FRC publishes revised corporate governance code

The Financial Reporting Council (FRC) has published its revised UK corporate governance code, which it says places emphasis on businesses building trust, with greater board engagement with workforce views and an end to ‘formulaic calculations of performance-related pay’ for executives

The new code, described by the regulator as ‘shorter and sharper’, calls for companies to establish a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.

The main changes include a new provision to enable greater board engagement with the workforce 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.

The code suggests one or a combination of methods should be used, including having a director appointed from the workforce; a formal workforce advisory panel; or a designated non-executive director. If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.

There should be a means for the workforce to raise concerns in confidence and – if they wish – anonymously. The board should routinely review this and the reports arising from its operation. It should ensure that arrangements are in place for the proportionate and independent investigation of such matters and for follow-up action.

The company purpose principles include asking the board to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term. The provisions require the board to assess and monitor culture. Where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy, it should seek assurance that management has taken corrective action.

The annual report should explain the board’s activities and any action taken. In addition, it should include an explanation of the company’s approach to investing in and rewarding its workforce.

To ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new code emphasises the need to refresh boards and undertake succession planning.

The code states the board should take action to identify and manage conflicts of interest, including those resulting from significant shareholdings, and ensure that the influence of third parties does not compromise or override independent judgment.

Where directors have concerns about the operation of the board or the management of the company that cannot be resolved, their concerns should be recorded in the board minutes. On resignation, a non-executive director should provide a written statement to the chair, for circulation to the board, if they have any such concerns.

When making new appointments, the board should take into account other demands on directors’ time. Prior to appointment, significant commitments should be disclosed with an indication of the time involved. Additional external appointments should not be undertaken without prior approval of the board, with the reasons for permitting significant appointments explained in the annual report. Full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment.

The new code also states the chair should not remain in post beyond nine years from the date of their first appointment to the board. To facilitate effective succession planning and the development of a diverse board, this period can be extended for a limited time, particularly in those cases where the chair was an existing non-executive director on appointment, provided a clear explanation is provided.

Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.

To address public concern over executive remuneration, the new code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. It states that formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.

When 20% or more of votes have been cast against the board recommendation for a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons behind the result. An update on the views received from shareholders and actions taken should be published no later than six months after the shareholder meeting. The board should then provide a final summary in the annual report and, if applicable, in the explanatory notes to resolutions at the next shareholder meeting, on what impact the feedback has had on the decision.

The FRC says the 2018 Code emphasises the need to report meaningfully when discussing the application of the principles and to avoid boilerplate reporting. The focus should be on how these have been applied, articulating what action has been taken and the resulting outcomes. and companies should avoid a ‘tick-box’ approach.

Sir Win Bischoff, chairman, FRC, said: ‘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 to guide the long-term success of UK businesses.

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

The code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere, and applies to accounting periods beginning on or after 1 January 2019.

UK Corporate Governance Code is here.

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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