Earlier this month, the Financial Reporting Council issued a public consultation on a comprehensive review of the UK Corporate Governance Code. The review aims to make the code more focused and concise, and align it with the new economic and social climate. The first aim is achieved by removing the supporting principles and incorporating them in the main principles or in a revised Guidance on Board Effectiveness. The second aim is reflected in a new focus on stakeholder engagement, corporate culture, diversity and the long-term success of the company.
The proposed code has five main sections, which broadly correlate to the previous sections: (1) Leadership and purpose; (2) Division of responsibilities; (3) Composition, succession and evaluation; (4) Audit, risk and internal control; and (5) Remuneration. The only exception is Section E of the current code (Relations with shareholders), which has been integrated throughout the revised code. Substantively, the proposed amendments incorporate insights from several reports and papers published over the past years, including: the Government Green Paper Consultation on Corporate Governance Reform, the FRC’s report on Corporate Culture and the Role of Boards, the Davies Review on gender balance of FTSE 100 boards, the Hampton-Alexander Review on FTSE women leaders, and the Parker Review of the ethnic diversity of UK boards.
One of the most important amendments is an express and wide recognition of the role of non-shareholding constituencies. The current version of the code has a strong shareholder wealth maximisation focus, and lacks any relevant stakeholder provisions. Following the recommendations of the reports mentioned above, most notably the Green Paper Consultation and the Culture Report, the revised code introduces several responsibilities towards stakeholders. First, Principle C requires directors to consult and take into account the interests of all corporate constituencies: “In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.” This principle is meant to align the Code with the enlightened shareholder value approach adopted in the Companies Act 2006. The responsibility to engage all constituencies is reinforced by a requirement on the board to explain in the annual report how it has engaged with all stakeholders and how their interests influenced the board’s decision-making (Provision 4). Second, the revised Code introduces a responsibility to ensure that the workforce is able “to raise concerns in relation to management and colleagues where they consider that conduct is not consistent with the company’s values and responsibilities.” (Principle D). This is supported by the board’s responsibility to establish a method for gathering the views of the workforce such as: a director appointed from the workforce; a formal workforce advisory panel; or a designated non-executive director (Provision 3). The term ‘workforce’ is a deliberate choice, as it includes not only persons with formal contracts of employment, but also other types of workers such as agency workers and those providing services on a self-employed basis. Moreover, Section 5 on Remuneration provides that the annual report should explain the company’s approach to developing and rewarding the workforce, and the mechanisms adopted by the company to inform its workforce on how executive remuneration aligns with wider company policy.
Another notable revision is the emphasis on diversity in the appointment, succession planning and evaluation of corporate boards. Principle J introduces a broad definition of diversity, which includes “gender, social and ethnic backgrounds, cognitive and personal strengths.” Provision 17 expands the scope of the nomination committee by including a responsibility to oversee “the development of a diverse pipeline for succession.” The new code also includes a responsibility to disclose, in the annual report, how the processes applied in relation to appointment planning support a diverse pipeline, what other actions the board has taken to promote a diverse pipeline, an explanation of the relation between diversity and the company’s strategic objectives and the gender balance of senior management and their direct reports (Provision 23).
The consultation will remain open until the end of February 2018. The new code is expected in early summer 2018, together with a revised version of Guidance on Board Effectiveness.