On 17 September the Financial Reporting Council (FRC) issued the latest version of the UK Corporate Governance Code (the Code).
Who does the FRC Code apply to?
The FRC Code applies to all publically listed companies, which must report on whether they have complied with the code, and provide an explanation for any areas in which they have not shown compliance.
If you are not a publicly listed company, it’s still worth having a look at the changes made to the FRC Code. The UK leads the world in corporate governance, and any best practice identified is likely to filter its way down to all boardrooms eventually. This blog therefore looks at the changes made to the code and assesses how they might be useful for SMEs, not-for-profit organisations, arms-length-bodies and so on.
The element which caused the greatest controversy during the consultation phase was undoubtedly the requirement that boards make an assessment on the viability of the business at least 12 months into the future. The FRC is aiming to make UK companies a better bet for investors, and sees directors expressing belief in the future of the company as a key way of achieving this.
Boards of directors will have to state that they have robustly assessed the key business risks, and taken steps to manage or mitigate these. Business risks must form part of the standard agenda of any board. Failure to properly manage risk harms the bottom line, damages company reputation and puts off potential funders and investors.
The revised FRC Code calls for boards to monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report. This is great guidance for any company. If you asked your board “what are the key risks facing the company?” would everyone answer in the same way? They should!
Under the revised FRC Code, boards are required to ensure that executive remuneration is designed to promote the long-term success of the company. This will also have to be demonstrated more clearly to shareholders. Companies should consider aligning compensation with the sustained creation of value as part of its remuneration policy, and be more open and transparent about what the remuneration policy is. This will greatly help key stakeholders see and understand the rationale for executive pay.
Companies should explain when publishing general meeting results how they intend to engage with shareholders when a significant percentage of them have voted against any resolution. Shareholder engagement is rapidly rising on the board agenda. Do you know who invests in your company and why? If not, find out.
The FRC has also highlighted the importance of the board’s role in establishing the ‘tone from the top’ of the company in terms of its culture and values. The directors should lead by example in order to encourage good behaviours throughout the organisation. Time and time again we are shown that even the most robust systems and procedures can be breached if behaviours are not consistently in line with values. Boards must exercise good leadership and ethical behaviour if they want to see ethical culture at all levels of the organisation.
The FRC recognises that key to the effective functioning of any board is a dialogue which is both constructive and challenging. They view having sufficient diversity on the board as a key factor in getting the right mix of challenge and support. They see diversity as much about a difference of approach and experience as it is about gender and race. The FRC Code is due to be updated again in 2016 and a review of board succession planning which will take diversity into account is likely to be included in future revisions.
In this respect, non-profit boards lead in terms of having more diverse boards. Our research of boards in Northern Ireland showed 32% female representation in the charity sector, but just 12% representation in the private sector. It seems that sometimes the publicly listed sector can learn from the non-profit sector too!
Some useful reading –
- The Oxford Handbook of Corporate Governance
- Corporate Governance: Principles, Policies, and Practices
- Corporate Governance and Accountability
- Corporate Governance: Law, Regulation and Theory
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