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UK FRC consults on revised corporate governance code and guidance but warnings remain over significant change

The UK Financial Reporting Council (FRC) has published for consultation a revised corporate governance code to reflect the changing business environment along with updated Guidance on Board Effectiveness.

The code is shorter, building on updated principles and highlighted the need for companies to include the views of their workforce in their decision making to promote diversity of gender, social backgrounds and ethnicity. In order to achieve this it included three options from the government’s corporate reforms agenda; having a director appointed from the workforce, a formal workforce advisory council or a designated non-executive director.

PwC global rewards partner Tom Gosling explained that the three options have been set within a comply-or-explain framework that recognises that there’s not a ‘one size fits all’ solution and that a combination of approaches could be required to fit with companies’ current engagement activities.

The revised code intends to remove exemptions currently available for smaller listed companies outside the FTSE 350. Companies are also required to be specific about consultation methods when facing significant shareholder opposition, including in relation to executive pay policies. As such, the period until executives receive share awards would be extended from three to five years, and a director with a tenue of more than nine years is no longer considered independent. Companies are also encouraged to give broader responsibility and discretion to remuneration committees, whose chairs should have a minimum of 12 months experience.

Gosling said: “Chairing a remuneration committee just got a lot harder. It’s right that the code emphasises the board’s role in overseeing pay and conditions across the workforce. However, this needs to be implemented in terms of principles and governance oversight rather than an expansion to the committee’s decision-making remit."

The FRC stated that the revised code promotes good practice for company boards, strategy and values as well as improving stakeholder trust. According to the FRC, applying these principles emphasises the value of good corporate governance to the company’s long term sustainable growth.

FRC chair Win Bischoff said: “As the country approaches Brexit, a revised code will be essential to restoring trust in business, attracting investment and ensuring the long-term success of companies for members and wider society.”

The revised code has been welcomed by stakeholders, such as PwC, EY, the Association of International Certified Professional Accountants (the Association) and Chartered Institute of Internal Auditors (CIIA). Yet the Association believes there is an opportunity to evolve the discussion on business models to help avoid the serious strategic missteps that lead to corporate failures and undermine trust.

Gosling said that the new code would demand a significant change in mind-set for companies habitually reporting against the current code provisions.  “It will be good for insightful reporting in the long term but there will be transition challenges. Companies and boards need to consider their overall response to this challenge in an integrated way,” he said.

EY UK corporate governance associate partner Mala Shah-Coulon commented: “Regulating via introducing new policies and processes can only go so far, so the FRC’s emphasis on culture and diversity is a welcome development in the need to restore trust in business. The revised code also put a greater emphasis on ‘outcomes and actions’, this should help avoid some of the recommendations becoming merely a tick box exercise.”

CIIA chief executive Ian Peters explained that the CIIA recognises the importance of the ‘tone at the top’ and that the inclusion of culture as a priority throughout the proposed code is welcomed. However, CIIA would like to see greater clarity on the policing of the code and what happens to companies when they fail to either ‘comply’ or ‘explain’ . The CIIA has also launched its own consultation on the FRC’s proposed changes, open for feedback from internal auditors until 8 December.

Institute of Chartered Accountants in England and Wales (ICAEW) executive director Robert Hodgkinson explained that it is also important to ensure individuals are held accountable when good business practice falls short. “[Good business practice] should not be something that is judged only by auditors, lawyers or directors. Over the next three months ICAEW will be putting these proposals to the test," he said.

The consultation is open until 28 February with conclusions expected to be released late 2018, and the updated code expected to apply from 1 January 2019. The consultation also includes questions on the future of the UK Stewardship code, which will be released for consultation late 2018.

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