Treat me right! FRC publishes revised UK Corporate Governance Code

It’s Joss Stone again. We used her song for our bulletin on the proposed 2018 Corporate Governance Code: People get ready! Now the 2018 Corporate Governance Code has been finalised and Joss Stone sang:

“So you think that you’re the one
who deserves my love
But love takes respect and
I will take nothing less
If you don’t know the rules
I’ll explain the rules to you.“.

More seriously though, the revised UK Corporate Governance Code (Code) is a much shorter document which places greater emphasis on shareholder and key stakeholder engagement and more focus on integrity and corporate culture, diversity and how overall governance contributes to a company’s long-term sustainable success. It includes new provisions on employee engagement at board level and requires the board to ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. It focusses on executive reward and pay by placing obligations on a company when 20% or more of votes are cast against a resolution and giving the remuneration committee greater responsibilities.

The revised Code will apply to financial years beginning on or after 01 January 2019 and so, unless companies decide to adopt all or part of the new Code early, the first reporting will not be until 2020. But, the Financial Reporting Council (FRC) expect companies to report during 2019 where significant votes are cast against resolutions and to develop future remuneration policies and changes to existing ones by reference to this version of the Code.

The FRC has also published:

• its revised Guidance on Board Effectiveness which should be read together with the Code
• a feedback statement on its consultation on the changes which includes a summary of the feedback received to its high-level questions on the UK Stewardship Code
• a feedback statement annex which tracks the changes made to the December 2017 Code which was consulted on
• key highlights of the Code, and
• letters to company Chairs, investors and proxy advisers from the FRC Chairman.

Our view

Is this a significant development in corporate governance?

Yes, while the broad application of the revised Code seems familiar it draws together much of the guidance from the FRC and others on culture, succession planning, stakeholder engagement and other matters and is full of small changes and nuances which are important.

The revised Code is significant because:

• It elevates various matters into Principles (remembering that the Listing Rules require companies to report on how they have applied the Principles (and comply or explain with the Provisions); the more meaningful the Principles, the more impactful compliance becomes with this aspect of the Listing Rules.
• It focuses on sustainable long-term success and the express recognition of responsibilities to society and stakeholders.
• Places a much greater emphasis on the culture of the company, which the board is expected to assess and monitor and should satisfy itself that its purpose, values and strategy are aligned with its culture.
• When read in conjunction with the regulations the Government has introduced to reinforce reporting about how directors have fulfilled their duties under section 172 Companies Act 2006, we think it supplements directors’ duties. Our view is that if directors have to report how they have fulfilled their duties at the end of the year, this will influence their conduct during the year. The result is to raise the standards of conduct expected of directors. But, we don’t see this as in conflict with directors’ duties, but as a further modernisation to align them with the wider responsibilities of companies to society.

We welcome the confirmation that, although the remuneration committee is responsible for determining the policy for executive remuneration and setting the remuneration for the Chair, executive directors and senior management, it is the board’s responsibility to authorise that remuneration. We also welcome the clarification of the roles that the board and the remuneration committee are expected to have regarding the workforce.

What’s the impact on companies below the FTSE 350?

The requirement for the board to be comprised of at least half, excluding the Chair, independent non-executives involves matching one executive on the board for at least one independent non-executive. For companies below the FTSE 350 this could force them to increase or reduce the size of the board in order to remain Code complaint. We would have much preferred a different outcome. In our S&S submission to the FRC (here) we proposed that companies below the FTSE 350 need only have an independent Chair and two independent non-executives.

What’s not there, that should be?

In our submission we proposed that:

• Non-financial services companies should have to consider whether to have a risk committee separate from their audit committee and explain their decision. The idea (not ours but one we support) is that in this way the audit committee can be more focused on the historic financial statements and the risk committee more focused on forward looking risks and threats to viability.
• Companies should be encouraged to allow an observer, board apprentice or mentee to attend some or all board meetings over a set period as a way of developing a broader, more diverse pipeline of board-ready or experienced candidates.

Access a detailed overview of the revised Code.