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FRC publishes revised UK Corporate Governance Code

09 October 2018

The Financial Reporting Council (FRC) has published an updated version of its UK Corporate Governance Code (the 2018 Code). The 2018 Code places emphasis on businesses building trust by forging strong relationships with key stakeholders.

The 2018 Code represents a more profound change to the UK Corporate Governance Code than have previous updates. Whilst, like its predecessors, it features overriding Principles, which must be applied, and underlying Provisions, which should be adopted on a ‘comply or explain’ basis, the 2018 Code:

  • Is shorter and sharper than the 2016 Code that it replaces
  • No longer has Supporting Principles between the Main Principles and their underlying Provisions, and
  • Has fewer Provisions - some have been deleted entirely and others incorporated into the Principles or removed to the accompanying guidance.

The main changes from the 2016 Code include:

  • Workforce and stakeholders: There is a new Provision to enable greater board engagement with the workforce to understand their views. The 2018 Code asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act. This Provision overlaps with the recently introduced directors’ report requirements that apply to all large and medium-sized companies with more than 250 employees.
  • Culture: Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.
  • Succession and diversity: To ensure that boards have the right mix of skills and experience, constructive challenge and to promote diversity, the 2018 Code emphasises the need to refresh boards and undertake succession planning. Boards should consider the length of term that chairs remain in post beyond nine years. The 2018 Code strengthens the role of the nomination committee on succession planning and establishing a diverse board. It identifies the importance of external board evaluation for all companies. Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.
  • Remuneration: To address public concern over executive remuneration, the 2018 Code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. It also discourages formulaic calculations of performance-related pay, emphasising that remuneration committees should apply discretion when the resulting outcome is not justified. The Provisions overlap with the recently introduced directors’ remuneration report requirements that apply to all Quoted companies with more than 250 employees.

The FRC has also published an updated version of Guidance on Board Effectiveness and a two-page Key Highlights Document, as well as a Feedback Statement that explains its responses to the 275 comment letters it received during the consultation process.

The 2018 Code is applicable for periods beginning on or after 1 January 2019.

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