BST · Professional Level
Corporate Governance and Ethics
The UK Corporate Governance Code (principles and provisions — board leadership, division of responsibilities, composition, audit, remuneration), board effectiveness (role of the chair, CEO, NEDs, senior independent director), the role of board committees (audit committee, remuneration committee, nomination committee), stakeholder management (Mendelow's power/interest matrix), corporate social responsibility (CSR) and sustainability, ESG frameworks and reporting, integrated reporting, and business ethics (ethical theories, ethical dilemmas, whistleblowing).
Learning Objectives
- •Describe the principles of the UK Corporate Governance Code and explain the "comply or explain" approach
- •Explain the roles of the chair, CEO, non-executive directors, and the senior independent director
- •Describe the role and responsibilities of the audit committee, remuneration committee, and nomination committee
- •Apply Mendelow's stakeholder matrix to analyse and manage stakeholder relationships
- •Explain CSR, sustainability, and ESG concepts and their relationship to corporate strategy
- •Describe ESG reporting frameworks including the ISSB standards
- •Explain integrated reporting and the six capitals
- •Discuss ethical theories and their application to business dilemmas, including whistleblowing
The UK Corporate Governance Code
The UK Corporate Governance Code (issued by the FRC) sets standards for good governance practice for companies with a premium listing on the London Stock Exchange. It operates on a "comply or explain" basis — companies must either comply with the Code's provisions or explain in their annual report why they have not.
Five sections of the Code:
- Board leadership and company purpose: The board promotes the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. It establishes purpose, values, and strategy, and ensures effective engagement with stakeholders (s.172 CA 2006 duty).
- Division of responsibilities: Clear division between the chair (board leadership) and the CEO (running the business). These roles should not be exercised by the same person. No individual should have unfettered decision-making powers.
- Composition, succession, and evaluation: Appropriate combination of executive and non-executive directors. Appointments based on merit with due regard for diversity. Formal annual board evaluation (externally facilitated every three years for FTSE 350).
- Audit, risk, and internal control: Formal and transparent policies for audit and maintenance of a sound system of internal control and risk management. Audit committee of at least three independent NEDs.
- Remuneration: Remuneration designed to support strategy and promote long-term sustainable success. Remuneration committee of at least three independent NEDs. No director involved in deciding their own remuneration.
Board Effectiveness — Key Roles
| Role | Key responsibilities |
|---|---|
| Chair | Leads the board. Sets the agenda. Ensures effective debate and challenge. Promotes openness. Ensures directors receive accurate, timely information. Facilitates NED contributions. Leads board evaluation. Should be independent on appointment and should NOT be the former CEO. |
| CEO | Runs the day-to-day business. Implements strategy agreed by the board. Manages the executive team. Reports to the board on performance. Separate from the chair. |
| Non-executive directors (NEDs) | Provide independent oversight, challenge, and support. Four key roles: Strategy (contribute to strategic development), Scrutiny (hold management to account), Risk (ensure effective risk management), People (executive remuneration, succession planning). At least half the board (excluding the chair) should be independent NEDs for FTSE 350. |
| Senior Independent Director (SID) | An independent NED who acts as sounding board for the chair, intermediary for other directors and shareholders. Available to shareholders if concerns cannot be resolved through normal channels. Leads the annual evaluation of the chair. |
Board diversity: The Code and FCA require boards to promote diversity — gender, ethnicity, social background, cognitive diversity, and skills. FTSE 350 companies report against specific targets (e.g., at least 40% women, at least one member from an ethnic minority background, at least one senior role held by a woman).
Board Committees
| Committee | Composition | Key responsibilities |
|---|---|---|
| Audit committee | ≥3 independent NEDs. At least one with recent and relevant financial experience. | Monitor integrity of financial statements and review significant reporting judgements. Monitor internal audit effectiveness. Review internal controls and risk management systems. Oversee external auditor relationship (appointment, fees, independence, non-audit services). Review the annual report for fairness, balance, and understandability. |
| Remuneration committee | ≥3 independent NEDs. Board chair may be a member (not chair of committee) if independent on appointment. | Set remuneration policy for executive directors. Ensure alignment with strategy and long-term success. Consider wider workforce pay. Include malus and clawback provisions. Prepare directors' remuneration report (subject to shareholder vote). |
| Nomination committee | Majority independent NEDs. Chaired by board chair (or independent NED when discussing chair succession). | Lead board appointment process (identify gaps, define specifications, oversee search). Ensure merit-based appointments with regard to diversity. Plan orderly succession. Oversee annual board evaluation. |
Stakeholder Management — Mendelow's Matrix
Mendelow's stakeholder matrix classifies stakeholders by power (ability to influence) and interest (degree of concern):
| Low interest | High interest | |
|---|---|---|
| Low power | Minimal effort — Monitor only. Example: general public. | Keep informed — Update to maintain goodwill. Example: small shareholders, local communities, NGOs. |
| High power | Keep satisfied — Prevent them becoming interested and using their power. Example: institutional investors (passive unless concerned), regulators. | Key players — manage closely — Most critical. Example: major shareholders, key customers, the board, lending banks. |
Stakeholders can move between quadrants — e.g., a regulatory change may move government from "keep satisfied" to "key players." Anticipate these movements. Section 172 CA 2006 requires directors to have regard to: employees, business relationships, community/environment, reputation, and fairness between members.
CSR, Sustainability, and ESG
CSR: Businesses have responsibilities beyond profit — to society, the environment, employees, and communities. Sustainability: Meeting present needs without compromising future generations (Brundtland, 1987). Triple bottom line (Elkington): People, Planet, Profit.
ESG factors:
- Environmental: Climate change, carbon emissions, energy, waste, water, pollution, biodiversity
- Social: Employee welfare, diversity, human rights, health and safety, data privacy, supply chain ethics
- Governance: Board composition, executive pay, shareholder rights, ethics, anti-corruption, transparency
ESG reporting frameworks:
- ISSB Standards (IFRS S1 and S2): Global baseline — S1 general sustainability disclosures, S2 climate-related disclosures
- GRI Standards: Comprehensive sustainability reporting focusing on the organisation's impacts (double materiality)
- TCFD: Climate-focused — governance, strategy, risk management, metrics and targets (now incorporated into IFRS S2)
- UK requirements: FCA requires TCFD reporting for listed companies. UK adopting ISSB through UK Sustainability Disclosure Standards.
Integrated reporting (<IR>): Concise communication on how strategy, governance, performance, and prospects create value across six capitals: financial, manufactured, intellectual, human, social and relationship, and natural.
Business Ethics
Ethical theories:
| Theory | Key idea | Application |
|---|---|---|
| Deontology (Kant) | Actions are right or wrong in themselves, regardless of consequences. Duty-based — follow moral rules. | A company should not lie to customers even if lying would increase profits. |
| Consequentialism / utilitarianism | Morality depends on consequences. The right action produces the greatest good for the greatest number. | A factory closure causing redundancies may be justified if it saves the company and remaining jobs. |
| Virtue ethics (Aristotle) | Focus on the character of the moral agent. Virtuous people make good decisions. | Cultivate ethical character: hire for integrity, lead by example, reward ethical behaviour. |
Common ethical dilemmas: Shareholder vs stakeholder interests, short-term profit vs long-term sustainability, transparency vs competitive advantage, global ethical standards vs local norms, tax planning vs aggressive avoidance.
Whistleblowing:
- Disclosure of wrongdoing (fraud, safety violations, financial misreporting) by an employee or insider
- Public Interest Disclosure Act 1998 (PIDA): Protects employees making "qualifying disclosures" in good faith to an appropriate person (employer, prescribed regulator)
- The UK Code requires the audit committee to review whistleblowing arrangements — confidential reporting mechanism, proper investigation, protection from retaliation
Examiner Focus
Common Pitfall
Study Tip
Examiner Focus
Watch Out
Study Tip
Written Practice
Corporate Governance and Ethics: Applied Requirement
Prepare a focused written answer with clear workings and justified recommendations.
A client has asked for a concise exam-style written response for a client or senior manager on corporate governance and ethics. Use the key rules, calculations, risks, and professional judgement from this topic to structure your answer.
Answer Prompts
- •Identify the issue and explain why it matters in the scenario.
- •Apply the relevant technical rule, calculation, or framework.
- •State the commercial, ethical, tax, reporting, or assurance implication.
- •Conclude with a clear recommendation or exam-ready judgement.
Marking Focus
- Application to facts rather than textbook recall
- Clear structure and answer-first communication
- Balanced judgement where there is uncertainty
- Commercially sensible conclusion
Key Definitions
UK Corporate Governance Code
FRC-issued code for premium-listed companies. "Comply or explain" approach. Five sections: board leadership, division of responsibilities, composition, audit/risk, remuneration.
Comply or explain
Companies must either comply with Code provisions or explain why not in the annual report. Provides flexibility while maintaining accountability.
Non-executive director (NED)
Independent board member providing oversight, challenge, and support. Four roles: strategy, scrutiny, risk, people. At least half the board (ex-chair) should be independent NEDs for FTSE 350.
Senior Independent Director (SID)
Independent NED acting as sounding board for the chair, intermediary for directors/shareholders, and leads the chair's annual evaluation.
Audit committee
Board committee of ≥3 independent NEDs (one with financial experience). Oversees: financial reporting, internal audit, internal controls, external auditor, annual report fairness.
Remuneration committee
Board committee of ≥3 independent NEDs. Sets executive pay policy aligned to strategy. Includes malus and clawback. Considers wider workforce pay.
Nomination committee
Board committee with majority independent NEDs. Leads appointments (merit + diversity), succession planning, board evaluation.
Mendelow's stakeholder matrix
Classifies stakeholders by power × interest: minimal effort (low/low), keep informed (low power/high interest), keep satisfied (high power/low interest), key players (high/high).
ESG
Environmental, Social, and Governance factors. Increasingly required in reporting (ISSB IFRS S1/S2, GRI, TCFD). Used to evaluate corporate sustainability and ethical impact.
Integrated reporting (<IR>)
Concise report on value creation across six capitals: financial, manufactured, intellectual, human, social/relationship, natural.
Whistleblowing
Disclosure of wrongdoing by an insider. Protected under PIDA 1998 (qualifying disclosures in good faith). Audit committee reviews whistleblowing arrangements.
Malus and clawback
Malus: reducing unpaid variable pay before vesting. Clawback: recovering already-paid variable pay. Applied for misconduct, misstatement, or risk failure.
Key Formulas
Worked Examples
Related Topics
Key Takeaways
- ✓UK Corporate Governance Code: "comply or explain" for premium-listed companies. Five sections: board leadership/purpose, division of responsibilities (separate chair/CEO), composition/succession/evaluation, audit/risk/internal control, remuneration.
- ✓Board roles: Chair (leads board, not former CEO), CEO (runs business), NEDs (strategy, scrutiny, risk, people — ≥50% independent for FTSE 350), SID (sounding board, intermediary, chair evaluation).
- ✓Three committees: Audit (≥3 NEDs, financial experience — FS integrity, internal audit, external auditor, controls), Remuneration (≥3 NEDs — executive pay, malus/clawback, wider workforce), Nomination (majority NEDs — appointments, diversity, succession).
- ✓Mendelow's matrix: power × interest → minimal effort, keep informed, keep satisfied, key players. Stakeholders can MOVE between quadrants. s.172 CA 2006 requires directors to consider stakeholder interests.
- ✓CSR and sustainability: responsibilities beyond profit. Triple bottom line (people, planet, profit). ESG: environmental + social + governance factors used to evaluate sustainability performance.
- ✓ESG reporting: ISSB (IFRS S1 general, S2 climate — global baseline), GRI (impact/double materiality), TCFD (climate — now in IFRS S2). UK adopting ISSB via UK SDS. Integrated reporting: six capitals (financial, manufactured, intellectual, human, social/relationship, natural).
- ✓Ethics: deontology (duty-based, actions right/wrong intrinsically), consequentialism (outcomes matter, greatest good), virtue ethics (character). Apply multiple perspectives to dilemmas — no single right answer.
- ✓Whistleblowing: PIDA 1998 protects qualifying disclosures in good faith. UK Code requires audit committee oversight of whistleblowing arrangements. Organisations should encourage reporting, protect whistleblowers, investigate promptly.
Practice Questions
Question 1 of 8
The UK Corporate Governance Code operates on a:
Question 2 of 8
The audit committee should comprise at least:
Question 3 of 8
A stakeholder with HIGH power but LOW interest should be:
Question 4 of 8
The SID is responsible for:
Question 5 of 8
ISSB standards IFRS S1 and S2 relate to:
Question 6 of 8
Malus and clawback provisions allow:
Question 7 of 8
Under PIDA 1998, a whistleblower is protected if they:
Question 8 of 8
Which is NOT one of the six capitals in integrated reporting?
Source and Version
Syllabus: ICAEW ACA Professional Level 2026 · Reviewed: 2026-05-04