FRC to extend corporate governance code beyond FTSE 350

The Financial Reporting Council (FRC) is planning to overhaul the UK corporate governance code with a greater focus on stakeholders, integrity and corporate culture, as well as extending the rules to include large private companies outside the FTSE 350

The consultation includes specific changes relating to engagement with the workforce and also executive remuneration, both of which have been the subject of considerable public debate.

As part of the consultation, the FRC wants to extend the Code to all companies below the FTSE 350 effectively removing the exemptions in the current code, on the grounds that good governance should extend to smaller companies as well as the largest.

This would mark a major change for companies outside the FTSE 350 as even among these listed companies a third are not fully compliant with the current Code. Grant Thornton’s annual review of FSTE 350 companies found that 66% declare full compliance, while 95% comply with all but one or two Code provisions.

The current Code has different requirements for FTSE 350 and smaller companies regarding the minimum number of independent directors and minimum requirements for board and committee composition.

The FRC states: ‘Although a company might be outside the FTSE 350 it may be of a similar size and structure.

‘Equally, these companies may also have significant impacts on their workforce and wider stakeholders and as such they should be subject to the same levels of corporate governance.

‘Nevertheless, we appreciate that recommending an independent board evaluation for these companies has the potential for disproportionate cost and other burdens and we would welcome views about the effect of this proposal.’

The consultation considers the impact of the removal of the exemption for companies below the FTSE 350 to have an independent board evaluation every three years, asking for stakeholder feedback on whether this would provide the right level of oversight.

There are also changes to the requirements for the composition of the board, requiring that ‘independent non-executive directors, including the chair, should constitute the majority of the board,’ and limiting independent directors and the board chair to a nine-year term.

Another change would see companies forced to explain what actions they intend to take if more than 20% of shareholder votes are cast against a resolution at AGMs. They would also be required, no later than six months after the vote, to publish an update before the final summary is provided in the next annual report.

The supporting principles from the current code have been removed and, in some cases, have been incorporated into the new principles or provisions, while others have been moved to the guidance on board effectiveness. 

Under the proposals, companies will have to instigate a method of consulting with their employees; the recommended minimum vesting and post-vesting holding periods for executive share awards would be extended from three to five years; chairs of remuneration committees would be required to have at least 12 months’ previous experience; and there are new actions companies should take when they encounter significant shareholder opposition to executive pay policies and awards.

On diversity, there will be no extension of mandatory reporting requirements although nomination committees will have to explain what action they have taken to increase diversity across the senior management pipeline, with the FRC seeking views on how companies can improve the transparency of reporting on gender diversity at senior manager level.

Employee involvement

The consultation outlines the government’s three options for ensuring the employee voice is heard in the boardroom: a director appointed from the workforce, a formal workforce advisory council, or a designated non-executive director. However, it does not suggest it will mandate a particular approach on the grounds that companies will require the flexibility to choose the right mechanism or combination of mechanisms for them.

The revised code has five sections:

  • leadership and purpose;
  • division of responsibilities;
  • composition, succession and evaluation;
  • audit, risk and internal control; and
  • remuneration.

Most of the changes relate to the first three sections of the current code, and the rules on audit, risk and internal control, remain largely unchanged.

The consultation includes some high-level questions about the future direction of the UK stewardship code, with the FRC saying it will consult on specific changes to this next year.

Sir Win Bischoff, chairman of the FRC, said: ‘We have engaged with many stakeholders and incorporated suggestions from the government’s green paper on corporate governance reforms, to produce a code which is shorter and sharper, and fit for purpose.

‘A principle promoting the importance of the intrinsic value of corporate culture is a new addition to the code. Building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company.

‘Engaging with and contributing to wider society must not been seen as a tick-box exercise but imperative to building confidence among stakeholders and in turn the long-term success of a company.’

The deadline for comments is 28 February 2018.

The FRC says it aims to publish a final version of the code by early Summer 2018, to apply to accounting periods beginning on or after 1 January 2019.

FRC Proposed Revisions to the UK Corporate Governance Code issued 5 December 2017

Report by Pat Sweet, Sara White

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