+44 (0) 207 495 2244

A UK Corporate Governance Code that is fit for the future

In July 2018 the Financial Reporting Council (“FRC”) released the 2018 UK Corporate Governance Code which is intended to cement the UK’s position as a world leader in Corporate Governance. The Code was also designed to respond to:

• a decline in public trust as a result of some high profile corporate failures
• a perception that some multinationals avoid paying their fair share of tax
• perceived excessive executive pay
• a lack of real wage growth and a perception of new ways of working and employment contracts that could be seen as insecure or exploitative

The Code broadens the scope of corporate governance beyond responsibilities to shareholders and places emphasis on businesses building trust by forging strong relationships with key stakeholders to the benefit of society as a whole. It calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy which promotes integrity and values diversity.

There is a renewed focus on the application of the Principles to ensure that the reporting is clear, meaningful, accurate and timely which should encourage more board engagement and transparency.

The main changes include:

Workforce and stakeholders: There is a new Provision to enable greater board engagement with the workforce to understand their views. The Code asks boards to describe how they have considered the interests of stakeholders when performing their fiduciary duty under the 2006 Companies Act. Secondary legislation will require all companies of a significant size (private as well as public) to comply which is consistent with the FRC’s guidance on Strategic Reports which was issued in tandem with the new Code.

Shareholder consultations: where more than 20% of votes have been cast against a resolution, the directors will need to explain the impact that shareholder consultations have had on actions taken by the company with a summary published in the annual report.

Culture: Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.

Succession and diversity: To ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new Code emphasises the need to refresh boards and undertake succession planning. Boards should consider the length of term that chairs remain in post beyond nine years. The new Code strengthens the role of the Nomination Committee on succession planning and establishing a diverse board. It identifies the importance of external board evaluation for all companies. Nomination Committee reports should include details of the contact the external board evaluator has had with the board and individual directors.

Remuneration: To address public concern over executive remuneration, the new Code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. Importantly, formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.

The new Code will retain its “comply or explain” approach providing the flexibility required for the UK’s diverse range of listed companies. The UK has an excellent reputation globally as a dependable place to do business which is underpinned by high quality regulation, standards and governance. As a result, the UK will continue to be an attractive place for investors to allocate capital and support the long-term success of UK, European and other international businesses.