Proposed changes to the UK Corporate Governance Code centre on hot-button issues like corporate culture, executive pay, diversity and shareholder engagement, incorporating suggestions made in the UK government’s plans for corporate governance reform and an earlier report by the Business Enterprise and Industrial Strategy (BEIS) select committee. The Financial Reporting Council is seeking comment on the revised code as part of a consultation process, with interested parties invited to comment by February 28, 2018.
The proposed new code, which FRC chair Win Bischoff describes as “shorter and sharper and fit for purpose’, continues to operate on a ‘comply or explain’ basis and is divided into five sections:
- Leadership and purpose;
- Division of responsibilities;
- Composition, succession and evaluation;
- Audit, risk and internal control; and
The revised code emphasises stakeholder engagement and the importance of companies seeking the views of the workforce, stating that: “[t]he workforce should be able to raise concerns in relation to management and colleagues” and that “the board should ensure effective engagement with, and encourage participation from, [shareholders and stakeholders]”.To this end, and in line with earlier calls for employee representation made by Prime Minister Theresa May in 2016, the revised code suggests that companies should either assign a non-executive director to represent employees, create an employee advisory council, or nominate a director from the workforce. Further, in an effort to encourage transparency and responsiveness to AGM voting, companies will need to explain what action has been taken to consult with shareholders when more than 20% of votes have been cast against the board’s recommendation.
The authors of the report have also taken into account the views of the Hampton-Alexander Review and Parker Review on diversity, challenging directors to consider the composition of not only the board, but also of management. More specifically, a provision has been added which requires the nomination committee to explain what actions they have taken to increase diversity in its executive pipeline and requires that companies report specifically on the gender balance in the first layer of management below board level. All companies, not only those in the FTSE 350, will be encouraged to increase transparency in this area.
Regarding executive remuneration, the revised code lists the items which the remuneration committee should address when determining executive director remuneration policy and practices. These factors are broken down into key themes, namely clarity, simplicity, predictability, proportionality and reward for individual performance, and alignment to culture. A new provision also stipulates that shares granted, or other forms of long-term incentives should be subject to a vesting and holding period of at least five years. Although updates to existing guidance on remuneration itself are relatively minor, the revised code expands the role of the remuneration committee, tasking its members with additional responsibilities to oversee “wider workforce pay” and to engage with the workforce “to explain how executive remuneration aligns with wider workforce pay policy”. In addition, a remuneration committee chair will be required to have at least 12 months experience on the committee before being appointment as chair of the committee.
Following the completion of the consultation period, the FRC is targeting a mid-2018 publication date, with the new code expected to apply for reporting years beginning on or after January 1, 2019.
Eanna is an analyst covering the UK market.