The 2018 Corporate Governance Code by the Financial Reporting Council (FRC) has been released, putting relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy.
The new “shorter and sharper” Code places emphasis on businesses building trust, with greater board engagement with key stakeholders and calls for an end to “formulaic calculations of performance-related pay” for executives. The FRC also says that workforces should be given the means to raise concerns in confidence – and that these concerns should be regularly reviewed, with investigative and follow-up action processes put in place.
The application of the principles, including the creation of a culture which aligns company values with strategy and sets out clear, meaningful reporting, is a key focus within the report.
The main changes include:
Workforce and stakeholders: There is a new Provision to enable greater board engagement with the workforce to understand their views. The Code asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act.
Culture: Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.
Succession and diversity: To ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new Code emphasises the need to refresh boards and undertake succession planning. Boards should consider the length of term that chairs remain in post beyond nine years. The new Code strengthens the role of the nomination committee on succession planning and establishing a diverse board. It identifies the importance of external board evaluation for all companies. Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.
Remuneration: To address public concern over executive remuneration, the new Code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. Importantly formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.
Commenting, Sir Win Bischoff, Chairman of the FRC, says: “Corporate governance in the UK is globally respected and is a framework trusted by investors when deciding where to allocate capital. To make sure the UK moves with the times, the new Code considers economic and social issues and will help to guide the long-term success of UK businesses.
“This new Code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.”
Roger Barker, Head of Corporate Governance at the Institute of Directors, welcomed the Code, particularly its “engagement with a wider range of stakeholders including the workforce, as well as encouragement of more long-term oriented business behaviour and recognition of the board’s role in overseeing a company’s purpose and culture”.
Business secretary Greg Clark adds: “These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run. They will help the UK remain the best place in the world to work, invest and do business.”
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