Caroline Biebuyck 4 May 2018 03:40pm

Cracking the corporate governance code

Do the proposed amendments to the corporate governance code deliver the change that is needed? Caroline Biebuyck reports
Caption: Illustration by Studio Takuma

The Financial Reporting Council (FRC) published its 2018/21 strategy at the end of March following a public consultation. A priority for the coming year is a comprehensive update of the UK’s Corporate Governance Code (suggested changes were published in a consultation paper late last year) and the investor Stewardship Code.

The revised corporate governance code is shorter and sharper than the current version, while incorporating the findings of recent reviews on areas such as culture and board diversity. More fundamentally, the focus shifts to how listed companies generate and preserve value over the long term, establishing a purpose, strategy and values, and making sure culture aligns with these.

Long-term stakeholder view

Companies should not underestimate the work required to implement the new code, says Anthony Carey, Mazars’ head of UK board practice. “If businesses are really to focus on long-term success, they need to take a hard look at all the aspects of how they are run, such as from investment in projects to linking remuneration to long-term performance and to the key performance indicators by which the business is measured. And while boards are conscious of how important it is they take a major interest in corporate culture, how they are tackling this is very much a work in progress.”

The FRC wants companies to focus on the principles underlying the code rather than its specific provisions, encouraging boards to think more fundamentally about their role and how they fulfil it. The feeling is that focusing on the code’s provisions has, over time, encouraged a checklist mentality by companies and by proxy agencies. “It’s almost become comply or else, rather than comply or explain,” says Mala Shah-Coulon, EY partner.

The theme of stakeholder engagement runs through the consultation. The proposals include asking boards to gather the views of their workforce and make sure there are appropriate mechanisms for getting these views heard in the boardroom. PwC partner Tom Gosling is pleased that the idea of mandating an employee director, suggested by the prime minister then later scrapped, did not take hold. “This isn’t about tokenism. This is about meaningful engagement with the workforce in order to get their views into board discussions,” he says. “Great companies already engage with employees, but there will be more emphasis in doing this in a structured and systematic way.”

Shah-Coulon is concerned that the principle of engaging with wider stakeholders in the code could be missed by the focus that has been given to employee consultation. “The wider issue of holistic engagement is important, not just in fulfilling responsibilities under the code but in running the business for its long-term success. Over time, you would hope there is no divergence between what is good and appropriate for shareholders and what works for all stakeholders.”

Board independence

One specific in the spotlight is the proposal that board chairs should step down after they have been on the board for nine years (this period includes previous non-executive directorships on the board).

Jocelyn Brown, senior investment manager in RPMI Railpen’s sustainable ownership team, says that while the pension scheme welcomes the proposed changes, it expects a “proportionate” implementation. “Succession planning is a multi-year process. Setting out this expectation now allows boards to begin having the difficult discussions. Boards need to balance the need to take notice of challenges and fresh thinking with institutional memory; there may be cases where a chairman needs to stay longer in post to oversee the orderly rotation of other directors.”

That potential lack of industry-specific knowledge of business cycles on the board troubles Mark Goyder, founder of Tomorrow’s Company, who believes there is room for more judgement about how long it is appropriate for the chairman to serve on the board. “A former financial services company chairman said to me, ‘I can read the situation as I’ve seen these cycles and bubbles before’. People like that cannot be readily dismissed. Also, consider family business models, where you get that long-term objective as a result of family members being part of an oversight board. That perspective has an impact on many things, not least long-term investment – something that UK industry has been lacking for some time.”

EY’s head of corporate governance, Ken Williamson, points out that the new provision would not stop experienced non-executives from moving to other companies’ boards. “Many of our contacts would prefer the flexibility to stay on a board for longer. And it’s always good to have someone on the board who went through the last business or financial cycle. But there’s a trade-off. As you spend more time on a board, there’s a natural threat to your independence and objectivity. There has to be a compromise, and that could mean non-executives in line for the chair role moving to take that role on in another company.”

He is more concerned about the proposal’s removal of the need to challenge the independence of non-executive directors after six years. Many listed companies currently rotate their non-executives after six years as best practice, he says. “Now the only definitive time period referred to is nine years. Companies might interpret this as not having to need to worry about independence until the nine years are up, instead of the existing six. That would be a retrograde step – the risk in respect of independence increases over time.”


The FRC has started to think about changes to the investor Stewardship Code, including how to incorporate the Shareholder Rights Directive. Full consultation about the stewardship code isn’t expected until later this year, but Elizabeth Richards, ICAEW’s head of corporate governance, is concerned the FRC’s initial questions hint at overreach. “Investors’ internal governance structures are a matter for their regulators not the FRC. The central objective of the stewardship code, their oversight of investee companies, mustn’t be diluted.”

However, Brown is glad to see the consultation acknowledging investors’ greater engagement in a broader range of topics, including culture. The bigger question, she says, is how the stewardship code will develop. “It would help if the stewardship code was more explicit about the expectations of those investing directly or indirectly and those advising them.”

More work needs to be done around the engagement between investors and companies, covering the information and dialogue and how investors discharge their stewardship responsibilities, says Gosling. “There is a demand deficit in long-term stewardship through the investment chain,” he says. “Some of this goes back to asset owners who aren’t demanding that investment companies take
a long-term interest. Revisions to the stewardship code provide an opportunity around how asset owners demand stewardship responsibilities of asset managers.”

“I’d love to be in a place where people realise, through new funds, that they are part owners of British listed companies and want to hold the directors to account on various things,” says Goyder. “To get there requires real institutional change and the kind of investment institutions that take the debate from the wholesale to the retail dimension.”

The long view

Can the codes help bring about the institutional changes, at the corporate and investor level, which are needed? “We currently think in silos: companies, investors or employees, and have created a system in which each of these silos are encouraged to think separately from the other,” says Norman Pickavance, Tomorrow’s Company’s CEO. “But they all share a common goal: improving progress and prosperity for the good of the whole. Only when we have a circular conversation will we achieve a breakthrough in our thinking.”

Public trust is a cornerstone of this exercise. That’s not something the FRC has much control over, says Richards. “However much the FRC tries to change the codes from a tick-box exercise to a more philosophical exercise, ultimately rebuilding this is a hearts and minds problem and a code is never going to get to the root of this,” she says.

ICAEW’s Connect and Reflect initiative aims to bridge that gap. Its reports will range from excessive pay to how employee directors add value. “Our titles are provocative and encourage companies to take a fresh view of how they are operating and think about whether they can justify how they operate to the public,” says Richards.

Details of the FRC consultation, which is now closed, can be found at For details of ICAEW’s Connect and Reflect project, click here