Corporate governance reform – FRC amendments to the UK Corporate Governance Code
In addition to secondary legislation, the UK government has asked the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code (the Code), which applies to companies with a Premium listing of equity shares on the London Stock Exchange.
What is happening?
The FRC’s consultation closed in February 2018. It aims to produce final versions of both the amended Code and its supporting Guidance on Board Effectiveness in the summer, to be applied from 1 January 2019.
Why does it matter?
In the area of executive pay, the FRC’s proposed amendments to the Code are numerous and wide-ranging. Some examples include:
- broader responsibility for the remuneration committee in overseeing remuneration policies
- the removal of exemptions for companies which fall outside the FTSE 350, and
- an extension of the recommended minimum vesting and post-vesting holding period for executive share awards from 3 to 5 years.
In the area of strengthening the employee, customer and supplier voice, the FRC intends to incorporate:
- the government’s suggestion of creating a new Principle (Principle C) establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level
- a new provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of the following mechanisms: a designated non-executive director, a formal employee advisory council, or a director from the workforce (Provision 3). The FRC chose to include all three potential mechanisms as the government consultation found that companies require a level of flexibility to be able to choose the mechanism most appropriate to them.
What action should you take?
- If your company is required to comply with the Code, you should review the FRC’s proposals and begin to think about whether new or amended systems and/or procedures will be required in order to ensure compliance.
- When the amended Code is published, you should review this and the accompanying guidance in detail and begin putting in place the systems and procedures identified before the effective date of January 2019.
- If you are a FTSE 350 company, consider whether the exemptions on which you have previously relied have been removed.
- If your company is listed on AIM, the following update explains how these amendments might also affect your company.