Our views

Changes to the UK Corporate Governance Code

Sophie Johnson, Corporate Governance Analyst

29 January 2018

The UK Corporate Governance Code has been in place since 1992 and has helped raise standards of governance in the UK, and has been widely copied, adapted and improved upon by several other countries. The government is consulting on proposed changes to the code, seeking to strengthen certain principles whilst retaining the flexibility that defines the UK approach.

The revised code is shorter with a greater focus on principals and accountability. It remains on a ‘comply or explain’ basis, but emphasis is now placed on reporting how a company complies rather than explaining non-compliance.

There is a new emphasis on internal culture. The Financial Reporting Council’s (FRC) report into the importance of company culture in driving sustainable long-term performance is acknowledged and directors are asked to embody and actively promote these values in the business. Companies will be required to improve employee engagement. To achieve this they can choose to appoint a designated non- executive director, have a formal employee panel, or appoint a director from the workforce.

The new Code will encourage greater shareholder engagement, with any ‘significant’ votes against management requiring a response from the company. Whilst this was included in the previous code, ‘significant’ is now defined as 20% or more votes against management. An update on a company’s response to the vote is required from the company no later than six months after the vote, with a final summary to be included in the following year’s annual report.

Board composition and independence assessments are also the subject of review. Exemptions for smaller companies may be removed, with the same independence thresholds expected regardless of the size of the company. Interestingly, the Chairman will no longer be excluded from the calculation of independence, a number of companies risk falling foul of these expectations.

The responsibilities of the Nomination Committee have been extended to promote diversity. Committees will now be required to report on their attempts to ‘promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths’ and to incorporate diversity in the pipeline for succession. Gender balance in the both senior management and their direct reports will also need to be disclosed.

The Remuneration Committee will be responsible for setting pay of senior management as well as the executives, alongside oversight of the entire workforce. A Chair of a Remuneration Committee will require at least 12 months experience before taking on the role and pay should ‘not reward poor performance and total rewards available should not be excessive.’ In line with this, committees will be required to use their discretion and report on whether the remuneration policy operated as intended and what (if any) changes were required.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.