FRC Revised UK Corporate Governance Code 2018

Introductory Fact Sheet

To down load a pdf version of this fact sheet please click here.

Overview

The new code comes into effect on the 1st January 2019.  Annual reporting from Premium listed companies will comply from the 1st January 2020.

The Code broadens the definition of governance and emphasises the importance of:

  • A positive relationship between companies, shareholders and stakeholders.
  • A clear purpose and strategy aligned with healthy corporate culture.
  • High quality board composition and a focus on diversity.
  • Remuneration which is proportionate and supports long-term success.

The 2018 Code is shorter and sharper and has fewer Provisions.  It does not set out a rigid set of rules; instead it offers flexibility through the application of Principles and through ‘comply or explain’ Provisions and supporting guidance.  It is the responsibility of boards to use this flexibility wisely and of investors and their advisors to assess differing company approaches thoughtfully.

Detailed Changes

(blue text indicates new requirements)

Stakeholders

  • Emphasis on improving the quality of the board and company’s relationships with a wider range of stakeholders
  • Taking effective action when receiving significant shareholder votes against resolutions and reporting back more promptly
  • Board responsibility for workforce policies and practices which reinforce a heathly culture.
  • Engaging with the workforce through one, or a combination, of a director appointed from the workforce, a formal workplace advisory panel and a designated non-executive director, or other arrangements which meet the circumstances of the company and the workforce
  • The ability for directors and the workforce to be able to raise concerns and for effecitve enquiry of these concerns

The boardroom

  • Emphasis on importance of independence and constructive challenge of the boardroom
  • Strengthening considerations of ‘overboarding’
  • A focus on diversity, the length of service of the board as a whole, and effective board refreshment
  • ‘Comply and explain’ provision for a maximum nice-year length of service, allowing flexibility to extend “to facilitate effective succession planning and the development of a diverse board…particularly in those cases where the chair was an existing non-executive director on appointment
  • Nomination committee responsibility for more effective succession planning that develops a more diverse pipeline.  Reporting on the gender balance of senior managers and their direct reports
  • Higher quality external board evaluations, emphasising the importance of the evaluator’s direct contact with the board and individual directors

Remuneration

  • More demanding criteria for remuneration policies and practices
  • Clearer reporting on remuneration, how it delivers company strategy, long-term success and its alignment with workforce pay
  • Directors exercising independent judgement on remuneration outcomes, taking account of wider circumstances
  • Remuneration committee chair should have served aon a remuneration committee for at least 12 months

Renewed focus on the Principles

By reporting on the application of the Principles in a manner that can be evaluated, companies should demonstrate how governance contributes to its long-term, sustainable success, covering the application of the Principles, how the board has set the company’s purpose and strategy, met objectives and achieved outcomes through its decisions.

High quality reporting on Provisions

The Provisions establish good practice on a ‘comply or explain’ basis.  Companies should avoid a ‘tick-box approach’.  An alternative to complying with a Provision may be justified in particular circumstances.  Explanations should provide a clear rationale for the action the company is taking, and when the company expects to conform to the Provision.

The role of investors and their advisors

Investors should engage constructively and discuss with the company any departures from recommended practice and have every right to challenge explanations if they are unconvincing, but explanations must not be evaluated in a mechanistic way.  Investors and proxy advisors should also give companies sufficient time to respond to enquiries about corporate governance.