Updated UK Corporate Governance Code published
The Financial Reporting Council has published final versions of an updated UK Corporate Governance Code and associated Guidance on Board Effectiveness. Changes to both of these were consulted on last year.
Following an exceptionally large response to its initial proposals, the FRC has expanded on some of the new Provisions to give more detail of what companies should do. Nevertheless, the final Code is still shorter and “sharper” than the current 2016 Code which it will replace. This version will also be welcomed because it has responded to a number of the concerns which had been raised. We have summarised notable points below:
Section 172 duties and reporting – The FRC has explicitly stated that the Code is not meant to override or interpret the statutory statement of directors’ duties in the Companies Act 2006. Under Section 172, directors must promote the success of the company for the primary benefit of its shareholders, but with regard to other stakeholders. The section on the company’s responsibilities towards its shareholders and other stakeholders has also been reorganised so that shareholders now come first and the workforce falls into the section on other stakeholders.
Methods for gathering workforce views – As in the consultation draft, the new Code recommends that companies establish a method for gathering the views of their workforce. The final Code no longer states, however, that it would be “normal” to use one of the three methods suggested (a director appointed from the workforce; a formal workforce advisory panel; or a designated non-executive director). If companies do not use one or more of the methods given they will though need to explain what they are doing and why it is effective.
NED independence and board balance – These Provisions have been significantly softened from those set out in the consultation. As is now the case under the 2016 Code, the chair should be independent on appointment but does not need to be considered independent throughout his/her tenure. Nevertheless, the chair should demonstrate objective judgement whilst in post. Helpfully for companies, the final Code also makes clear that it is up to the board to decide on whether or not to class non-executives as independent, with reference to the independence tests. The consultation had proposed that there should be a firm recommendation that directors could not be considered independent where they fell into any of the categories set out in the independence tests.
Length of chair’s tenure – The FRC has decided to retain the consultation recommendation that a chair should not stay in post for more than nine years from when they were first appointed to the board. However, this Provision does acknowledge that transitional arrangements may be necessary and that existing NEDs should not be deterred from applying to become chairs of the same company. It therefore states that, to facilitate effective succession planning and the development of a diverse board, it is possible for the nine-year limit to be extended for a limited time, particularly where the chair was an existing NED on appointment.
As was originally planned, the new Code will apply to financial years beginning on or after 1 January 2019. This means that listed companies will, for the most part, start to report against the new Code in 2020, unless they choose to pre-comply or need to report on significant dissent against meeting resolutions in 2018. In any case, work to implement the new recommendations, particularly with regard to new remuneration arrangements, will need to be started on before the reporting deadline.
See here for more information on these changes. For more information about remuneration and workforce issues see our separate alert. Each of these is available to subscribers on the Linklaters Knowledge Portal.