3 Things In-House Lawyers Need To Know About Corporate Governance

Picture of Yasmin K. Brinkley, MBA, LLM

Yasmin K. Brinkley, MBA, LLM

Corporate governance plays a fundamental role in the effective management and direction of companies, and it is essential for in-house lawyers to have a comprehensive understanding of its principles and practices.

This article aims to provide an in-depth analysis of corporate governance for in-house lawyers, focusing on its significance, legal requirements, and the benefits of ensuring compliance.

By examining the key aspects of corporate governance, in-house lawyers can better fulfil their responsibilities and contribute to the overall success and sustainability of the companies they represent.

What In-House Lawyers Need To Know About Corporate Governance

Corporate governance encompasses the legal, regulatory, and voluntary frameworks that govern how companies are directed and controlled.

It is crucial for in-house lawyers to grasp the fundamental concept of corporate governance, as it directly impacts the decision-making processes and overall management of the company.

What In-House Lawyers Need To Know About Corporate Governance - Corporate Governance Codes - Alternative Investment Market

The system of corporate governance is primarily overseen by the board of directors, who are responsible for promoting the long-term sustainable success of the company and ensuring alignment with its purpose, values, and strategy.

In the United Kingdom, corporate governance requirements are derived from various sources, including the Companies Act 2006 and specific regulations such as the Companies (Miscellaneous Reporting) Regulations 2018.

These regulations impose disclosure requirements on UK-incorporated companies with more than 2,000 employees or significant financial thresholds, mandating them to explain the corporate governance code they apply, any departures from the code, and their own corporate governance arrangements.

Additionally, the introduction of the UK Corporate Governance Code emphasises the board’s role in ensuring adequate cooperation within the group to discharge governance responsibilities effectively.

What do in-house lawyers need to know about corporate governance? In-house lawyers play a crucial role in facilitating compliance with corporate governance requirements.

They can assist in establishing policies and processes necessary for the board to function properly, periodically reviewing the company’s governance processes, and considering improvements or initiatives to strengthen governance.

Furthermore, in-house lawyers are instrumental in ensuring that governance standards and strategies set by the board are effectively implemented, thereby contributing to the overall compliance with legal and regulatory obligations.

Importance of Board Minutes and Decision-Making

Written records of a board’s decision-making are of utmost importance in corporate governance. Board minutes serve as evidence that directors were aware of their duties and considered all relevant factors when making important decisions.

The Companies Act 2006 stipulates that minutes of board and committee meetings must be retained for ten years, highlighting the significance of maintaining accurate and comprehensive records.

In the event that a director believes the minutes do not properly reflect the discussions, they have the responsibility to press for changes and, if necessary, make their own written record to ensure that all views expressed at the meeting are accurately documented.

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Benefits of Effective Corporate Governance

Ensuring effective corporate governance yields numerous benefits for companies and their stakeholders.

From the government’s perspective, good corporate governance enhances the UK’s reputation as having a world-leading corporate governance framework, thereby providing an international competitive advantage and making the UK an attractive place for investment.

At an individual company level, a culture that supports the mechanics of governance not only benefits the company itself but also fosters better relationships with shareholders and other stakeholders whose interests should be considered by the board.

Moreover, a sound system of corporate governance contributes to risk limitation and facilitates the governance of groups and subsidiary companies.

While UK company law does not explicitly recognise the existence of a group, a robust corporate governance framework can mitigate risks and ensure effective management and governance of complex group structures.

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What In-House Lawyers Need To Know About Corporate Governance: Corporate Governance Codes and Principles

In addition to legal requirements, various corporate governance codes and principles provide guidance for companies in establishing effective governance practices.

The UK Corporate Governance Code sets out principles for promoting the long-term sustainable success of companies and aligning their purpose, values, and strategy with their culture.

Furthermore, the Quoted Companies Alliance (QCA) and the Wates Corporate Governance Principles for Large Private Companies offer alternative frameworks for companies to explain their corporate governance arrangements, adopting a ‘comply or explain’ approach and focusing on key principles and required disclosures.

Alternative Investment Market And Large Private Companies

The corporate governance landscape has witnessed significant changes, particularly for AIM (Alternative Investment Market) companies and large private companies.

As of 28 September 2018, AIM companies are required to disclose the corporate governance code they adhere to, demonstrate compliance with the code, and provide reasons for any deviations from it.

Moreover, the Companies (Miscellaneous Reporting) Regulations 2018 have introduced new disclosure requirements for UK-incorporated companies with more than 2,000 employees or specific financial thresholds, necessitating an explanation of the applied corporate governance code, departures from the code, and the company’s own governance arrangements.

The QCA, an independent organisation advocating for small to mid-size companies, has revised its corporate governance code, known as the QCA Code. This code adopts a ‘comply or explain’ approach and is based on ten key principles along with a set of required disclosures.

On the other hand, the Wates Principles, published by the Financial Reporting Council (FRC), are aimed at large private companies and encompass six broad principles covering aspects such as purpose and leadership, board composition, responsibilities, opportunity and risk, remuneration, and stakeholder relationships and engagement.

These principles enable a diverse range of companies to elucidate their corporate governance arrangements, employing an ‘apply and explain’ approach.

Furthermore, the UK Corporate Governance Code (UKCG Code) offers a benchmark for non-premium listed and unlisted companies, allowing them to align with recognised governance standards.

Reasons in favour of adopting the UKCG Code include benchmarking against a widely perceived gold standard, particularly for large businesses, and its application across a group of companies.

Additionally, for companies in regulated sectors, the UKCG Code is commonly viewed as setting the standard for good governance, which regulators adopt as best practice obligations [4] .

In 2018, the government conducted a consultation on the need for stronger corporate governance and transparency measures concerning complex group structures.

The consultation emphasised the importance of effectively managing and governing complex corporate structures, highlighting the need for robust corporate governance arrangements and internal controls.

Consequently, the UKCG Code now emphasises the board’s responsibility to ensure adequate cooperation within the group, enabling the effective discharge of governance responsibilities, including the communication of the parent company’s purpose, values, and strategy.

In summary, in-house lawyers need to know about corporate governance policies including the evolving corporate governance requirements for AIM and large private companies. This necessitate a thorough understanding of the applicable codes and principles.

By adhering to these frameworks, companies can enhance their governance practices, promote transparency, and ultimately contribute to their long-term success and sustainability.

What Emphasis Does The UKCG Code Place On Cooperation Within A Group For Effective Governance?

The UKCG Code emphasises the board’s responsibility to ensure adequate cooperation within the group to discharge governance responsibilities effectively

Conclusion: Corporate Governance for In-House Lawyers

In conclusion, corporate governance is a critical aspect of company management and oversight, and in-house lawyers play a vital role in ensuring compliance with legal and regulatory requirements.

By understanding the legal obligations, significance, and benefits of effective corporate governance, in-house lawyers can contribute to the overall success and sustainability of the companies they represent.

It is imperative for in-house lawyers to stay abreast of developments in corporate governance regulations and codes, as well as to actively engage in the establishment and implementation of governance policies and processes within their respective companies.

This article serves as a comprehensive guide for in-house lawyers, providing insights into the legal requirements, practical implications, and benefits of corporate governance.

By adhering to the principles and practices of corporate governance, in-house lawyers can effectively fulfil their responsibilities and contribute to the long-term success of the companies they serve.

Picture of Yasmin K. Brinkley, MBA, LLM

Yasmin K. Brinkley, MBA, LLM

Yasmin is an expert in Commercial Contracts, Securities Regulation, Corporate Governance, Intellectual Property and Media Law. Yasmin completed her LLB Degree and MBA in Toronto. She is a dual-qualified lawyer in Canada, and England & Wales, and an Adjunct Professor of Business Law. Yasmin helps small businesses and charitable bodies to navigate financial legalities.

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