Codes of Corporate Governance
The Combined Code of Corporate Governance
If your club is a PLC listed on the London Stock Exchange then it must comply with the Combined Code of Corporate Governance (CCCG). The code aims to protect shareholder interests and can be used to ensure that the voice of shareholder supporters is heard. The code is voluntary in the sense that companies must comply with all aspects of the code, or provide a public statement explaining each and every point of non-compliance. Since the code is widely regarded as best practice, the aim of this ‘voluntary’ set-up is to name and shame companies that are not using best practice. Shareholders can decide whether they are happy with an explanation or sell their shares. Of course, for football supporters, selling shares in their club is often not an option as their priority is to see that their club survives and prospers, rather than to make a financial return. Therefore it is important that supporter shareholders bring maximum pressure to bear to ensure that clubs comply with the combined code. If your club is not complying with the code, point this out to the Company Secretary, other large shareholders (identifiable from the share register), and the media.
While the CCCG is a requirement only for companies listed on the London Stock Exchange, it is widely regarded as best practice. Therefore, any company with shareholder interests would benefit from complying with it.
The OECD Principles of Corporate Governance
Another important code of corporate governance is The Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. The OCED principles provide an international standard of corporate governance that has been endorsed by the 29 countries that make up the OECD.
The OECD principles explicitly recognise the rights of stakeholders (and not just shareholders):
‘The governance framework should recognise that the interests of the corporation are served by recognising the interests of stakeholders and their contribution to the long-term success of the corporation.’ OECD Principles of Corporate Governance, Section III, OECD, Paris.
The OECD principles are aimed primarily at companies whose shares are publicly traded on any market. However, the Preamble to the Principles states that, ‘to the extent they are deemed applicable, they might also be a useful tool to improve corporate governance in non-traded companies, for example, privately held and state-owned enterprises.’ (Preamble to the OECD Principles, OECD, Paris.)
Supporters’ Trusts that do not own shares should use the OECD principles to put pressure on clubs to recognise the positive role that the Supporters’ Trust (as a major legally constituted stakeholder) can play in shaping the long term success of the club.
A Supporters’ Trust that owns shares should use the Combined Code and the associated guidance on internal control (known as the Turnbull guidance – see below).
Using the CCCG: A supporters’ guide
Part 1 of the CCCG sets out the principles behind the code. Part 2 specifies the requirements of the code. Supporters’ Trusts that have a shareholding should check that their club complies with all aspects of Part 2 of the code and the related Turnbull Guidance designed to ensure effective internal control/auditing and risk assessment. Supporters’ Trusts should also have a grasp of the five sets of principles underlying the code, especially those concerning the role of institutional shareholders. A registered Trust that holds shares or pools the proxy votes on behalf of its members is an institutional shareholder, and as such is required by the code to monitor the corporate governance of the company, to cast proxy votes and to enter into dialogue with the board.
The Principles of the CCCG
There are five areas that make up the code:
The board of directors
This set of principles is designed to ensure that there are checks and balances on the power of members of the board of directors via: transparent mechanisms for appointing directors to the board; separation of powers between the Chair (who runs the board) and the Chief Executive Officer (who runs the business); the correct proportion of non-executive directors, including independent non-executives; and regular meetings to carry out business and sufficient information. The code requires every board to have a nominations committee to make recommendations on new directors. The nominations committee should have a majority of non-executive directors and be chaired by the chairman or a non-executive director.
This set of principles is designed to ensure that directors’ contracts and remuneration are subject to scrutiny, justifiable and related to performance. Every board must have a remuneration committee wholly comprising independent non-executive directors to make recommendations to the board on directors’ pay. The committee should provide a written report to shareholders every year, and where appropriate the remuneration report should be subject to approval by the Annual General Meeting.
Relations with shareholders
Boards must use the AGM ‘to communicate with private investors and encourage their participation.’ (CCCG, Part 2, Section 1, C2). Shareholders should receive notice of the AGM and all papers, reports and proposed resolutions at least 20 days in advance of the meeting. Members of the Audit, Remuneration and Nomination Committees should be there to answer questions. ‘Companies should count all proxy votes and, except where a poll is called, should indicate the level of the proxies lodged on each resolution, and the balance for and against the resolution, after it has been dealt with by a show of hands.’ (CCCG Part 2, Section 1 C.2.1).
Accountability and audit
The board should present a clear and accurate statement of the company’s financial position and future outlook. There should be an audit committee with at least 3 non-executive directors. The board should review the effectiveness of the company’s internal controls on an annual basis and report to shareholders. Either there should be an internal audit system or companies that do not have one should regularly review the need for one.
Institutional shareholders have an obligation to ensure that the companies in which they hold shares use best practice corporate governance and that votes proxied to them are cast. Institutional shareholders should also be willing to enter into dialogue with the board.
Institutional shareholders, Supporters’ Trusts and the CCCG
Supporters’ Trusts with a shareholding should ensure that their club complies with all aspects of the CCCG. Under Part 2 section 1.C, companies are required to enter into dialogue with institutional shareholders (which includes Supporters’ Trusts with share holdings). Equally, Trusts are under obligation to meet with the board.
“Companies should be ready, where practicable, to enter into a dialogue with institutional shareholders based on the mutual understanding of objectives.” (CCCG, Part 2, Section 1, C.1)
“Institutional shareholders should be ready, where practicable, to enter into a dialogue with institutional shareholders based on the mutual understanding of objectives.” (CCCG, Part 2, Section 2, E.2)
Where a Supporters’ Trust holds the proxy votes of a number of shareholders, the club is required to meet with representatives from that group, and/or to address a Trust meeting and answer questions. A number of Supporter Trusts have successfully used this part of the code to establish regular meetings with members of the board. At Tottenham Hotspur, for example, the Vice Chairman of the club attended a question and answer session with members of the Tottenham Hotspur Supporters’ Trust.
“Boards should use the AGM to communicate with private investors and encourage their participation.” (CCCG, Part 1, Section 1 C.1).
The board should encourage participation at the AGM. As has been discussed earlier in this Handbook, at some clubs the Supporters’ Trust has effectively used this part of the code to switch the day of the AGM to a weekend to allow supporter shareholders to attend. (See section 184.108.40.206).
As part of encouraging participation, the board should also welcome resolutions from institutional shareholders. Although there is not at present a legal requirement for companies to circulate shareholder resolutions free of charge, it is best practice to do so, and the 2001 Company Law Review recommended that the law be changed to require companies to do so. A number of football clubs have circulated resolutions from Supporters’ Trusts free of charge.
“The board should appoint a senior independent non-executive director to whom concerns can be conveyed and name that director in the Annual Report.” (CCCG, Part 2 Section 1, A 2.1).
The Supporters’ Trust should find out who is the senior non-executive director and raise any concerns they have about the corporate governance of the club with them.
The Turnbull Guidance
The Turnbull Guidance (Turnbull Committee (1999), Internal Control: Guidance for Directors on the Combined Code, London: Institute of Chartered Accountants) was introduced to provide assistance to companies on the types of internal controls they should have in place to comply with the Accountability and Audit principles of the CCCG. The guidance requires the board of directors to consider: ‘the nature and extent of the risks facing the company’ (Turnbull Report, point 18), the chances of the risks actually occurring, the level of acceptable risk, measures to reduce risk and the cost of implementing such measures relative to their benefit.
The collapse of the ITV Digital contract, which left many football clubs in financial difficulty, provides an example of the importance of carrying out proper risk assessment. All too often when clubs face financial difficulty, it is the supporters who have to bail them out. If your Trust owns shares, ask to see the board’s risk assessment of any major stream of revenue drying up.