Corporate Governance

Proposals for a new corporate governance code announced

Simon Lowe Simon Lowe

The FRC has published new proposals for revising the UK Corporate Governance Code. How will these affect business?

Building on the impact of the last 25 years of governance guidance, the FRC recently published their proposed revisions to create a ‘shorter, sharper’ UK Corporate Governance Code (the Code)1.

The proposed new Code emphasises how boards can build trust and integrity within their businesses by setting and assessing culture, better succession planning and improved stakeholder engagement. It also highlights the importance of transparency with annual reporting which is coherent, connected, and avoids boiler-plating.

Here is our summary of the key changes proposed:

The new Principles

The most obvious change to the new Code are the Principles of governance. The proposed new Code is made up of: 

1) Leadership and purpose

2) Division of responsibilities

3) Composition, succession and evaluation

4) Audit, risk and internal control

5) Remuneration

Current Principles are - Leadership, Accountability, Effectiveness, Remuneration and Relations with Shareholders. The supporting principles from the current Code have been removed and either been incorporated into the new Principles or Provisions, or moved to the Guidance on Board Effectiveness. The FRC emphasises that all premium-listed companies are required to disclose how they have applied the Principles.

1)    Leadership and purpose. Building on the FRC’s work on culture, this principle 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, including shareholders.

2)     Division of responsibilities. The biggest change in this area relates to chair independence, currently judged only on appointment. In the proposal it is treated the same as that of other NEDs, and will count towards the overall balance of board independence. This change will affect FTSE chairs who are already over a 9-year tenure2; those companies would need to change the chair or appoint another independent NED to comply with the Code. The proposed changes also remove the board’s discretion around director independence. If passed, directors who don’t meet certain criteria (such as those with more than 9 years tenure) won’t be considered independent.

3)    Composition, succession and evaluation. This takes aspects of the existing Code but with more focus on succession planning and broader diversity. Our 2017 governance research found that succession planning is a consistently poor area of reporting3 and it is good to see the FRC giving it more prominence. The proposal gives the nomination committee greater responsibility for succession planning below board level and overseeing the workforce, to develop a diverse pipeline of senior managers.  

4)    Audit, risk and internal control. There is little change here from the current Code, recognising the relatively recent changes to the Code and guidance in this area4

5)    Remuneration. This now includes greater guidance on what is expected from a remuneration policy, emphasising factors such as clarity, simplicity and predictability. It also extends the responsibility of the remuneration committee beyond board level to overseeing workforce pay policies. With gender pay reporting requirements coming in this year5, pay ratio reporting to follow, the extension of holding periods and a continued focus on executive remuneration, the responsibilities of the remuneration can only increase.

Smaller companies exemption

Another key proposal is the removal of the ‘smaller companies’ exemption. If passed, this means all companies with a premium listing will require:

  • a remuneration and audit committee with at least three independent directors
  • a majority of independent directors on the board
  • a tri-annual, external board evaluation, or to declare non-compliance.

Currently, the Code states that smaller companies can be exempt from these requirements. The FRC has explained that the proposal is to acknowledge that the Code is best practice and all listed companies should strive to adopt it. This may be a burden on smaller companies, who will need to appoint additional NEDs to sit on these committees, and invest in external board evaluation. As the majority of board evaluations are conducted by just four firms and board recruitment by six firms6 there are also questions about how the market will react to this potential increase in demand.

Overall, the FRC has risen to the challenges set by the government’s governance reforms7 and used the opportunity to conduct a full review of the Code. They have also reviewed the Guide for Board Effectiveness and will be revising the Stewardship Code in 2018.

The consultation runs until 28 February 2018 with the new Code to come into effect for accounting periods beginning on or after 1 January 2019. We will be issuing a response to the consultation.

For more information on the proposed Code changes and how they will affect your business, please get in touch with Simon Lowe.

More information and guidance on best practice for your own annual reporting can be found in our reporting toolkit8.

References

  1. FRC - Proposed Revisions to the UK Corporate Governance Code – December 2017 
  2. Financial Times - UK corporate governance code changes to hit dozens of chairmen – December 2017
  3. Grant Thornton - 2017 Corporate governance review
  4. FRC – Guidance on Risk Management, Internal Control and Related Financial and Business Reporting – September 2014
  5. Grant Thornton – Gender pay gap reporting
  6. Grant Thornton – Corporate Governance Review 2017 – page 36 [ 3137 kb ]
  7. Grant Thornton - What do the corporate governance reform proposals mean? – September 2017
  8. Grant Thornton - Helping your annual report build stakeholder confidence