July 17, 2018 Corporate Governance – new code released
“An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business.”
That is the opening statement in the guide to board effectiveness which accompanies the Financial Reporting Council’s (FRC) 2018 revision of the corporate governance code. The guide is designed to stimulate boards to think more about how they carry out their role and what they can do to improve their effectiveness. In pursuit of this the FRC poses a series of questions covering areas such as board composition, company culture and the board’s relationship with management, shareholders and stakeholders.
FRC Chairman Sir Win Bischoff commented that “This new Code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.” Shorter and sharper it may be but nevertheless, it packs a punch in requiring boards to meet high standards across a number of areas. For example the new FRC code places a strong emphasis on boardroom composition, diversity and succession planning. As a consequence the nomination committee will now have responsibility for ‘more effective succession planning that develops a more diverse pipeline.’ Boards also have the option to extend a maximum nine-year length of service in order to ‘facilitate effective succession planning and the development of a diverse board ’but a ‘comply or explain’ provision requires boards to comment should they take up this option.
Another area for consideration is the need to foster effective relationships with shareholders, stakeholders and employees. Board responsibility for workforce policies and practices which reinforce a healthy culture comes in for specific mention with suggestions put forward for a number of workforce engagement options. Boards will also be required to take effective action in the light of significant shareholder votes against resolutions.
The new code comes into effect for reporting periods or after 1 January 2019. In drawing up the code the FRC has set out eighteen principles with listing rules requiring companies to explain how the principles have been applied. Flexibility is built in through a ‘comply or explain’ regime with the importance of providing clear explanations rather than following a tick box approach being highlighted in the guidance.
Commenting on the new code the Business Secretary Greg Clark said “These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run.”