The new corporate governance code becomes effective soon. It is the centrepiece of the government’s intent to enhance public trust in business. Steve Giles takes a look
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This article was first published in the November/December 2018 UK edition of Accounting and Business magazine.
UK plc has been preparing for the new corporate governance code since it was published by the Financial Reporting Council in July 2018, following extensive consultation. With the effective date looming – accounting periods beginning on or after 1 January 2019 – now is a good time to look at what the changes will mean.
While the revised code’s overall aim remains the same as the previous one – improving governance to promote the long-term success and attractiveness of capital markets – its contents have been substantially reviewed and refreshed.
It forms part of the government’s ‘world-leading package’ of reform to ‘enhance the public’s trust in business’, and is based on greater accountability and transparency. The reform package includes changes to legislation. The Companies (Miscellaneous Reporting) Regulations 2018 requires businesses to disclose in the annual report arrangements for engaging with stakeholders. Large companies now need to produce a corporate governance statement. The Wates Principles (see panel), which align with the code, are designed to provide a framework to report against on an ‘apply or explain’ basis.
The revised code retains many elements of 2016’s code but is adapted to reflect the changing economic and social climate. In addition to being shorter and differently structured (see box, left), it has an important new societal dimension. It aims to build trust through strong relationships between companies, shareholders and key stakeholders, thereby engendering sustainable growth in the UK economy. Previous codes concentrated on the company-shareholder relationship. The word ‘stakeholder’ appears rarely in the 2016 version – now it is highly visible.
The introduction states that directors ‘need to build and maintain successful relationships with a wide range of stakeholders’. Boards now must describe how they consider the interests of stakeholders when performing their duty under section 172 of the Companies Act 2006. The importance of engaging the workforce is highlighted. Provision 5 sets out three potential mechanisms:
- a director appointed from the workforce
- a formal workforce advisory council
- a designated non-executive director
If the board does not choose one or more of these methods, it must explain what alternative arrangements are in place.
The revised code also promotes more effective communication with shareholders. For example, where 20% or more votes are cast against a board resolution, the board should explain what actions it proposes to take to consult shareholders, and provide an update after six months, with a final summary in the annual report. Details of significant votes against will be available on a public register maintained by the Investment Association.
Next, the board is asked to assess and monitor culture. For the first time the company’s purpose must be established. The board should ensure that its company’s purpose, values, strategy and culture are aligned, based on integrity, ‘generating value for shareholders and contributing to wider society’.
In addition, the code strengthens significantly the role of the nominations committee in promoting effective succession planning and diversity.
There is a small but important change regarding the chairman. Provision 19 states that boards should consider the length of time that chairs remain in post beyond nine years.
There are key changes to remuneration too. Provision 40 establishes guidelines for executive director remuneration policy and practices. Remuneration committees should consider workforce pay and related policies when setting director remuneration. They should ‘exercise independent judgment and discretion’, especially when the outcomes from formulaic calculations of performance-related pay are not justified. The aim, as with many of the code changes, is to address public concern.
Steve Giles is a consultant, lecturer and author specialising in governance, risk and compliance
CPD technical article
"The revised corporate governance code has an important new societal dimension"