FRC proposes revised UK Corporate Governance Code

The Financial Reporting Council (FRC) has this week proposed a revised UK Corporate Governance Code but has left the parts that specifically deal with risk largely unchanged. A revised code is needed to reflect the changing business environment and help UK companies achieve the highest levels of governance, said the FRC. It explained that the proposed code is “shorter and sharper”, building on the findings from the FRC’s Culture Report published last year. The revised code focuses on the importance of long-term success and sustainability, addresses issues of public trust in business and aims to ensure the attractiveness of the UK capital market to global investors through Brexit and beyond. It is built on an updated set of principles that emphasise the value of good corporate governance to sustainable growth of a company. This includes a new focus on the importance of corporate culture. The majority of changes have been made to the first three sections of the code that deal with effectiveness of governance and leadership. There is also more focus on shareholder engagement. However, the section on audit, risk and internal control, which covers viability statements, remains largely unchanged, explained the FRC. This section of the revised code retains “many concepts contained in the current code”, it said. The FRC does make some recommendations about the production of viability statements in proposals for the revised code. It said that investors want viability statements to explain “more adequately the long-term prospects of the company and to communicate messages about its long-term future”. It also noted confusion about the time frameworks on which companies choose to base their viability statements. “Investors have pointed to the confusion created by companies using a range of timescales over which they describe their prospects, and they want to understand better how these periods affect the assessment of prospects. They also generally want companies, especially those making long-term investments, to discuss their prospects of long-term success over periods going beyond their immediate strategy horizon,” said the FRC. In its revised code document, the FRC encourages companies to develop their viability statements in two stages. Firstly, by considering the prospects of the company over a period reflecting its business and investment cycles. Secondly, by stating whether they have a reasonable expectation that they will be able to continue to meet their liabilities during the assessment period, drawing attention to any qualifications or assumptions. But beyond these advisory statements there is a little change in the code when it comes to the viability statements and risk reporting. More widely, the FRC said the new principles underpinning the revised Corporate Governance Code will allow companies to better report how governance structure contributes to long-term success and achieves wider objectives The revised code sets out good practice so that the boards can establish a company’s purpose, strategy and values to satisfy themselves that these and their culture are aligned. It aims to help companies undertake effective engagement with wider stakeholders, to improve trust and achieve mutual benefit. The new code encourages companies to gather the views of their workforce and give remuneration committees broader responsibility and discretion to oversee how remuneration and workforce policies align with strategic objectives. In addition, the revised code aims to ensure that board appointments and succession plans are based on merit and objective criteria to avoid group think, while also promoting diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. The proposals also aim to ensure companies are more specific about their actions when encountering significant shareholder opposition on any resolution, including those on executive pay policies and awards. Sir Win Bischoff, chairman of the FRC, said: “The UK is globally renowned for its corporate governance framework, which is underpinned by the UK Corporate Governance Code. At this critical time and 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. We have engaged with many stakeholders and incorporated suggestions from the government’s Green Paper on Corporate Governance Reforms, to produce a code which is shorter and sharper and fit for purpose.” He also welcomed the new principle promoting the importance of corporate culture. “Building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company. Engaging with and contributing to wider society must not been seen as a tickbox exercise, but as imperative to building confidence among stakeholders and in turn the long-term success of a company,” said Mr Bischoff.

FRC proposes revised UK Corporate Governance Code

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