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UK Corporate Governance Code

Background

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 board 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 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 FRC revised the UK Corporate Governance Code in 2012 to include new disclosure provisions on board diversity, fair reporting, the work of the audit committee and a board statement that the annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy.

The Code was further revised in September 2014, with the addition of more responsibilities for directors in relation to risk management and internal control, more emphasis on the fact that remuneration policy should be set with the overall objective of delivering long-term benefit to the company and 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.  The new Code also included the FRC's final response to the proposals of the Sharman Inquiry - a new statement, to be included in financial reports, that the directors' 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 July 2018, the FRC published a new UK Corporate Governance Code together with revised Guidance on Board Effectiveness.  The new Code applies for periods commencing on or after 1 January 2019.

Guidance on Audit Committees

Premium listed companies look to the FRC Guidance on Audit Committees (“the Guidance”) for further assistance when seeking to fulfil certain provisions in the UK Corporate Governance Code (“the Code”).  Premium listed companies are required by the Listing rules to comply with the Code whilst unlisted companies may voluntarily do so and by extension follow the Guidance.

The Guidance, which the FRC revised in 2012 along with changes to the UK Corporate Governance Code, provides recommendations on the audit committee’s establishment and effectiveness, relationship with the board, role and responsibilities and communications with shareholders. 

Project milestones

The FRC published a consultation on whether to amend the UK Corporate Governance Code to address a number of matters relating to executive remuneration.  The comment period for this closed on 6 December 2013.

The FRC also released proposals to amend the Code in November 2013 as part of its latest consultation on the implementation of the findings of the Sharman Inquiry. These proposed revisions would be applicable for periods commencing on or after 1 October 2014. The comment period on these proposals closed on 24 January 2014.

In April 2014, the FRC published a further consultation on proposed changes to the Code, stemming from the earlier consultations listed above.  This consultation reflected feedback received on the earlier consultations and as a result the FRC proposed changes to the Code in respect of:

  • Directors' remuneration; and
  • Risk management and going concern

The comment period for this consultation closed on 27 June 2014.

In September 2014 the FRC published an updated version of the Code, based on the consultations listed above. This revised Code is applicable to financial years beginning on or after 1 October 2014.

In June 2016, the FRC issued a 2016 version of the UK Corporate Governance Code, revised Guidance on Audit Committees, the Ethical Standards 2016 and revised UK International Standards on Auditing (ISAs) as a result of the UK's implementation of the EU Audit Regulation and Directive.

Current status of the project

A consultation was published by the FRC in December 2017 for a new-style UK Corporate Governance Code together with revised Guidance on Board Effectiveness and some questions on the future of the Stewardship Code.  The consultation run until 28 February 2018.

In July 2018, the FRC published a new UK Corporate Governance Code together with revised Guidance on Board Effectiveness.  The new Code applies for periods commencing on or after 1 January 2019.

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