Introduction

Corporate governance has undergone significant scrutiny due to high-profile failures, including Maxwell, Enron, Parmalat, and HBOS. These events have influenced regulatory reforms, particularly in the UK, where governance practices have evolved to restore investor confidence and ensure economic stability. The report examines the government’s increasing involvement in corporate governance, analysing its rationale, impact, and broader implications.

The firm, government and corporate governance

Corporations operate primarily to maximise profit, yet their economic influence extends beyond shareholders to employees, customers, and broader society. The government plays a role in ensuring corporate accountability and stability, particularly when corporate failures have widespread economic consequences. The 2008 financial crisis demonstrated how private banking failures required public intervention, reinforcing the need for governmental oversight.

Corporate governance aims to align management actions with shareholder interests. Traditionally, UK governance has been influenced by the shareholder-primacy model, prioritising profit maximisation. However, regulatory developments, including the Companies Act 2006, have acknowledged stakeholder interests, reflecting a shift towards a more balanced approach.

The model of corporate governance in the UK

The UK corporate governance model has been shaped by ongoing debates between shareholder and stakeholder perspectives. Shareholder value remains a priority, ensuring managerial accountability and efficiency. However, corporate failures have prompted regulatory revisions, acknowledging the wider impact on employees, investors, and the economy.

The UK Companies Act 2006 introduced director responsibilities that extend beyond shareholder interests, incorporating considerations such as employee welfare and environmental impact. This shift reflects increasing recognition that corporate sustainability requires balancing profitability with broader responsibilities.

Regulating corporate governance in the UK

The codes of conduct and best practice

Over the past three decades, UK corporate governance has evolved through multiple regulatory frameworks. The Cadbury Report (1992) introduced the principle of voluntary compliance with governance codes, aiming to enhance board accountability. The Greenbury Report (1995) focused on executive remuneration, advocating transparency in director pay structures.

Subsequent reports, including Hampel (1998) and Higgs (2003), reinforced corporate governance principles. The Combined Code (1998) formalised many recommendations, emphasising the “comply or explain” approach, allowing firms to justify deviations from governance norms. Despite these developments, corporate failures continued, prompting the UK Corporate Governance Code (2010) to introduce mandatory annual director elections and external board performance reviews.

The company law reform

Parallel to governance codes, the Companies Act 2006 introduced legal reforms to strengthen corporate accountability. It codified directors’ duties, reinforcing responsibilities such as acting in the company’s best interest, ensuring transparency, and avoiding conflicts of interest.

The Act also granted shareholders the right to sue directors on behalf of the company, enhancing investor protection. These measures aimed to reduce corporate misconduct and improve governance structures, particularly following corporate failures that exposed weaknesses in self-regulation.

The role of government in corporate governance

To compensate for the failure of self-regulation

Corporate self-regulation was initially preferred to avoid excessive governmental control. However, firms primarily driven by profit incentives often fail to self-regulate effectively. Studies suggest firms comply with regulations only when non-compliance penalties outweigh compliance costs.

Corporate scandals have demonstrated weaknesses in self-regulation, necessitating governmental intervention. The Financial Reporting Council (FRC) and the Financial Services Authority (FSA) share oversight responsibilities with the government, creating a hybrid regulatory framework to address governance deficiencies.

To prevent corporate scandals and restore investors’ confidence

The Enron, WorldCom, and Parmalat scandals exposed governance failures, leading to significant financial losses for investors and employees. Public trust in corporate structures declined, prompting calls for stricter regulation. The UK government has implemented measures, including enhanced financial disclosure requirements and shareholder engagement policies, to restore confidence.

UK reforms focus on ensuring governance frameworks support financial stability and corporate integrity. The Companies Act 2006 and governance codes aim to prevent fraud and improve accountability, reinforcing investor protection while maintaining a competitive business environment.

To promote competitive advantage

The UK aims to maintain its position as a global financial hub by ensuring effective governance frameworks. Studies indicate that UK corporate governance standards attract international investment, as they balance high regulatory standards with relatively low compliance costs.

The Sarbanes-Oxley Act in the US introduced stringent compliance requirements, leading some firms to prefer UK listings due to its more flexible “comply or explain” model. The UK government continues to refine governance policies to maintain competitiveness while ensuring investor confidence.

To convince investors that the government is addressing their concerns

Investor confidence has been impacted by corporate failures, particularly in the financial sector. Public discontent over executive bonuses and bank bailouts has led to increased scrutiny of governance practices. The UK government has introduced measures, such as the Walker Review (2009) on banking governance, to address investor concerns.

Despite these efforts, corporate governance remains cyclical, with reforms often following crises. The government balances regulatory intervention with market flexibility, ensuring governance frameworks support investor protection without stifling business growth.

Further discussions and conclusions

Government involvement in corporate governance varies globally. In the UK, regulation has evolved to address governance failures, balancing self-regulation with governmental oversight. The Companies Act 2006 and governance codes reflect an effort to enhance corporate accountability while maintaining competitive business conditions.

Other countries, including China and Australia, have also increased governance regulation in response to corporate failures. Governance reforms aim to improve corporate transparency, protect investors, and strengthen economic stability. The UK model serves as a reference for regulatory frameworks worldwide, demonstrating how governance policies evolve in response to corporate challenges.

The report concludes that governmental involvement in corporate governance will continue to develop, influenced by economic conditions, corporate failures, and investor expectations. Future governance policies must balance regulatory oversight with business flexibility to ensure long-term corporate sustainability and economic growth.