How-to guide: How to implement sustainable corporate governance (UK)

Updated as of: 01 August 2025

Introduction

This guide will assist in-house counsel, boards of directors and senior management teams in their understanding and implementation of a sustainable corporate governance framework. Much of the background information and general principles set out in this resource will be applicable in many jurisdictions worldwide, but it has a specific focus on the UK.

This guide covers:

  1. The meaning of corporate governance
  2. Understanding sustainable corporate governance
  3. How to integrate sustainability into a corporate governance framework

This How-to guide can be read in conjunction with Checklist: Mainstreaming sustainability into a corporate governance framework, which provides detailed steps for organisations to follow to integrate sustainability into a corporate governance framework; and How-to guide: Corporate governance in financial services.

Section 1 – The meaning of corporate governance

1.1 Definitions of corporate governance

The Dictionary of Economics defines corporate governance as:

The processes, both formal and informal, through which a corporation is administered and managed. Corporate governance involves the legal requirements imposed upon the corporation, the policies adopted by the corporation, and the informal customs within the corporation. The concept of corporate governance also embodies the interactions between the many parties that can be viewed as stakeholders in the corporation: directors, managers, shareholders, employees, customers, banks, and regulators.

The Financial Reporting Council (FRC) describes corporate governance as ‘the system of rules, practices and processes that are put in place to manage and control a company’.

The Corporate Governance Institute (CGI) describes good corporate governance as ‘the foundation of any successful business and that it refers to the processes, practices, and policies used to make formal decisions and run a company’. The CGI goes on to say that ‘Good governance requires that the board of directors meet regularly, retain control over the business, divide responsibilities clearly, and ensure that risk management is ongoing’.

1.2 Why corporate governance is important

The OECD, whose work on corporate governance is guided by the G20/OECD Principles of Corporate Governance 2023 (the Principles), considered by many to be the main international benchmark for good corporate governance, states that:

corporate governance guides how a company is directed and its relationships with its shareholders and stakeholders. With the right structure and systems in place, good corporate governance enables companies to create an environment of trust, transparency and accountability, which promotes long-term patient capital and supports economic growth and financial stability.

The OECD considers that good corporate governance will help companies improve access to finance, particularly from capital markets. This promotes investment, innovation and productivity growth, and fosters economic dynamism more broadly. Good corporate governance protects investors, including households with invested savings, and through formal procedures that promote the transparency and accountability of board members and executives to shareholders, helps to build trust in markets. Good corporate governance supports the sustainability and resilience of corporations which, in turn, contributes to the sustainability and resilience of the broader economy.

The FRC considers that good corporate governance contributes to long-term company performance by helping to build an environment of trust, transparency and accountability. This helps businesses foster long-term investments, financial stability and business integrity. Businesses with good corporate governance policies see stronger growth and help contribute to a more inclusive society by ensuring the interests of all stakeholders are balanced.

The CGI highlights that incorporating good corporate governance can help reduce the chances of corruption in the company. Fraud and scandals within a company occur frequently when directors and executives are not required to follow a formal governance code, as highlighted in the Maxwell and BCCI cases (see paragraph 1.3 below).

The Institute of Chartered Accountants in England and Wales considers that:

there is a symbiotic relationship between the governance of individual companies and economic governance performed at the country, regional and international levels. The pieces relate to each other like tectonic plates. When one piece changes shape or subtly changes its position there are broader consequences. For example, company failures bring the effectiveness of governments and regulators into question. However, the opposite is also true. Good corporate governance is the foundation of socio-economic stability.

Ultimately, maintaining a solid governance framework should not be viewed as a regulatory requirement but as a critical risk management tool and a fundamental component of ensuring a business’s longevity and success.

1.3 Corporate governance in the UK

In July 1991, a consortium of central banks, including the US Federal Reserve, the Bank of England, and the Luxembourg Monetary Institute, coordinated the closing of a multinational bank known as the Bank of Credit and Commerce International (BCCI). The discovery of a massive and widespread fraud, perpetrated over several years, precipitated BCCI’s closure.

Following the death of media mogul Robert Maxwell in 1991, his publishing empire collapsed as banks called in their loans. At the same time a massive hole was discovered in the pension fund of the Mirror group, money having been diverted by Maxwell in an attempt to shore up the finances of his business empire. The Maxwell companies filed for bankruptcy in 1992. Two of Robert Maxwell’s children were subsequently prosecuted for fraud, though many years later both were eventually acquitted.

The collapse of both BCCI and Robert Maxwell’s publishing empire are widely considered as examples of what happens when there are continuous, widespread corporate governance failings (including weak internal controls, inadequate board oversight and conflicts of interest). Following these cases (and others), corporate governance in the UK was strengthened and it is now primarily underpinned by the Companies Act 2006 (Companies Act) and regulations published by the Financial Conduct Authority (FCA) in the form of the UK Listing Rules (the Listing Rules) and the Disclosure Guidance and Transparency Rules (DTRs).

The Companies Act sets out:

  • the duties of directors and how they may be held to account;
  • rules regarding directors’ appointment and removal;
  • the requirements for annual reports and accounts and their approval by shareholders.

The Listing Rules and the DTRs impose certain governance requirements that a company must meet to seek admission of its shares to the Official List of the FCA and the Main Market of the London Stock Exchange. These rules build on the statutory content requirements for annual reports and accounts published by listed companies and related continuous market disclosures.

In the UK, all companies with a premium listing on the London Stock Exchange are required to apply the UK Corporate Governance Code (the Code), which is explained in more detail at 1.4 below.

Many other jurisdictions have equivalent codes or guidance (eg, the German Corporate Governance Code). Other jurisdictions may not have defined corporate governance codes, but instead rely on different pieces of legislation to manage and control companies, for example, Ghana, where the principal legislation affecting the governance of companies is the Companies Act 1963 (Act 179). Other relevant legislation includes the Securities Industry Act 2016 (Act 929) and the Securities and Exchange Commission Regulations 2003 (LI 1728).

1.4 The different elements of corporate governance

1.4.1 The Code

The Code, which was last amended in 2024, is mandatory for all companies with a premium listing on the London Stock Exchange, and is also framework that many other UK companies voluntarily adopt, even if they are not legally required to do so. The Code is reviewed and updated every few years, and operates on a ‘comply or explain’ basis, which means that boards do not have to comply with the Code, so long as they explain in their annual report why they have chosen not to.

The Code therefore does not set out a rigid set of rules, but provides flexibility through ‘comply or explain’ reporting against its Provisions. The Code includes the following sections:

  • Board leadership and company purpose – 'a successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society; the board should ensure that the necessary resources, policies and practices are in place for the company to meet its objectives and measure performance against them; the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are all aligned; all directors must act with integrity, lead by example and promote the desired culture; governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives; where the board reports on departures from the Code’s provisions, it should provide a clear explanation; in order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties; the board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern'.
  • Division of responsibilities – 'the chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information; the board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business; non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account; the board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently'.
  • Composition, succession and evaluation – 'appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan for the board and senior management should be maintained. Both appointments and succession plans should be based on merit and objective criteria. They should promote diversity, inclusion and equal opportunity; the board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed; annual evaluation of the board should consider its performance, composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively'.
  • Audit, risk and internal control – 'the board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements; the board should present a fair, balanced and understandable assessment of the company’s position and prospects; the board should establish and maintain an effective risk management and internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives'.
  • Remuneration – 'remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy; a formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome; directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances'.

The 2024 version of the Code contained revisions to address the important issue of internal controls and to make it clear that the board is accountable for effective internal controls, while understanding the need for flexibility, proportionality and the particular circumstances of individual companies. The original draft, issued for consultation in 2023, included a number of references to environmental, social and governance (ESG) issues, stating that companies should report on how these factors affect business strategy, explain how measurement of environmental and social performance is assured and link executive pay outcomes to ESG objectives. When the final version of the Code was produced, these provisions had unfortunately been deleted.

1.4.2 The Principles

By contrast, the Principles are designed to help policy makers evaluate and improve the legal, regulatory and institutional framework for corporate governance in their jurisdiction. They ‘identify the key building blocks for a sound corporate governance framework and offer practical guidance for implementation at the national level’. But they also:

provide guidance for stock exchanges, investors, corporations and others that have a role in developing good corporate governance, and help companies manage environmental and social risks, with insights on disclosure, the roles and rights of shareholders as well as stakeholders and the responsibilities of company boards.

The Principles include the following sections:

  • Ensuring the basis for an effective corporate governance framework – 'the corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement'.
  • The rights and equitable treatment of shareholders and key ownership functions – 'the corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights at a reasonable cost and without excessive delay'.
  • Institutional investors, stock markets and other intermediaries – 'the corporate governance framework should provide sound incentives through the investment chain and provide for stock markets to function in a way that contributes to good corporate governance'.
  • Disclosure and transparency – 'the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, sustainability, ownership and governance of the company'.
  • The responsibilities of the board – 'the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders'.
  • Sustainability and resilience – 'the corporate governance framework should provide incentives for companies and their investments to make decisions and manage their risks in a way that contributes to the sustainability and resilience of the organisation'.

Section 2 – Understanding sustainable corporate governance

2.1 Definition of sustainable corporate governance

The term ‘sustainable corporate governance’ refers to a corporate governance framework that has integrated the environment, climate change, biodiversity and nature, and the protection of human rights in its structure and systems. This helps to ensure that the business avoids, minimises, reduces and mitigates any adverse environmental and social risks and impacts that may arise from its activities.

The term ‘sustainable’ instead of ESG is used in this resource in order to reduce the likelihood that such issues are seen as separate and distinct from ‘business as usual’ corporate governance and to highlight that the processes, both formal and informal, through which a corporation is administered and managed should all be sustainable. However, the inclusion of ‘G’ in ESG highlights that governance is critical to sustainability.

Sustainable corporate governance can also be described as a values-based, holistic (or integrated) approach that is embedded and communicated authentically throughout the organisation in a way that aligns people, planet, profit and purpose.

Sustainability can be incorporated into corporate governance voluntarily where not imposed by law.

2.2 The importance of sustainability in corporate governance

Simon Y Wong, an independent adviser on governance and sustainability, states that:

Corporations are dominant actors in modern economies, with vast impacts on society and the environment – from the provision of goods and services that lengthen and enrich lives to those that exploit our inherent vulnerabilities and contribute to increasingly devastating ecological harm . . .

The OECD (and others) state that ‘businesses are the engine of the economy’. They contribute to economic and social development through job creation, development of skills and technology, and the provision of goods and services. However, at the same time, business activities can have adverse impacts on people, the environment and society. All businesses, regardless of their location, size, sector, operational context, ownership and structure, should act responsibly, and identify and manage risks of impacts linked to their operations, products or services, including in their supply chains and other business relationships.

In order to promote the positive contribution that businesses can make to economic and social development and help prevent and address negative impacts, the International Labour Organization (ILO), the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN), have developed instruments that provide guidance on responsible and sustainable business. Although voluntary, these instruments establish that all companies have the responsibility to avoid and address adverse impacts with which they are involved, including in their supply chains, while making a positive contribution to the economic, environmental and social progress of the countries in which they operate. These expectations of good conduct go beyond legal requirements. They can enhance company performance and have a positive impact on business operations by managing risks more efficiently and enhance corporate reputation, among other benefits. For further information on these instruments, please see How-to guide: Understanding the legal framework for human rights and the importance of human rights due diligence (UK).

The implementation of international corporate responsibility standards such as those developed by the ILO, OECD and the UN have also become essential for businesses aiming to contribute to the UN’s Sustainable Development Goals (SDGs). By making a positive contribution to economic growth and the development impact on people, the environment and society, businesses can become a powerful driver for achieving the SDGs. For example, ensuring respect for human rights and decent working conditions in supply chains can drive large-scale positive change across SDGs. From an operational perspective, it is also a practical and dynamic way to integrate the SDGs in core business and existing management processes.

Integrating sustainability into a governance framework will also enable businesses to better meet the requirements of sustainability legislation, for example:

It will also enable organisations to better meet the requirements of international sustainability standards, for example:

If not managed correctly, just as inadequate corporate governance can create material risks for businesses, sustainability issues can create legal and financial risks and can severely damage a business’s reputation. To manage these risks, businesses must treat sustainability issues as more than just a reporting issue and adopt a values-based, integrated sustainable approach to corporate governance that is embedded and communicated authentically throughout the organisation in a way that ensures the business ‘does no harm whilst doing good’.

In addition, investors and consumers are paying more attention to the standards of sustainable governance they want to see. Lawmakers and regulators are becoming tougher on governance standards – particularly in light of recent environmental and human rights abuses, and employees and partners may go elsewhere if a business’s sustainability standards are weak, particularly in comparison to its competitors.

An additional advantage (as envisaged by the OECD) is that sustainable corporate governance could provide greater access to capital. There is a growing number of specialist sustainable investment funds, and businesses should do what they can to ensure that they are eligible for these funds. Ambitious businesses will want to go further and ensure that their sustainability credentials make them a particularly attractive investment opportunity.

Section 3 – How to integrate sustainability into a corporate governance framework

As noted in the definitions in section 1.1, a corporate governance framework comprises the rules, practices and processes that define how an organisation is governed. When incorporating sustainability into such a framework, organisations should:

  • balance the interests of an organisation’s many stakeholders, including shareholders, management, customers, suppliers, financiers, government and the community;
  • enable the organisation to consider and report both its impacts on the environment and society, as well as how environmental and social issues impact the financial wellbeing of the business; and
  • ensure that environmental and social considerations are embedded into all aspects of the organisation’s decision-making and operations. This includes establishing clear sustainability goals, engaging stakeholders and implementing robust risk management and reporting mechanisms.

Businesses of all sizes should integrate sustainability into their corporate governance framework, but the approach should be proportional and reflect the size and type of an organisation.

For detailed steps setting out how to incorporate sustainability into a corporate governance framework, in line with the Principles, see Checklist: Mainstreaming sustainability into a corporate governance framework.

Additional resources

United Nations – ‘The Corporate Responsibility to Respect Human Rights: An Interpretive Guide’
Ceres – ‘View from the Top – How Corporate Boards can Engage on Sustainability Performance’
United Nations – UN Guiding Principles Reporting Framework
World Economic Forum – ‘How to Set Up Effective Climate Governance on Corporate Boards’
Chapter Zero – Board Toolkit
Ceres – ‘Running the Risk – How Corporate Boards can oversee Environmental, Social and Governance (ESG) Issues’
Principles for Responsible Investment – ‘Corporate Governance for Asset Owners’
The World Bank – Environmental and Social Framework
Taskforce on Nature-related Financial Disclosures – ‘Proposed approach to value chains’

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