On 17 September 2014, the Financial Reporting Council published a new edition of the UK Corporate Governance Code, incorporating changes it has made to the Code following its latest regular consultation exercise.

Listed companies are required to report each year on how they have applied the Principles of the Code and also report on a comply-or-explain basis (if not, why not?) on whether they have applied the Provisions in the Code. The new Code will apply to reporting periods beginning on or after 1 October 2014, so companies should start considering the impact on their governance processes, and in due course on the relevant areas of their annual reports.

The main changes to the Code address going concern and risk management, remuneration and shareholder voting issues. They include:

Going concern and risk management

  • In place of the requirement to report that the business is a going concern (with supporting assumptions or qualifications, as necessary), a new requirement for directors to state in the company’s annual and half-yearly financial statements whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and to identify any material uncertainties as to the company’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements (Provision C.1.3).
  • A separate new requirement for directors to confirm in the company’s annual report that they have carried out “a robust assessment” of the principal risks facing the company, describing the risks and explaining how they are being managed or mitigated (Provision C.2.1). Taking account of the company’s current position and principal risks, the directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate. The directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period, drawing attention to any qualifications or assumptions as necessary (Provision C.2.2). The existing requirement to review the effectiveness of risk management and internal controls systems at least annually has been supplemented by an ongoing requirement to monitor those systems (Provision C.2.3).


  • A shift of emphasis on directors’ remuneration so that, instead of focusing on levels of remuneration that are sufficient to attract, retain and motivate directors, Main Principle D.1 (The Level and Components of Remuneration) requires executive directors’ remuneration to be designed to promote the long-term success of the company, and that performance-related elements should be “transparent, stretching and rigorously applied”. Of course, securing the best directors by offering attractive remuneration packages is not at odds with promoting long-term success. The FRC expects companies to set and report on targets in this context that are controlled by the remuneration committee and that do not encourage excessive risk-taking. Where shares form part of remuneration the remuneration committee should consider requiring directors to hold a minimum number of shares, and to hold shares for at least a fixed period even if it extends beyond their departure (Schedule A).
  • For the first time, companies are positively required to include claw-back provisions to recover or withhold sums paid or payable to under-performing directors or explain why not (Provision D.1.1). While quoted company director remuneration has been moving in this direction over the last few years anyway, the need expressly to report on these aspects of remuneration in future annual reports on a comply-or-explain basis is undoubtedly going to accelerate these trends – but retaining shares after vesting over and above a minimum shareholding requirement can be particularly challenging. Some technical difficulties also arise in making changes so as to comply because, for most companies, the remuneration policy on which shareholders voted in 2014 is the one which will be carried forward for the next few years without amendment. The changes to the Code are virtually the same as were proposed as part of the consultation exercise (click here for our earlier Law-Now issued at that time for a more detailed look at the impact of the changes).

Shareholder voting

  • The extension of Main Principle E.2 (Constructive Use of General Meetings) to apply to all general meetings rather than just annual general meetings, and a requirement that – while the period for AGMs remains 20 working days – all notices of other general meetings should be sent to shareholders at least 14 working days before the relevant meeting.
  • A new requirement that when, in the board’s opinion, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result, rather than merely how it proposes to respond to what it perceives shareholder concerns to be (Provision E.2.2). The reference to votes cast against a resolution does not include withheld votes.