We have published our comment letter on proposed revisions to the UK Corporate Governance Code published by the Financial Reporting Council (FRC) in December 2018.

Overall we are supportive of the broad objectives behind the proposed changes to the UK Corporate Governance Code. We believe that driving board focus on matters such as corporate culture and stakeholder engagement reflects the current demands of broader society for greater accountability from leading UK companies. However, we do have some comments about the way these and other important concepts are being introduced into the Code.

Our key messages are:

• We support the objective of regular refreshment of board composition and agree that nine years is an appropriate time period to be considered independent for non-executive directors. However, for chairmen we suggest you should consider extending this period to twelve years as we are concerned that the nine year time period could restrict the ability of companies to choose a candidate from the existing board members, i.e. ‘promoting’ an existing non-executive director to the post of chairman.
• We agree with the broadening of the remuneration committee remit to include setting executive director and senior management remuneration. We also support a move towards remuneration committees having greater access to information on workforce policies, enabling them to make executive pay decisions in the context of reward and conditions across the organisation. Our view is that more guidance is needed around the definition of ‘oversight’, to avoid either a boilerplate response or an over-delegation of responsibility. ‘Oversight’ should focus on the supervision and monitoring of workforce policies, as opposed to input in their design and implementation.
• At present Provision 7 refers to the need for the board to “identify and eliminate” conflicts of interest. In our view, it would be better, and more realistic, to call for boards to identify and manage conflicts of interest in line with the requirements of the Companies Act.
• We are supportive of the overall objective to drive greater clarity of a company’s purpose. The revised Guidance includes helpful recommendations on how a board should think about corporate culture but there is, perhaps deliberately, little guidance on how boards should “establish company purpose” as suggested by new Code Principle A. We believe some commentary in the Guidance on how a company should think about company purpose would be helpful.
• Finally, we would ask that the FRC work with the FCA to review the auditors’ responsibilities in respect of corporate governance. The review responsibility in the Listing Rules is long-standing but the related FRC Bulletins have not kept up-to-date as the Code provisions have changed. Some of the provisions to be reviewed are now subject to specific duties in ISAs (UK) – for example those dealing with risk, going concern and viability – where the Bulletins and ISAs (UK) are now inconsistent. Investors may expect a consistent level of auditor challenge, but the current regime does not necessarily achieve this. We suggest that the FRC and FCA agree to consult together on what the auditor’s responsibilities should be in relation to the revised Code.
• We have chosen not to respond to each of the Stewardship Code questions individually. We would however like to stress the importance of developing the Stewardship Code to mirror the new areas of focus you are introducing to the UK Corporate Governance Code, i.e. stakeholder engagement and contribution to society.

The full comment letter can be downloaded here.

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