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Proposed changes to the UK Corporate Governance Code

  • United Kingdom
  • Corporate secretarial services

26-01-2018

On 5 December 2017, the Financial Reporting Council (the “FRC”) published its proposals for a revised UK Corporate Governance Code (the “Code”) which are drawn from the issues raised by the Green Paper Consultation.

The revised Code is shorter, and more concise, containing only 17 Principles and 41 Provisions in its 5 sections. It will address the elements of governance seen as most important to board effectiveness and corporate purpose, including a new focus on stakeholders, corporate culture, and diversity and how the overall governance of the company contributes to its long-term success. The FRC plans to tighten up and strengthen its sanctions.

Responses to the consultation regarding the new code should be received by 28 February 2018, and can be accessed here. The FRC intends to publish a final version of the new Code by June 2018, to apply to accounting periods beginning on or after 1 January 2019. 

The headings and content of the current 2016 Code have been revised as below:

Current Corporate Governance Code

   Proposed Corporate Governance Code

Section A - Leadership 

 Section 1 - Leadership and purpose

Section B - Effectiveness

 Section 2 - Division of responsibilities

Section C - Accountability

 Section 3 - Composition, succession and evaluation

Section D - Remuneration

 Section 4 - Audit, risk and internal control

Section E - Relations with Shareholders

 Section 5 - Remuneration

 

 

Significant changes, removals and additions – proposed changes

 

Leadership and purpose: Some of the more procedural aspects of the current Code have been moved to the Guidance. These are still important, but are now common business practice and therefore are not included in the revised Code, which strives to raise standards.

Remuneration: Section 5 will now include information on what the remuneration committee should address, including: clarity; simplicity; predictability; proportionality and reward for individual performance; and alignment to culture. This section also provides for an expanded remit with the remuneration committee taking on responsibility for oversight of company remuneration and wider workforce policies.

Workforce definition: The revised Code asks companies to take into account the views of the ‘workforce’. This term has been carefully chosen to capture the complexity and diversity of modern contractual relationships. It recognises that the culture of the company, its strategy and values, and decisions made by the board and senior management, will impact on all those paid to work for the company. Furthermore, Provision 3 includes the Government’s three options for ensuring the employee voice is heard in the boardroom: a director appointed from the workforce; a formal workforce advisory council; or a designated NED.

NEDs and Chairmen: The revised Code strengthens the Provisions on independence, requiring   that where a non-executive director and/or the chair does not meet the stated criteria, they should not be considered independent.

Shareholder relations and engagement: The importance of company and shareholder engagement remains vital and a number of original Provisions are now within the first section in the revised Code, including Principle C (requirement to effectively engage with and encourage participation from shareholders and stakeholders, and Provision 5 (in addition to general meetings the chair should seek regular engagement with major shareholders to understand their views on significant matters).

Significant votes against resolutions: In Section 1, the proposed Code is more specific about actions that the company takes where significant votes against resolutions are registered at annual general meetings. The revised Code requires the company to explain what actions it intends to take to consult shareholders in order to understand the reasons behind the result.

Whistleblowing: Section 1 of the revised Code expands the emphasis of the whistleblowing provisions by removing the specific reference to ‘improprieties in matters of financial reporting or other matters’ to allow the workforce to raise wider concerns.

Smaller Listed Company Exemptions: The current Code offers exemptions for those companies outside of FTSE 350, in section B Provision 1.2. The proposed Code removes these exemptions.

A brief history of the Code

The current UK Corporate Governance Code has evolved from the original 1992 Cadbury Code, which established the so called comply-or-explain approach.

The current Code mirrors the original 1992 Code having kept the classic definition of the context of the Code: (paragraph 2.5 of the 2016 Code) “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.”

Changes in the past five years:

  • In October 2013, the FRC opened a consultation on directors’ remuneration and another consultation in November 2013 concerning risk management, internal control and the growing concern basis of accounting;
  • In December 2014 the FRC opened a consultation on auditing and ethical standards to address the implementation of the EU Audit Directive;
  • As a result, in September 2015 the FRC opened a new consultation incorporating the feedback on auditing and ethical standards;
  • On 17 June 2016 the FRC published the updated Code, which applies to accounting periods beginning on or after 17 June 2016, and is designed to comply with current EU regulations on statutory audit;
  • In November 2016, the Government launched a Green Paper and Consultation on Corporate Governance Reform; and
  • In August 2017, the Government responded to the Green Paper with the press release entitled “World-leading package of corporate governance reforms announced to increase boardroom accountability and enhance trust in business.”