New Corporate Governance Code: a code for success?

This year has seen a series of significant corporate governance developments which have culminated in the release of the new UK Corporate Governance Code (the Code), announced by the Financial Reporting Council (FRC) last month.

In June, we saw the introduction of the Wates Corporate Governance Principles for Large Private Companies which represent another step towards more widespread good practice in internal governance within private companies.

The UK has a reputation for being a leader in corporate governance. But in recent years, this reputation has been tainted by a series of high-profile corporate failures – the collapse of BHS and Carillion, and the Sports Direct scandal to name a few. It is therefore not surprising that a reform of the existing Code was considered necessary.

To restore confidence in UK corporate governance, the FRC has updated the Code which applies to all companies with a premium listing of equity shares on the London Stock Exchange.

‘Shorter and sharper’

The Code is ‘shorter and sharper’ and focuses on how companies contribute to their long-term sustainable success and achieve wider objectives.

To demonstrate this, the Code includes provisions relating to:

• boards engaging with the workforce to understand their views;
• describing how stakeholder interests have been considered in decision-making;
• fostering and monitoring a culture which aligns with the company’s values;
• succession planning;
• promoting diversity and inclusion within boards; and
• executive pay, in particular providing that remuneration committees should bear in mind the salaries of the workforce when deciding the pay of directors.

Comply or explain

The Code provides a flexible framework and retains the ‘comply or explain’ regime. Companies must report on how they have complied with the provisions of the Code, or explain how, and why, they have not complied.

By reporting on how the Code is applied, companies should be able to demonstrate how their internal governance helps to achieve long-term success. Companies will produce different reports based on how the provisions of the Code are applied to each company’s unique circumstances.

Structure of the Code

The Code is made up of five sections, based on the FRC’s key drivers for change, namely: board leadership and purpose; division of responsibilities; composition, succession and evaluation; audit risk and internal controls; and remuneration.

The Code provides that an effective board will promote the purpose of a company and will ensure its values and culture support that purpose. A board requires an effective chair, a balance of skills, experience and knowledge and a clear understanding of its accountability to all of its stakeholders. Board decisions should be open to challenge and lively debate and discussion is encouraged with individual directors having the opportunity to make a valuable contribution.

The Code also states that remuneration of executives should be aligned to the company’s long-term goals and that pay elsewhere in the company should be considered when approving executive pay levels. Forging good relationships with stakeholders is important and a wide range of views should be considered, not just the views of those stakeholders intrinsically linked to the company.

Timescale

The reporting requirements will come into force on 1 January 2019 and the Code will apply to financial years beginning on or after that date. This means companies will effectively start reporting from 2020, unless the Code is adopted early.

Only time will tell what effect the new Code will have on the corporate governance landscape. Whilst rebuilding trust and transparency in UK businesses cannot happen overnight, the new Code does provide stakeholders with the tools to hold boards accountable for their actions.