FRC proposes shorter, sharper, new UK Corporate Governance Code

On Tuesday 5 December 2017 the Financial Reporting Council published its keenly-anticipated Consultation Paper on the Review of the UK Corporate Governance Code. The FRC has published a revised version of the UK Corporate Governance Code (the new Code), as well as proposed new Guidance on Board Effectiveness (the new Guidance), which complements and supports the new Code. In addition, the FRC is carrying out an initial consultation on the Stewardship Code.

Edis-Bates Associates plan to run a breakfast seminar on Wednesday 21 February 2018 at Schroders plc’s offices in Gresham Street, London EC2V 7QA to run through these significant changes. Speakers will include David Styles from the FRC. As always, we shall provide a comprehensive delegate pack. Full details will be sent to you in due course.

Here is a brief overview of the FRC’s consultation.

1. Key Dates: The consultation ends on 28 February 2018; the final version of the new Code is expected to be published in “early Summer 2018”; and the Code will apply to accounting periods beginning on or after 1 January 2019. So, for 31 December year-enders, the first disclosures under the new Code will come in early 2020, although some may adopt early, at least in part.

The FRC also plans to consult further on the Stewardship Code in “mid-2018”, having raised 31 questions about this code in the consultation just released.

2. Documents Published: As well as the Consultation Paper itself, there are three appendices:

• Appendix A: Revised UK Corporate Governance Code
• Appendix B: Revised Guidance on Board Effectiveness
• Appendix C: Summary of Changes from 2016 UK Corporate Governance Code.

The FRC also published a Press Notice. All of these are available on the FRC website at:

3. Format Changes: This is a very significant revision of the format of the old 2016 Code. There are a number of new items, and some deletions. Although the content of all but a handful of the old Principles and Code Provisions survive, they often appear in different places (including in the new Guidance).

The new Code is significantly shorter. The 2016 Code had 45 Principles and Supporting Principles and 55 Code Provisions, whereas the new Code has only 17 Principles and 41 Provisions – a massive 42% reduction!

There are still five sections and there are still Principles and Provisions (no longer called Code Provisions). However, the Supporting Principles have gone (most have been incorporated into the revised Principles and Provisions, but some have gone into the new Guidance, and a couple deleted).

Schedule A (which covered performance-related remuneration) has moved into the section headed ‘Remuneration’, and the table of governance disclosures in Schedule B will be updated when the Code is finalised.

4. Content Changes: There are too many changes to cover in a brief note and we have yet to analyse fully all the documents published. However, the majority of changes relate to those sections in the 2016 Code headed: ‘A. Leadership’, ‘B. Effectiveness’ and ‘E. Relations with Shareholders’. There are a few changes to ‘D. Remuneration’ and none covering ‘C. Accountability’.

The following key changes stand out.

A. New Items: There are a number of new items included in the new Code and in the new Guidance, including:

• Culture – There is a new Principle (A) and a new Provision (2) covering culture.
• Engaging with the Workforce and other Stakeholders – Three options are suggested as a mechanism for engaging with employees (a director appointed from the workforce, a formal workforce advisory panel, or a designated NED). Also a new Provision (4) requires a statement in the annual report on such engagement, plus how the board satisfies section 172 of the Companies Act (directors’ duties).
• Shareholder Opposition – A new Provision (6) beefs up the requirement to explain the company’s plans where more than 20% of votes are cast against a resolution, with a later update and annual report disclosure.
• Independence – the chairman is expected to be independent at all times, not just on appointment. And NEDs ‘should not be considered independent’ where the existing non-independence factors apply.
• Companies outside the FTSE 350 – a number of exemptions for these companies have been withdrawn, including exemption from the need to be evaluated externally.
• Diversity – a number of changes have been made to encourage boards to intensify their efforts in relation to gender, ethnic and social diversity. New Provision 23 requires increased disclosures in the annual report in this area.
• Remuneration – A requirement for any new remuneration committee chairman to have served on the committee for 12 months; a lengthening of the required vesting and holding period to five years; a widening of the remit of the committee to cover senior management pay, and overseeing remuneration and workforce policies when setting the policy for director remuneration.

B. Deletions: There have been a handful of deletions from the 2016 Code in the following areas: D&O insurance; board size; non-executive terms of office; remuneration committees positioning their companies relative to other companies; executive directors’ retention of NED fees from other companies; non-executive share option grants; NED fees set out in the Articles; approval of LTIPs; separate resolutions at AGMs; counting of proxies; and timetable for sending AGM notices to shareholders.

5. Related Documents: The FRC has included a revised Guidance on Board Effectiveness to accompany, supplement and support the new Code. The feedback from this consultation on the new Code may raise other issues for inclusion in this Guidance.

Furthermore, 31 high-level questions have been asked in the Consultation Paper about the Stewardship Code and a detailed review is promised in mid-2018.

We hope you find this brief summary helpful.


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