Jessica Fino 5 Dec 2017 11:53am

FRC unveils “shorter and sharper” corporate governance code

The Financial Reporting Council (FRC) has revised its corporate governance code to a “shorter and sharper” version reflecting the changing business environment

From now on, companies will have to take into account the views of their workforce when making decisions and set out tougher restrictions over executive pay.

In a consultation published on Monday, the watchdog said that the revised code sets out good practice through which companies’ boards can establish their purpose, strategy and values and ensure these are aligned with their culture at the same time as improving trust among stakeholders.

It highlighted the need to “gather views of the workforce” when making decisions and to ensure that boards promote “diversity of gender, social and ethnic backgrounds, cognitive and personal strengths” in their boards.

Companies are also being asked to make sure appointments and succession plans are based on merit and objective criteria in order to avoid groupthink.

Moreover, they are required to be more specific about their consultation methods when encountering significant shareholder opposition, including those relating to executive pay policies and awards.

They are also encouraged to give remuneration committees broader responsibility and discretion for overseeing how remuneration and workforce policies align with strategic objectives.

Additionally, the consultation proposed that the time executives have to wait until they are able to receive share awards be extended from three to five years. It added that chairs of remuneration committees should have at least 12 months’ previous experience.

The FRC also suggests a time limit for independence by stating that, where an individual has served on the board for more than nine years, they are no longer considered independent, including where an independent non-executive goes on to be the chair.

The consultation included the government’s three options for ensuring employees are heard in the boardroom, including a director appointed from the workforce, a formal workforce advisory council or a designated non-executive director.

Sir Win Bischoff, chairman of the FRC, said, “The UK is globally renowned for its corporate governance framework, which is underpinned by the UK corporate governance code.

“At this critical time and as the country approaches Brexit, a revised code will be essential to restoring trust in business, attracting investment and ensuring the long-term success of companies for members and wider society.”

Sir Bischoff added that building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company.

Robert Hodgkinson executive director, technical at ICAEW, said the changes were meant to achieve two things; “To simplify the code and to change it into something that meets the wider expectations of society.

“In order to restore trust in business we need to set out what constitutes good business practice – and ensure individuals can be held to account where they fall short – and enable everyone to engage with that process,” he said.

“This should not be something that is judged only by auditors, lawyers or directors. So over the next three months ICAEW will be putting these proposals to the test to see if it really is meeting these expectations and is simple."

However, while PwC’s global rewards partner Tom Gosling welcomed the code, he also warned that it would demand a significant change in mindset for some companies that habitually report against the current code provisions as a checklist.

“While this will be good for insightful reporting in the long-term, there will be significant transition challenges.

“The job of chairing a remuneration committee just got a lot harder. It’s right that the code emphasises the board’s role in overseeing pay and conditions across the workforce. However, this needs to be implemented in terms of principles and governance oversight rather than an expansion to the committee’s decision-making remit."

Simon Lowe, partner and chair of the Governance Institute at Grant Thornton agreed, noting that regardless of how the code may change, it was individual businesses taking ownership of their governance practices and creating a strong culture which percolates from the top that would really make a difference.

Nicky Morgan, chair of the Treasury Committee, praised the code for its promotion of diversity. “As the report states, ‘there is clear evidence that greater female representation in the boardroom and senior management has a positive impact on performance’,” she said.

Morgan added that the committee would be considering the reforms to the code as part of its inquiry into Women in Finance, and would discuss them in further detail during an evidence session with the FRC in the new year.

The changes are now up for consultation, which also includes questions to inform the future direction of the UK Stewardship Code. The consultation phase runs until 28 February and the conclusions will be released in late 2018.