A new version of the UK Corporate Governance Code (the Code) came into force on 1 October and applies to accounting periods beginning on or after 1 October 2014 for all companies with a premium listing of equity shares, regardless of whether they are incorporated in the UK or elsewhere.
The Financial Reporting Council (FRC) began consulting on possible changes to the Code in relation to its two-yearly review back in May this year, having previously consulted on some changes in relation to directors' remuneration on October 2013 and risk, management, internal controls and the going concern basis of accounting in November 2013. Please see our May article for details of the changes which were proposed. Click here to see the new version of the Code.
Most of the changes to the Code reflect those set out in the May consultation, though a few further changes have been made. The key changes to the 2012 version of the Code are set out below.
Section C: Accountability
- Companies to state whether they consider it appropriate to adopt the going concern method of accounting and identify material uncertainties if they feel unable to continue to do so
- Companies should robustly assess their principal risks and explain how they are being managed and mitigated
- Companies should include a viability statement, stating whether they believe they will be able to continue in operation and meet liabilities, having considered their current position and principal risks, and specify the period covered by this statement. The FRC expects the assessment period to be significantly longer than 12 months
- Companies should monitor their risk management and internal control systems, review them annually and report on the review in the annual report
- Companies can choose where to report on their risk and viability disclosures. The FRC recommends that these be placed in the Strategic Report so that directors are covered by the safe harbour provisions of section 463 of Companies Act 2006.
Section D: Remuneration
- Companies need to ensure that executive remuneration is designed with the long-term success of the company in mind and responsibility for making this happens lies with the remuneration committee
- Provisions should put in place arrangements that would enable performance adjustments or post-vesting claw back for executive directors' variable pay (bonuses and long term incentives) and specify the circumstances in which remuneration committees would consider it appropriate to act.
Section E: Shareholder engagement
- Companies should explain the action they intend to take in order to understand shareholders' concerns when a significant percentage have voted against any resolution at any general meeting
- Section E. 2 has been changed so it now requires boards to use all general meetings, as opposed to formerly just annual general meetings, to communicate with investors and to encourage their participation. The Code specifies that for general meetings (other than AGMs) the notice and related papers should be sent to shareholders at least 14 working days in advance.
Other points to note
- In the revised preface to the Code, the FRC emphasises the board's role in leading by example to establish the culture, values and ethics of the company
- It also states that a key element for an effective board is constructive challenge which can be encouraged through sufficient diversity on the board, including both of gender and race but also through differences of approach and experience
- The FRC has already stated that board succession planning will form part of the review items for its next Code review in 2016 and diversity in its wider context will form part of the succession planning review.
The FRC has published guidance on the strategic report, risk management, internal control, business and financial reporting and audit committees, which relate to Section C of the Code. These guidance notes are available on the FRC website at www.frc.org.uk.