Corporate governance in Britain is codified in a document that carries no legal force and shapes behaviour anyway. The comply-or-explain model asks companies to follow a code of principles or account publicly for departing from it, and for most of its history it worked well enough that few people outside the City thought about it.
Then came a run of failures severe enough to make governance a mainstream political subject: outsourcing collapses, retail insolvencies with pension deficits attached, and audit failures at firms whose accounts had been signed off weeks earlier. The response reshaped board practice more than any code revision had.
The audit expectation gap
The most persistent misunderstanding is what an audit is for. An audit provides reasonable assurance that financial statements are free of material misstatement. It is not a solvency opinion, a fraud investigation or a guarantee of survival. When a company fails shortly after a clean audit report, the public reasonably asks what the auditor was doing, and the technically correct answer satisfies nobody.
Reviews commissioned into audit quality, and the subsequent programme of reform overseen by the Financial Reporting Council, have narrowed that gap by requiring more explicit statements about going concern and viability. Boards now spend materially more time on the assumptions behind those statements than they did a decade ago.
Internal controls move to the centre
The most consequential change is the shift of internal control from a matter for the finance function to a matter for the board. Directors are increasingly expected to state that they have reviewed the effectiveness of material controls, which forces a level of documentation and testing that many mid-cap companies had never carried out.
The cost of this is real and the benefit is diffuse, which is why it attracts criticism. But the underlying logic is sound: most accounting failures are not sophisticated frauds but the accumulation of weak controls in fast-growing businesses, where reporting quality lags operational complexity.
The limits of the non-executive
Non-executive directors are asked to supervise a business they visit for a handful of days a year, using information prepared by the people they are supervising. The role depends almost entirely on the quality of the questions asked and the willingness of management to answer them honestly. It is a structurally weak position dressed in strong language.
Research by bodies including the ICAEW has consistently identified information asymmetry, rather than independence or competence, as the central constraint. The practical remedies are unglamorous: direct access to the second tier of management, unfiltered internal audit reporting, and enough time in role to develop judgment about what normal looks like.
Pensions changed the calculus
The scandals that provoked the strongest reaction involved defined benefit pension schemes left underfunded while dividends continued. That produced a genuine shift in power toward trustees and toward the Pensions Regulator, whose ability to intervene in corporate transactions is now a live consideration in any restructuring or acquisition involving a legacy scheme.
For boards, the practical consequence is that capital allocation decisions carry a covenant question they did not previously carry. A buyback that would once have been routine now requires an argument about why the scheme is not a better use of the cash.
What good practice looks like now
The boards that handle this well share habits rather than structures. They spend meeting time on the two or three risks that could end the company rather than distributing attention evenly across a register. They read the numbers management would prefer they did not ask for. And they treat culture as a control, on the reasonable basis that no reporting system survives an organisation that rewards the wrong behaviour.
The accountability gap that codes do not close
British corporate governance is built on comply-or-explain, and the mechanism depends entirely on someone reading the explanation and acting on it. In practice the reading happens, the acting rarely does. Institutional investors hold thousands of positions through index products, proxy advisers apply standardised templates at scale, and the marginal cost of engaging seriously with a mid-cap board is difficult to justify against the fee a passive mandate earns.
The result is a system that produces excellent disclosure and weak consequence. Boards publish detailed accounts of their composition, their evaluation processes and their risk oversight, and the quality of that reporting has improved substantially. What has not improved is the probability that a director who oversaw a serious failure of control loses their position, or that a chair who packed a remuneration committee with allies faces a contested vote.
Where accountability has bitten, it has usually come from outside the governance code entirely: an activist with a concentrated position, a regulator with statutory powers, or litigation. None of those is a substitute for functioning stewardship, and all three arrive after the damage rather than before it.
The reform that would matter most is also the least discussed. It is not another set of reporting requirements but a change in the economics of stewardship — pooled engagement vehicles that let smaller institutions share the cost of serious scrutiny, and a genuine expectation that asset owners rather than asset managers carry the responsibility. Until the cost of paying attention falls below the benefit of doing so, boards will continue to be marked by people who have read the explanation and moved on.
