Changes to the UK Corporate Governance Code
The Financial Reporting Council (FRC) has published an updated version of the UK Corporate Governance Code, promoting best practice in areas such as engagement with wider stakeholders, succession planning, diversity and corporate culture.
The new UK Corporate Governance Code, which applies to premium-listed companies for financial periods beginning on or after 1 January 2019, has five updated sections. Key changes include:
1. Board leadership and company purpose
The Board will need to disclose:
- How it has engaged with employees and wider stakeholders and how their interests have influenced the Board’s decision-making.
- Which methods it has used to give the workforce a voice on the Board. This might include nominating a director from the workforce, creating a workforce advisory panel or assigning a non-executive director to represent the workforce. Where alternative arrangements are in place, the Board should explain why it considers that they are effective mechanisms.
- The company’s broader social purpose, beyond financial performance, and demonstrate how culture is aligned with its purpose, values and strategy.
- Companies with significant shareholder opposition of more than 20% to any resolutions are required to publish an interim action statement within six months and a final summary in the next annual report.
2. Division of responsibilities
- At least half the board, excluding the chair, should be non-executive directors whom the board considers to be independent.
- The chair is to be independent at all times and must meet the same independence criteria as other non-executive directors.
- When making new appointments, the Board should take into account other demands on directors’ time. Significant new commitments should be disclosed to the Board with an indication of the time involved prior to being taken on.
3. Composition, succession and evaluation
- Appointments to the board and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
- The Nomination Committee will need to explain its approach to succession planning; actions taken to promote diversity in the talent pipeline; the policy on diversity and inclusion, its objectives and linkage to company strategy; and the gender composition of its senior managers.
- The chair should not remain in post beyond nine years from their first appointment to the Board. This can be extended for a limited time to facilitate effective succession planning and the development of a diverse board. A clear explanation should be provided.
4. Audit, risk and internal control
- This section of the revised Code contains little change, recognising the relatively recent updates and guidance in this area.
- Executive remuneration should be aligned to company purpose and values, and clearly linked to the successful delivery of the company’s long-term strategy.
- Remuneration committees should take into account workforce policies and practices when setting the policy for executive director remuneration.
- There must be evidence of engagement with shareholders on remuneration issues and the outcomes of those actions.
- Reasons must be provided as to why the remuneration is appropriate using internal and external measures, including pay ratios and pay gaps. This links to new legislation, subject to parliamentary approval, that will require companies to disclose and explain the pay difference between chief executives and their average UK employee.
- Share awards granted for the purpose of supporting alignment with long-term shareholder interests require a vesting and holding period of five years or more.
- Remuneration committee chairs should have at least twelve months’ experience on a remuneration committee prior to their appointment.
How could this be approached?
The purpose of the new UK Corporate Governance Code is to continue to raise the standard of governance in the UK and where high standards of governance are in place, there is a great opportunity for companies to communicate how this is contributing to long-term value creation.
Clear and concise communication is key and the new requirements should not result in adding layer upon layer of information, hindering effective communication. Companies should approach governance reporting with the principles of best practice reporting in mind and aim to:
- Make information understandable and engaging: consider using case studies to provide examples of Board engagement with stakeholders and demonstrate governance in action, without the use of jargon or over-complicated language.
- Develop a clear and compelling narrative: discuss purpose, culture and values in the Chair’s introduction to set the ‘tone from the top’ and demonstrate how the Board recognises their importance for long-term business performance.
- Use diagrams to enhance content, not repeat it: diagrams can reduce the need for supplementary commentary and provide greater insight into Board processes e.g. showing how diversity is considered in succession planning.
- Reduce word count without reducing content: focus on the quality of information not the quantity: less is more.
- Review content to reduce repetition: try not to shoehorn additional disclosures in without considering the overall flow of information and if these are discussed elsewhere i.e. in the strategic report.
- Be transparent: discuss stakeholder concerns and show how the Board is responding to them.
- Clearly link between the governance report and strategic report: show how the Board has performed its duty to promote the long-term success of the company.
To find out more about the full extent of the changes to the UK Corporate Governance Code and what you can do in preparation, please contact [email protected]