The Financial Reporting Council (the "FRC") has published a new edition of the UK Corporate Governance Code (the "Code") following its usual two-yearly review and the 2013 consultations on directors' remuneration, risk management, internal control and the going concern basis of accounting. The changes apply to companies with financial years beginning on or after 1 October 2014. Key aspects are as follows:
- The FRC has explained that Code changes relating to directors' remuneration are designed to place greater emphasis on a company's long-term success and ensure that remuneration committees take lead responsibility in this respect. Remuneration committees should avoid paying more than is necessary and devise a balance between fixed and performance-related, immediate and deferred remuneration. Performance-related elements of executive directors’ remuneration should now be "transparent" as well as "stretching and rigorously applied".
- There is a new requirement for companies to be able to clawback or withhold payments under performance-related remuneration schemes and to specify the circumstances in which it would be appropriate to do so. Companies should also consider appropriate vesting and holding periods for directors' share-based remuneration, including after they have left the company.
Financial and business reporting
- In annual and half-yearly financial statements, rather than report the business as a going concern, directors should now state whether they considered it appropriate to adopt the going concern basis of accounting, and identify any material uncertainties about the company’s ability to continue to do so for at least the next 12 months.
Risk management and internal control
- To elicit greater disclosure about a company's viability over time, in the annual report directors should now confirm (i) that they have carried out a "robust assessment" of principal risks facing the company, describe those risks and explain whether they are being managed or mitigated, and (ii) how they assessed the company's prospects, over what period and why that period is appropriate. Directors should clarify 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 a specified period. The FRC expects this period to be "significantly longer" than 12 months.
- The board's existing obligation to annually review and report on the company's risk management and internal control systems has been bolstered with an additional ongoing obligation to monitor such systems.
Relations with shareholders
- Where a "significant proportion" of shareholders have voted against a resolution (excluding withheld votes), the company should explain what action it will take to understand the result. The FRC has stated that it expects companies to explain how they will engage with shareholders to assess their concerns, rather than how they will respond to such concerns.
- The Code now clarifies that the general principle of boards using meetings to communicate with, and encourage participation of, investors applies to all general meetings and not just annual general meetings ("AGMs"). Notice (and related papers) of general meetings should be sent at least 14 working days in advance. The equivalent requirement for AGMs is 20 working days (as previously).
Further information and guidance
(which contains a useful Appendix summarising in greater detail the differences between the 2012 and 2014 Code editions)
- View a new guidance note entitled "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting"
(which amalgamates and replaces the 2005 Turnbull and 2009 Going Concern guidance notes)