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New UK Corporate Governance Code is published

  • United Kingdom
  • Corporate secretarial services

19-07-2018

The Financial Reporting Council (the “FRC”) published the final version of the new UK Corporate Governance Code (the “Code”) on 16 July 2018. The new Code applies to all UK companies with a premium listing, whose accounting periods begin on or after 1 January 2019.

The purpose of the Code is to promote trust in UK businesses through transparency and integrity, and strengthen corporate Britain. The new Code is focused on board effectiveness, stakeholder engagement, and a company’s corporate purpose and culture.

The proposed changes to the Code were outlined in our last article. Drawn from the issues raised by the Green Paper Consultation of August 2017, the proposed changes were published on 5 December 2017 and the consultation period was closed on 28 February 2018. The final published Code can be found here.

The proposals were largely adopted, with the following revisions made after consultation:

Section 1 Leadership and purpose

Principle D has been split with the focus on director’s integrity incorporated into principle B. The principles have been re-ordered with the inclusion of a new principle E:

“E: The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.”

Section 2 Division of Responsibilities

Principle F (proposed E) and principle H (proposed G) have included the requirement that the board will receive accurate and timely information on matters, and the additional need for non-executive directors to have sufficient time to meet their board responsibilities. In the proposed changes, these stipulations had originally been moved to the provisions.

Section 3 Composition, succession and evaluation

Principle L now recommends an annual evaluation of the board composition, diversity and co-operation.

Section 5 Remuneration

Principle P (proposed O) has been changed to state that remuneration policies should be designed to support strategy and promote the long term success of the company. Principle Q (proposed P) has removed reference to performance related elements. Executive remuneration will also be required to be more transparent.

To assist with adherence to the Code, the FRC have published updated guidance on board effectiveness, through their Guide on Board Effectiveness.

In summary the principles and provisions of the new Code include:

• alignment of company purpose, strategy, values and corporate culture, including reporting on how stakeholder interests have influenced the board’s decision-making;

• effective engagement with shareholders and stakeholders, including the board’s role in monitoring and gathering views of the workforce;

• responsibilities of the board to ensure that workforce policies are consistent with the company’s long-term sustainable success;

• board responsibility for identifying and assessing emerging risks (in addition to the principal risks);

• consideration of the length of service of the board and the need for regular refreshment with succession planning and board member contribution; and

alignment of remuneration and workforce policies to the long-term success of the company, including incentives and pension plans.

Responses from the industry on the Code so far appears to be mixed with positives seen as being the stronger focus on workforce and stakeholder engagement, alignment of the corporate culture with the company purpose, specific reference to s.172 of the Companies Act 2006 in provision 5, and maintaining the comply or explain approach.

However, there are some concerns as to how the Code will be enacted, particularly on workforce engagement and the tenure of the chair. Furthermore, where the 2016 code made recommendations, for example for directors to undertake continued professional development, these recommendations within the new code have been demoted to guidance, when in fact they are a crucial part of directorship.