Travis Perkins Corporate Briefing: FRC Publishes Revised Corporate Governance Code
On 5 December 2017, the FRC published for consultation proposed revisions to the UK Corporate Governance Code 2016.
On 16 July 2018, the FRC published the revised Corporate Governance Code (the “2018 Code”), along with Guidance on Board Effectiveness (“2018 Guidance”). The latest version covers much of the same ground as its predecessor, although some notable changes have been made in relation to stakeholder engagement, the role of the remuneration committee, diversity and independence of non-executive directors. In terms of the key differences in layout between the 2016 and the 2018 version of the Code, the supporting Principles from the 2016 Code have been removed or in some cases incorporated into the new Principles or Provisions or moved to the guidance. The Principles of the 2018 Code emphasise the value of good corporate governance to long term sustainable success. By following the more detailed Provisions and using the associated guidance, companies can demonstrate throughout their reporting how the governance of the company contributes to its long term sustainable success.
The 2018 Code is applicable to all premium listed companies, whether incorporated in the UK or elsewhere, and applies to accounting periods from 1 January 2019.
The 2018 Code can be summarised as follows:
1 – Board Leadership and Company Purpose
This section relates to company culture, establishing the company’s purpose, values and strategy, with emphasis on stakeholder relationships and contributing to the wider society. All directors must act with integrity and should ensure that workforce policies are consistent with the company’s values and support its long term sustainable success. The Provisions focus on reporting in the annual report, namely: the sustainability of the company’s business model, explaining the board’s activities and actions taken, and understanding the views of key stakeholders. There are also Provisions concerning whistleblowing and managing conflicts of interest.
2 – Division of Responsibilities
This section relates to the responsibilities of the chair, being responsible for the overall effectiveness of the company, promoting a culture of openness and debate, and ensuring that directors receive accurate and timely information. Emphasis is put on independence; no one or small group of individuals should dominate the board’s decision making, and the board should be made up of executive and (independent) non-executive directors. The chair must be independent, and, where appropriate, report on each non-executive director it considers independent (this should apply to at least half of the board).
3 – Composition, Succession and Evaluation
This section reflects the need for improved practices and reporting on diversity and succession planning. Succession plans should be based on merit and objective criteria, promoting diversity of gender social and ethnic backgrounds, and cognitive and personal strengths. Annual evaluation of the board should consider its composition, diversity, skills and knowledge. A Nomination Committee should be established to oversee the development of a diverse pipeline of succession to be reported on in the annual report. The chair should not remain in post beyond 9 years, and there should be a formal and rigorous annual evaluation of the performance of the board.
4 – Audit, Risk and Internal Control
This section relates to transparency and effectiveness of internal and external audit functions. The board should present a fair assessment of the company’s position and prospects. The board should establish an Audit Committee with a minimum membership of 3 or, in case of smaller companies, 2, and the work of the Audit Committee should be published in the annual report.
5 – Remuneration
This section relates to remuneration policies and strategies to promote long-term sustainable success. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. The Remuneration Committee should be established with a minimum membership of 3 or, in the case of smaller companies, 2, and the work of the Remuneration Committee should be published in the annual report. Remuneration of non-execs should be determined in accordance with the articles of association.
- Stronger wording with regards whistleblowing, stating that the workforce should be able to raise any matters of concern in the 2018 Code.
- An explanation when announcing voting results is required when 20% or more votes are cast against a resolution recommended by the board, with an update no later than 6 months later covering the views received and actions taken. The board should then provide a summary in the annual report.
- Boards are asked to describe in their annual reports how they have considered the interests of stakeholders when performing their duty under section 172 CA06. This new provision supports the reporting requirements recently introduced by the Companies (Miscellaneous Reporting Requirements) Regulations 2018.
- There is a maximum length of service for the chair of the company of 9 years.
- The Nomination Committee is required to oversee the development of a diverse pipeline. It is also required to report on the gender balance of senior management and their direct reports.
- Exemptions for smaller companies relating to annual director re-election and the composition of the Board, the Audit Committee and the Remuneration Committee, have been removed.
- Remuneration Committees have greater responsibility for overseeing pay and incentives across their company, and are required to engage with the wider workforce.
- The chair of the Remuneration Committee should have served on such a committee for at least 12 months before appointment.
The structure of the 2018 Guidance has been amended to follow the structure of the 2018 Code. The 2018 Guidance is much longer and more detailed than the existing version. It also includes questions which are designed to assist boards in applying the Principles of the 2018 Code. The 2018 Guidance focuses on matters relating to board effectiveness which are addressed in Sections 1 to 3 of the 2018 Code and matters related to remuneration addressed in Section 5. It also includes some of the procedural aspects of governance which were previously covered by Principles or Provisions of the 2016 Code.
The 2018 Code will apply to accounting periods beginning on or after 1 January 2019, so the first reporting will not be until 2020. The FRC notes, however that it would be appropriate to report on Provision 4, relating to reporting on significant votes at shareholder meetings, during 2019. It also states that future remuneration policies and changes to existing ones should be developed with reference to the new Code and the Guidance on Board Effectiveness.
The FRC further states that it will monitor how governance practices and reporting develop in response to the new Code, which will include more in-depth reviews of annual reports. It intends to pay attention to the application of the Principles and compliance with the Provisions, including explanations, and will escalate its monitoring after the introduction of the new Code.
All the rules in the Code are non-binding; companies are free to not apply them so long as they explain why they believe they are right to do so.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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