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Update To The UK Corporate Governance Code 2014

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Update To The UK Corporate Governance Code 2014Corporate Governance is broadly concerned with the relationships between shareholders of a company and its board. Effective governance should facilitate efficient, entrepreneurial and prudent management that delivers long term value to a company’s shareholders.

The Corporate Governance framework in Ireland and the UK is based on three things:
  • Company legislation;
  • Regulation (i.e. listing rules for listed companies); and
  • Corporate Governance code.

The UK Corporate Governance Code provides a principles based framework for corporate governance with a “comply or explain” approach. The Code sets out standards of governance for listed companies. The UK Corporate Governance Code was updated most recently in September 2014 in order to address risk management strategies and increase the level of information that investors receive about a company.

Viability Statement

The revised Code requires companies to publish a ‘viability statement’ whereby directors must state whether they believe the company will be viable in the future with the assessment being a minimum of 12 months. Companies must now comprehensively consider not only their current position and principle risks facing the company and how these are being addressed, but also determine how long their forecast should be.

This directly relates to the desire of shareholders to have more information available to them in relation to the future of the company. Forecasting for the basis of their viability statement should be carefully considered based on the nature of the business, its investment and planning periods as well as other factors. Companies operating in the same business sectors may benchmark against competitors considering what their competitors are doing and what shareholders are expecting.

Remuneration

Executive pay has been a focal point of discussions in relation to good governance standards and the Financial Reporting Council (FRC) have made it very explicit in the Code that pay should be linked to long-term performance of the company and not used as a tool to attract and incentivise senior managers. In further efforts to promote this principal the FRC have removed the wording on the need to ‘attract, retain and motivate’ directors from the Code.

Further changes to the Code relate to the design of performance-related remuneration for executive directors. The FRC state that such schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so. Under the ‘comply or explain’ principle, if a company does not have provisions to claw back or withhold remuneration it will be a requirement to explain why this is the case.

Shareholder Engagement

The update to the Code gives guidance on how boards should respond if the company fails to maintain a substantial majority in support of a resolution on remuneration. The Code suggests that when announcing the results of an AGM vote, companies should set out how they intend to engage with shareholders to assess their concerns which have led to a significant vote against a resolution, rather than how they intend to address these concerns. A clear policy should be made in relation to how a company intends to engage with shareholders when a significant percentage of them vote against any Resolution passed by the Directors.

Companies are likely to want to communicate the results of that engagement and any changes they are making, but this is not a requirement of the Code. The Code does not define what constitutes a ‘significant proportion’ and this will be left to each company to assess.

Welcoming Of The Code

The updates to the Code have been welcomed by investors as the more prominent measures will effectively provide more information to them about how companies are run as well as a more comprehensive assessment of potential risks facing them. The chief executive of the FRC suggests that the changes to the Code will strengthen the focus of companies and investors in the long term and ensure the sustainability of value creation.

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