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Corporate governance redefined - the new UK Corporate Governance Code

Posted on 20 July 2018 by Kate Higgins

Corporate governance redefined - the new UK Corporate Governance Code

A wider and redefined framework for corporate governance has this week been set out in the FRC's new UK Corporate Governance Code. Published on Monday 16 July, it arguably represents the biggest single overhaul in principles of UK corporate governance since the code was adopted in 1992. Unsurprisingly, given the context of perceived declining trust in big business following the financial crisis and recent corporate collapses, the code places at its heart the need to ensure not only the long term sustainability of the company and value for shareholders, but also the company’s contribution to wider society. There is increased focus on stakeholder engagement (including with shareholders and its workforce), on board accountability, diversity and succession planning and the need for discretion and workforce alignment on directors' remuneration. 

While the code is the UK’s gold standard for Corporate governance against which premium listed companies are required to comply, it is also of relevance to many other quoted companies - for example those with a standard listing or admitted to AIM. They will be reviewing their arrangements in advance of other new corporate governance reporting requirements, including recent changes to the AIM rules (requiring a website corporate governance statement) and other draft new annual reporting provisions applicable to all companies of a significant size due to take effect from January. While other, also recently updated, codes, such as the QCA corporate governance code are available to those companies, many of the key principles and themes are aligned. The FRC's UK corporate governance code therefore provides a useful benchmark for the direction of travel for those companies. 

Although the revised code applies to accounting periods commencing on or after 1 Jan 2018 and reporting on it will not start until summer 2019, companies should start to review their governance regime now. The code places renewed emphasis on compliance with the principles. Come reporting season, the company will need to be able to explain how it has applied them in the context of the particular circumstances of the company, how it has set the company's purpose and strategy, met objectives and achieved outcomes through the decisions it has taken. The revised "Guidance on board effectiveness", which has been published alongside the code, provides some helpful questions for boards. As such, there is some deep strategic thinking and advance planning to be done, and companies will need to work through the numerous key changes in the code's provisions. Action points (to name a few) include that the company:

  • identifies and prioritises key stakeholders and puts in place or refines the means of effective engagement with them – this includes workforce engagement. Companies should either adopt one or more of three engagement mechanisms proposed in the code: a director appointed from the workforce; a formal workforce advisory panel or a designated non-executive director or (alternatively) provide other arrangements and explain why the latter are effective. Boards will need to show how their engagement with stakeholders has impacted their decision-making come reporting season.
  • has effective shareholder engagement and plans ahead of the shareholder voting season for votes against resolutions – a new provision, applicable from next year that will require increased engagement following any vote where 20 per cent or more of votes are cast against a resolution. The company will need to be ready with a response on the shareholder engagement it plans to take following the vote and report back on their views and actions taken within 6 months.
  • reviews the independence and effectiveness of board members and division of responsibility between the non-executive and executive - this will include ensuring that the company can comply or explain against the provision for a maximum 9 year service of the chairman, particularly where the chair was an existing non-executive on appointment. The company should also check that members of the board are not "overboarding" (to ensure they can devote sufficient time and attention to the company) and that there is a formal and rigorous annual board and committee performance evaluation. 
  • reviews terms of reference and composition of remuneration and nomination committees, both of which will have refocussed roles as a result of changed provisions on directors' remuneration, recruitment and succession planning - board diversity in succession planning is placed firmly within the nomination committee's remit and is not limited to gender and ethnic diversity, although the  nomination committee will be required to report on the gender balance of the senior management and their direct report
  • assesses the effectiveness of culture within the business and of its whistleblowing policies.

This redefinition of corporate governance is timely. Faced with looming political and economic uncertainty, it would be easy for boards to act in a way that responds to short term profitability pressures rather that ensuring its mission and culture remain relevant and robust and thereby secure a company's longer term future. However, together with other initiatives under way to promote more responsible investment for the longer term, the new code, effectively applied should help companies resist those pressures.

For more information please contact the author of this article or any member of our public company group. See also Corporate Governance – new AIM requirements and QCA code. The code and guidance are currently available here and here but in due course are likely to be made available on the FRC's main corporate governance page here.

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