Is The New UK Corporate Governance Code Good For Business?

Helpfully, Anna Colban, Project Manager, Corporate Governance and Reporting, for the Financial Reporting Council was on hand at this year’s Equiniti Share Registration Conference to explain what’s new.

Anna has been working on the updates for two years, driven by changing expectations of business, greater Parliamentary scrutiny and the fact the Code is now 25 years old. Trust is a key driver of public confidence, with media revelations about organisations such as Carillion, Sports Direct and BHS fanning the flames of public distrust. As Anna pointed out, the 2018 Edelman Trust Barometer shows no sign of an upturn in trust towards UK corporates – among the general public or the informed public.

Cultural diversity

The main thrust of the changes in the Code is to encourage boards to align their overall strategy with a healthy organisational culture and consideration of the impact their business has on all stakeholders with the aim of driving long-term business success. There’s also a continued push to increase the independence of the chair, the cultural diversity of boards and workforce representation.

But Anna stressed that this is accompanied by a strong desire to make the Code as workable as possible for company secretaries and their organisations. The suggestions in the associated Guidance on Board Effectiveness are intended to help companies apply the new Code. The Code has been streamlined and simplified, she said, refocusing on the principles. Supporting principles have been dropped and there are fewer provisions.

She also emphasised the firm focus on continuing flexibility through the ‘comply or explain’ approach. If a provision in the Code isn’t workable for an organisation, they still have the option to explain why they are taking a different course of action.

So what are the key changes?

Stakeholder engagement (Principle D and Provision 5)

There’s a push here to ensure that boards work harder to engage with and understand the views of their major stakeholders, and ensure that their annual report explains how these interests have been addressed in board discussions and decision making.

Workforce engagement (Principle E and Provisions 5/6)

The new Code gives the workforce a stronger voice in the boardroom. Boards are expected to listen to the workforce, with three possible engagement methods set out in the Code:

• Appoint a director from the workforce
• Set up a formal workforce advisory panel
• Appoint a NED with specific responsibility in this area

Alternatively, organisations can explain why they wish to make an alternative arrangement to address this matter.

A live poll of delegates at the event found that 34% of the audience said their Board are planning on appointing a designated NED and 35% were planning a combination of the three stated options. (See bottom of the article for full poll results.)

Tenure and independence (Provisions 9, 10 and 19)

There is no change to the requirement for the chair to be ‘independent on appointment’ or to the ‘independence criteria’. But, the tenure of the chair is now limited to nine years (subject to limited exceptions, if explained). Anna revealed that the questions of tenure and independence generated the most intensive debate of the process.

Composition and succession (Principles J&L and Provisions 17, 18 & 23)

As well as an enhanced role for the nomination committee, the emphasis here is twofold. Firstly, there should be a strong focus on diversity both at board level and in the executive pipeline. And secondly, succession planning and board evaluations should be a priority, with the evaluations highlighting directors’ individual contributions.

Remuneration committees (Principles O & P, Provisions 33 & 37)

Against a backdrop of public perception of excessive executive pay, the changes on remuneration emphasise that remuneration committees should adopt a fair and thoughtful approach to executive remuneration, including taking account of wider workforce pay, stronger links between long-term performance and remuneration, using discretion to adjust pay awards where justified, and better communication with employees. 

Anna explained that the updated Code is intended to drive improved governance practices, a focus on culture, and better quality information for investors, leading to sustainable, long-term business success, and, ultimately, contribute to an improvement in public trust.

However, a live poll of delegates at the event found that 56% of the audience were not convinced that the reforms would deliver on their intentions. (See bottom of the article for full poll results.)

Anna pointed out the Code alone could not deliver these things. It could, however, push companies in the right direction. She believes that this mood results from uncertainty in a number of areas but that things will settle down

In the panel session that ensued, Steve Banfield, Industry Director at Equiniti agreed, and when asked what impact he thought the new Code might have on the UK as a capital market suggested that these changes should prove positive. In his view London is already considered a gold standard with regards to investor protection which in turn generates significant capital for corporate issuers to gain access to. These changes, if implemented as the Code intends, should provide additional investor engagement and protections whilst not proving overly onerous on companies. 

Steve also believes that investor scrutiny will be key to corporations embracing the updated Code – particularly as the FRC has no role in enforcing the Code. However, Anna added that, while the FRC has not actively monitored the Code in the past, it is something that the FRC is looking to step up – and the scope and nature of future monitoring is being actively considered.

The business case

From Anna’s perspective, there’s unlikely to be any strong business case as to why an organisation wouldn’t want to comply with the refreshed Code, because she believes it will help them to be more successful. The new Code encourages greater accountability from directors, boards and their committees, she said. It will require a more reflective approach and a focus on outcomes for which the essential building blocks are clarity of purpose, engagement and listening. All good things for business.

The revised Code will apply to accounting periods beginning on or after 1 January 2019, with the first reports in 2020.

Poll 1 

How is your board planning to engage with the workforce?

Poll 2

Do you think the reforms will deliver what is intended, and change the culture of business?