Corporate Governance

The latest update of the UK Corporate Governance Code has been issued by the Financial reporting Council and is available for download here.

The main focus for the 2014 update has been to significantly improve the quality of information available to investors about the risk management processes, the long-term health and strategic intentions of listed companies.

The FRC has continued the trend, which began with the 2006 Companies Act, of asking listed company directors to consider the long-term viability of the business, including solvency and liquidity looking forward for a period significantly longer than 12 months.

In an attempt to tackle the growing unrest amongst shareholders and particularly shareholder activists, over executive pay, boards of listed companies will also now need to ensure that executive remuneration is designed to promote the long-term success of the company and demonstrate how this is being achieved more clearly to shareholders – thus aligning executive reward with the sustained creation of value.

The key changes to the Code include:

Going concern, risk management and internal control

  • Companies should state whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so;
  • Companies should robustly assess their principal risks and explain how they are being managed or mitigated;
  • Companies should state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months; and
  • Companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.
  • Companies can choose where to put the risk and viability disclosures. If placed in the Strategic Report, directors will be covered by the “safe harbour” provisions in the Companies Act 2006.*

Remuneration

  • Greater emphasis to be placed on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee; and
  • Companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, and should consider appropriate vesting and holding periods for deferred remuneration.

Shareholder engagement

  • Companies should explain when publishing general meeting results how they intend to engage with shareholders when a significant percentage of them have voted against any resolution.

Other issues

The FRC has also highlighted the importance of the board’s role in establishing the ‘tone from the top’ of the company in terms of its culture and values. The directors should lead by example in order to encourage good behaviours throughout the organisation.

In addition the FRC has emphasised that key to the effective functioning of any board is a dialogue which is both constructive and challenging. One of the ways in which such debate can be encouraged is through having sufficient diversity on the board, including gender and race. Nevertheless, diverse board composition in these respects is not on its own a guarantee. Diversity can be just as much about difference of approach and experience. The FRC is considering this as part of a review of board succession planning and will consider the need to consult on these issues for the next update to the Code in 2016.

Conclusion

The great value of the UK Corporate Code, with its ‘comply or explain’ regime, as opposed to legislation, is that it can be quickly and easily modified to reflect current Corporate Governance thinking and address shareholder concerns in a relatively short time-scale.

The fact that Bankers bonuses are still making the headlines six years after the Banking crisis which plunged the world into recession, illustrates the need for this timely reinforcement by the FRC of the basic requirements for company directors to consider the long-term implications of their actions on the sustainability of the business and to always act in the best interests of the business – as set out in the 2006 Companies Act.