The Financial Reporting Council (FRC) have published proposals for a revised UK Corporate Governance Code.
The updates to the Code are designed to ‘reflect the changing business environment and help UK companies achieve the highest levels of governance’.
Here we examine the proposed changes and their implications for boards.
What is the UK Corporate Governance Code?
In the words of the FRC, the Code ‘sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders’.
Any company that has a Premium Listing of equity shares in the UK is required under the Listing Rules to report on how they have applied the Code as part of their annual report and accounts.
What revisions are proposed to the Code?
The planned changes make the code shorter and sharper. They have been made in response to the findings from the FRC’s Culture Report published in 2016.
The new code ‘focuses on the importance of long-term success and sustainability, addresses issues of public trust in business and aims to ensure the attractiveness of the UK capital market to global investors through Brexit and beyond’.
Earlier this year, the FRC’s annual report suggested that UK boards need better governance. The proposed changes aim to address that failing.
The Code sets out good practice guidelines intended to ensure that boards can:
- Establish a company’s purpose, strategy and values and satisfy themselves that these and their culture are aligned
- Undertake effective engagement with wider stakeholders, to improve trust and achieve mutual benefit, and to have regard to wider society
- Gather views of the workforce
- Ensure appointments to boards and succession plans are based on merit and objective criteria to avoid group think, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths
- Be more specific about actions when they encounter significant shareholder opposition on any resolution, including those on executive pay policies and awards; and
- Give remuneration committees broader responsibility and discretion for overseeing how remuneration and workforce policies align with strategic objectives
How can boards meet the new requirements?
Announcing the changes, Sir Win Bischoff, FRC Chairman, said that ‘Building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company’.
As the strategic engine of the firm, the board is central to this culture (and in fact the Code is supported by revised Guidance on Board Effectiveness – the FRC’s suggestions for best practice for boards and board committees).
You and your fellow directors play a key role in delivering the type of organisation the FRC is looking for.
In order to meet the requirements of the upgraded Code, you need to:
- Align your organisation’s culture with your strategy. Make sure your board has the right mix of perspectives and your meetings are run efficiently so that you drive forward the decisions that matter.
- Seek out the views of your workforce, customers and the wider community to ensure your strategy is in line with their needs.
- Avoid falling prey to behavioural traps that can hinder good decision-making and prevent you maximising board effectiveness.
- Respond openly to any shareholder concerns, particularly if they relate to tricky subjects like remuneration or executive pay.
- Look at all the strategies you can employ to deliver best practice governance. Give directors the resources they need to make good decisions – whether that’s by appointing a suitably diverse group of board members; ensuring members are given the information they need and sufficient time to consider the issues at stake; or harnessing technology to deliver more effective board processes.
What are the next steps for the new Code?
The revisions are out for consultation currently; you can have your say by emailing email@example.com before 28 February 2018.
The consultation also includes questions to inform the future direction of the UK Stewardship Code, which will be published for consultation in late 2018.
What should boards do now?
Assuming that the changes will come into effect in a form not dissimilar to the proposals, it is worth getting ahead in terms of meeting the new requirements. Looking at the five points above and taking action where your processes currently fall short is a good start point. Make sure you are doing all you can to deliver around the FRC’s requirements on good practice, ethics and behaviour.