The long-awaited final version of the UK Corporate Governance Code was published on 16 July, 2018, reflecting the results of the consultation carried out by the FRC on a draft of the new Code (the “draft Code”) which closed in February. Along with the final version of the new Code, the FRC has also published a final version of its new Guidance on Board Effectiveness and a Feedback Statement on the consultation (in which NED on Board participated), with an Annex showing changes made to the draft Code following the consultation. All of these documents can be found at https://www.frc.org.uk/news/july-2018/a-uk-corporate-governance-code-that-is-fit-for-the.
Since the draft Code was published last December, the Carillion debacle has occurred and become the subject of a report published in Mayby the House of Commons Work and Pensions and BEIS Committees. (See https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/carillion-report-published-17-19/ for details.) Scathing criticisms were of course made of the Carillion board, and of others (including the FRC), in that report, and attention drawn to numerous governance failings within the company; but the Carillion affair has not resulted in major changes being made to the overall approach adopted in the draft Code – and while perhaps a surprisingly large number of changes have been made to the detail of the draft Code, none of these appear to have been driven directly by Carillion.
As in the draft Code, the emphasis in the final version of the new Codeis on “qualitative” governance, not structures and procedures. Consideration of the FRC’s potential role as an enforcer of the Code – at present enforcement being essentially a matter for shareholders – is left for another day. But a review of the UK Stewardship Code containing a code of behaviour for institutional shareholders and others which may impact on shareholder activism in badly run companies (including Carillion) is promised for later this year. This UK Stewardship Code has not been amended since 2012 – a long time in governance – and a review of the ways in which the Code may encourage investors usefully to involve themselves in the affairs of the companies in which they invest may be thought long overdue.
For the time being, companies subject to the UK Corporate Governance Code – premium listed companies and other listed and AIM companies which choose to follow the Code in preference to other governance codes –eg. the QCA Code (whose latest version was published in April this year) – are left to mull over for themselves (with the help of their advisers) how they are going to meet Code obligations with respect to financial years commencing on or after 1st January 2019. This will impact particularly on future reporting obligations, and especially for larger companies which are subject not only to the Code but also to the (partly overlapping) new rules on reporting (on directors’ duties and other matters) set out in the new Companies (Miscellaneous Reporting) Regulations 2018, published at https://www.legislation.gov.uk/ukdsi/2018/9780111170298/contents .
New reporting obligations – most notably in relation to the ways in which directors have carried out their duties with regard to stakeholders under s.172 of the Companies Act 2006, which arise both under the new Code (Provision 5) and under the Regulations noted above – reflect the pressures behind the Governance initiatives for reform for business to earn the trust of other parts of the community, and therefore to increase transparency. y
The new UK Corporate Governance Code retains the previous distinction between Principles, which companies must apply (as set out in their annual corporate governance statement) and more detailed Provisions, with which companies should either comply – or explain why they have not. Nothing in the new Code displaces these previous arrangements for companies following the Code, but there is new encouragement for companies to find their own way to address Provisions, and “explain” any non-compliance, rather than simply to comply with them on a “tick box” approach.
The final version of the new Code follows the “shorter and sharper” approach adopted in the draft Code, with significant reductions in the number of both Principles and Provisions as compared with the previous (2016) version of the Code, and with various Provisions in the former Code now transferred to the Guidance on Board Effectiveness.
We shall no doubt return to various topics and questions raised by the new Code as thoughts on its terms and practice relating to it develop.
Part II of this blog article will focus on some selected points where the draft Code has been altered following the FRC consultation.
About the author of this article
Mark Cardale is Director of Sanctuary Governance (Development and Training) Ltd. He writes and lectures extensively on corporate governance and related topics, and is the current editor of A Practical Guide to Corporate Governance, published by Sweet & Maxwell in 2014.
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