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UK corporate governance codes

Corporate governance refers to the way a company is controlled and how its values and standards are met. This article looks at the key terms of the 2018 UK Corporate Governance Code as well as touching upon other corporate governance codes established in the UK, the different types of company that they apply to and the impact they have on businesses operating in the UK.

What is the 2018 UK Corporate Governance Code?

The 2018 UK Corporate Governance Code (the ‘Code’) is a set of standards published by the Financial Reporting Council that apply to companies with a premium listing on a UK regulated market under the UK Listing Rules for financial years beginning on or after 1 January 2019.

The Listing Rules (‘LR’) are a set of regulations from the UK Listing Authority that apply to any company listed on a UK stock exchange. To be ‘listed’ a company needs to apply to the Financial Conduct Authority (‘FCA’) to be put on an official list of entities that can trade on a market and the FCA sets out the criteria that those companies have to comply with to be accepted onto the official list (the LRs are part of this criteria).

Companies have a choice under the LRs as to whether to apply for a standard or premium listing – the type of listing a company chooses will dictate the level of requirements that it has to comply with. A premium listing requires a company to comply with the listing requirements imposed by both EU legislation and additional UK provisions set out in the Listing Rules. A standard listing requires companies only to comply with obligations imposed by EU legislation. 

Recent updates to the 2018 UK Corporate Governance Code

The 2018 Code replaces the 2016 version of the Code and is a lot shorter than its previous version. The key updates for companies are:

  • Greater disclosure of the company’s values, policies, procedures, the decisions of committees and the board in the company’s annual report.
  • The requirement for the board to engage with its employee base directly – either by appointing an employee representative to the board as a director, designating a non-executive director to promote workforce engagement, setting up a workforce advisory committee or by alternative means that the board can justify to its shareholders.
  • If more than 20% of shareholders vote against a board recommendation for a resolution, the company has to consult with those shareholders, publish an update statement and then include in the company’s annual report an impact summary of the feedback on the board’s decisions.
  • More responsibilities for remuneration committees and audit committees to monitor and review workplace policies.
  • As a general rule, the company should encourage long-term shareholdings by executive directors and workforce to incentivise loyalty to the company.
  • The board should review and promote the company’s whistleblowing policies.

Aspects of your business that may be affected by the 2018 UK Corporate Governance Code

If you are a company with a premium listing on a UK regulated market for financial years beginning on or after 1 January 2019, the Code sets out the principles and key provisions with which you must comply.

Unless companies decide to comply with the provisions of the Code early, the first reporting reflecting the principles and provisions of the Code will be seen in 2020. Companies may decide to report on some of the principles and provisions sooner, such as the significant votes at shareholder meetings, and future and amended remuneration policies.

The Code is a set of guidelines (not rules), and it only sets out good practice. The Code is still subject to English law and particularly the Companies Act 2006, and it should be interpreted as an example of the directors’ duties under the Companies Act 2006. There is also some overlap with the rules set out by the FCA.

The main principles of the 2018 UK Corporate Governance Code

The table below sets out the key principles contained in the Code that will have to be applied by companies with a premium listing on a UK regulated market.

Board leadership and company purposeCompanies should have:

  • An effective and entrepreneurial board whose role is to promote the long-term success of the company, generating value for shareholders and contributing to wider society.

  • A purpose, values and strategy, and satisfy itself that these and its culture are aligned.

  • Effective controls in place to assess and manage risk.

  • Effective engagement with shareholders and stakeholders.

  • Workforce policies and practices that are consistent with the company’s values and support its long-term success.
  • Division of responsibilitiesThe chairperson of the board of the company:

  • leads the board and is responsible for its overall effectiveness in directing the company; and

  • should be objective and promote openness and debate.

  • The board should include a combination of executive and non-executive directors. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business (such as the chief executive officer). Non-executive directors should have enough time to meet their responsibilities as board members.
    Composition, succession and evaluationAppointments to the board should be:
  • made in accordance with a formal and transparent procedure,

  • part of a succession plan based on merit and objective criteria; and

  • able to demonstrate the promotion of diversity.

  • The length of service of the board as a whole should be considered and membership of the board should be regularly refreshed
    Audit, risk and internal controlThe board should make sure that the company has independent internal and external audit functions and should be able to present a fair and balanced assessment of the company’s financial position and prospects.
    The board should establish procedures to manage risk and oversee the internal control framework to enable the company to achieve its long-term strategic goals.
    RemunerationRemuneration policies and practices should:

  • promote long-term sustainable success; and

  • be aligned to company purpose and values.

  • Directors should exercise independent judgement and discretion.

    The ‘comply or explain’ model

    If you are a company that is captured by the Corporate Governance Code, you have to make a disclosure statement in your annual financial report setting out how you have applied the Code’s principles in a tangible way that shareholders can evaluate (for example, as justifications for the decisions taken by the board of directors of the company).

    By providing specific examples in your disclosure statement, a company can meaningfully comply with this obligation – if you use generic wording, there is a danger that the reporting becomes a ‘box-ticking’ exercise. Signposting and cross-referencing those parts of your annual report that refer to how the principles have been applied is also considered good practice for reporting as it makes analysing the information easier for investors.

    A company must also state whether or not it has applied the principles of the Code and complied with the provisions of the Code throughout the latest accounting period. If it has not complied, it must set out which of those principles it has not complied with (and for how long) and why.

    There may be valid reasons why a company cannot comply with the principles (either at all, or for a limited period of time), such as circumstances related to the size of the company and its ownership structure. These should be clearly set out in the disclosure statement.

    The key provisions of the 2018 UK Corporate Governance Code

    The table below sets out the key provisions contained in the Code that should be applied by companies with a premium listing on a UK regulated market.

    Key provisionsDetails
    Board leadership and company purpose
  • Disclosure in annual report of the company’s financial model and business risks.

  • Board to assess and monitor culture.

  • Regular shareholder engagement – the chair of the board has to make sure the board understands its shareholders’ views.

  • If there is shareholder opposition of more than 20% against a board recommendation for a resolution, the company has to consult with shareholders and, within six months of the vote, publish an update on the views received and actions taken, and the annual report should include a final summary of the impact of the feedback on the board’s decisions.

  • Disclosure in annual report of how the company engages with its workforce and other stakeholders.

  • A director should be appointed to the board from the workforce, or a formal workforce advisory panel should be set up or a non-executive director should be designated to deal with engagement. If the board has not chosen one of these methods, it should explain any alternative arrangements and why these are considered effective.

  • The company should have adequate whistleblowing requirements.

  • Board should identify and manage conflicts of interest.

  • Unresolved directors’ concerns on the company’s operation or management should be written in the management meeting minutes.
  • Division of responsibilities
  • Independent chairperson.

  • No one person to be chairperson and CEO.

  • CEO not to become chair unless advance shareholder consultation.

  • Disclosure in annual report to identify the extent to which the non-executive directors are independent.

  • The majority of the board (including the chairperson) should be independent non-executive directors and the company should have a senior non-executive director to appraise the chairperson’s performance.

  • Non-executive directors should be involved in appointing and removing executive directors.

  • Responsibilities of the chairperson, CEO, senior independent director and board committees to be clear, written, agreed and publicly available.

  • Disclosure in annual report of the number of board and committee meetings including individual director attendance.

  • Directors must make sure that they will have enough time to fulfill their board responsibilities when they are appointed. Full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or another similar role.

  • Disclosure in annual report of the reasons for significant appointments to the company.

  • Prior board approval required for external executive appointments.

  • Company secretary to advise the whole board, who should collectively be responsible for the company secretary’s appointment or removal.
  • Composition, succession and evaluation
  • Nomination committee to be put in place to manage appointments to the company, particularly board and senior management positions, and to lead the company’s succession plans.

  • All directors have to be subject to annual re-election.

  • Chairperson to be appointed for no more than nine years (subject to a limited extension to facilitate succession planning and diversity of board).

  • External resources (such as search companies or open advertising) to be used to recruit chairperson and non-executive directors and reported on in annual report.

  • Performance of the board to be evaluated on a yearly basis and the chairperson is responsible for acting on results of the evaluation.

  • Disclosure in annual report of recruitment and succession planning policies and procedures in relation to strategic plans of the company.
  • Audit, risk and internal control
  • Audit committee to be set up with a minimum of three independent non-executive directors (or two in the case of smaller companies) with relevant financial experience. The chairperson is not allowed to be a member.

  • Audit committee to be responsible for monitoring and integrity of financial statements, annual report, business model and strategy, reviewing internal controls, implementing risk management and audit policies, appointing an external auditor and managing external audit process.

  • Disclosure in annual report of audit committee and its work, including any risks or issues identified and addressed.

  • Directors to issue a responsibility statement for annual report and company accounts.

  • Disclosure in annual report of board’s assessment and management of emerging and key risks for the company.

  • Disclosure in annual report of risk management and internal control systems.

  • Directors to issue a statement annually and half-yearly stating whether the company should adopt a going concern basis of accounting when preparing the accounts.

  • Directors to issue a statement in the annual report as to the company’s prospects.
  • Remuneration
  • A remuneration committee of at least three independent non-executive directors (or two for smaller companies) should be established – the chairperson of the board can only be a member if they are an independent appointment by the company.

  • Chairperson of the remuneration committee to have served on a remuneration committee for at least 12 months.

  • Remuneration committee should decide the remuneration policy for executive directors and senior management and review the wider workforce remuneration policies.

  • Non-executive director remuneration determined in accordance with company’s articles of association (the rulebook that sets out how the company will be run) or by the board and to be reflect of the time commitments and responsibilities of those directors.

  • No executive director to receive share options or other performance-related elements.

  • Disclosure in annual report of any remuneration consultants appointed by the remuneration committee.

  • Company should encourage long-term shareholdings by executive directors and share award incentive schemes giving workforce actual shares should be released for sale on a phased basis so that not all shares are awarded at the same time, promoting continuous performance over the long-term.

  • The total period from when a worker is awarded a right to shares and the length of time that the worker must hold those shares for has to be longer than five years.

  • Remuneration committee to develop policy on post-employment shareholding requirements.

  • Company must have discretion to recover or withhold shares or sums but should specify where it can do this.

  • Only the basic salary of employees should be pensionable.

  • Notice or contract periods should be one year or less.

  • Disclosure in annual report of the remuneration committee’s work.
  • Corporate governance and private companies

    A recent major reform in the UK gave large private companies their own corporate governance code. The Companies (Miscellaneous Reporting) Regulations 2018 (‘Regulations’) were introduced on 17 July 2018 and will apply in relation to the financial years of companies beginning on or after 1 January 2019.

    It is expected that the first reporting will therefore be seen in 2020, apart from where a company introduces a new remuneration policy on or after 1 January 2019, in which case the company is required to disclose the impact of share price increases on executive pay in that report.

    In summary, if you are a large private company, you should take notice because the Regulations impose additional reporting requirements on large private companies on top of the ones that are already set out in the Companies Act 2006:

    • Large companies have to include a statement in their strategic report on how the directors have considered the duties that they have under section 172 of the Companies Act 2006 (the duty to promote the success of the company) in their engagement with suppliers and customers to promote the success of the company.
    • If you are a company with, in one financial year, more than 2,000 employees and/or have a turnover of more than £200 million and a balance sheet total of more than £2 billion, you must include a corporate governance statement in your directors’ report for that year stating which corporate governance code the company is following and provide details on the extent to which is it complied with.
    • The chairperson of the company’s remuneration committee has to make a statement including a summary of any discretion exercised by the committee in deciding directors’ remuneration.
    • Companies have to report on how much of a director’s remuneration is because of an increase in the share price of the company.
    • Companies quoted on the UK Official List, the New York Stock Exchange, NASDAQ or another recognised stock exchange in the European Economic Area with more than 250 UK employees have to report certain information comparing the remuneration of the CEO with average staff pay.
    • Companies with more than 250 UK employees (if the company is a parent company it is the number of employees in the group and not just the company itself that is used) are required to include a statement in their directors’ report on how the directors have engaged with employees and what effects that has had on the decision-making of the company in the relevant financial year.
    • Companies have to include specific examples of the performance measures used in their remuneration policy in relation to the maximum remuneration of directors.

    The statements need to be accessible on the company’s website.

    To supplement the Regulations, a voluntary corporate governance code called The Wates Corporate Governance Principles for Large Private Companies (or ‘the Wates Principles’) was introduced which sets out six key principles for good corporate governance of large UK private companies. They apply to UK-incorporated public and private companies that either: (a) have more than 2,000 employees globally; or (b) both turnover of more than £200 million and total assets of more than £2 billion globally.

    If your company decides to adopt the Wates Principles, you have to either report how the company complies with the principles or explain the reasons why the company has not complied with them and what alternative governance measures it has in place. The Wates Principles are:

    • Purpose – the board has to promote a company’s purpose and values and make sure that the company’s culture aligns with those values and strategy.
    • Composition – the board has to be made up of competent people with a range of skills, backgrounds, experience and knowledge. The chairperson has to promote productive debate and the size of the board should be appropriate and relative to the size of the company.
    • Responsibilities – the board must know how it is accountable and how it should perform and behave. The board’s policies and procedures should enable directors to effectively make decisions and act independently.
    • Opportunity and risk – the board should promote the long-term success of the company and this should be reflected in the value of the company. The board should monitor how risks are identified and managed.
    • Remuneration – the board should make sure that the company’s executive remuneration policy is compatible with the long-term success of a company and the average staff pay in the company.
    • Stakeholders – the board should look to engage the company’s key stakeholders, including the workforce, when taking decisions. The board has a responsibility to build good stakeholder relationships to further the company’s purpose and values. 

    Corporate governance code and unlisted companies

    The Code is aimed at listed rather than unlisted companies. Directors of unlisted companies should, however, also implement a solid corporate governance model to ensure that they comply with their statutory duties. There are a number of corporate governance codes in addition to those detailed in this article that set out ‘best practices’ that a company can follow, such as the Corporate Governance Guidance and Principles for Unlisted Companies in the UK, published by the Institute of Directors.

    Corporate governance and professional services companies

    Professional services companies in the UK are subject to the basic statutory governance obligations under the Companies Act 2006 which provides a ready-made framework of corporate governance. Professional services companies that are regulated and that operate in the financial services sector are often referred to as firms or professional services firms (or ‘PSFs’). They are monitored by the Financial Reporting Council and the FCA, among other EU bodies. PSFs have additional reporting requirements imposed by various regulatory regimes.

    About our expert

    Jas Bhogal

    Jas Bhogal

    Corporate Partner
    Jas qualified as a solicitor in 2006. She has 12 years' experience working almost exclusively with start up companies, high growth potential SMEs, along with venture capitalists, other investment platforms and individual and corporate investors.

    What next?

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