In November 2016 the Department for Business, Energy and Industrial Strategy (BEIS) published a Green Paper on corporate governance reform which focussed on executive pay and strengthening the voice of employees and other stakeholders in the boardroom.
This was followed by the announcement in February 2017 of a fundamental review of the UK Corporate Governance Code by the Financial Reporting Council (FRC) to take account of the issues raised in the BEIS Green Paper.
On 29 August 2017 the Government published its response to the Green Paper consultation. It identified a number of proposals that it intended to take forward, including inviting the FRC to initiate a consultation with the aim of revising the UK Corporate Governance Code in a number of key areas.
On 5 December 2017 the FRC did just that and published for consultation proposed revisions to the UK Corporate Governance Code and Guide on Board Effectiveness. The proposed revised UK Corporate Governance Code is fundamentally rewritten and is shorter and more concise than the existing version, comprising 17 Principles and 41 Provisions. The existing supporting Principles have been removed. In some cases they have been incorporated into the new Principles and Provisions or alternatively moved to the Guidance on Board Effectiveness.
Proposed revisions
The revised UK Corporate Governance Code is divided into five sections:
- Section 1 – Leadership and purpose
- Section 2 – Division of responsibilities
- Section 3 – Composition, succession and evaluation
- Section 4 – Audit, risk and internal control
- Section 5 – Remuneration.
Each section sets out Principles followed by more detailed Provisions. The existing supporting Principles have been removed. The new Principles and Provisions are intended to address the elements of governance most important to board effectiveness and corporate purpose, and to focus on stakeholders, integrity and corporate culture, diversity and how the overall governance of the company contributes to its long-term success.
As mentioned above, the Corporate Governance Code has been fundamentally rewritten and the changes are too numerous to list here. However a summary of the proposed changes includes:
- insertion of a new Provision requiring the board to explain in the annual report how it has engaged with the company’s workforce and other stakeholders, and how their interests and the matters set out in section 172 of the Companies Act 2006 (the director’s duty to promote the success of the company) has influenced the board’s decision-making
- insertion of a new Provision under which the board must establish a method for gathering the views of the company’s workforce, such method would normally be a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director
- insertion of a new Provision providing that, where more than 20 per cent. of votes have been cast against a resolution, the company should explain the actions it intends to take to consult shareholders to understand the reasons behind the result. No later than six months after the vote, an update should be published. The final summary should be provided in the annual report, or in the explanatory notes to resolutions at the next meeting, on the impact the feedback has had on the decisions of the board
- strengthening the provisions on non-executive independence. In particular, the chair must demonstrate independence and meet the stated independence criteria throughout their tenure (not only on appointment)
- removal of all exemptions from the requirements of the UK Corporate Governance Code for companies below the FTSE 350, including in relation to board composition, board evaluation, annual re-election, and audit and remuneration committee composition
- broadening the requirements relating to diversity to incorporate the findings of the Parker Review Committee
- insertion of a requirement that, before appointment as chair of the remuneration committee, the appointee should have served on a remuneration committee for at least 12 months
- expansion of the remuneration committee’s remit to include responsibility for oversight of company remuneration and workforce policies and practices
- extension of the vesting and holding period for shares granted or other forms of long-term incentives, in normal periods, from at least three years to at least five years
- insertion of a new Provision under which remuneration schemes and policies should provide boards with discretion to override formulaic outcomes.
Proposed changes to the Guidance on Board Effectiveness
The Guidance on Board Effectiveness has been amended to follow the new structure of the revised UK Corporate Governance Code and to support the other proposed changes. The amendments also incorporate the FRC’s focus on the workforce and wider stakeholders as well as diversity. The FRC acknowledges that further changes may be required once the formal consultation has concluded.
What next?
The FRC has asked for responses to be received by 28 February 2018 and it aims to publish a final version by early summer 2018. The new UK Corporate Governance Code will apply to accounting periods beginning on or after 1 January 2019. The FRC plans to publish a consultation on changes to the Stewardship Code during the middle of 2018.
WM Comment
In addition to the revised UK Corporate Governance Code there are also changes that the Government intends to bring in via secondary legislation even sooner than 2019. As reported previously, the new requirement to report on the ratio of CEO pay in relation to the rest of the UK workforce is planned for 2018 together with the introduction of a requirement for companies with more than 2,000 employees, whether private or public, to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code. We will keep you updated as to when this secondary legislation is introduced.
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