The UK’s Financial Reporting Council (FRC) has proposed a revised corporate governance code which it said is “shorter and sharper” than the existing code and builds on its work into corporate culture last year.
The FRC said the revised code focused on the importance of long-term success and sustainability, addressed issues of public trust in business and aims to ensure the attractiveness of the UK capital market of the UK capital market to global investors through Brexit and beyond.
The findings of its 2016 corporate culture report demonstrated the importance of aligning company purpose, strategy and values in order to achieve long-term success, the FRC said Successful companies, the regulator believes, should be open and accountable to their workforce. The revised Code is clear that two-way dialogue is necessary to achieve good governance, with companies putting in place practices and processes to achieve that.
Sir Win Bischoff, chairman of the FRC said: “A Principle promoting the importance of the intrinsic value of corporate culture is a new addition to the code. 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 tick-box exercise but imperative to building confidence among stakeholders and in turn the long-term success of a company.
The FRC said it had also taken account of the Hampton-Alexander Review and Parker Review reports on diversity to ensure that the Code challenges directors to consider the composition of not only the board but also the management pipeline.
Additionally, the FRC is consulting on specific changes to the Code as requested by the government’s response to the green paper consultation on corporate governance reform. These are: for companies to have a method of consulting with their employees; extending recommended minimum vesting and post-vesting holding periods for executive share awards from three years to five years; that chairs of remuneration committees should have at least 12 months’ previous experience; and specifying the steps companies should take when they encounter significant shareholder opposition to executive pay policies and awards.
The regulator has also asked for comments on the future direction of the UK Stewardship Code and plans to consult on specific changes to this next year.
Sarah Wilson, the chief executive of Manifest said: “The FRC has put together a package of proposals and measures which aim to re-focus the purpose of governance. Bringing the workforce and other stakeholders more formally into the governance framework will undoubtedly be a shock for some – as will the introduction of ESG and sustainability measures. We very much welcome the move towards more holistic thinking and less reliance on robotic box-ticking approaches. “
The FRC said that the revised code set out good practice so that the boards of companies could establish a company’s purpose, strategy and values and satisfy themselves that these and their culture were aligned; undertake an effective engagement with wider stakeholders, to improve trust and achieve mutual benefit and to have regard to wider society; gather views of the workforce and ensure effective engagement with wider stakeholders, to improve trust and achieve mutual benefit, and to have regard to wider society.
A new provision said that the board should establish a method for gathering the views of the workforce. This would normally be a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director. Additionally, the code requires companies to ensure appointments to boards and succession plans are based on merits and objective criteria in order to avoid groupthink and promote gender, social and ethnic diversity.
The revised code also requires boards to be more specific about actions when they encounter significant shareholder opposition on any resolution as well as giving remuneration committees broader responsibility and discretion for overseeing how remuneration and workforce policies align with strategic objectives.
Responses to the consultation are required by 28 February 2018. These should be sent to firstname.lastname@example.org.
Separately the FRC has said it will be finalising its guidance on the strategic report which it had consulted on earlier this year. This follows the announcement by the government that it will be introducing legislative changes in respect of reporting on section 172. The FRC said that it is likely that these changes, expected in March 2018, will result in an amendment to the existing strategic report requirements and further amendments to the guidance will be required.
The FRC said it had also received feedback that some preparers would welcome further clarification on the changes resulting from the introduction of the non-financial reporting regulations which will apply to companies with December 2017 year-ends onwards. It has published the answers to frequently answered questions in order to provide companies with more guidance on the regulations.