In the 26 years since the Cadbury Report was published, there have been many additions, revisions, consolidations and supporting guidance. Sixty-six percent of the FTSE 350 now comply with the Code, compared to 36% in 2002, when we first launched our FTSE 350 Corporate Governance Review.
This time the FRC, rather than issue further amends, have approached the review process as though it were a completely new code. The result has been greater recognition of the fundamental, symbiotic relationship between investors, and companies, an emphasis of directors’ wider responsibility to other stakeholders and an indication of emerging trends and practices.
Further attention is given to remuneration. And the nomination committee gains a greater focus on longer-term succession planning including diversity and future skill requirements for the board.
Culture comes into the spotlight with greater recognition now being given to its pervasive influence and the need for companies not only to articulate and promote culture but also to monitor how embedded it is throughout the organisation.
Throughout the narrative, there is an underlying promotion of the need for greater transparency with annual reporting which is coherent, connected, and avoids boilerplating.
The new Code is much slimmer, with only 18 principles and 41 provisions compared to the old Code’s 99 principles, supporting principles and provisions. The breadth of its remit is reinforced - all premium-listed companies must disclose how they have applied the Principles.
The new Principles
Leadership and purpose - incorporates culture, purpose and values, and shareholder and stakeholder engagement as part of the boards’ leadership role. It is an important change, highlighting the crucial role of the board in setting the tone from the top and engaging with a wide range of stakeholders. There is an expectation that boards will not only articulate and promote culture but also monitor how well embedded it is throughout the organisation.
Division of responsibilities - the biggest change relates to board independence in terms of removal of smaller companies exemption. All companies who follow the Code should have at least half the board, excluding the chair, comprising of non-executive directors (NEDs) whom the board considers independent. The Code retains board’s discretion around director independence but the hurdles have a harder edge to them.
Composition, succession and evaluation - takes aspects of the previous Code but increases focus on succession planning and broader diversity. Our 2017 governance research found that succession planning is a consistently poor area of reporting. The new Code places greater emphasis on the nomination committee’s role in planning for succession below board level to develop a more diverse pipeline of senior managers with skills to address the emerging needs of the future. The new Code emphasises that the chair should not remain in post beyond nine years from the date of their first appointment to the board although an interim elevation extends the clock. All directors of smaller companies are now recommended to be subject to annual re-election.
Audit, risk and internal control - little change here recognising the relatively recent changes to the Code and guidance in this area.
Remuneration - now includes greater guidance on what is expected from a remuneration policy, emphasising factors such as clarity, simplicity, predictability and alignment to culture. It also extends the responsibility of the remuneration committee beyond board level, to reviewing workforce pay policies. With gender pay and pay ratio reporting requirements now in place and with the extension of holding periods and a continued focus on executive remuneration, the responsibilities of the remuneration committee continue to increase.