Corporate governance often sits in the “important but not urgent” category – until something goes wrong. As an in-house lawyer, you’re uniquely positioned to ensure your organisation gets it right from the start. This guide distils the essentials of corporate governance into practical insights you can apply immediately.
What corporate governance really means
Corporate governance isn’t about day-to-day operations. It focuses on the long-term success of a company and the delivery of value to shareholders. Think of it as the framework of checks and balances within which decisions are made.
At its core, good governance encompasses many things: risk management, stakeholder relationships, trust, accountability, business integrity, corporate social responsibility (including ESG criteria), as well as company culture and workforce engagement (including diversity, equity, social mobility and inclusion). Admittedly, it’s a broad remit, but understanding the scope will help you identify where governance issues might arise in your organisation.
Frameworks for corporate governance
The UK operates a system of mandatory frameworks alongside voluntary codes, guidance and best practices. For listed companies, compliance with the UK Corporate Governance Code is a “comply or explain” requirement. Companies operating in regulated sectors will have their own specific reporting requirements. Mandatory frameworks act as guard rails and often reveal corporate governance issues as a matter of process.
But what about companies not subject to mandatory frameworks (e.g. private limited companies that don’t operate in regulated sectors)?
For these organisations, dissent is a good indicator. Regular dissent in the form of disrupting shareholder meetings, voting against or abstaining from shareholder votes, bad press, or regular disgruntled employees or other stakeholders often point to poor corporate governance. As in-house counsel, you should be alert to these warning signs and address them before they escalate.
Roles and responsibilities
Directors and Their Duties
Primary responsibility for corporate governance sits with directors, whether executive or non-executive. However, effective corporate depends on how the board engages with shareholders, workers, stakeholders, and advisers.
Executive directors owe fiduciary duties to the company and provide day-to-day management of a company’s business in both operational and strategic roles. Non-executive directors also owe fiduciary duties to the company and provide supervisory oversight by constructively challenging executive directors, holding senior management to account, and bringing independent judgement.
Shareholders and other key players
Shareholders also play a crucial role in a company’s corporate governance by monitoring the composition and performance of the board (and removing underperforming directors), holding the board to account, and exercising voting rights (or abstaining).
Other important players include:
- The chairperson (if appointed), whose roles is to facilitate open dialogue between the directors, as well as between the board and the shareholders;
- The company secretary, ensuring governance procedures are followed; and
- Company committees (e.g. audit, risk, and remuneration committees), that focus on oversight and integrity.
Directors’ duties: The essentials
Directors’ duties are owed to the company, not directly to shareholders or other stakeholders. This distinction matters when advising on potential conflicts. Importantly, in an (imminent) insolvency situation, directors’ duties shift from being owed to the company to being owed to the company’s creditors.
The statutory director duties include:
Acting within powers
- Directors must follow the company’s constitution (its articles and shareholder resolutions)
- and use their powers only for their proper purpose.
Promoting success
Directors must act in good faith to promote the success of the company for the benefit of its members as a whole, having regard to six factors including the likely consequences of any decision in the long-term, the interests of employees, business relationships with suppliers and customers, impact on the community and environment, maintaining a reputation for high standards of business conduct, and acting fairly between members.
Exercise independent judgment
Directors must exercise the discretion independently and can’t simply follow instructions from others.
Exercise reasonable care, skill and diligence
Directors exercise reasonable care, skill and diligence in carrying out their duties. They meet a baseline standard of competence that applies to every director, regardless of personal qualities, experience or qualifications. This objective standard ensures all directors act with the same minimum level of care. When a director brings particular knowledge, skills or experience to the role, they meet a higher standard that reflects their own expertise.
Managing Conflicts of Interest
There are two categories of conflicts- transactional (where a director has an interest in a transaction the company is entering into) and situational (any other conflict, e.g. a director also being a major shareholder). A common example is where a director of a company is a major shareholder in that company’s supplier. Before the company enters a supply contract, the director must declare his interest in that transaction. The performance of that supply contract creates a situational conflict in that the director’s personal interest might be to ensure that the supplier gets away with providing a sub-standard performance to the company.
For in-house lawyers, helping directors understand and apply these duties is one of the most valuable governance roles you can play. When a board understands why duties exist, its decision-making can improve dramatically.
Managing risk and liability
Directors can be indemnified by the company from third-party claims (usually in the articles of association), and Directors’ and Officers’ Insurance can provide wider coverage than an indemnity from the company, covering during and after directorship, though it excludes criminal or fraudulent conduct, claims brought by others insured under the same policy, and claims by major shareholders owning more than a certain percentage (typically 10-15%).
Practical Risk Management
As in-house lawyers, your role isn’t to scare directors, but to give them the tools to protect themselves and the company. Practical steps include:
- Regularly reviewing indemnity and D&O cover.
- Running director training sessions on conflicts and decision-making.
- Ensuring clear records of board discussions and rationale (board minutes are your best evidence).
- Helping directors recognise when duties shift, particularly as insolvency looms, when duties move from shareholders to creditors.
Decision-making in practice
Directors’ decisions are made by simple majority or unanimously. Decisions made by majority require a meeting to be called with valid notice given, a quorum present (a conflicted director won’t count towards the quorum), and voting properly conducted. Minutes must be prepared and kept for at least ten years from the date of the meeting. Unanimous decisions are typically recorded by written resolutions of the directors but can take any form that indicates that they share a common view on a particular matter.
Shareholders have superior decision-making powers for certain decisions requiring shareholder resolutions (such as amending articles), which can be made through meetings (with notice, quorum, voting by hand or poll) or written resolution (no need for meeting, voting by number of shares held).
Strengthening Board Process
As in-house counsel, your focus should be on process discipline:
- Make sure board papers reach directors in good time prior to the relevant meeting.
- Ensure conflicts are declared before votes are cast.
- Keep minutes clear and factual.
- Retain records for at least ten years.
Practical action points
Create a Conflicts Register
Something you can implement immediately is create a “conflicts register” for your board. A simple spreadsheet tracking potential and actual conflicts, declarations made, and authorisations obtained will save considerable time and reduce risk. Review it at every board meeting and update it as circumstances change.
Other Key Takeaways
- Monitor for early warning signs of governance failures, particularly shareholder dissent and stakeholder complaints
- Ensure directors understand their duties are owed to the company, not shareholders or groups
- Keep meticulous records of board and shareholder decisions
- Review D&O insurance coverage regularly and ensure it aligns with your company’s risk profile
This article was written by Albert Mennen, Senior Associate at Bird & Bird
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