overlap and duplication in non-financial reporting requirements, with the intention of streamlining existing frameworks and eliminating duplication in companies’ directors’ and strategic reports. In March, 2024, the Government announced new regulations, scheduled to come into effect in October, 2024, which will reduce duplication and unnecessary requirements in annual reporting, increase the Companies Act thresholds for company size by 50%, enable annual reports to be shared digitally with members and widen the pool of auditors able to tender for PIE audits.
Diversity. Diversity and inclusion (“D&I”) continue to be prominent areas of focus in the UK. Several reviews and recommendations on the board diversity of the Financial Times Stock Exchange (“FTSE”) 350 companies have been undertaken in recent years, with greater gender and ethnic diversity being encouraged from board level and senior management right through to all levels of the workforce. The 2016 Hampton-Alexander Review recommended that FTSE 350 companies have at least 33% female board representation, whilst the 2017 Parker Review recommended that each FTSE 100 board of directors have at least one director from a minority ethnic background by 2021, and each FTSE 250 board have at least one director from a minority ethnic background by 2024. The Hampton Alexander target and the Parker target for FTSE 100 companies have been met but there continues to be considerable pressure to improve further. The FTSE Women Leaders Review (the successor to the Hampton-Alexander Review) made new recommendations on gender balance in 2022, recommending, amongst other things, an increased voluntary target of at least 40% female representation for FTSE 350 boards and leadership teams by the end of 2025. The FCA has introduced mandatory requirements in the Listing Rules requiring companies to comply or explain against prescribed board diversity targets (based upon the FTSE Women Leaders Review and Parker Review recommended targets) in annual reports with effect from April 2023. In March, 2023, the Parker Review recommended that FTSE 350 companies set a percentage target, by December, 2023, for senior management positions that will be occupied by ethnic minority executives in December, 2027. Details of the target, and why it has been set at that level, is to be included in companies’ 2024 annual reports. Diversity continues to be a central issue for investor bodies.
1.4 What are the current perspectives in this jurisdiction regarding the risks of short termism and the importance of promoting sustainable value creation over the long term?
Under section 172 of the Companies Act, directors have a duty to act in the way they consider in good faith and would be most likely to promote the success of the company for the benefit of its shareholders as a whole. In doing so, they are required to have regard to six statutory factors, one of which is the “likely consequences of any decision in the long-term”. Despite the prevalence of “long-termism” in statutory law, short-termism has long been identified by the Government as a significant risk in the UK’s equity capital markets.
The Kay Review in 2011, commissioned by the Government, concluded that “short-termism” was a significant and systemic problem in the UK. This was demonstrated by a tendency to under-invest in businesses (for example, by neglecting innovation and upskilling of the workforce) and instead focusing on short-term gains (by pursuing rapid growth through M&A deal activity). Since then, the Government has implemented various initiatives to try to counter this issue. These include strengthening the emphasis on engagement in long-term company strategy in the UK Stewardship Code; abolishing mandatory quarterly reporting requirements for listed companies; and reforming the corporate reporting landscape with a view to fostering more effective engagement between a company and its shareholders on sustainable long-term value.
Long-termism is also relevant in relation to the sustainability issues companies must now consider as part of their overall corporate governance approach. The intersection of climate concerns and the requirement to have regard to the long-term consequences of company decisions has recently been called into question in a derivative action brought by an activist shareholder, on behalf of the company it was invested in, against the company’s board of directors. The allegation was that the directors had set publicly stated climate related targets, reflective of their judgment of what was in the long-term interests of the company, and that failure to adopt policies that were capable of achieving these targets was a breach of their statutory duties to act with reasonable care, skill and diligence. Although the case was dismissed at an early stage, it has prompted discussion as to what long-term considerations directors should take into account in light of climate (and even nature) concerns.
2.1 What rights and powers do shareholders have in the strategic direction, operation or management of the corporate entity/entities in which they are invested?
In the UK, there is a general separation between the concepts of company ownership (by the shareholders) and control (by the board). The board of directors is generally responsible for the day-to-day decisions relating to the management of the company and its business, such powers being conferred by the company’s articles of association.
However, shareholders may be able to influence certain strategic matters of the company, either through the exercise of their voting rights attached to their shareholding or through active engagement with the board.
Under the Companies Act, certain matters must be put to shareholders for their prior approval, including: any amendments to the company’s constitution; authorisation of the directors to allot shares; and the ratification of a director’s conduct. Further matters reserved for shareholders’ approval might also be set out in a company’s constitution. Typically, at a company’s annual general meeting (“AGM”), routine matters will be put to a shareholder vote, such as the annual re-election of directors, the disapplication of pre-emption rights over new issues of shares and the approval of remuneration reports and policies. The Companies Act determines whether such matters should be determined by an “ordinary resolution”, amounting to a simple majority of votes, or a special resolution being 75% of votes, cast in favour. Currently under the Listing Rules, premium-listed companies must also obtain prior shareholder approval in general meetings for certain matters, such as completing significant transactions, transactions with a related party or reverse takeover transactions. The requirement for prior shareholder approval will remain only for reverse takeover transactions if, and when, the Listing Regime reforms come into effect.
Dissenting votes on such matters exert pressure on directors to change their company strategy. Activism (the typically public pressuring of boards) is usually carried out with a view to protecting or enhancing overall shareholder value; however, it may be aimed at effecting social or environmental change. As well as voting against resolutions, shareholder activism can take many forms, from engaging directly with the board to communicate views to senior management, to publicly expressing dissatisfaction with the company’s management or the terms of a proposed transaction relating to the company via announcements to the market, the press or social media, or in more extreme cases, such as the litigation referred to in question 1.4 above, through derivative claims alleging a breach of directors’ duties. Shareholders holding 5% of the voting rights can forcibly require the company to put a resolution to a general meeting and to call a meeting, as explained further below.
The CG Code provides that when 20% or more of votes are cast on a resolution proposed at a general meeting against the board’s voting recommendation, the company must explain the actions it intends to take to consult shareholders to understand the reasons behind the result. An update on the views received from shareholders and actions taken should be published within six months after the meeting, following which the annual report should include a final summary on what impact the feedback has had on the decisions the board has taken and any actions or resolutions now proposed.
2.2 What responsibilities, if any, do shareholders have with regard to the corporate governance of the corporate entity/entities in which they are invested?
Shareholders do not owe any legal duties or responsibilities to the company or other members over the company’s governance. Effective corporate governance should be delivered by the board, but in tandem with active engagement with shareholders and other key stakeholders. As discussed above, shareholders can, however, exert influence over companies through the exercise of their voting rights or through active engagement. Institutional investors will pursue stewardship activities, which include maintaining an open dialogue with the board and holding the board to account on a range of issues that impact the long-term performance of the company.
The UK Stewardship Code sets clear benchmarks for investors to promote the effective stewardship of investee companies. Signatories who commit to its principles are encouraged to engage more actively in the management of investee companies in order to improve long-term returns to clients and beneficiaries.
2.3 What kinds of shareholder meetings are commonly held and what rights do shareholders have with regard to such meetings?
All public companies are required to hold an AGM. At the AGM, the company will lay before its members the annual accounts and reports and may also conduct other business, including declaring a dividend, re-electing directors, appointing new directors to the board and appointing or re-appointing the auditors. Listed companies will normally have additional matters for the order of business, including shareholders’ resolutions on approving the directors’ remuneration report and remuneration policy, authorising the allotment of shares and the disapplication of pre-emption rights and authorising the holding of general meetings on 14 days’ notice.
Under the Companies Act, shareholders also have the right to request specific matters be put on the agenda for discussion at the AGM, and circulate to shareholders a statement relating to that resolution or other business on the agenda, if they represent at least 5% of the total voting rights or at least 100 members who have a right to vote at the AGM and hold shares in the company on which there has been paid up an average sum, per member, of at least £100. Shareholders holding 5% or more of the voting rights may also require the board to call a meeting of the company to require a particular resolution to be put to that meeting (for example, to remove a director from the board).
Other general meetings might be convened by the company throughout the year, where the shareholders are required to approve important matters.
2.4 Do shareholders owe any duties to the corporate entity/entities or to other shareholders in the corporate entity/entities and can shareholders be liable for acts or omissions of the corporate entity/entities? Are there any stewardship principles or laws regulating the conduct of shareholders with respect to the corporate entities in which they are invested?
The company’s relationship with its shareholders is governed by its articles of association which, under the Companies Act, constitutes a statutory contract setting out the rights and obligations of the shareholders and the company.
As regards a shareholder’s duties toward other shareholders, in general, resolutions will be decided by a majority vote and there is no obligation on shareholders to consider the interests of other shareholders, provided that such decisions have been taken in good faith.
If a minority shareholder feels aggrieved by the company’s actions, it may bring an “unfair prejudice” claim under the Companies Act alleging that the company’s affairs have been conducted in a manner that is unfairly prejudicial to its interests. It may also choose to bring a “derivative” claim on behalf of the company for wrongs made against the company to the detriment of shareholders. If successful, the company would receive compensation from the relevant director(s).
A company has a separate legal personality from its shareholders and transacts with third parties in its own name, rather than for its shareholders. Consequently, even if the company frequently acts at the direction of its shareholders, its actions are its own and for which it is liable and such liability does not pass to the shareholders. A shareholder’s liability (beyond losing the value of its equity in the company) is limited to the amount, if any, unpaid on the shares held by them.
The UK Stewardship Code sets out key principles of stewardship, which signatories must apply on an “apply and explain” basis. Signatories must report annually on their stewardship activities, including on their engagement with companies and holding them to account on material issues, collaborating with others, and exercising rights and responsibilities.
2.5 Can shareholders seek enforcement action against the corporate entity/entities and/or members of the management body?
In general, directors’ duties are owed to the company, not the company’s shareholders – although they must promote the success of the company in the interests of its shareholders when discharging their duties. As discussed above, shareholders have rights of action against the company arising from the articles of association, which is effectively a “statutory contract” between the company and its members. A shareholder might seek to bring a personal claim designed to uphold the “statutory contract” or to enforce certain rights given to members under the Companies Act. It might also wish to bring an unfair prejudice claim (as discussed in question 2.4 above) or bring a winding up petition under the Insolvency Act, 1986 to secure an order for the winding up of the company and the distribution of its assets in the resulting liquidation.
Shareholders have no direct right of action against the directors for breach of duty owed to the company; however, as noted above, they might choose to bring a derivative claim under the Companies Act against the directors on behalf of the company for a breach of directors’ duties.
There might be exceptional circumstances where directors do owe a duty of care to the shareholders under common law. However, in such cases, there must be a “special relationship” between the relevant directors and shareholders, where the latter legitimately place particular trust and confidence in the directors to protect their particular interests (rather than merely the interests of the company). Such situations are rare but might typically arise where there are personal or familial connections between directors and the shareholders or a director assumes a special responsibility to certain shareholders.
2.6 Are there any limitations on, or disclosures required, in relation to the interests in securities held by shareholders in the corporate entity/entities?
Under the DTRs, a shareholder must notify a publicly traded company and the FCA of the percentage of voting rights that it holds (or is deemed to hold through its direct or indirect holding of financial instruments) if, as a result of an acquisition or disposal of shares or financial instruments, the percentage reaches, exceeds or falls below certain thresholds. For UK publicly traded companies, these are 3% and, after that, each 1% threshold up to 100%. On receipt of the notification, the company must announce the details to the market by the end of the trading day after it receives the notification.
Public companies (whether listed or unlisted) may serve notice on a person whom it knows, or has reasonable cause to believe to be, or to have been at any time during the three years immediately preceding the date of the notice, interested in voting shares in the company. Under the Companies Act, there are criminal and civil sanctions for a person who fails to comply with a notice to provide the required information.
The Takeover Code also requires shareholders to disclose their interests in securities in certain circumstances. If, in a takeover or merger transaction, an offer or possible offer has been announced in respect of the company triggering an “offer period”, all holders of 1% or more of the relevant securities must disclose their position and any subsequent dealings. Additionally, a mandatory bid may be triggered where a person acquires an interest in securities, which (together with any interests held by any person acting in concert with it) carry 30% or more in the voting rights of a company. Acquisitions taking an existing shareholder’s interests (together with any of its concert parties) through 30% may trigger a mandatory bid.
The National Security and Investment Act 2021 imposes mandatory notification requirements on persons who acquire specified levels of control (the key thresholds being 25%, 50% and 75%) over qualifying entities that operate in a sector of the UK economy, specified by the Government as being sensitive for national security reasons. If an acquisition that requires mandatory notification completes without Government approval, it is void. Notified acquisitions may be blocked, cleared or made subject to certain conditions. Transactions that do not require mandatory notification can be called in for investigation (including after closing) where the Government considers they may nonetheless give rise to national security concerns. Where this is considered to be a risk, details may be submitted on a voluntary basis to obtain a ruling prior to closing.
Premium-listed companies have additional restrictions and disclosure obligations that apply where a person comes to hold 10% or 30% of the voting rights. For companies in certain sensitive sectors, such as financial services, telecoms and media, additional restrictions and disclosure obligations apply in some circumstances.
See also question 3.4 below for PDMR obligations.
2.7 Are there any disclosures required with respect to the intentions, plans or proposals of shareholders with respect to the corporate entity/entities in which they are invested?
In the UK, there are no general requirements for shareholders to disclose their intentions, plans or proposals in respect of investee companies. Under the Takeover Code, a bidder must disclose their intentions regarding the target in a takeover or merger transaction including its position on the target’s future business, the target group’s employees and employer contributions to pensions schemes. In any shareholder activist situation, designed to motivate change in the investee company, activist shareholders or others might wish to publicise their intentions or views on the company’s strategy and direction.
2.8 What is the role of shareholder activism in this jurisdiction and is shareholder activism regulated?
Shareholder activism is increasingly prevalent in the UK and, as discussed in question 2.1, can be an effective means to influence the board’s strategy with a view to protecting or enhancing overall shareholder value, or to effect social or environmental change. Much activism has related to a company’s management or governance, focusing on changing some or all of the board, or as a means of delivering value to shareholders by implementing (or not implementing) a proposed transaction. Directors’ remuneration remains an area of focus for shareholders, who will express their dissent by voting against remuneration reports or policies (or the re-election of remuneration committee chairs), particularly where the remuneration is perceived as not being aligned to the company’s financial and non-financial performance. Recent years have seen a rise in activism fuelled by the increasing momentum behind sustainability (beyond just climate-related) concerns.
Shareholder activism is not generally regulated; however, actions taken must not breach any law or regulation. Active stakeholder engagement is widely encouraged and the CG Code and the UK Stewardship Code provides appropriate parameters within which to do so, strengthened by investor oversight. Investor bodies, such as the Investment Association, Glass Lewis and ISS, issue annual guidance and voting recommendations in advance of the AGM season concerning governance issues and will recommend that their members vote against resolutions that do not follow their guidance.
Shareholder activism has increasingly played an important role in UK takeovers, where activists have sought to publicly argue and exert pressure on the board during transactions in order to seek a better price for their shares. This practice is not prohibited, although the overall process for UK public M&A is governed by the Takeover Code and regulated by The Takeover Panel to ensure that the target’s shareholders are treated fairly.
3.1 Who manages the corporate entity/entities and how?
The board of directors is responsible for the management of the company, with the day-to-day business decisions taken by the executive directors who have an operational and strategic role in the business.
The CG Code provides for a “comply or explain” regime and sets out a clear framework for the structure of an effective board. In particular, it stresses that the roles of chair and chief executive (“CEO”) should be distinct: the chair leading the board and being responsible for its overall effectiveness in directing the company, whilst the CEO being responsible for running the company’s business. The roles of chair and CEO should not be carried out by the same person and the CEO should not be later appointed as chair of the same company – so as to avoid a concentration of power in only one individual at board level.
The CG Code provides that at least half the board, excluding the chair, should be non-executive directors (“NEDs”) whom the board consider to be independent. One of the independent NEDs should be appointed “senior independent director” to lead the other NEDs, to provide a sounding board for the chair and to serve as an intermediary for the other directors and shareholders.
The CG Code also recommends that boards of listed companies delegate certain responsibilities to committees, comprising primarily independent NEDs. It sets out how an audit committee should set up to be responsible for providing independent oversight of the annual corporate reporting process and discharging governance responsibilities in respect of audit and risk management principles. A remuneration committee (established to determine the remuneration policies for executive directors and the wider workforce) and a nomination committee (established with the responsibility to lead the board appointment process, ensure that plans are in place for the orderly succession of board and senior management positions and to oversee the development of a diverse pipeline for succession) should also be established.
Whilst not specifically required by the CG Code, “ESG committees” are becoming increasingly commonplace and are typically tasked with overseeing ESG reporting, disclosures and general sustainability issues impacting the company. Designated “Risk Committees” are also set up by some companies to oversee the wider risk remit.
3.2 How are members of the management body appointed and removed?
Following the appointment of a company’s first directors at incorporation under the Companies Act, the process for appointing subsequent directors is usually set out in the company’s articles of association. Generally, directors are appointed by shareholders passing a simple majority of votes (known as an “ordinary resolution”). On an interim basis (for example, to fill a board vacancy), the board will also have power under the articles of association to appoint additional directors, typically until the next AGM.
The CG Code provides that all directors should be subject to annual re-election, which takes place at the company’s AGM. Any directors appointed by the board on an interim basis must also stand for re-election at the next AGM. The CG Code also recommends that the chair should not remain in post beyond nine years from their first appointment.
The nomination committee is responsible for leading the appointment process for directors and senior management. Board appointments should be subject to a “formal, rigorous and transparent procedure”, should be based on merit and, according to the current CG Code, should promote various aspects of diversity including gender, social and ethnic backgrounds as well as cognitive and personal strengths.
Under the Companies Act, shareholders also have the power to remove a director from office by ordinary resolution at a general meeting, provided that specific conditions are met (including special notice provisions). Additionally, the articles of association may also set out a process by which the board may require the removal of a director from office.
3.3 What are the main legislative, regulatory and other sources impacting on compensation and remuneration of members of the management body?
The Companies Act is the main source of primary legislation governing directors’ remuneration. Directors must prepare a remuneration report for each financial year, which is subject to an advisory and non-binding vote of the shareholders. The purpose of the remuneration report is to provide investors with meaningful information on directors’ remuneration to provide transparency on executive performance and pay. Additional secondary legislation sets out the content requirements for the directors’ remuneration report.
The Companies Act further requires directors to produce a remuneration policy, which is subject to a binding vote of shareholders every three years. Forming part of the remuneration report, the remuneration policy sets out a forward-looking policy on the making of payments to directors and past directors. Ordinary resolutions are required to approve both the remuneration reports and policies.
Listed companies with more than 250 UK employees are required to report annually on the difference in pay between that of their CEO and that of the company’s UK employees whose full-time equivalent remuneration ranks them at the 25 th , 50 th and 75 th percentiles.
The corporate governance framework also plays a significant role in the remuneration framework for directors. The CG Code sets the principles by which companies should design directors’ remuneration policies and practices, stating that executive remuneration should be aligned to company purpose and values and linked to the delivery of the company’s long-term strategy. It also provides that boards should establish a remuneration committee of independent NEDs with responsibility for determining remuneration of the executive directors and wider workforce. For NEDs’ remuneration, the CG Code provides that this should be determined in accordance with the articles of association or, alternatively, by the board.
Director remuneration is also a key focus for investors. Each year, various investor bodies publish voting guidance on the approval of remuneration policies and reports. The Investment Association’s Principles of Remuneration, usually published each year, set out expectations on general remuneration principles concerning structures and policies, together with providing guidance for remuneration committees to assist them in applying the principles and are particularly influential.
Finally, the Listing Rules also require shareholder approval of certain long-term incentive schemes and discounted share option arrangements.
3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body in the corporate entity/entities?
Pursuant to reporting regulations, the annual report on remuneration (forming part of the directors’ remuneration report) for the relevant financial year must contain a statement, in respect of each serving director during that period, of any requirements or guidelines for the directors to own shares in the company and whether those requirements or guidelines were met. Additionally, the directors’ and their connected persons’ interests in company shares, the total number of share scheme interests, details of such interests and share options must also be set out in the report.
Under UK MAR, transactions by managers (being persons discharging managerial responsibilities (“PDMRs”)) and persons closely associated with them must immediately notify the company and the FCA of every relevant transaction in the company’s financial instruments conducted on their own account no later than three working days after the transaction date. The company must announce such information no later than two working days after receiving the notification through a regulatory information service (“RIS”).
Additionally, PDMRs must not conduct any transactions on their own account, or on the account of a third party, in relevant financial instruments during a closed period (unless one of the limited exceptions apply). A “closed period” is the period of 30 calendar days before the announcement of an interim financial report or the year-end financial report. Additionally, PDMRs must also comply with UK MAR and not trade in a company’s financial instruments while unpublished inside information exists.
3.5 What is the process for meetings of members of the management body?
The procedures for board meetings will be set out in a company’s articles of association. Typically, they will set out requirements on quorum, notice and voting. The articles of association will usually provide that any decision must be made by a majority vote at a board meeting or by directors’ written resolutions. There may also be provisions that explicitly allow for the directors to conduct meetings remotely (for example, on a telephone or video call) and that allow the board to delegate some of its functions to committees. As previously mentioned, the CG Code expressly stipulates that certain matters (such as audit, remuneration and nomination matters) should be delegated by the board to committees.
The CG Code provides that boards must meet sufficiently regularly to discharge their duties effectively and to allow time to consider all the relevant issues. Additionally, the annual report must disclose the number of board meetings and committee meetings held and attendance by directors.
3.6 What are the principal general legal duties and liabilities of members of the management body?
The general duties of directors are set out in the Companies Act. Directors must owe seven core statutory duties to the company. These are:
Directors must also comply with other requirements under the Companies Act, including duties relating to the preparation of the company’s annual accounts and its filing requirements. Directors are also subject to various duties arising in other relevant legislation, such as tax, employment, health and safety and insolvency legislation.
Common law duties will also apply to directors including a duty of confidence in respect of confidential information and a duty in certain circumstances to consider or act in the interests of creditors.
The potential consequences of a director’s breach of duty include a court order to pay money to the company following a claim for damages for compensation; setting aside of the transaction; termination of a director’s service contract; the grant of an injunction to restrain breach of fiduciary duty; director disqualification; and, in some cases, criminal proceedings.
3.7 What are the main specific corporate governance responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body?
Directors are responsible for the general corporate governance of the company and accordingly must properly discharge their duties, ensure the company’s compliance with its governance requirements and should engage effectively with stakeholders. Corporate governance regulatory requirements and investor expectations continue to evolve. Consequently, it is increasingly challenging for directors to ensure that they are keeping abreast of, and complying with, all relevant laws, regulation and developments, whilst meeting the expectations of shareholders and other stakeholders.
3.8 Are indemnities, or insurance, permitted in relation to members of the management body and others?
Under the Companies Act, companies must not exempt their directors from liability for breach of duty in relation to the company, nor indemnify them from such liability. However, this is subject to Companies Act provisions that expressly permit a company to take out insurance cover for a director against any liability arising in connection with any negligence, default, breach of duty or breach of trust in relation to the company.
Additionally, under the Companies Act, companies are permitted to indemnify directors against claims by third parties (including legal fees incurred) (“QTPIP”). They are also permitted to provide a qualifying pension scheme indemnity provision (“QPSIP”), that is, to indemnify a director of the company acting as a trustee of an occupational pension scheme against liability incurred in connection with the company’s activities as trustee of the scheme. However, QTPIPs and QPSIPs must not cover any liability for fines imposed in criminal proceedings, penalties payable to regulatory authorities or any liability incurred in unsuccessfully defending criminal proceedings.
3.9 What is the role of the management body with respect to setting and changing the strategy of the corporate entity/entities?
The board of directors is responsible for setting, monitoring and changing the company’s strategy. External pressures from key stakeholders (such as shareholders, the workforce, regulators and customers), together with competitive pressures and wider geopolitical events, might cause the directors to revise their strategy accordingly.
4.1 May the board/management body consider the interests of stakeholders other than shareholders in making decisions? Are there any mandated disclosures or required actions in this regard?
The board’s consideration of its stakeholders is a key feature in English law and regulation.
Section 172 of the Companies Act provides that directors, when discharging their duty to promote the success of the company for the benefit of its members as a whole, must have regard to (amongst other matters) the interests of employees, the fostering of relationships with its suppliers, customers and others, and the impact of its operations on the community and the environment. Some consider that directors should do more than “having regard to” these factors and there is a campaign, spearheaded by the Better Business Act coalition, seeking to reform the section 172 wording to elevate directors’ duty towards wider society and the environment. Companies must include a section 172 statement in their strategic report (which forms part of the annual financial report), describing how the directors have had regard to these matters when performing their section 172 duties. In making this statement, the directors are also encouraged to consider their relationships with all other relevant stakeholders, including with pension schemes and their entire workforce (beyond those with employment contracts).
Most traded, banking and insurance companies in the UK now also have to include a non-financial information statement in their strategic reports, which as well as dealing with mandatory TCFD disclosures, must also focus on the impact of the company’s activities in relation to a range of sustainability matters. As a minimum, this must include environmental matters, the company’s employees, social matters, respect for human rights, anti-corruption and anti-bribery matters. Even if the directors of a company do not have explicit obligations in respect of these matters, the need for disclosure in this respect will mean, in practice, that directors will be considering such matters and how the operations of their company impact on them.
The CG Code places strong emphasis on the stakeholder voice and encourages engagement between the company and its workforce and other stakeholders. Indeed, the FRC’s Guidance on Board Effectiveness notes that an effective board will understand the importance of engaging with the company’s shareholders, the workforce and other stakeholders – and how it approaches this will be a useful insight into the company’s culture.
The rise of ESG-related concerns in the UK economy, and the difficulties that UK businesses experienced during the COVID-19 pandemic, has driven companies to consider how to engage effectively and meaningfully with their stakeholders. This engagement should be clearly explained when complying with relevant non-financial disclosure requirements.
Under common law, the directors have a duty to consider or act in the interests of creditors if the company is insolvent or approaching insolvency.
4.2 What, if any, is the role of employees in corporate governance?
Greater employee engagement is widely considered to contribute to long-term value and better corporate governance. As mentioned above, the CG Code places importance on a company’s stakeholder engagement and, in particular, with its workforce.
The CG Code suggests that companies should adopt one or a combination of specific engagement methods, being a director appointed from the workforce, a formal workforce advisory panel or a designated NED. If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.
The CG Code provides that workforce policies and practices must be consistent with the company’s values and support its long-term sustainable success, and further that the workforce must be able to raise any matters of concern in confidence. There is also a focus on the remuneration committee’s role by providing that it should review workforce remuneration and related policies and the alignment of incentives and rewards with culture, taking these into account when setting the policy for executive director remuneration.
As mentioned in question 4.1 above, directors must also have regard to the interests of employees when discharging their section 172 duties and are required to report on the action taken to engage with employees in their annual report.
4.3 What, if any, is the role of other stakeholders in corporate governance?
As discussed in questions 4.1 and 4.2 above, the directors must have regard to certain stakeholders when discharging their duty to promote the success of the company as a whole for the benefit of the shareholders. These include considering the company’s employees, suppliers, the wider community and the environment. However, this is not an exhaustive list and effective corporate governance and the success of a business is also dependent on the role played by other stakeholders, such as regulators, the company’s customers and wider societal expectations. The increased focus on ESG issues in recent years means that stakeholders expect businesses to be transparent, accountable and adopt socially responsible behaviours, having a positive impact on the wider community.
4.4 What, if any, is the law, regulation and practice concerning corporate social responsibility and similar ESG-related matters?
Legal and regulatory ESG-related requirements applicable to UK companies have grown exponentially in recent years. Some of the more notable regimes are described below, while question 5.3 below has further detail on reporting requirements.
Under the UK’s Streamlined Energy and Carbon Reporting regime (“SECR”), companies are required to report on greenhouse gas emissions, energy consumption and energy efficiency action in their annual financial report. This is complemented by the Energy Savings and Opportunities Scheme, which requires large UK companies to measure and audit their energy use, and implement tailored and cost-effective measures to reduce this energy usage.
As discussed previously, there are now mandatory comply or explain diversity requirements in the DTRs to encourage companies to consider the diversity of their administrative, management and supervisory bodies more broadly, taking into account a wider range of diversity characteristics. Although the FCA’s rules only apply to listed companies, the Parker Review additionally applies to 50 of the largest private companies within its scope, and sets recommendations for UK companies to establish targets to increase the ethnic diversity of their senior manager and boards, develop candidates for board positions, and monitor and report on progress against these targets.
The Modern Slavery Act in the UK restricts practices related to slavery, exploitation, forced or compulsory labour, and human trafficking. Large businesses operating in the UK have an obligation to produce a statement setting out the steps that they have taken to ensure that there is no modern slavery in their own business and their supply chains. If an organisation has taken no steps to do this, their statement should say so. There is a body of opinion in the UK that the modern slavery regulations are currently mainly proscriptive, without accompanying ‘active’ obligations. Various reviews, including a House of Lords Select Committee, appointed in January, 2024, have considered the impact of the Modern Slavery Act, with a view to potentially reform the act to increase its efficacy at combating modern slavery in the UK.
Lastly, in respect of asset management, the UK Stewardship Code was strengthened to have a greater focus on ESG matters than previous versions. Signatories are expected to take ESG matters into account and to ensure their investment decisions are aligned with their clients’ needs. Indeed, the definition of “stewardship” refers to the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment and society.
5.1 Who is responsible for disclosure and transparency and what is the role of audits and auditors in these matters?
The board as a whole is responsible for the company’s compliance with its disclosure and transparency requirements, including the preparation of the company’s annual reports, circulars, website disclosures and market announcements. The auditor is responsible for reporting on specific elements of the annual report and accounts prepared by the directors, including parts of the directors’ remuneration report, the strategic report and the directors’ report. In its report, the auditor must state whether, in its opinion, the annual accounts give a “true and fair view” of the state of affairs of the company as at the end of the financial year and the profit and loss of the company for the financial year. The opinion must also state whether the accounts have been prepared in accordance with the relevant reporting frameworks and Companies Act requirements.
The Listing Rules further require that premium-listed companies must ensure the auditors review certain corporate governance statements and statements regarding going concern and longer-term viability before the annual report is published.
Pursuant to various legislation, the company and/or the directors may be liable for any loss suffered as a result of a failure to comply with relevant reporting and disclosure requirements.
5.2 What corporate governance-related disclosures are required and are there some disclosures that should be published on websites?
Listed companies are subject to a wide range of corporate governance-related disclosures, imposed by statutory legislation and capital markets regulation in the UK.
Under the Listing Rules, premium-listed companies are required to make “comply or explain” disclosures against the CG Code in their annual report, which must be published on the company’s website. It follows that other corporate governance disclosures required to be made in the annual report and accounts (such as the section 172 statement) will also be available to view on the website via the annual report. As discussed in question 1.3 above, the Listing Rules also require all listed companies to make “comply or explain” disclosures in line with the recommendations of the TCFD, which requires (amongst other things) disclosures relating to the organisation’s governance around climate-related risks and opportunities.
Under the DTRs, certain companies admitted to trading on a UK regulated market must provide a corporate governance statement in their annual report (which overlaps with some of the requirements to which premium-listed companies are subject under the Listing Rules). Amongst other disclosures, the corporate governance statement must include a description of the main features of the company’s internal control and risk management systems in relation to financial reporting, the composition and operation of the administrative, management and supervisory bodies and their committees and the company’s diversity policy. The corporate governance statement is usually included in the directors’ report within the annual report – although a company can choose to include it in a separate report or through a document on its website.
The Listing Rules also require companies to make market announcements on a range of corporate governance matters, including where there is any change to the capital structure, the board, company name or accounting date. Additionally, UK MAR requires all announcements containing inside information be published on the company’s website, as well as via relevant news services.
As outlined in questions 2.6 and 3.4 above, pursuant to the DTRs, publicly traded companies must also announce any notifications received from shareholders regarding changes to the voting rights held and, pursuant to UK MAR, any notifications received regarding transactions in financial instruments by PDMRs and their closely associated persons.
Under the Companies Act, listed companies must also publish information relating to its revised remuneration policy on its website, together with information relating to the resolution approving the remuneration policy. A company’s gender pay gap report and its modern slavery statement (covered in question 4.4 above) must also be published on its website.
5.3 What are the expectations in this jurisdiction regarding ESG- and sustainability-related reporting and transparency?
As discussed above, ESG and sustainability-related reporting and transparency expectations continue to rise in the UK, in line with corresponding ESG reporting requirements for listed companies and large private companies.
In relation to diversity, the FCA’s Listing Rules require listed companies to include a statement in their annual report setting out whether they have met specific board diversity targets, as at a chosen reference date within their accounting period and, if they have not met the targets, an explanation of their non-compliance. Companies are also required to publish numerical data (including percentages) in a standardised tabular format on the sex or gender identity and ethnic diversity of their board, senior board positions (Chair, CEO, SID and CFO) and executive management as at the same reference date. Listed companies are also required to disclose their diversity policy within their corporate governance statement in the annual report. Furthermore, the CG Code requires that the annual report includes specific information concerning the nomination committee’s work on the company’s D&I policy.
Companies with at least 250 employees are also subject to mandatory pay gap reporting requirements. Employees must analyse their gender pay gap on 5 April each year and publish their gender pay gap report on their website within 12 months. Although much debated, there is currently no mandatory requirement for companies to report on their ethnicity pay gap, although some companies do. The Government published guidance in April, 2023 for employers to support them with voluntary ethnicity pay gap reporting.
Listed and large commercial companies are also required to make disclosures in their annual reports consistent with the recommendations and recommended disclosures of the TCFD. While the TCFD pertains to climate change, under the Companies Act (and as discussed in question 4.1 above), traded, banking, and insurance entities, in addition to mandatory TCFD disclosures, also have to make additional disclosures relating to sustainability more generally. Disclosures must include environmental matters (including the impact of the company’s business on the environment), the company’s employees, social matters, respect for human rights, and anti-corruption and anti-bribery matters.
The TCFD-derived reporting requirements for listed and large companies are expected to be superseded by the UK SRS, which are in the process of being developed by the Government and are based on the IFRS’s S1 (sustainability) and S2 (climate-related) disclosure standards. The UK SRS would then be integrated into the Listing Rules and legislation as part of the UK’s proposed “Sustainability Disclosure Requirements” (SDR) regime. Any changes brought in are not expected to apply before 1 January, 2026. The SDR regime may also look to bring in developments relating to transition plan disclosures, nature-relate disclosures and a UK green taxonomy.
The issue of greenwashing is currently high on the corporate agenda, and the risks are increasingly taking on a regulatory (and in other jurisdictions like the US, a litigious) nature. This requires companies to have the right governance in place to ensure the accuracy of the information being disclosed to the market. The FCA recently released anti-greenwashing guidance aimed at ensuring that sustainability-related claims about products and services of FCA-regulated entities are fair, clear and not misleading. In addition to the FCA, the UK Competition and Market Authority also has responsibilities for monitoring and sanctioning greenwashing functions, and with the passage of the Digital Markets, Competition and Consumer Bill, 2023, will shortly gain powers to (amongst others) impose strong sanctions, including fines of up to 10% of global turnover, for misleading green claims. Given that the CMA has recently been actively investigating various companies and sectors for greenwashing concerns, it is expected that the CMA will be more active in its policing of greenwashing in light of its expanded sanctioning powers.
5.4 What are the expectations in this jurisdiction regarding cybersecurity and technology-related reporting and transparency?
Expectations in the UK are shaped by the Companies Act and the CG Code. A company’s strategic report must contain a fair review of its business and a description of the principal risks and uncertainties facing the business. The CG Code includes provisions for reporting on internal controls which covers reporting on cybersecurity measures. Annual reports will include reporting on cybersecurity risk management and governance. The information provided would, typically, include identification of possible cyber risks, operational resilience efforts, risk mitigation processes, data protection policies and applicable law and regulations. Institutional investors, such as Glass Lewis and the PLSA, also now address in their guidelines how they expect companies to provide appropriate and timely disclosures on technology and cyber-related issues.
In January this year, the Government published a draft Cyber Governance Code of Practice with the aim of formalising its expectations of directors for governing cyber risk. The draft Code proposes five overarching principles together with relevant corresponding actions. One of the proposed actions is that a governance structure should be established that includes a clear definition of roles and responsibilities, and ownership of cyber resilience at executive and non-executive director level, establishing formal reporting, and determining how internal assurance can be achieved. The Code will be voluntary and is not yet finalised.
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