The UK will be getting a revised Corporate Governance Code, most likely effective January 2019.
The House of Commons Library has published a briefing paper on Corporate Governance Reform. The briefing paper provides an overview of the corporate governance framework in the UK, including the history of the UK corporate governance code (UKCG Code) and the interaction of the UKCG Code with directors’ duties under the Companies Act 2006 (CA 2006). The paper also provides an overview of the reforms announced by the government in August 2017 and provides an update on timescales.
The government is keen to strengthen corporate governance in 3 particular areas:
- employees’ and other stakeholders’ voice
- governance of large private companies
- executive pay
The Financial Reporting Council is currently drafting a final version of the revised UKCG Code, intending to publish it this summer with it applying to accounting periods beginning on or after 1 January 2019.
The draft revised Code contains 17 principles and is about half the size of the current UKCG Code. Some of the current Supporting Principles have been transferred to the Guidance on Board Effectiveness while others have been dropped. The effect is to highlight the Main Principles of the revised Code.
Of particular note are the following points:
- Boards will be required to provide informative narrative reporting on the fulfilment of section 172 CA 2006 duties. Boards will be required to explain precisely how they have considered each of the different stakeholder interests and how this has been reflected in financial decisions. This will be introduced through secondary legislation rather than in the revised Code.
- Boards will be required to set out in their annual accounts how they have effectively engaged with stakeholders.
- The Investor Forum will be encouraged to pro-actively facilitate dialogue between boards and investors as investors hold a key stewardship role.
- A new body will be established to develop and oversee a new code for the corporate governance of large private companies.
- The government intends to introduce secondary legislation to require quoted companies to report on pay ratios, comparing CEO remuneration to average pay in the wider company workforce, with a narrative explanation of any changes to the ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce.
- The government has rejected the idea of legislating to introduce a binding shareholder vote on executive pay awards.