UK Corporate Governance Code
The UK Corporate Governance Code (formerly the Combined Code on Corporate Governance) (“the Code”) prescribes expected actions and behaviour of the boad directors which includes setting the tone on values throughout the company. The Code sets out standards of good practice in relation to issues such as leadership, effectiveness, accountability, remuneration, and relations with shareholders.
The Code was most recently amended in September 2014, with these amendments being effective for periods commencing on or after 1 October 2014.
Leadership: The Code provisions recommend regular board meetings and distinct and separate roles for the chairman and chief executive. It advocates for non-executives to apply scepticism in order to challenge and scrutinise management effectively.
Effectiveness: The size, skills, experience and balance of non-executive and executives directors should be adequate to deal with the complexity of the business and its industry. Non-executive directors shoud be independent. Board appointment, evaluation and re-selection procedures should be transparent. All directors, especially non-executive, ought to demonstrate commitment whilst getting support from management to develop an understanding of the business and its industry.
Accountability: The board should present a fair, balanced and understandable assessment of the company’s position and prospects in its annual report. The directors should state in annual and half-yearly financial statements whether they consider it appropriate to adopt the going concern basis of accounting in preparing them, and identify any material uncertainties to the company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements. The narrative reporting at the front half of the annual report should be consistent with the financial statements and corresponding notes at the back. The board is responsible for ensuring sound risk management and internal control systems are in place whilst also maintaining an appropriate relationship with the company’s auditors. The audit committee, a sub-committee of the board will look after financial reporting matters and the workings of both internal and external auditors. At least one member of the audit committee must be a qualified accountant.
The September 2014 amendments introduce a new requirement that, in addition to a statement that the business is a going concern, the directors will also have to make another statement indicating that they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over an assessed period, the length of which must also be disclosed. In addition, the directors' responsibility for risk management is enhanced to include making a robust assessment of the principal risks facing the company and a specific responsibility for monitoring the company's risk management and internal control systems.
Remuneration: The package should be consistent with the calibre of director that the company is wishing to attract, whilst not excessive. A director should not be involved in deciding his or her own remuneration and all arrangements should be transparent, following set procedures. The remuneration should be set against individual and corporate performance with a focus on enhancing long term performance of the company which is important to stem against rapid increases which of directors’ reumeration are not line with the company’s results.
The September 2014 amendments emphasise that the overall objective of the remuneration policy should be to deliver long-term benefit to the company, supported by a requirement to avoid paying more than necessary. A specific reference to recovering or withholding performance-related payments, also know as 'clawback', is also included.
Relations with shareholders: All directors should be fully aware of shareholders’ concerns and opinions even though the chief executive and finance director will have more direct interaction with major shareholders. The annual general meeting is an effective way of maintaining contact with shareholders and the directors should encourage shareholder participation.
The September 2014 amendments include a new provision requiring companies to explain what action they intend to take in response to situations where a significant proportion of votes have been cast against a resolution at any general meeting. This is likely to be particularly relevant to resolutions on directors' remuneration.
Complying with the Code does not by itself guarantee good governance. Directors have to ensure the unique conditions in their Company that require a tailored response are identified and met.
The Code recommends that Chairman report personally in the company’s annual statements how the principles relating to the role and effectiveness of the board have been applied.
The Code should be followed on a comply or explain basis where a company may find that an alternative approach may be more beneficial towards good governance than a provision in the Code. In that case, the company ought to explain the situation in the annual statements.
Though unlisted companies may comply with the Code, the Listing Rules require premium listed companies to apply the Main Principles and report to shareholders on this.
The 2012 Code (link to FRC website) is applicable for financial periods beginning on or after 1 October 2012. The 2014 Code (link to FRC website) is applicable for financial periods beginning on or after 1 October 2014.
Consultation on Audit Reform
In September 2015, the FRC issued a consultation on changes to Ethical Standards for Auditors, International Standards on Auditing (ISAs), the UK Corporate Governance Code and the Guidance on Audit Committees arising from the UK implementation of the EU Audit Regulation and Directive. Proposed changes to the latter two pronouncements also implement parts of the Competition & Markets Authority’s (CMA) final Order, providing audit committees with one place to look for guidance on the process to manage the relationship with their external auditor. Comments on the consultation close on 11 December 2015.