The new U.K. corporate governance reform will get tough on irresponsible corporate behavior
The Code contains broad principles and more specific provisions. Listed companies are required to report, as part of their annual report and accounts, on how they have applied the main principles of the Code. They must also confirm that they have complied with the Code's provisions or - where they have not - explain.
In July 2016 when prime minister Theresa May, delivered a speech that outlined her vision on how to reform corporate Britain.
Effectiveness, remuneration, accountability to shareholders
She reiterated the need of a "deep economic reform," including "getting tough on irresponsible behaviour in big business" and refusing to accept the concept that “anything goes.” The plans included having workers' representatives on boards, simplifying bonus structures, checking that incentives are aligned with long-term strategy, making shareholder votes on corporate pay binding rather than advisory, and ensuring full disclosure of bonus targets and outlining the ratio between the CEO's pay and the average company worker's pay.
More than a year later the May government has published its package of proposed reforms which will come into force in June 2018. The new UK Corporate Governance Code
The UK Corporate Governance Code 2016 sets the corporate standards of good practice about board leadership and effectiveness, remuneration, accountability and relationships with shareholders.
All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report in their annual report and accounts on how they have applied the Code.
If shareholders feel that a company has carefully considered the most appropriate governance structures for it, this can lead to higher levels of trust. Therefore, the quality of all disclosures is essential even when companies are complying with all the provisions of the Code.
Explanations
Companies must provide clear and meaningful answers when they choose not to comply with one of the provisions of the Code, so that their shareholders can understand the reasons for doing so and judge whether they are content with the approach the company has taken. There may be many good reasons why a company or a group may choose not to comply, and an explanation does not imply poor governance.
Explanations should be full and include reference to context and comprehensible rationale. They should explain how the company is fulfilling the relevant principle of the Code and whether deviation from its provisions is time limited. Ideally, explanations should be sufficiently full to meet the needs of all shareholders.
Additional background and information on 'comply or explain' is included in the FRC's paper titled What Constitutes an Explanation under 'Comply or Explain'? These include, for example, providing a clear rationale for the action taken and describing any mitigating measures.
Review of the Corporate Governance Code 2017
In February 2017, the FRC announced plans for a fundamental review of the UK Corporate Governance Code. This will take account of work on corporate culture and succession planning, and the issues raised in the Government's Green Paper and the report by the Business Enterprise and Industrial Strategy (BEIS) Select Committee Inquiry.
The FRC responses to these papers:
The review will build on the Code's globally recognised strengths developed over the past 25 years while considering the appropriate balance between its principles and provisions and the growing demands on the corporate governance framework.
Along with a review of the Code, the Board Effectiveness Guidance will be updated to take account of any proposed changes to the Code.
Source;
The FRC has undertaken a series of stakeholder meetings during the first half of 2017 to inform the direction of the review. This will be followed by a formal 12-week consultation towards the end of 2017
- For details see; https://frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf
- See the relevant section of the Listing Rules; https://www.handbook.fca.org.uk/handbook/LR/
- What constitutes an explanation under 'comply or explain'? Report of discussions between companies and Investors; https://frc.org.uk/getattachment/a39aa822-ae3c-4ddf-b869-db8f2ffe1b61/what-constitutes-an-explanation-under-comply-or-exlpain.pdf
