FRC reveals much-awaited new UK Corporate Governance Code

UK regulator the Financial Reporting Council (FRC) yesterday released the much-awaited 2018 UK Corporate Governance Code, which attempts to put the relationship between companies and shareholders at the heart of long-term sustainable growth in the UK economy.

The new, shorter code is the result of an extensive and lengthy consultation, and places emphasis on businesses building trust by forging strong relationships with key stakeholders. It calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy, promotes integrity and values diversity.

There is a renewed focus on the application of the ‘principles’ – the FRC wishes to see clear, meaningful reporting. Investors and proxy advisers must assess explanations carefully and not take a tick-box approach.

The main changes include:               

Workforce and stakeholders – There is a new provision to enable greater board engagement with the workers to understand their views. The code asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act              

Culture – Boards are asked to create a culture that aligns company values with strategy and to assess how they preserve value over the long term               

Succession and diversity – To ensure boards have the right mix of skills and experience, and to promote diversity, the new code emphasizes the need to refresh boards and undertake succession planning.

Boards should consider the length of time 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 emphasizes that remuneration committees should take into account workforce remuneration and related policies when setting director pay. Importantly, formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.

In a statement, Sir Win Bischoff, chairman of the FRC, says: ‘Corporate governance in the UK is globally respected and is a framework trusted by investors when deciding where to allocate capital. To make sure the UK moves with the times, the new code considers economic and social issues and will help guide the long-term success of UK businesses.

‘This new code, in its shorter and sharper form and with its overarching theme of trust, is paramount to promoting transparency and integrity in business for society as a whole.’

UK business secretary Greg Clark adds: ‘These changes will drive improvements in how boardrooms engage with employees, customers, suppliers and shareholders, delivering better business performance and public confidence in the way businesses are run.’

In an additional narrative accompanying the new code, Paul George, executive director of corporate governance and reporting at the FRC, writes: ‘Shareholders play a vital role in holding businesses to account but this is only effective if companies regularly engage with shareholders and provide accurate and timely information to them.

‘To bolster this engagement, the new code states that companies should explain the actions they intend to take to consult shareholders when more than 20 percent of votes have been cast against a resolution. They should also publish an update no later than six months after such a vote, and a final summary should be included in the annual report detailing the impact shareholder feedback has had and any actions it has subsequently taken.’

Responding to the code, Matthew Fell, UK chief policy director of business pressure group the CBI, says in a statement: ‘The Corporate Governance Code plays a vital role in ensuring companies are well run and clear about the behaviors expected of them. With the spotlight on the role business plays in society, it is important the code continues to evolve to meet changing expectations and maintain high standards. 

‘Companies should define their most important stakeholders – which will often be employees – and then set out how they choose to engage with them to take their views into account. It is helpful to see this new emphasis by the FRC.

‘The clarifications on the interpretation of tenure and independence, particularly around the role of the chair, are welcome so that they do not rule out people who have a significant contribution to make.’