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What are the key changes?
In July the Financial Reporting Council published its revised UK Corporate Governance Code 2018, setting out a range of new requirements for both corporate behaviour and reporting. It places greater focus on company purpose, culture, stakeholder engagement and directors' remuneration and will apply to all premium listed companies for financial years beginning on or after 1 January 2019.
The Code’s key principles have been revised and expanded based on feedback from leading UK companies and are intended to meet the increasing demands of the public for improved corporate governance in the wake of financial crises and incidents of business misconduct. For instance, the 2016 Code’s key principles of Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders have become ‘Board Leadership and Company Purpose’, ‘Division of Responsibilities’, ‘Composition, Succession and Evaluation’, ‘Audit, Risk and Internal Control’ and ‘Remuneration’.
The most notable difference is that ‘Relations with Shareholders’ is no longer a separate principle but is now embedded across all the others. Furthermore, it has been broadened to include wider stakeholders, with a particular emphasis on engaging with employees.
The key changes from the 2016 Code are summarised below:
- Align corporate culture to the company's strategy, values and purpose.
- Effectively engage with wider stakeholders to improve trust and comply with the duty to promote the success of a company set out in section 172 of the Companies Act 2006.
- Elevate employee engagement to board level and give more visibility and voice to employees.
- Limit Chairmen’s tenure to nine years (or less) from the date of their appointment to the board.
- Improve gender, social and ethnic diversity in the talent pipeline through succession planning for both the board and senior management.
- Increase vesting and holding periods for long-term incentives to at least five years.
- Expand the role of the remuneration committee to cover company-wide remuneration policies and ensure they are designed to support strategy and promote long-term sustainable success.
Companies will need to start preparing for the implementation of the 2018 Code now in order to be compliant in 2019. Preparing for the changes will require collaboration with legal, compliance, human resources and corporate social responsibility teams. Corporate behaviour and persistent biases will take time to change but we think that the revisions to the Code will help to alleviate issues of public trust in business and ensure the attractiveness of the UK capital market to global investors. We also believe that clear and consistent reporting can act as a catalyst for that change.
Please let Bill Krarup, Director, Investor Communications, know if you need help to navigate the key changes to the Code.