July 17, 2018
The Financial Reporting Council (FRC) has published its new Corporate Governance Code in a bid to improve trust in UK business. The new Code will remain on the “comply or explain” basis mandatory for which it has been criticised in the past, but has been broadly welcomed by industry bodies. The code sets out a number of recommendations aimed at improving culture and trust in business, of which it suggests at least one be applied. They include having a director appointed from the workforce, a formal workforce advisory panel and a designated non-executive director. The Code will apply to accounting periods from January 2019 and is applicable to all companies with a premium listing.
The main changes announced by the FRC include:
- Workforce and stakeholders: There is a new Provision to enable greater board engagement with the workforce to understand their views. The Code asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act.
- Culture: Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.
- Succession and diversity: To ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new Code emphasises the need to refresh boards and undertake succession planning. Boards should consider the length of term that chairs remain in post beyond nine years. The new Code strengthens the role of the nomination committee on succession planning and establishing a diverse board. It identifies the importance of external board evaluation for all companies. Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.
- Remuneration: To address public concern over executive remuneration, the new Code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. Importantly formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.
Ben Willmott, head of public policy at the CIPD, the professional body for HR and people development, comments: “We welcome that the FRC’s revised Corporate Governance Code places a greater emphasis on the relationship that the business has with its employees. The new Code requires boards to focus much more on providing opportunities for employee voice and ensuring workforce policies and practices are consistent with the company’s values and support its long-term success. The workforce is fundamental to any businesses success but all too often, its voice is not heard at the top levels of organisations. The updated Code is a step in the right direction for ensuring that employee opinions are taken into account on the issues that matter most.
“It’s also encouraging to see the updated Code place increased emphasis on organisations’ culture and how they preserve value over the long-term. We welcome the fact that in future, companies will be required to set out much more clearly in the annual report how they assess and monitor their culture and the actions they are taking to address problems where practices or behaviours don’t align to their stated values.
“The singular focus on short-term gains for financial stakeholders that has guided so many businesses in the past keeps on creating problems for organisations around trust and stability. We see this through inexplicably high pay-outs for some FTSE 100 CEOs and through numerous corporate scandals that are created in the rush for financial gain. We hope that the new Code goes some way towards instilling better behaviours in business and better outcomes for all stakeholders.”
Matthew Fell, CBI UK Chief Policy Director, said: “The Corporate Governance Code plays a vital role in ensuring companies are well run and clear about the behaviours expected of them. With the spotlight on the role business plays in society, it is important the Code continues to evolve to meet changing expectations and maintain high standards. Companies should define their most important stakeholders – which will often be employees – and then set out how they choose to engage with them to take their views into account. It is helpful to see this new emphasis by the FRC. The clarifications on the interpretation of tenure and independence, particularly around the role of the Chair, are welcome so that they do not rule out people who have a significant contribution to make.”