Corporate Governance In The UK And U.S. Comparison

Background

What is meant by the term "corporate governance?" It is basically the systems and processes established by corporate entities for ensuring proper accountability, probity and openness in the conduct of an organisation's business. The basic principles of corporate governance include transparency, accountability, fairness and responsibility founded upon the concept of disclosure to encourage the necessary trust and confidence of shareholders.

Recently, corporate governance has been very much in the spotlight in the UK following the publication of a number of important reports, all of which have had an influence on the corporate governance environment in which we operate today. However, the current UK corporate governance environment does not exist in isolation, as there have been significant influences from Europe and the U.S. In particular, the collapse of Enron and WorldCom in 2002 has meant issues of corporate governance remain highly topical.

There is, as yet, no generally applicable global corporate governance model. Corporations tend to work within the parameters set out by national laws and regulations and the economic goals and expectations of shareholders. There has, however, been some measure of convergence in corporate governance internationally, largely resulting from the standards required by international investors and capital markets. There have also been initiatives by the World Bank and, more recently, the Organisation for Economic Co-operation and Development (OECD) to provide a theoretical and analytical framework for corporate governance.

UK Corporate Governance

The regulation of corporate governance in the UK is provided by a number of different rules, regulations and recommendations, namely:

Common law rules (e.g. directors' fiduciary duties).

Statute (notably the Companies Act 1985).

A company's constitutional documents (the memorandum and articles of association).

The Listing Rules, which apply to all companies that are listed on the Official List (or AIM Rules, as appropriate).

The Combined Code on Corporate Governance (the provisions of the Code are not mandatory but listed companies are required to include a statement in their annual reports as to whether or not they comply with the Code and give reasons for non-compliance). The Code is supplemented by: the Turnbull Guidance (relating to the internal control requirements of the Code), the Smith Guidance (on audit committees and auditors) and suggestions of good practice from the Higgs Review.

Non-legal guidelines issued by bodies that represent institutional investors (such as the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF) and the Pensions & Investment Research Consultants (PIRC). These guidelines apply to listed companies and although they are informal, some institutional investors may oppose any corporate actions that contravene them.

In the context of takeovers of public companies, the City Code on Takeovers and Mergers and the rules of the Takeover Panel apply.

The Financial Services Authority's Code of Market Conduct (relating to the disclosure and use of confidential and price sensitive information and the creation of a false market).

U.S. Corporate Governance

In the U.S., corporate governance is determined predominantly by legislation in the form of the Sarbanes-Oxley Act of 2002 ("SOX") and detailed regulations which SOX required the Securities and Exchange Commission ("SEC"), New York Stock Exchange ("NYSE") and NASDAQ to draw up.

The UK "comply or explain" approach to corporate governance varies significantly from the general approach taken by SOX. Although SOX-related regulations use the "comply or explain" method in some instances (for example, in relation to whether a company has a "code of ethics" or its audit committee has a "financial expert"), in most other instances, U.S. regulation tends to rely on the legislation and fines and imprisonment penalties for violating the requirements of SOX.

The easiest way to provide some comparison between the U.S. and UK corporate governance framework is by a comparative table, as set out opposite:

There are evidently other aspects of corporate governance that are not covered in this article, however this table provides a useful comparison of the two regimes. In addition, as referred to above, recent European developments have had significant influence in the UK corporate governance environment and its future evolution. It is also important to remember that this is an evolving area and a number of reforms are being proposed and discussed. However, the clamour for more effective internal controls has led to a number of changes to the regulatory and compliance landscape in both the UK and the U.S.

The changing face of the legislative landscape throws up significant challenges for companies and the in-house counsel advising them. The demand for steps to be taken to address the recent corporate scandals has led to the regulators having increased resources, and there has also been an upsurge in shareholder activism. Institutional investors are increasingly demanding greater compliance with corporate governance regulations and calling directors and advisers to account for the quality of their decision-making. Generally, investors on both sides of the Atlantic are increasingly prepared to challenge and question company policies and, therefore, a thorough knowledge of the relevant provisions and a coherent governance policy is essential.

Crucially, whatever the size of the company, appropriate risk and compliance policies must be in place, and companies and their in-house counsel must be able to prove that these policies are actively implemented. In-house counsel must understand the numerous regulatory and legislative policies across a number of jurisdictions and ensure the relevant corporate entities function within their relevant environment, whilst not losing the focus of remaining competitive in a business environment. Communication and company culture will be crucial in this process and, without doubt, the development of the global corporate governance environment continues to present a significant challenge for in-house counsel.