The rules for corporate governance in the UK have changed

New codes, new regulations – the net has been spread

There are two forms of corporate governance: corporate governance good practice, that all companies should adopt in some form, and ‘Corporate Governance’, that requires some companies to adopt formal governance practices and to report on behaviour.

In the UK the rules for the latter have changed – and the coverage has been extended.

How does it affect you?

Between September 2018 and January 2019, the application of corporate governance requirements and regulations has changed significantly, with new codes and the inclusion for the first time of large private companies and companies listed on the Alternative Investment Market (AIM).

These requirements apply to company accounting periods beginning on or after 1 January 2019.

In 2018, three new corporate governance codes were revised or introduced:

The Corporate Governance Code
The Quoted Companies Alliance Corporate Governance Code
The Wates Corporate Governance Principles for Large Private Companies

Quoted companies with a premium listing

These companies, which have traditionally had to apply formal corporate governance regulations, must apply a revised version of the UK Corporate Governance Code.

For parent companies with a premium listing, the board should ensure that there is adequate co-operation within the group to enable it to discharge its governance responsibilities under the Code effectively.

Large private/unlisted companies

Large private companies are now included under corporate governance reporting regulations; they must state which corporate governance code, if any, has been applied and how.

‘The Wates Corporate Governance Principles for Large Private Companies’ has been developed specifically for this purpose. It introduces an approach to good corporate governance that offers sufficient flexibility for a diverse range of companies to explain the application and relevance of their corporate governance arrangements without being unduly prescriptive.

AIM companies

For the first time, under AIM Rule 26, AIM-listed companies must follow and report on a recognised corporate governance code, and disclose on their website:

Details of the corporate governance code that has been applied
How the company complies with that code
Any instances where it departs from its chosen corporate governance code

Information on disclosures must be clearly presented and easily accessible from the AIM Rule 26 landing page on the company’s web site. The AIM regulation expects disclosures to be reviewed annually and the web site to include the date on which the disclosures were reviewed.

The London Stock Exchange suggests two codes for this purpose, although companies are free to make their own choice:

UK Corporate Governance Code
Quoted Companies Alliance Corporate Governance Code

The QCA Code is a pragmatic and practical corporate governance tool designed for quoted small and medium-sized enterprises in the UK.

It is a “standard-setter, not a regulator”.

Corporate Governance Reporting Regulations

The corporate governance changes, as well as new reporting requirements on employee engagement and director remuneration, are covered by the Corporate Governance (Miscellaneous Reporting) Regulations 2018, which apply to company reporting on financial years starting on or after 1 January 2019.

Definitions

In order to be able to interpret and apply the regulations, it is first necessary to understand the definitions of company types.

Small company:

annual turnover must be not more than £10.2 million.
the balance sheet total must be not more than £5.1 million.
the average number of employees must be not more than 50.

Medium company:

Meets at least two out of three of these criteria:

annual turnover must be not more than £36 million.
the balance sheet total must be not more than £18 million.
the average number of employees must be not more than 250.

Quoted company:

UK incorporated companies that are quoted on the UK Official List, the New York Stock Exchange, NASDAQ, or a recognised stock exchange in the European Economic Area.

This category does not include companies listed on the Alternative Investment Market.

Application

Companies with more than 250 UK employees:

Companies with more than 250 UK employees must summarise:

How the directors have engaged with employees
How they have had regard to employee interests and the effect of that regard
Principal decisions taken in the financial year

All quoted companies:

All quoted companies must illustrate in the directors’ remuneration policy within their directors’ remuneration report, the effect of future share price increases on executive pay outcomes.

They must summarise any discretion that has been exercised on executive remuneration outcomes reported in respect of share price appreciation or depreciation during relevant performance periods

Quoted companies with more than 250 UK employees

Larger companies must also report on the ratio of CEO’s total remuneration to the median (50^th), 25^th, 75^th percentile full-time equivalent remuneration of their UK employees, and include an explanation of the consistency with company’s wider policies on employee pay, reward and progression.

Large companies

Large companies must include a statement as part of their strategic report describing how the directors have had regard to matters in section 172(1)(a) to (f) of the Companies Act 2006.

Very large private/public unlisted companies

Very large private/public unlisted companies must state which corporate governance code was adopted and explain any departures from it.

If they did not apply a recognised code, they must explain what corporate governance was applied.

References

This article is intended to alert and inform, not to advise. The Regulations are straightforward, but detailed and it is strongly advised that you obtain and study your own copy.

Author

Richard Winfield is the International Authority on Director Development. He helps directors and boards become more effective by clarifying goals, improving communication and applying good corporate governance.