Guidance note: 2018 UK Corporate Governance Code

Published in July 2018, the 2018 UK Corporate Governance Code (Code) replaces the 2016 UK Corporate Governance Code (2016 Code) as the key source of corporate governance recommendations for companies with a premium listing.  The Code consists of 18 ‘Principles’ of good governance and 41 ‘Provisions’.  It has five sections dealing with:

• Leadership;
• Division of responsibilities;
• Composition, succession and evaluation;
• Audit, risk and internal control; and
• Remuneration

It applies to all companies with a premium listing, whether incorporated in the UK or elsewhere.  Parent companies will also be responsible for ensuring compliance within their group.  Whilst designed for companies with a premium listing, it is recommended that companies with a standard listing and AIM-listed companies follow the Code as far as possible, particularly where a future transfer to a premium listing is planned.  The higher standards established by the Code will provide additional investor protection and long term sustainability.

The Code applies to companies’ reporting periods beginning on or after 1 January 2019 meaning, unless there is early adoption, the reporting of the Code will be seen in 2020.

Disclosure statement

The Listing Rules require a company with a premium listing to make a disclosure statement on corporate governance and the Code in its annual financial report.  Such information includes the following:

• a statement of how the company has applied the Principles set out in the Code;
• a statement of compliance throughout the relevant accounting period in accordance with the Provisions set out in the Code; and
• details of any Provisions with which the company has not complied and, if applicable, the company must provide the reasons for non-compliance.

Importantly therefore, the Listing Rules do not require compliance with the Code; they instead require companies to state whether they have applied the Code’s Principles and complied with the Code’s Provisions and provide justification for non-compliance.

The Code has been simplified and shortened following the 2016 version.  The Code places emphasis on the following key areas for consideration and improvement:

• Strengthening workforce and stakeholder voices in the boardroom: the board should actively ensure that workforce policies and practices are modernised and in accordance with the company’s values. They should evidence in the annual report how board discussions and decisions have been influenced by stakeholder and workforce interests. For example, details of occasions when the workforce has been consulted on company strategy and been given a platform to voice their opinions.  How have these opinions been recorded and discussed at board level?
• Improving employee engagement methods by incorporating one or a combination of the following:
  • a director appointed from the workforce;
  • a formal workforce advisory panel;
  • a designated non-executive director.
• Greater transparency on voting: if there is opposition of more than 20% of voters to the board’s recommended resolutions, the company should explain the reason for its actions, consult with shareholders and then, within 6 months of the vote, publish an update.  A summary of the feedback on the board’s decisions should be included in the annual report;
   
  • As directors’ responsibilities are becoming increasingly complex, overboarding needs to be addressed i.e. preventing the board from being over-worked. When making new appointments to the board, consideration should be given to the candidates’ significant time commitments.  New directors should be asked at the outset to disclose any significant factors which may affect their performance.  An example of the steps a company might take to meet this recommendation is to impose a cap on the maximum number of boards on which a director can sit.
  • Diversity (of gender, social and ethnic backgrounds) across the workforce and in executive roles is to be promoted by the board to ensure a long term diverse succession plan. The nomination committee should oversee such development – for example, by setting appropriate targets in the short, medium and long term – and report on progress.

• There has been a removal of two exemptions which existed under the 2016 Code for smaller companies (those not in the FTSE 350):
  • whilst the 2016 Code allowed smaller companies to only have two independent non-executive directors, the new Code requires at least 50% of the board to be non-independent directors; and
  • under the Code, directors of all companies should be subject to annual re-election by shareholders.
• The responsibilities of the remuneration committee should be widened to review workforce remuneration and company policies regarding the company’s values and workforce culture. Remuneration should be continuously monitored with incentives and rewards offered which align with company values.
• Vesting periods for share awards should be changed so that, in normal circumstances, share awards are released in a phased basis and subject to a total vesting and holding period of 5 years or more;
• The culture of an organisation should be continually assessed so that policies, practices and behaviour are aligned with the company’s purpose, values and strategy and all action is conducted transparently. The board should seek assurances that the company’s management team take all necessary corrective action.  In terms of reporting, the board should be able to explain its approach to investing in and rewarding its workforce in line with company culture;
• Whistleblowing policies should be updated to enable the workforce to raise concerns anonymously and in confidence. The board should continuously review reports arising from its operation and ensure it has suitable arrangements for fair, proportionate and independent investigation and follow-up action; and
• The tenure of a chairman should be decreased to a maximum of 9 years, subject to a limited possible extension period.