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FRC Consultation on Corporate Governance

By Julia Penny

The FRC have issued the promised consultation on the Corporate Governance Code. Whilst we will cover some more detail on this in later sessions, it is perhaps interesting to note the direction of travel. The consultation closes on 28 February 2018, so if you have strong views on some or all of the proposals put the date in your diary, so you remember to comment.

Overall, the aim is to shorten and sharpen the code, but also to ensure that it properly identifies the characteristics of good governance in the current era. This means there are a number of key themes throughout including:

  • The importance of a good culture;
  • The voice of the workforce and how companies ensure this is considered;
  • Diversity on the Board and in the management pipeline;
  • Encouraging governance policies that generate value for shareholders and society in the long-term;
  • Extending minimum vesting periods for executives share awards to five years;
  • The requirements for smaller (outside FTSE 350) and large listed companies being aligned.

In general, both larger and smaller listed entities comply with most of the principles and provisions, but compliance is weaker in some areas for smaller companies. In particular the consultation includes an analysis which identifies that 25 companies within the FTSE 350 but outside of the FTSE 100 don’t have 50% independent Non-executive Directors (iNEDs). This suggests that with increased focus on this area there may be a further push to increase the number of iNEDs on Boards.

There was some debate, prior to the consultation, as to what might be proposed with regard to workforce consultation and how the company ensures that they have a voice. Three models were suggested for achieving this, but none seemed to be a clear favourite with those asked and so the consultation retains all three, allowing companies the flexibility to choose what works best for them. The three methods are as follows:

  • A director appointed from the workforce;
  • A formal workforce advisory council;
  • A designated non-executive director.

Companies will therefore have to consider how best to implement this requirement, if they do not already have something in place. Note that the use of the phrase workforce, instead of employees, is designed to recognise the multiple methods in which labour is obtained. So this requirement extends potentially to subcontractors, agents, self-employed contractors or any others who effectively contribute to the workforce.

Diversity is already firmly on the corporate agenda and the consultation reminds us that there is plenty of evidence showing that companies are more successful when they have a diverse board. The aim is to improve diversity with regards to both gender and ethnic or social background, but the consultation holds back from requiring any figures with regard to ethnic background, though asks the question as to whether this should be required.

There is also a move to ensure that where there is a significant (20%) shareholder objection to a resolution, the company must establish why the shareholders felt that way and report on what they are doing to tackle the issues. This is often in relation to remuneration and there is a plan to expand the remit for the remuneration committees to engage with employees and oversee pay and incentives across the wider workforce and not just the Board.

There is, of course, much more detail in the consultation regarding the planned changes to the Corporate Governance Code. The consultation also includes some initial questions with regard to the Stewardship code, which will be formally consulted upon in detail next year. For the moment though, this article has set out some of the main areas of planned change.

 

December 2017 

 

Disclaimer
This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.