Our summary of the FRC's consultation on proposed changes
to the UK Corporate Governance Code at the end of 2017.
The Financial Reporting Council (FRC) published its consultation on proposed changes to the UK Corporate Governance Code at the end of 2017. This will impact how companies report on key corporate governance issues.
At the end of 2017, the Financial Reporting Council published its consultation on proposed changes to the UK Corporate Governance Code.
How will this impact companies and the way they report on corporate governance?
In brief, some of the proposed revisions are simply to make the current Code sharper and more concise, while others are new provisions that place greater emphasis on stakeholders (particularly employees), diversity, corporate culture and intensifying the role the Board plays in a company’s long-term success.
The FRC aims to publish the final version of the new Code by summer 2018 and it will come into effect for financial years beginning on or after January 2019. Here is a summary of the key proposed changes:
- Wider stakeholders – there will be a new principle referring to companies’ responsibilities to wider stakeholders and a provision requiring the Board to explain in the annual report how it has engaged with employees and wider stakeholders and how their interests have influenced the Board’s decision-making.
- Employee engagement – a new provision would focus on giving employees a voice on the Board. Companies need to explain how they are engaging with employees and considering their input. This can be done in various ways, one of which could be nominating a director from the workforce, creating an employee advisory council or assigning a non-executive director to represent employees.
- Corporate culture – a new provision will require the Board to explain in the annual report how it promotes a culture that is aligned with the company’s purpose, strategy and values.
- Shareholder votes against – there will be a new provision requiring all listed companies with significant shareholder opposition to any resolutions to publish an interim action statement within six months and a final summary in the next annual report.
- Diversity and succession planning – the new Code will require Boards to demonstrate how senior management and Board appointment and succession planning practices are designed to promote diversity, not only of gender but also of social and ethnic backgrounds. The Nomination Committee report will also need to explain its approach to succession planning, actions taken to promote diversity in the talent pipeline, the link between diversity and corporate strategic objectives and the gender composition of its senior managers.
- Independence of the Board – the new Code states that independent non-executive directors, including the Chairman, should constitute the majority of the Board and that the Chairman is to be independent at all times and not just on appointment.
- Remuneration – the Remuneration Committee will need to explain how executive remuneration is aligned to strategic achievements and the long-term success of the company. There should also be evidence of engagement with shareholders on remuneration issues and the outcomes of those actions. The new Code will also require that executive long-term incentives be subject to a vesting and holding period of at least five years (instead of three). This is to promote a longer-term approach to pay policy and practice.
To discuss our thoughts on the implication of the new changes, or to discuss your investor communication challenges, please contact us [email protected]