UK’s corporate governance code revised

The UK’s Financial Reporting Council (FRC) has released a revised Corporate Governance Code which broadens the definition of governance and focuses on flexible principles.

It also places greater emphasis on a company’s purpose and culture and its relationship with the long-term sustainable success of the company.

Set to take effect starting January 1, 2019, the revised code is shorter and sharper than the current code and has fewer provisions.

It will apply to all companies with a premium listing on the London Stock Exchange, whether incorporated in the UK or elsewhere, for accounting periods beginning on or after 1 January 2019.

The revised code does not set out a rigid set of rules. Rather, it offers flexibility through the use of principles and ‘comply or explain’ provisions and supporting guidance. Supporting principles have been removed.

The code falls short of implementing British Prime Minister Theresa May’s plan to make it mandatory for companies to put workers on their boards.

It does, however, recommend that the board consider appointing a director from the workforce, forming a formal workforce advisory panel and/or designating workforce engagement to a non-executive director.

It states: ‘If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.’

These provisions are in line with the code’s strong emphasis on independence and constructive challenge in the boardroom.

For example, it states that chairs should not remain in the post beyond nine years from the date of their first appointment to the board. But to facilitate effective succession planning and develop a diverse board, this period can be extended for a limited time, particularly in those cases where the chair was an existing non-executive director on appointment. A clear explanation should be provided.

It adds that the board should appoint one of the independent non-executive directors to be the senior independent director to provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders.

‘Led by the senior independent director, the non-executive directors should meet without the chair present at least annually to appraise the chair’s performance, and on other occasions as necessary,’ it states.

The code seeks to strengthen the consideration of ‘overboarding’.

For instance, it states that prior to appointment, new directors should disclose significant commitments and indicate the time involved.

Additional external appointments should not be undertaken without prior approval of the board, with the reasons for permitting significant appointments explained in the annual report.

In addition, full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment.

The code also calls for higher quality external board evaluations and emphasises the importance of the evaluator’s direct contact with the board and individual directors.

Another of its provision is that open advertising and/or an external search consultancy should generally be used to appoint the chair and non-executive directors.

The code sets more demanding criteria for remuneration policies and practices. It also calls for clearer reporting on remuneration, how it delivers company strategy, long-term success and its alignment with workforce remuneration.

The code is supported by the Guidance on Board Effectiveness. This document does not set out the ‘right way’ to apply the code. Instead, it is intended to stimulate thinking on how boards can carry out their role most effectively.

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