Publication of the Revised UK Corporate Governance Code (2018)

The Revised UK Corporate Governance Code (2018) was published on 16 July 2018. The 2018 Code is shorter and sharper, “Supporting Principles” have been removed and it has fewer Provisions. The revised code broadens the definition of governance and emphasises the importance of:  

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

The revised code is designed to set higher standards of corporate governance to promote transparency and integrity in business and to attract investment in the UK for the long term, benefitting the economy and wider society.

Stakeholders  

There is an emphasis in the revised code on improving the quality of the board and company’s relationships with a wider range of stakeholders.  There is also a new board responsibility for workforce policies and practices which reinforce a healthy culture that will involve engaging with the workforce through one, or a combination, of a director appointed from the workforce, a formal workforce advisory panel and a designated non-executive director, or other arrangements which meet the circumstances of the company and the workforce.  

The board

There is an emphasis in the revised code on the importance of independence, constructive challenge of the boardroom and strengthening consideration of ‘overboarding’. There is a focus on diversity, the length of service of the board as a whole, and effective board refreshment.

A ‘Comply or explain’ provision for a maximum nine-year length of service, allows flexibility 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.

The Nomination committee has responsibility for more effective succession planning that develops a more diverse pipeline.

The revised Code emphasises reporting on the gender balance of senior management and their direct reports.

Remuneration  

The revised Code recommends more demanding criteria for remuneration policies and practices and clearer reporting on remuneration, how it delivers company strategy, long-term success and its alignment with workforce remuneration.  

The revised Code recommends that remuneration committee chairs should have served on a remuneration committee for at least 12 months.

Compliance

Companies should avoid a ‘tick-box approach’. An alternative to complying with a Provision within the revised code may be justified in particular circumstances based on a range of factors, including the size, complexity, history and ownership structure of a company. Explanations should set out the background, provide a clear rationale for the action the company is taking, and explain the impact that the action has had. Where a departure from a Provision is intended to be limited in time, the explanation should indicate when the company expects to conform to the Provision. Explanations are considered to be a positive opportunity to communicate, not an onerous obligation.

Investors

Investors should engage constructively and discuss with the company any departures from recommended practice. When considering explanations, investors and proxy advisors should pay due regard to a company’s individual circumstances. Proxy advisors 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 reporting.

The Code is available at: https://www.frc.org.uk

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