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Sharpening the governance code

In its 25th year a major revision is being contemplated for the UK’s Corporate Governance code.  The revision has been much heralded, with a widespread acknowledgement that although it is still fit for purpose the time has come to ensure that the code will continue to deliver effective governance in a changing world.

With this in mind the Financial Reporting Council (FRC) has opened up its proposals for a code revision to consultation and scrutiny.  Keen to stress that the revision is not a case of throwing the baby out with the bathwater, the FRC has highlighted its desire to retain elements of the code which are still relevant whilst adapting others to ‘reflect the changing social and economic climate’. The revision also takes account of a wide range of consultations and reports including the Government’s green paper consultation on reform, the FRC’s 2016 cultural report and the Hampton-Alexander Review and Parker Review reports on diversity. Whilst not directly forming part of this revision, the consultation also looks at the UK Stewardship code with a view to undertaking revisions to that code in 2018.

Key factors influencing the FRC’s proposals include:

  • the comply or explain principle
  • the role of culture as a key ingredient of delivering sustainable long-term performance
  • the importance of engaging with stakeholders
  • the role which diversity plays in strong governance
  • the primary duty of directors to promote the long-term success of the company

With these factors in mind the new code is divided into five sections starting with leadership & purpose followed by division of responsibilities. These broadly correlate with the existing code’s provisions on leadership and effectiveness but have been strengthened to take account of areas such as the importance of recognising the role which stakeholders have to play, shareholder engagement and a greater responsibility to the workforce. Board composition also comes in for scrutiny including a proposal to remove the exemption for companies below the FTSE 350 to have an independent board evaluation every three years.

This flows in to section three of the new proposals which looks at board composition, succession and evaluation. Highlights here include the importance of diversity both within the boardroom and the executive pipeline, thereby forming the basis for a renewed emphasis on diversity within succession planning. The fourth section which looks at audit, risk and internal control is largely unchanged from the current code, having been subject to significant revision in recent times. Finally, section five is concerned with remuneration; in particular looking to deliver an expanded remit for the remuneration committee as a way of responding to recent concerns over executive pay.

Commenting on the consultation and proposals the Business Minister Margot James said: “Firms that are alive to the concerns of their workers and shareholders see the benefits on their bottom line and the Financial Reporting Council’s proposals will ensure our largest companies benefit more from the experience of their workforce, suppliers and customers.” The consultation closes on 28 February 2018.

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