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Proposed revisions to the UK Corporate Governance Code

  • United Kingdom
  • Capital market law



On 5 December 2017, the Financial Reporting Council (FRC) published its proposals for a revised UK Corporate Governance Code. The Code is shorter, building on the FRC’s Culture Report from 2016.  It also draws on the issues raised as part of the Green Paper Consultation on Corporate Governance Reform. The revised Code contains Principles (setting out high level requirements), supported by Provisions, which generally operate on a ‘comply or explain’ basis. The Supporting Principles from the current Code have been removed, and some have been incorporated into the new Principles or Provisions. The new Code is supported by the revised Guidance on Board Effectiveness. Some of the more procedural aspects of the current Code have been moved into the guidance.

The new Code is divided into five sections, as noted below.

The changes are subject to consultation, and the FRC have set out a full list of consultation questions in relation to the new Code. Comments are requested by 28 February 2018. The FRC aims to publish a final version of the Code by early Summer 2018, to apply to accounting periods beginning on or after 1 January 2019.

The paper also includes high level consultation questions on the UK Stewardship Code. However, the FRC intends to formally consult on changes to the Stewardship Code in 2018.

Key changes for consultation

Some of the key Principles and Provisions of the new Code are set out below.

Section 1 – Leadership and purpose

Wider stakeholders - the Government requested that the FRC consult on both a new Code Principle relating to wider stakeholder views, and a new Code Provision requiring the adoption (on a comply or explain basis) of one of three employee engagement mechanisms. Principle C incorporates responsibilities to wider stakeholders in addition to shareholders. Provision 3 sets out the 3 options, one of which should be established, for gathering the views of the workforce, namely a director appointed from the workforce, a formal workforce advisory council or a designated non-executive director.

Directors duties - the Government plans to introduce secondary legislation to require all companies (private and public) of a “significant size” to explain how their directors comply with section 172 of the Companies Act 2006, with regards to employees, suppliers and customers. Provision 4 makes reference to section 172, but the FRC notes that it will keep the wording under review pending sight of the relevant legislation.

Significant votes against resolutions – a revised Code Provision (Provision 6) states that where more than 20% of votes have been cast against a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult with shareholders. An update should be published no later than 6 months after the vote, and a final summary in the Annual Report. A footnote will highlight the Investment Association’s soon to be published public register.

Section 2 – Division of responsibilities

Board composition – composition of the board remains broadly the same under the revised Code. The requirement under the new Code (Provision 11) will be that independent non-executive directors, including the chair, should constitute the majority of the board (see below as regards independence). There will no longer be an exemption here for companies outside the FTSE 350.

Independence and tenure - the provisions on independence have been strengthened. New Principle E provides that the chair should demonstrate independent and objective judgement (as opposed to simply meeting the required independence criteria on appointment). Revised provision (Provision 15) changes the emphasis on independence, and provides that where a non-executive director or chairman does not meet the stated criteria, they should not be considered independent. The criteria themselves have not been amended, and the nine year time limit is retained for an individual no longer being considered independent. One of the specific consultation questions asked is whether nine years remains an appropriate time period for determining independence.

Section 3 – Composition, succession and evaluation

Diversity – boards are asked to intensify their efforts with regards to diversity. Principle J aims to broaden perceptions of diversity and ensure that succession planning promotes diversity of social and ethnic backgrounds, in addition to gender.

A new Provision (23) will require all FTSE 350 companies to disclose in their Annual Reports the gender balance of their executive committee and direct reports to the executive committee. The FRC welcomes views on extending this requirement beyond the FTSE 350, and whether the information should be extended to cover, eg ethnicity.

Removal of exemptions for companies below the FTSE 350 - as with board composition (above), the FRC has considered the exemptions in the current Code for companies below the FTSE 350 and proposes to remove all of them. Subject to the outcome of the consultation, this will mean that such companies below the FTSE 350 would be required to have an independent board evaluation every 3 years (Provision 21), and all directors will have to be re-elected annually (Provision 18).

Section 4 – Audit, risk and internal control

This section remains largely unchanged (being largely driven by legal and regulatory requirements), and, in the case of audit and audit committees, the Code was amended recently.

Section 5 – Remuneration

Following the invitation to the FRC in the Government’s response to the Green Paper Consultation on Corporate Governance, the following Provisions have been included:

Expanded remit for remuneration committees – to have delegated responsibility for determining the remuneration policy and setting remuneration for the board and senior management.

Remuneration committee chairs - requirement for the remuneration committee chair to have served for at least 12 months before taking on the role.

Long term incentives – to be subject to a vesting and holding period of at least 5 years. 

Useful links

Proposed Revisions to the UK Corporate Governance Code

Appendix A – Revised UK Corporate Governance Code

Appendix B – Revised Guidance on Board Effectiveness

Appendix C – Summary of Changes from the 2016 Code