The Financial Reporting Council (FRC) Publishes The Revised UK Corporate Governance Code - Corporate Governance

On 16 July 2018, the FRC published a new U.K. Corporate Governance Code (2018 Code), a revised Guidance on Board Effectiveness, and feedback on its December 2017 consultation, previously covered in our Q1 2018 newsletter. A notice published alongside the revised 2018 Code confirmed that responses to the consultation were supportive of the proposed changes.

The 2018 Code is shorter than the previous U.K. Corporate Governance Code and comprises 18 Principles and 41 Provisions. The previous supporting Principles have been removed and in some cases incorporated into the new Principles and Provisions, or moved to the revised Guidance on Board Effectiveness.

The main changes made in the 2018 Code include:

Board engagement with the workforce: insertion of a new Provision to facilitate greater board engagement with the workforce. The 2018 Code provides for certain methods of communication with the workforce, and companies will need to explain failure to use any of the methods provided for in the 2018 Code. Boards are also asked to describe how they have considered stakeholder interests when performing their duty pursuant to section 172 of the Companies Act 2006 (the duty to promote the success of the company for the primary benefit of its shareholders).
Workplace policies and practices: Boards are asked to ensure that workforce policies and practices align with company values and support its long-term sustainable success.
Succession planning: the 2018 Code emphasises the need to refresh boards and requires that the maximum length of service for the chair be nine years. The 2018 Code does acknowledge that transitional arrangements may be required and that the nine year limit may be extended from time to time, particularly where the chair was an existing NED on appointment. The 2018 Code also highlights the importance of external board evaluation.
Remuneration: Remuneration committees should take into account relevant remuneration policies when setting director remuneration in order to ensure that remuneration is proportionate and supports long term success. The 2018 Code sets more demanding criteria for remuneration policies and practices, and provides that reporting on remuneration should be clearer, setting out how it delivers company strategy, long-term success and its alignment with workforce remuneration.

Key changes in the 2018 Code which differ from what was proposed by the FRC proposed in its 2017 consultation include:

Companies may, in addition to using one of the three workforce engagement mechanisms specified in the original consultation, use alternative mechanisms provided they justify its use.
The chair need not continue to qualify as independent following appointment and previous board independence requirements were retained instead of amended.
The final 2018 Code narrows down the provisions whereby the "smaller company" exemptions have been removed, and the exemption has only been removed in relation to provisions regarding board independence and re-election of directors.

The 2018 Code will apply to accounting periods beginning on or after 1 January 2019, so the first reporting will not be until 2020 (unless companies decide to adopt all or part of the 2018 Code early).

The FRC will monitor the development of governance practices and reporting following implementation of the 2018 Code. The Financial Conduct Authority is also reviewing its Handbook and considering changes in line with the 2018 Code.

The 2018 Code can be found here: