The Financial Reporting Council (FRC) released a new UK Corporate Governance Code on 16 July 2018. The code was first published in draft form in December 2017 and this was followed by an extensive 7 month consultation with employers, workforce and other stakeholders.
What has emerged has been described as a shorter, sharper code, designed to promote, 'clear, meaningful reporting'. This was deemed necessary as the pre-existing code was felt to be too passive with regard to corporate behaviour.
The new code will apply to accounting periods beginning on or after 1 January 2019, the first reporting under the new code rules will not arise until 2020. The code applies to all companies with a Premium Listing of equity shares in the UK.
The major changes in this new code are focused on corporate culture, stakeholder engagement and board composition. It should be noted that the section on remuneration has also been revised.
Corporate Culture & Board Composition
The new code requires the Board to outline the company culture and report how they have discharged their duties. The Board must also adopt an employee relations procedure/mechanism such as an employee director to be appointed to the board, a formal advisory panel or designated Non-Executive Director or alternative with full explanation for this alternative. The board composition must focus more on diversity of its members.
This code also requires the Board’s immediate response to shareholders where there is 20% dissent with regard to a Board decision - the Board must in this case, give periodic responses (every 6 months) to shareholders and give full explanation of the feedback received, and its impact in the annual report.
There is considerable focus on the independence of the Chair in the code, recognising the unique responsibilities of the Chair of the Board following his/her appointment. It was felt that this unique position made traditional independence requirements inadequate.
The new codes states the Chair should serve for no longer than 9 years however there is provision for time to be extended to allow for effective succession planning and the development of a diverse board. This will be helpful in circumstances where the Chair was previously a Non-Executive Director.
The code takes a less onerous approach to Non-Executive Director independence than originally proposed in the draft document. It provides more latitude for what is described as 'unusual situations' with wording much less onerous using language such as, 'circumstances which are likely to impair, or could appear to impair independence'.
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The role of the Remuneration Committee has also changed; it is now responsible for reviewing workforce remuneration and related policies. There is also an expectation that the Committee will exercise independence and discretion with regard to remuneration outcomes. The reasoning for changes to the remuneration committee is to support long-term success for UK businesses.
Structure & Reporting
The new code offers a level of flexibility through the mechanism of 'comply and explain' provisions and guidance and the use of Principles. The board/company are advised to use this new flexibility prudently. Companies should avoid the 'tick box' approach to corporate governance, any alternative procedure used will need full explanation by the Board in the annual report as to why their alternative approach suited better to those in the Code. The explanation should include a full background, and give clear reasoning for the actions of the company and also explain the impact of the action. These "comply and explain" provisions should be seen as a positive opportunity to communicate rather than an onerous obligation/requirement.
The new UK Corporate Governance Code is designed to set higher standards of corporate governance, through promotion of transparency and integrity in business. It focuses on board diversity, increased relationships with stakeholders and shareholders, the aim being, to attract investment into the UK for the long term to benefit the economy and wider society.