New Corporate Governance Code and Revised Guide on Board Effectiveness in force
The new Corporate Governance Code (the Code) and the revised Guidance on Board Effectiveness have been published.
What is happening?
The Code applies to all companies with a premium listing, whether or not these are incorporated in the UK in respect of accounting periods beginning on or after 1 January 2019.
There are five sections:
- board leadership and company purpose
- division of responsibilities
- composition, succession and evaluation
- audit, risk and internal control, and
- remuneration.
Why does it matter?
The Code particularly engages with the following matters:
- shareholder and wider stakeholder engagement
- creation of a corporate culture with an aligned purpose, strategy and values
- workforce policies which support long-term sustainable success
- consideration of regular refreshment of boards of directors, and
- proportionate remuneration.
The Code has been substantially re-written and focus has been placed on reporting on the application of the Code principles rather than “box-ticking” as a means of effecting governance. The Code also follows a different structure to previous codes. For example, there are no longer “supporting principles”. The matters which were previously supporting principles have now either become principles or provisions or have been included in the Guidance on Board Effectiveness.
The Code does continue to adopt a “comply or explain” approach. Key changes for accounting periods from 1 January 2019 onwards include reporting on:
- how the board has set purpose and strategy, met objectives and achieved outcomes
- how the board has engaged with shareholders and other stakeholders in fulfilling its duties and considering the factors under section 172 Companies Act 2006 (see here)
- how the board has taken account of the wider views of the workforce though a designated non-executive director, workforce-appointed director, formal advisory panel or similar
However, companies should be aware that they will be required to publicly address any significant shareholder dissent (a vote of more than 20% against a board proposed resolution or a withdrawn resolution) before then.
Smaller companies should also be aware that the old code included certain exemptions or relaxations for companies which were below the FTSE 350 in the prior year. These exemptions and relaxations have been reviewed and, in some cases, removed.
What action should you take?
As some of the Code provisions (such as taking account of the views of the workforce) may require a change in approach and potential cultural changes, we expect many companies to elect to start to implement their Code changes early.
Review the Code and the (useful) Guidance on Board Effectiveness with a view to putting in place practices and procedures to ensure and facilitate compliance with the new reporting requirements (particularly if you are a smaller premium listed company and previously benefitted from exemptions/relaxations).
Be aware of the need to address significant shareholder dissent if it arises.