Collaboration, Culture, & Confidence the new UK Corporate Governance Code is here!

After months of consultation, the Financial Reporting Council (FRC) has published the new UK Corporate Governance Code applicable for accounting periods beginning on or after 1 January 2019. Whilst the Code is applicable to all companies with a premium listing, as with all areas of governance, its principles and provisions make a good governance benchmark that all companies wishing to optimize profits, success and ensure a happy and engaged workforce should aspire to.

The Code is shorter, easier to follow and many of the themes and provisions of the previous Code are still present, but at a time when public confidence in business and companies is at an historic low, there is an increased focus on collaboration with stakeholders, improving culture, improving board diversity and succession planning; and ensuring that wider workforce pay is considered when setting director remuneration. All with the sincere hope that public confidence in business can be restored.

Collaboration

Amazingly, the word “Stakeholder” appears only once in the previous version of the Code (published April 2016) and only in the Preface rather than forming any part of the Principles. The word “staff” only appears in relation to needing to ensure a whistleblowing procedure is in place and providing directors access to them. There is no mention of the “workforce” or “employee’ except for in relation to determining the independence of directors.

It is here that perhaps the biggest shift has occurred – the introduction to the new Code states that directors should “build and maintain successful relationships with a wide range of stakeholders”. Whilst the need to engage effectively with shareholders has been a key element of the Code for many years, this has now been extended to include wider stakeholders (and in particular the “Workforce”) and is backed up with an entire principle dedicated to not only engagement with these groups but the active encouragement of participation: The Code states that “in order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.”

The Workforce as a Key Stakeholder

In order to satisfy the requirement to engage with the workforce the Code actually stipulates methods which should be used, including appointing a director from the workforce itself, setting up a formal workforce advisory panel and/or ensuring there is a designated non-executive director responsible for engagement with the workforce. Companies could use alternative methods but if they do so they will need to explain how such a method is effective.

Which method is used and how its effectiveness is ensured, will require some serious consideration by companies. No tick-box exercise here…the workforce has a strong voice and it is inevitable that its collective voice will be heard if employees don’t think that the company is adequately representing their views or considering their interests.

Culture

In the preface of the 2016 Code it talked of the Board establishing the culture of the company, setting the ‘tone from the top’ and leading by example. The new Code significantly raises the status of this key Board function. It now forms part of the key principles and is supported by provisions. Not only should the Board set the culture and ensure alignment with its values but the Code now states that the Board must assess and monitor the culture and take action where it is not satisfied that practices or behaviour are aligned with the company’s vision, values and strategy by seeking assurance from management that corrective action is taken.The provisions also require the annual report to contain an explanation about the Company’s approach to investing in and rewarding its workforce, acknowledging that training, benefits and remuneration play a key part to ensuring a positive workplace culture.Boards should now be considering how best to deliver on these requirements and ensure that regular consideration of culture issues are on its forward plans and agendas.

Succession Planning – an increased role for Nomination Committees

There were mentions of succession planning in the previous code, but now it has taken on a new importance with the Code emphasising the need to refresh Boards and undertake succession planning always with a view of promoting diversity in all its forms. Under the new provisions, nomination committees should “ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession”. Within the annual report, companies should, where explaining the work of the nominations committee, include details on the companies’ approach to succession planning and how it supports “developing a diverse pipeline”. With details of succession planning needing to be published, Companies need to ensure that their plans for both senior management and the Board are clear, effective and promote diversity whilst ensuring that appointments and succession are objective and based on merit.

Executive Remuneration

High executive remuneration continues to hit the headlines, with The Telegraph reporting last year that despite the average FTSE 100 CEP salary falling 17%, it would still take a staggering “160 years for the average worker to earn” the same. Whilst average executive pay looks set to continue to fall as shareholders and other stakeholders express their concern at the high remuneration packages, especially where performance has been below par, the Code now emphasises that workforce remuneration and related policies should be taken into account when setting director remuneration. This is quite a big shift in approach and will hopefully result in fairer and more justified remuneration being set at the highest level of organisations.

Interestingly, following more negative headlines concerning the high value pensions received by CEOs, the new Code emphasises that pension contribution rates for executive directors should also be aligned with those available to the workforce and further that changes in pensionable remuneration or contribution rates should be “carefully considered when compared to workforce arrangements”. This is the first time that the Code has placed a link between executive directors’ pay and that of the wider workforce and will hopefully be a positive step towards fairer remuneration practices.

For assistance with compliance with the new code, succession planning, Remuneration or Nomination Committee support, or any other Governance needs, please contact us here to find out more.

Sources: FCA Press Release:  https://www.frc.org.uk/news/july-2018/a-uk-corporate-governance-code-that-is-fit-for-the; The Telegraph, 03.03.2017: https://www.telegraph.co.uk/business/2017/08/02/average-ftse-100-ceo-salary-fell-17pc-last-year-still-takes/