UK Corporate Governance Code

The UK Corporate Governance Code (“the Code”) sets out the Principles the board of directors should apply in order to promote the purpose, values and future success of the company. The Code sets out expected standards of good practice in relation to issues such as board leadership and company purpose, division of responsibilities, composition, succession and evaluation, audit, risk and internal control, and remuneration.

Though unlisted companies may elect to follow the UK Corporate Governance Code, the Listing Rules require premium listed companies to apply the Principles and comply with the provisions and to report to shareholders on this.

The current version of the Code was published by the Financial Reporting Council (FRC) in July 2018 and became effective for periods commencing on or after 1 January 2019.  In May 2023, the FRC launched a consultation on changes to the Code.

All of the Principles of the Code should be applied by the company and the manner in which the company has applied them should be explained in the annual report. Directors should take care to apply the Code’s Principles to reflect the unique conditions in their Company that require a tailored response and should explain how they have done this.

The FRC's Guidance on Board Effectiveness encourages the Chair to report personally in the company’s annual report about board leadership and effectiveness and the outcome of the board evaluation.

The Code’s provisions 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 following the provision in the Code. In that case, the company ought to explain the situation clearly in the annual report. A clear and meaningful explanation should be provided for any departures, particularly where non-compliance is long-term or indefinite. The explanation should include the following elements: the context and background; a convincing rationale for the approach being taken; any risk and mitigating actions considered; and a timescale to set out when the company intends to comply (where relevant).

2018 Code

Board leadership and company purpose: The board should promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. It should ensure that the company’s purpose, values and strategy are aligned to the corporate culture and to workforce policies and practices. It should establish a framework of prudent and effective controls and ensure effective engagement with shareholders and stakeholders.

Division of responsibilities: There should be a clear division of responsibilities between the chair and the executive. The chair is responsible for the board’s overall effectiveness, should demonstrate objective judgement and promote a culture of openness and debate. The balance of the board should be appropriate. All directors should receive accurate, timely and clear information. Non-executives should offer sufficient time for the role and should provide constructive challenge, strategic guidance, specialist advice and hold management to account.

Composition, succession and evaluation: Board appointment, annual evaluation and re-selection procedures should be formal, rigorous and transparent, ensuring the membership of the board is regularly refreshed and due attention is paid to diversity. Succession plans should be based on merit and objective criteria and should promote diversity. All directors, especially non-executive, ought to demonstrate commitment whilst getting support from management to develop an understanding of the business and its industry.

Audit, risk and internal control: 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. In addition to a statement that the business is a going concern, the board should make a statement indicating that it has 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. The board is responsible for making a robust assessment of the principal and emerging risks facing the company and have a specific responsibility for monitoring the company's risk management and internal control systems, and ensuring they are sound whilst also maintaining an appropriate relationship with the company’s auditors. The audit committee, a sub-committee of the board, should look after financial reporting matters and the workings of both internal and external auditors.  At least one member of the audit committee must have recent and relevant financial experience and the committee as a whole should have relevant sector experience.

The narrative reporting at the front half of the annual report should be consistent with the financial statements and corresponding notes at the back. 

Remuneration: The package should be consistent with the calibre of director that the company is wishing to attract, whilst not excessive. Remuneration should be designed to support strategy and promote long-term sustainable success. A director should not be involved in deciding his or her own remuneration and all arrangements should be transparent, following set procedures. The remuneration committee should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances. Pension rates should be aligned with those available to the workforce. Remuneration arrangements should include the capacity to recover or withhold performance-related payments ('clawback') and there should be a formal policy for post-employment shareholding requirements.

The Code includes a 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 particularly relevant to resolutions on directors' remuneration.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.