What is Corporate Governance

NED Capital Knowledge Centre  |  Adrian Lawrence FCA, Founder

Corporate governance is the system by which companies are directed and controlled. It encompasses the structures, processes and relationships through which a company is overseen — defining how authority is exercised, how accountability is maintained and how the interests of shareholders, directors, employees, customers and other stakeholders are balanced in the way the company is run. In practice, corporate governance is the difference between a board that genuinely oversees the management of a company and a board that exists only on paper.

This guide explains what corporate governance means in the UK context, what its legal and code foundations are, how it is structured through the board and its committees, why it matters for companies of all sizes and how governance principles apply differently across listed companies, private businesses, PE-backed portfolios and not-for-profit organisations.

The Origin of Corporate Governance

Corporate governance as a formal discipline emerged primarily from the problem of the separation of ownership and management. In a small owner-managed business, the person who owns the company and the person who runs it are the same — governance is inherent because the owner bears all the consequences of their own decisions. As companies grow, raise external capital and become owned by shareholders who do not manage the business, a fundamental problem arises: management may not always act in the interests of shareholders. Managers can pursue their own financial interests, avoid difficult decisions that shareholders would require, misrepresent the business’s performance or take risks with shareholders’ capital that shareholders would not sanction if they were fully informed.

This problem — variously described as the principal-agent problem or the agency problem in economics — is the reason corporate governance exists. Governance structures create accountability mechanisms that constrain management’s ability to act against shareholders’ interests: boards with genuine oversight authority, independent directors who are not accountable to management, external auditors who provide independent assurance on financial reporting, and shareholder voting rights that allow owners to exercise influence over the company’s strategic direction and the composition of the board.

The most significant UK corporate governance reform milestones were the Cadbury Report (1992), which established the principle of board independence and introduced the concept of the non-executive director as a governance mechanism; the Greenbury Report (1995), which addressed executive remuneration governance; the Hampel Report (1998), which brought these strands together into the first Combined Code; and the subsequent revisions of what is now the FRC UK Corporate Governance Code, most recently revised in 2024.

The UK Corporate Governance Framework

Corporate governance in the UK operates through a combination of statute, governance codes and market expectations. These operate at different levels and with different binding force.

Companies Act 2006. The Companies Act 2006 establishes the legal foundation of corporate governance for all UK companies — the duties of directors, the requirements for maintaining company records, the rights of shareholders and the framework for company meetings. The Act’s directors’ duties — set out in sections 171-177 — apply to all company directors regardless of whether the company is listed, private, PE-backed or charitable. These duties include the duty to act within the company’s constitution, the duty to promote the success of the company, the duty to exercise independent judgement, the duty to exercise reasonable care and skill, the duty to avoid conflicts of interest and the duty to declare interests in proposed transactions.

FRC UK Corporate Governance Code. The FRC UK Corporate Governance Code applies to companies with a UK premium listing. It operates on a “comply or explain” basis — listed companies must either comply with the Code’s provisions or explain in their annual report why they have not. The Code covers five areas: board leadership and company purpose; division of responsibilities; composition, succession and evaluation; audit, risk and internal control; and remuneration. The 2024 revision of the Code strengthened provisions on internal controls and ESG governance.

QCA Corporate Governance Code. The QCA Corporate Governance Code provides a governance framework for smaller listed and AIM companies for whom the full FRC Code’s provisions may be disproportionate. The QCA Code is principle-based, with ten principles covering board composition, accountability, risk management, remuneration and communication with shareholders. AIM Rule 26 requires AIM companies to adopt a recognised corporate governance code and disclose how they apply it.

AIC Code of Corporate Governance. The Association of Investment Companies Code provides a governance framework specifically for investment companies (investment trusts) — recognising that the governance requirements of a closed-ended investment company differ materially from those of an operating company.

Private companies — not listed on any exchange — are not subject to any governance code. Their governance obligations arise from the Companies Act and from their articles of association and any shareholders’ agreement. Private company governance varies enormously from highly structured (in PE-backed companies where the shareholders’ agreement creates detailed governance obligations) to essentially informal (in sole-director owner-managed businesses where governance is entirely discretionary).

The Core Principles of Corporate Governance

The principles that underpin effective corporate governance, across all company types and governance frameworks, reduce to four core concepts that are consistently articulated in UK and international governance standards.

Accountability. Directors are accountable to shareholders for the way they exercise their authority over the company. Accountability mechanisms include: board elections at annual general meetings; the external audit, which provides independent assurance on financial reporting; the board’s annual report and accounts, which discloses the company’s performance and how the board has governed it; and the ability of shareholders to requisition extraordinary general meetings and to remove directors.

Transparency. The company should be open with shareholders and other stakeholders about its financial position, its strategy and the risks it faces. Transparency obligations in listed companies include: annual reports and accounts prepared in accordance with applicable accounting standards; half-year and quarterly reporting where required; regulatory announcements of price-sensitive information under Market Abuse Regulation requirements; and remuneration disclosures showing how directors are paid.

Fairness. All shareholders — not just the largest — should be treated equitably. Governance mechanisms that protect fairness include: the one share, one vote principle in most UK equity structures; the takeover code’s rule that all shareholders receive the same price in a takeover; related party transaction approval requirements that prevent majority shareholders from extracting value at minority shareholders’ expense; and pre-emption rights that protect existing shareholders’ proportionate ownership when new equity is issued.

Responsibility. Directors are stewards of the company’s resources and are responsible for its long-term success — not merely its short-term financial performance. The FRC Code’s 2018 revision specifically emphasised the board’s responsibility to the company’s wider stakeholders — employees, customers, suppliers and communities — alongside its accountability to shareholders. Section 172 of the Companies Act requires directors to have regard to the interests of employees, the need to foster business relationships with suppliers and customers, and the impact of the company’s operations on the environment and the community.

The Board of Directors and Its Role in Governance

The board of directors is the central institution of corporate governance. It is the body through which shareholders exercise authority over management — setting strategy, overseeing performance, managing risk and ensuring that the company operates legally and ethically.

The board’s governance role is distinct from management’s operational role. The board sets the company’s strategic direction; management executes it. The board oversees financial performance; management delivers it. The board assesses risk; management manages it. Where this distinction breaks down — where management either dominates the board’s deliberations or where the board becomes operationally involved in management decisions — governance quality deteriorates.

Effective board governance requires a board of appropriate size and composition, with the right balance of executive experience, sector knowledge and independent oversight. The FRC Code recommends that at least half the board of a FTSE 350 company should be independent non-executive directors (excluding the chair). For smaller listed companies, at least two independent NEDs. This independence requirement reflects the central governance function of the non-executive director — providing oversight and challenge that is genuinely independent of management.

The Role of the Non-Executive Director

The non-executive director is the primary instrument through which the board’s governance independence is maintained. NEDs do not manage the company — they do not have executive authority over management or operational responsibility for the business. Their governance function is oversight and challenge: ensuring that management’s financial reporting is accurate, that the strategy is credible and well-executed, that the management team has the capability to deliver the plan and that material risks are identified and adequately managed.

The non-executive director’s most important governance characteristic is independence. A NED who is captured by management — who consistently supports management’s position without independent challenge — is not fulfilling their governance function regardless of how many board meetings they attend. Genuine independence of judgement, combined with the sector knowledge and governance experience to challenge management credibly, is the combination that makes a NED genuinely valuable.

The FRC Code sets out specific criteria for assessing the independence of non-executive directors — excluding NEDs who have been recently employed by the company, who have material business relationships with the company, who represent significant shareholders, or who have served on the board for more than nine years (a rebuttable presumption rather than an absolute limit). These criteria reflect the governance principle that independent oversight is only meaningful if the director is genuinely free from relationships that could compromise their objectivity.

Board Committees

Listed companies operate governance through board committees — sub-committees of the board with specific governance mandates that report to the main board. The three principal committees under the FRC Code are the audit committee, the remuneration committee and the nomination committee, each chaired by an independent NED.

Audit committee. Responsible for the integrity of the company’s financial reporting — overseeing the external audit process, reviewing the annual accounts before board approval, monitoring the effectiveness of internal controls and risk management, and managing the relationship with the external auditors. The FRC Code requires the audit committee to include at least three independent NEDs, with at least one member having recent and relevant financial experience. See our Chair of the Finance Committee Recruitment page for more on finance committee governance appointments.

Remuneration committee. Responsible for setting executive remuneration — the base salary, bonus structure, long-term incentive plan and pension arrangements for the CEO, CFO and other designated executive directors. The remuneration committee’s independence is essential: executive directors should not be involved in setting their own remuneration. The committee must act within the guidelines issued by the Investment Association and must present remuneration policy to shareholders for approval at the AGM at least every three years.

Nomination committee. Responsible for board composition — reviewing the skills, experience and independence profile of the current board, identifying gaps and leading the process for appointing new directors. The nomination committee should operate a formal, rigorous and transparent procedure for board appointments, using an independent search firm where appropriate. The committee should also oversee management succession planning — ensuring the company has plans for the CEO and other senior management roles in the event of unexpected vacancy.

Shareholder Rights and Engagement

Shareholders exercise governance authority primarily through their voting rights at general meetings. Annual general meetings (AGMs) are required for public companies and give shareholders the right to: approve the annual accounts; appoint or re-appoint directors; approve the remuneration report; appoint auditors; and consider resolutions proposed by shareholders or by the board. Private companies may dispense with the AGM requirement but must still allow shareholders to exercise their rights.

Institutional shareholders — pension funds, asset managers, insurance companies and sovereign wealth funds — collectively hold the majority of shares in most listed companies and exercise significant governance influence both through their voting decisions at AGMs and through direct engagement with the boards of the companies they invest in. The Stewardship Code, published by the FRC, sets standards for how institutional investors should engage with the companies they invest in on governance matters. The Stewardship Code operates alongside the Corporate Governance Code to create a governance ecosystem in which both boards and investors are held to standards of responsible governance.

Corporate Governance Across Different Company Types

FTSE listed companies. Operate under the FRC Corporate Governance Code on a comply-or-explain basis. Governance requirements are the most extensive — large independent boards, formal committee structures, annual remuneration reports, gender diversity targets and increasingly detailed ESG reporting. The quality of FTSE listed company governance has improved substantially since Cadbury, though corporate failures continue to demonstrate that compliance with governance codes does not guarantee governance quality in practice.

AIM and growth market companies. Apply the QCA Code. Governance requirements are less prescriptive but the principles of independence, accountability and transparency apply. Smaller boards, less formal committee structures and more concentrated ownership are typical, but the governance fundamentals — independent NEDs, effective audit oversight, transparent reporting — are as important as in larger companies.

Private equity-backed companies. Not subject to any governance code, but governed by the shareholders’ agreement between the PE investor and the company. PE governance is typically more commercially intensive than listed company governance — the value creation plan creates a performance accountability framework more immediate than listed company oversight mechanisms. Independent NEDs in PE governance provide the oversight and challenge that the investor representative cannot provide with full independence. See our How Private Equity Governance Works guide for a detailed explanation of the PE governance framework.

Private owner-managed companies. The most variable governance environment. No code applies, no mandatory committee structure and governance quality depends entirely on the owner’s commitment to governance discipline. The most significant governance transition for owner-managed businesses is the appointment of the first independent NED — the point at which informal owner governance begins to formalise into a board structure that can survive the founder’s involvement.

Charities and not-for-profit organisations. Governed by charity law, the Charity Commission’s governance framework and, for larger charities, the Charity Governance Code. Trustees hold the equivalent of a company director’s role in charity governance — accountable for the charity’s management and the stewardship of charitable assets. The Charity Commission’s guidance on trustee responsibilities provides the governance framework for the charity sector.

Why Corporate Governance Matters

The evidence that good governance produces better corporate outcomes is substantial — though not universal. Companies with effective board governance demonstrate, on average, better long-term financial performance than those with weaker governance. They are less likely to experience the catastrophic failures associated with governance breakdown — the management fraud, the undisclosed liabilities, the risk management failures — that have punctuated UK corporate history.

The most instructive examples of governance failure are instructive precisely because they reveal which specific governance mechanisms failed. The BHS collapse in 2016 raised fundamental questions about the oversight of related party transactions and the fitness of the major shareholders to exercise the ownership responsibilities they held. The collapse of Thomas Cook in 2019 raised questions about the board’s oversight of a heavily indebted balance sheet and management’s optimistic trading narratives. Patisserie Valerie’s 2019 fraud raised questions about the adequacy of audit committee oversight. In each case, the governance mechanisms that existed in the company — a board, external auditors, committee oversight — were present but were not functioning effectively.

Good governance does not guarantee corporate success — companies with excellent governance fail when their markets change, their products become obsolete or their management makes poor strategic decisions. But poor governance is a consistent predictor of poor outcomes — the company that lacks independent board oversight, transparent financial reporting and genuine management accountability is structurally more vulnerable to the kind of problems that have destroyed shareholder value in UK corporate history.

Evolving Corporate Governance Themes

ESG governance. Environmental, social and governance factors are increasingly central to corporate governance expectations. Institutional investors require companies to report on their climate risk exposure, their carbon emissions, their diversity policies and their supply chain social standards. The TCFD (Task Force on Climate-related Financial Disclosures) framework, now embedded in UK regulatory requirements for large companies, requires boards to assess and disclose climate-related risks and opportunities.

Board diversity. The gender diversity of UK listed company boards has improved substantially since the Davies Review (2011) and subsequent Hampton-Alexander Review established targets. Female representation on FTSE 100 boards has exceeded 40%. Ethnic diversity has received more recent attention through the Parker Review. The governance argument for diversity is not primarily moral but practical — homogeneous boards are more prone to groupthink and less likely to identify the risks that their shared experience blinds them to.

AI and technology governance. The governance of artificial intelligence — its use in company operations, its ethical implications and its risk management — is an emerging board responsibility. Boards that do not understand the AI tools their management are deploying, or the risks those tools create, are not fulfilling their governance oversight function in an environment where AI is increasingly material to business performance and risk. See our page on AI Ethics Board Members for more on this evolving governance role.

Stakeholder governance. The 2018 revision of the FRC Code and the 2006 Companies Act’s Section 172 both reflect a broader conception of governance accountability — to employees, communities and environment as well as shareholders. The Wates Principles for large private companies (2018) extend governance accountability expectations to private businesses, reflecting the view that companies whose decisions affect large numbers of stakeholders should be accountable for how those decisions are made regardless of their listing status.

Improving Corporate Governance in Your Business

For privately held and owner-managed businesses considering governance improvement, the most impactful steps are practical and incremental rather than code compliance exercises.

Appoint an independent non-executive director. The single most significant governance improvement for an owner-managed business approaching institutional investment, PE funding or significant external stakeholder accountability. A well-chosen independent NED provides genuine external challenge, financial reporting oversight and governance credibility that the founding team cannot provide for itself. See our Hire a NED page for guidance on making the first NED appointment.

Establish a regular board meeting cadence. Monthly or quarterly board meetings with a consistent agenda, a properly prepared board pack circulated in advance, and minutes that record decisions and actions. The board meeting discipline — even without external directors — creates governance accountability that informal management meetings do not.

Improve management information quality. Timely, accurate management accounts with a clear EBITDA presentation and variance commentary are the foundation of financial governance oversight. Boards cannot exercise meaningful financial oversight without reliable management information.

Document and manage conflicts of interest. Related party transactions, management incentive arrangements and any other situations where directors’ personal interests intersect with the company’s should be formally disclosed and managed through a documented process. The absence of conflicts management is one of the most common governance gaps in private company transactions.

Related guides: What Is a Board Meeting?  |  Executive vs Non-Executive Director  |  How PE Governance Works  |  NED Knowledge Centre

NED Capital places non-executive directors for boards across the UK. For guidance on your first NED appointment or a board governance conversation, call 0203 137 2496 or see our NED Recruitment Agency page.