UK Speaks To The Future With New Corporate Governance Code
The UK's corporate governance watchdog, the Financial Reporting Council (FRC), has just published its proposals for a revised UK Corporate Governance Code. As heralded by its Chair, Sir Win Bischoff at an event around Future Boards in Oslo last month, it is both "shorter and sharper."
It reads as if it was written in 2017, which is great progress. At a time of enormous economic and technological change, it stresses the importance of true diversity and representation by business and a need for hands-on awareness and creation of business culture. It calls for workforce representation and its engagement, emphasises the need to focus on long-term value and (repeatedly) highlights the critical importance of getting remuneration right for a multitude of reasons - including the re-establishment of trust in business.
Talking to me about the new, revised Code, David Styles, FRC Director of Corporate Governance, said: "The biggest difference in terms of its general approach is that it is based on a wider interpretation of corporate governance. We now have a much greater emphasis on the creation of value for the longer-term, the need to re-establish trust in business, and (for business) to engage with a wider number of stakeholders."
There is much in the revised Code that resonates with growing thinking on corporate governance around the world, and the FRC has spent six months in outreach consultation beyond just UK companies and shareholders. But what remains is the UK emphasis on 'comply or explain', a desire not to be overly prescriptive, and a reluctance to dictate for fear of creating a 'tick-box' mentality, rather than thoughtful consideration of best practice.
Keeping that emphasis inevitably brings up the question of sanctions: what if nobody pays attention to the newly revised principles and provisions of the Code? It isn't clear what sanctions might entail, but the FRC has set clearer guidelines than ever before on how it expects the UK's listed businesses to behave, and to report.
Among new elements of the Revised Code, a few that jumped out: (emphasis is mine)
Principle D: "All directors must act with integrity...the workforce should be able to raise concerns in relation to management and colleagues where they consider that conduct is not consistent with the company's values and responsibilities."
Provision 3: "The board should establish a method for gathering the views of the workforce. This would normally be a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director. There should also be a means for the workforce to raise concerns in confidence and (if they wish) anonymously. The board should review this and ensure that arrangements are in place for the proportionate and independent investigation of such matters and for follow-up action."
Provision 4: "The board should explain in the annual report how it has engaged with the workforce and other stakeholders..."
Provision 6: "When more than 20% of votes have been cast against a resolution, the company should explain...and an update should be published no later than six months after the vote."
Principle J: "Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be in place for a board and senior management. Both appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths."
Provision 18: "All directors should be subject to annual re-election..."
And so on. Provision 23 is all about the annual report describing the work of the nomination committee. The revised Code asks for a description of how the board evaluation has been conducted, detailing the outcomes, actions taken and influences on board composition, It also asks for an explanation of actions taken to ensure a diverse pipeline "for future succession to board and senior management appointments", "an explanation of how diversity supports the company in meeting its strategic objectives" and "the gender balance of those in the senior management and their direct reports."
That should wake up the FTSE 250.
But, in a real sign of the times, the word that probably comes up more than any other in the revised Code is 'remuneration.'
Principle O : "The board should satisfy itself that company remuneration and workforce policies and practices promote its long-term success and are aligned with its strategy and values."
Boom. As they say. For to speak 'company remuneration' and 'workforce policies and practices' in the same breath shows how much thinking about business has changed in the UK in the last six or seven years. And there is a lot more on remuneration, including very specific guidelines for remuneration committees, and Chairs of such committees, and specifics on remuneration schemes and policies.
Note Provision 36: "Remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interests. In normal circumstances, shares granted or other forms of long-term incentives should be subject to a vesting and holding period of at least five years...". There is also Provision 41, calling for all sorts of detail on the work of the remuneration committee in the annual report.
I am personally fond of Provision 7: "The board should take action to identify and eliminate conflicts of interest, including those resulting from significant shareholdings, and ensure that the influence of third parties does not compromise or override independent judgement."
Before I lose your attention, it is time to mention Brexit. It has to said that, among the many cards that are hastily being produced to show we can still have a winning hand in that game, this is clearly another. I don't play card games, but these revisions to the UK corporate governance Code do look as if they might provide real strength.
They come at the end of a year when the FRC has been celebrating 25 years of the UK Corporate Governance Code on its website, with a series of blogs. In the interests of transparency, I would like to note that I was asked if I would like to contribute. I picked my topic, sent in my piece, and it was published with no alterations within 48 hours. It now features (with some delight on my part) on this site.
The UK's CIPD , the professional body for HR and people development, has been quick to respond to the revised Code. “The FRC’s proposals are a welcome move to improve corporate governance in the UK. The proposals place a much greater focus on organisational culture and employee voice, meaning that company boards will need to invest more time and thought on strategic workforce issues than ever before. This is a significant step forward in recognising the value of the workforce and the need for its voice to be heard at board level" said Peter Cheese, CEO.
“We also strongly support the proposal to broaden the role of the remuneration committee to oversee pay and incentives across the wider workforce rather than just focusing on executive pay" he said.
"This is an important step in encouraging businesses to be more active in capturing and acting on their people data and for boards and the remuneration committee to improve their understanding and oversight of people data. Such a move will require fundamentally changing the role and makeup of the remuneration committee to ensure it has the right levels of expertise and necessary time and support to carry out its expanded remit" he added.