September 18, 2014 Updating the governance code
On 17th September the Financial Reporting Council issued an updated version of the Corporate Governance Code. According to the FRC “This significantly enhances the quality of information investors receive about the long-term health and strategy of listed companies, and raises the bar for risk management.”
The revised code will apply for accounting periods beginning on or after 1 October 2014 and has been drawn up following extensive consultation. Whilst the changes apply to all relevant companies the revision includes an extra supplement containing guidance for directors of banks “on solvency and liquidity risk management and the going concern basis of accounting.”
The changes seen reflect the FRC’s drive to improve the information available for investors and to link remuneration more closely to long term sustainable performance. To this end companies will be expected to provide a ‘viability statement’ as part of their strategic report to investors. This statement is expected to look more than 12 months ahead to assess long term solvency and liquidity.
Whilst generally welcoming the revised code the Institute of Directors raised some concerns regarding this requirement to take a long term view. Commenting on the revision, Dr Roger Barker, Director of Corporate Governance at the Institute of Directors said “The future is inherently uncertain and companies do not have crystal balls. Although investors would like companies to provide them with certainty about their future prospects, this is often not realistic.”
Aside from ‘viability statement’ the revisions cover shareholder engagement, remuneration, going concern, risk management and internal control. For example, companies will be expected to review risk and internal control strategies at least annually and will need to put mechanisms in place to recover or withhold variable pay in certain circumstances. There is also a requirement for companies to publish how they intend to engage with shareholders if a significant proportion of them vote against a resolution at a general meeting.
In the preface to the code revisions the FRC takes the opportunity to highlight the importance of boards setting the tone from the top. It calls on directors to “lead by example and ensure that good standards of behaviour permeate throughout all levels of the organisation.” It also recognises the challenge of running a board successfully and highlights the need to maintain mutual respect and openness amongst directors commenting that “To achieve good governance requires continuing and high quality effort.”