The UK Corporate Governance Code: A British Invention with Global Impact
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Few governance frameworks have achieved the global influence of the UK Corporate Governance Code. First issued after the Cadbury Report in 1992, it introduced the world to a simple but radical idea: “comply or explain.”
Unlike the rule-bound system of the United States, the UK Code is principle-based. It does not prescribe every detail of board practice; instead, it sets out expectations and allows companies to diverge, provided they explain their reasoning to shareholders. This balance between flexibility and accountability has made the Code one of Britain’s most successful exports, inspiring governance regimes from Europe to Asia.
But how does “comply or explain” work in practice? Does it strengthen board accountability—or enable box-ticking and cosmetic compliance? And what lessons can be drawn from corporate failures such as Carillion or BHS, where governance clearly fell short despite the presence of the Code?
This article examines the UK Corporate Governance Code’s history, principles, operation, and practical challenges—offering insights for boards, investors, and regulators worldwide.
This article is part of our broader series on governance, building on the cornerstone piece Good Corporate Governance – Foundations of Trust and Accountability, which explores the global principles of accountability, transparency, and sustainable success.
The Origins of the Code: Cadbury, Greenbury, Higgs
The UK Code emerged from a series of governance crises in the late 1980s and early 1990s. Collapses like Polly Peck and Maxwell Communications undermined investor confidence and revealed weaknesses in board oversight.
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Cadbury Report (1992): Recommended independent audit committees, separation of CEO and chair, and the principle of “comply or explain.”
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Greenbury Report (1995): Focused on executive remuneration after public outcry over pay excesses.
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Higgs Review (2003): Strengthened the role and independence of non-executive directors.
These reports were consolidated by the Financial Reporting Council (FRC) into a single UK Corporate Governance Code, updated regularly (most recently in 2024). The Code now forms part of the Listing Rules of the London Stock Exchange: premium-listed companies must report annually on how they have applied the Code.
Read more on The Cadbury Report and the Corporate Governance (overview) by the FRC.
The Principle of “Comply or Explain”
At its heart, the Code relies on two assumptions:
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Boards will either comply with its provisions or explain clearly and credibly why they do not.
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Investors will hold boards to account by evaluating these explanations and acting accordingly.
This model avoids a “one size fits all” approach. A small technology company may reasonably depart from certain requirements that make sense for a global bank. The Code’s flexibility is its genius—but also its Achilles heel, because it depends on the engagement of investors to enforce discipline.
Read more in the UK Corporate Governance Code the Financial Reporting Council and our blog The UK Corporate Governance Code – Comply or Explain in Practice.
The Core Provisions of the UK Code
The current Code (2024) is organized into five sections:
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Board Leadership and Company Purpose – The board should promote long-term sustainable success, establish company purpose, and ensure values and culture align with strategy.
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Division of Responsibilities – The roles of chair and CEO must be separate, with a majority of independent non-executive directors.
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Composition, Succession and Evaluation – Appointments should be merit-based and promote diversity; annual board evaluations are expected.
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Audit, Risk and Internal Control – The board must maintain sound risk management and internal control systems, supported by an independent audit committee.
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Remuneration – Executive pay should be aligned with company strategy and long-term success, with transparent disclosure of performance metrics.
Each provision is accompanied by guidance, but the spirit is principle-driven: boards must use judgment, not just compliance checklists.
Case Study: Carillion – When Governance Fails
Carillion, once the UK’s second-largest construction and facilities company, collapsed in 2018 with £7 billion in liabilities. The case is often cited as a failure of “comply or explain.”
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The board claimed compliance with most provisions of the Code.
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Independent non-executives failed to challenge management’s aggressive accounting of long-term contracts.
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The audit committee did not question the sustainability of cash flows.
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Shareholders received reassurances right up to the brink of collapse.
Parliament’s inquiry was scathing: the Code’s existence meant little without active, courageous oversight. Carillion demonstrated that “comply or explain” can become a veneer of legitimacy unless investors interrogate explanations and boards foster a culture of challenge.
Other Illustrative Cases
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BP (Deepwater Horizon, 2010): Showed the need for boards to oversee safety and environmental risks, not just financial metrics.
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BHS (2016): Sale of the business for £1 revealed weak stewardship and failures in pension oversight.
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Royal Mail (2013 IPO): Raised concerns about executive pay and investor alignment post-privatization.
These cases highlight that governance is not just about structures (committees, codes) but about substance—board behavior, culture, and accountability.
Investor Stewardship: The Other Half of the Equation
“Comply or explain” relies heavily on engaged investors. In the UK, this is reinforced by the Stewardship Code, which sets standards for institutional investors on how they should monitor and engage with companies.
When investors fulfill their role—asking tough questions, voting thoughtfully, and holding directors accountable—the system works. But when investors are passive or dispersed, explanations go unscrutinized.
The stewardship model has inspired similar frameworks globally, but its effectiveness depends on investor capacity and willpower.
Strengths of the UK Code
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Flexibility: Adapts to different business models and sizes.
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Dialogue-based: Encourages constructive engagement between boards and investors.
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Global influence: Inspired codes in Europe, Asia, and beyond.
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Continuous evolution: Regular updates reflect emerging issues (diversity, ESG, culture).
Criticisms and Weaknesses
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Box-ticking culture: Some companies treat the Code as a compliance checklist.
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Weak enforcement: No sanctions for poor explanations unless investors act.
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Over-reliance on shareholders: In fragmented markets, accountability can be diluted.
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Culture gap: Formal compliance may mask weak board dynamics and poor challenge.
The 2024 Revision: ESG and Stakeholder Interests
The latest revision of the Code emphasizes:
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Integration of ESG factors into strategy and reporting.
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Clear articulation of company purpose and how culture supports it.
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Enhanced disclosure on diversity and inclusion at board and senior management level.
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Stronger guidance on audit committee reporting and risk oversight.
This reflects a shift from a narrow shareholder focus to a broader stakeholder-oriented governance model—closer to continental European traditions.
Read more in our blog: European Sustainability Reporting Standards.
Global Comparisons
The UK’s principle-based model contrasts with:
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U.S. rule-based approach (SOX, SEC, Delaware courts).
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German two-tier board system (co-determination).
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Asian hybrid models (Japan’s gradual reform, Singapore’s stricter regulation).
Despite differences, the UK Code remains a reference point: many countries have adopted “comply or explain” mechanisms, including the Netherlands, South Africa, and Hong Kong.
The Future of “Comply or Explain”
Looking ahead, three trends will shape the Code’s effectiveness:
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Investor activism: Institutional investors are more assertive on ESG, diversity, and strategy.
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Technology and risk: Boards must oversee cyber resilience, AI ethics, and data governance.
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Global convergence: The rise of ISSB sustainability standards may push the Code to integrate ESG reporting more explicitly.
“Comply or explain” will survive if it continues to evolve—remaining principle-based, but underpinned by rigorous transparency and active stewardship.
Read more in the Guardian – Corporate governance: does ‘comply or explain’ have a future?
Conclusion: Principles Only Work if Practiced
The UK Corporate Governance Code is a landmark in global governance. Its genius lies in flexibility: rather than prescribing every action, it demands accountability through transparency. Yet its weakness is equally clear: without courageous boards and engaged investors, compliance becomes hollow.
Carillion, BHS, and BP remind us that governance codes are tools, not guarantees. They require boards to live their principles and investors to test them. “Comply or explain” in practice is not a choice between compliance and explanation—it is a demand for honesty, clarity, and accountability.
UK Corporate Governance Code
UK Corporate Governance Code
UK Corporate Governance Code UK Corporate Governance Code UK Corporate Governance Code UK Corporate Governance Code UK Corporate Governance Code UK Corporate Governance Code