Corporate Governance Code updates aim to raise the bar

This month has seen an updated version of the UK Corporate Governance Code issued by the FRC

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This month has seen an updated version of the UK Corporate Governance Code issued by the FRC (Financial Reporting Council), to be applied to accounting periods beginning on or after 1 October 2014.

Formerly the Combined Code, the UK Corporate Governance Code has been a key part of spreading boardroom best practice since its launch in the early 1990s. The UK has some of the highest levels of Corporate Governance worldwide and operates under the ‘comply or explain’ principle. The last changes to the Code occurred alongside changes to the UK Stewardship Code back in 2012, which we summarised here.

These most recent changes to the Code aim to ‘significantly enhance the quality of information investors receive about the long-term health and strategy of listed companies, and raise the bar for risk management’, and can be grouped under three key sections:

  • Going concern, risk management and internal control
  • Remuneration
  • Shareholder engagement

These include companies needing to state whether it is appropriate to adopt the going concern basis of accounting, and to robustly assess principal risks and how they are managed, as well as monitoring risk management and internal control systems.

Remuneration has been revised with a greater emphasis ensuring that remuneration policies are designed with long-term success of the company in mind. Companies are also advised to put arrangements in place to enable them to utilise variable pay when appropriate.

Companies should also look to show how they will engage with shareholders when a significant proportion have voted against any resolution when publishing general meeting results.

They also highlight the importance of the Board leading from the top in terms of culture and values, and that a successful board should have sufficient diversity in order to create a dialogue that is constructive and challenging.

The CEO of the FRC Stephen Haddrill said of the update, “The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation.

Recognising the different circumstances for business, companies are allowed to choose the period over which they look forward but we are clear this should be more than a year and reflect the nature of the business. Crucially the directors should explain their reasoning to investors. If included in the Strategic Report their statements will be subject to a safe harbour in accordance with companies’ legislation.

The changes on remuneration also focus companies on aligning reward with the sustained creation of value. The Code will continue to operate on the principle of ‘comply or explain’, which has served investors and the UK corporate sector well for over 20 years.”

The Code will be reviewed again in 2016. Meanwhile, click here to view the updated Code.