New UK Corporate Governance Code published

The Financial Reporting Council (FRC) has announced the publication of the new shorter and snappier UK Corporate Governance Code. The new Code follows the FRC’s consultation in December 2017. (See our Corporate Law Update for the week ending 8 December 2017 for more information.)

The new Code applies to premium-listed companies (whether UK or overseas companies) for accounting periods beginning on or after 1 January 2019. Under Listing Rule 9.8.6R, a company with a premium listing must comply with the Code and explain any divergence from it.

The Code been formulated as a shorter document based on 18 “principles”, divided into five sections:

  • Board leadership and company purpose
  • Division of responsibilities
  • Composition, succession and evaluation
  • Audit, risk and internal control
  • Remuneration

Each section contains between three and five principles, which are supported by between seven and ten provisions.

The new Code covers much of the ground that the current UK Corporate Governance Code touches on. However, the FRC has made the following significant changes:

  • Workforce engagement. Companies are now asked to choose one or more of three models for engaging with their workforce – appointing a director from the workforce; establishing a formal workforce advisory panel; and / or appointing a designated non-executive director. If a company does not adopt one or a combination of these three models, it must explain what alternative arrangements it has put in place and why they are effective.
  • Remuneration committees. In order to serve as the chair of a company’s remuneration committee, a person must first have served for at least 12 months on a remuneration committee (although not necessarily that same company’s remuneration committee).The new Code also requires companies to submit their general workforce pay and related policies to their remuneration committee for “review”. This is softer than the FRC’s original proposal that remuneration committees “oversee” workforce remuneration. The new Code reserves ultimate responsibility for workforce pay specifically to the company’s board.
  • Diversity. The new Code incorporates the concept of gender, social and ethnic diversity in various places, including in relation to annual reporting and board appointments and evaluation.
  • Performance awards. Awards under long-term incentive plans (LTIPs) should be subject to a minimum five-year holding and vesting period, although the new Code does envisage shares being released for sale “on a phased basis”.
  • Votes against resolutions. Where a company receives more than 20% of shareholder votes against a resolution, it will need to explain what actions it intends to take to consult with shareholders to understand the reasons behind the result.
  • Smaller companies. Companies below the FTSE 350 will now need to ensure at least half of their board is independent. The new Code also prohibits a smaller company’s chair from sitting on its audit committee.

Notably, the FRC has decided not to adopt some of the original proposals in its consultation. These include the following:

  • Chair independence. A company’s chair will not be required to remain independent throughout their tenure. Instead, they will merely need to be independent on appointment (as is the case under the current Code). However, the new Code does state that a chair should not serve for more than nine years.
  • Director independence. The current Code contains certain factors a board should consider when deciding whether a director is independent. The FRC had proposed to convert these from considerations into “hard conditions”, but ultimately it has decided not to take this path.
  • Smaller companies. The FRC had proposed to remove all relaxed requirements for smaller companies from the Code. In some cases, it has done this (see above). However, the FRC has decided to continue to allow smaller companies’ audit and remuneration committees to consist of at least two independent non-executive directors (rather than three, as for larger companies), and not to require smaller companies to conduct a board evaluation at least every three years.

The FRC has also updated its Guidance on Board Effectiveness.