Much has happened in corporate governance since the middle of last year that will have an impact on companies of all sizes. In this article Robert Wharton explains why looking in the mirror now will save your company a hurried make-over later on.
Below is a summary of the most important changes to corporate governance and although focused on listed companies, the principles will eventually be applied to private companies of all shapes and sizes. Many of the UK’s non-listed companies voluntarily comply with the various governance codes as a hallmark and monitor of best practice. It is for that same reason that all companies should take note.
For accounting periods starting on or after 1 Jan 2019 the 2018 UK Corporate Governance Code as published by the FRC on 16 July 2018 applies (in general) to listed companies. The 18 Principles and the 41 Provisions are shorter and sharper than the 2016 version, plus changes have been made to the 2016 Code.
Key differences between the 2016 and 2018 UK Corporate Governance Code
- The Board should choose and publish how it engages with the workforce
- If there is shareholder opposition of more than 20% to a resolution, the Board is to consult with shareholders and explain actions in an update to shareholders
- Other business/time commitments of directors are to be considered before appointment
- External board evaluations are to take place
- Board, executive and workforce diversity is to be promoted and reported on
- There are to be extended responsibilities for remuneration committees
- The chairperson should not be in post for more than 9 years and he/she and other NEDs should remain “independent”
- The Board is to assess and monitor culture
- Whistleblowing arrangements must be made known to the workforce.
The broad obligation of the recent changes is to report on how the company has applied the “comply or explain” principle. In the detail are some stringent reporting requirements on remuneration of directors. Much activity is expected this season by shareholders objecting to excessive director remuneration.The Government has also been busy in helping to cement the principles and spirit of the 2018 Code within other parts of the UK’s corporate landscape. On 19 July 2018 the Companies (Miscellaneous Reporting) Regulations 2018 were brought into force to underpin and reinforce new rules which would apply to “large private companies”. In broad terms those are companies (public/unquoted or private) which have more than 2,000 employees, or a turnover of more than £200 million and a balance sheet of more than £2 billion. These companies will need, for financial years commencing after 1 January 2019, to set out which corporate governance arrangements the company is applying; how it is applying those arrangements; and if it is departing from the arrangements, then why. Where a qualifying company has not applied a corporate governance code during the year, the statement would need to explain both the reasons for that decision and the arrangements for corporate governance that have in fact been applied.
Non-compliance as an offence
The new legislation makes non-compliance with the reporting provisions an offence. In addition, the Board must report and publicise via its website exactly how the directors have complied with their previously much understated “Section 172” statutory duty under the Companies Act 2006 (the Act). This duty requires directors to promote the success of the company – which now must be demonstrated via actions and evidence, and publicly reported on by way of inclusion in the company’s strategic report. Many lawyers feel this brings much-needed focus to this Section 172 plus the other codified statutory duties for directors which are occasionally mentioned in dispatches but rarely lived, learned and quoted by the many tens of thousands of company directors working for UK companies who are of course, whether they know it or not, bound by the Act. You can find further information on these duties here.That legislation must be seen alongside the fact that there are many different corporate governance codes which a company could adopt. It is hoped by the FRC that the Wates Corporate Governance Principles will be adopted by many companies and indeed a wider range than those defined as large private companies. The Code’s “comply or explain” principle has been turned into “apply and explain” so as to fit different company situations.
Principles within Wates
- Purpose and leadership – aligning views of workforce and contracts of employment, setting “a tone from the top”, culture and success of the company
- Board composition – balance of skills, diversity, independent NEDs, board evaluations
- Director responsibility – accountability, conflicts of interest, governance, clear and comprehensive board papers from management, and directors to understand the same
- Opportunity and risk – promotion of long-term success, innovation, risk systems, internal controls, monitoring and review
- Remuneration – fair levels of remuneration for the whole workforce, transparency of remuneration, link to achievement of long-term corporate aim
- Stakeholder relationships – effect of board decisions on stakeholders current and future, and on the environment, consideration of material sector stakeholders including regulators, creditors and communities, with a two-way dialogue.
Other corporate governance codes and guidelines have been issued by a number of other organisations. For example, the Association of Financial Mutuals has a separate code for its members; the Investment Association provides guidelines on remuneration; the Pensions and Lifetime Savings Association (formerly NAPF) published in 2018 a new version of its corporate governance policy and voting guidelines; the Institutional Shareholder Services is a provider of proxy voting and corporate governance services; and Pensions Investment Research Consultants is an independent body in corporate governance. As will be seen, all of those are sector-specific.
Smaller companies and specialist sectors
For smaller companies operating in niche areas, there are already proposals to subject them, forcibly, to better management. The FCA will bring into effect at the end of 2019 a senior managers regime (similar to that imposed on banks and insurers) on independent financial advisers. It should be noted, even for those currently regulated by the FCA, that corporate law governance and regulatory governance are two different regimes.For the above reasons 2019 will be the year of corporate governance change. Governance is not a culture that can be rectified retrospectively.
This article is a synopsis of the general application of corporate governance, and specific advice should be obtained in relation to your sector and size of company.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.