Corporate Governance

Focus on the issue of corporate governance - "the system by which companies are directed and controlled" (Cadbury Report 1992) - has been growing steadily over the past 15 years or so. In building societies, corporate governance is concerned with the relationship between the board of the society and the owners of the business - the members.

Like listed companies, good corporate governance practice for building societies is embodied in a combination of legislative requirements, guidance and codes of practice.

The Building Societies Act 1986

The Building Societies Act 1986 contains certain corporate governance requirements for building societies and these are covered in a BSA guide to the Act. this can be accessed below. 

The Combined Code on Corporate Governance

 A revised Combined Code on Corporate Governance was issued in June 2008 and applies to reporting years beginning on or after 29 june 2008. The Combined Code is addressed to publicly quoted companies. However, the FSA’s Regulatory Guide for Building Societies says  societies ‘should have regard to the Combined Code when they establish and review their corporate governance arrangements’ (section 1.3.2 G of the Regulatory Guide refers).

To assist building societies in having ‘regard to’ the Combined Code  the BSA  developed guidance on it and this was issued in September 2004 and has twice been revised, most recently in September 2008. The guidance for building societies follows a ‘by exception’ approach, in that it refers only to those elements of the Combined Code which are either not considered to be relevant to building societies, or which raise particular issues for building societies considered worthy of discussion. The FSA was consulted about - and welcomed - the BSA guidance, as did other bodies such as the Financial Reporting Council, which 'owns' the Combined Code.

The extent of building society compliance with the Combined Code

Building societies have readily embraced the Combined Code - even though they are not obliged to do so.  The BSA analysed the annual reports of building societies in respect of reporting years ending on or after 31 October 2007.  We found that more than 98% of building societies (including all the largest 20) had regard to the Combined Code in 2007.  

Directors’ Remuneration

An important theme of corporate governance philosophy in recent years is that institutions should be held to account for the remuneration of their boards.  Unlike listed companies, which are obliged to put a vote to their shareholders at their AGM, it is not compulsory for building societies to hold an advisory vote of their members on the society’s directors’ remuneration policy.  However, the BSA considers it is good practice for building societies to hold such votes and we encourage them to do so.

There has been a considerable increase in the number of building societies holding an advisory vote on directors’ remuneration policy in recent  years. In 2008,  99% held votes on directors’ remuneration.  This compares favourably with prior years. For example in 2005 just  54 societies (86%) held votes on directors’ remuneration.  In all votes held in 2008, building society members strongly endorsed the society’s remuneration policy: percentages of votes cast in favour have ranged from 84% to 99%.  Most societies also include a report on directors’ remuneration with the summary financial statement they send to all members of the society.