New guidance on corporate governance published
The Financial Reporting Council (the “FRC”) has published a revised version of the UK Corporate Governance Code (the “Code”) containing guidance on risk management and internal controls,… Read more
The Financial Reporting Council (the “FRC”) has published a revised version of the UK Corporate Governance Code (the “Code”) containing guidance on risk management and internal controls, remuneration policies and engagement with shareholders.
Whilst primarily aimed at companies with a Premium Listing of shares in the UK, who are required under the Listing Rules to “comply or explain” in their annual report and accounts, the broad principles of the Code may be of interest to other companies who may consider that it would be beneficial to adopt certain of the provisions.
“Tone from the top”
The FRC has emphasised the importance of the board in establishing the correct “tone from the top” and that the board should lead by example to prevent misconduct, unethical practices and support the delivery of long-term success. The FRC was also keen to establish the appropriate relationship between the board’s risk assessment and management responsibilities.
Risk management and going concern
The FRC has proposed that companies make two separate statements in its annual report: one stating whether they consider it appropriate to adopt the going concern basis of accounting in preparing the annual and half-yearly financial statements and another relating to a broad assessment of the company’s viability over a specified period, which is expected to be significantly longer than twelve months.
The directors should also confirm in the annual report that they have carried out a robust assessment of the principal risks facing the company, including those that would threaten the business model, future performance, solvency or liquidity. The directors should describe those risks and explain how they are being managed or mitigated.
According to the FRC’s feedback statement following its consultation on the changes to the Code, this section provoked the most comments and disagreement between the respondents, and may were concerned about the difficulty of making forward looking statements. To deal allay these concerns, the FRC reminded directors of the safe harbour from liability contained in section 463 of the Companies Act 2006. By including the disclosures on viability in the strategic report, directors will only be liable to the company if they knew the disclosures were untrue or misleading or if they knew any omission was a dishonest concealment of a material fact.
Remuneration
Remuneration policies must be designed to promote the long-term success of the company. In relation to performance-related elements of remuneration, these must be “transparent, stretching and rigorously applied” and the FRC expects companies to set and report on targets that do not encourage excessive risk-taking and over which remuneration committees have effective control. In designing performance-related remuneration schemes, schemes should include claw-back arrangements that would enable the company to recover sums paid or withhold the payment of any sum and specify the circumstances in which it would be appropriate to do so.
The remuneration committee should ensure that an appropriate balance is struck between fixed and performance-related, immediate and deferred remuneration. For share-based remuneration, the remuneration committee should consider requiring directors to hold a minimum number of shares and to hold shares for a further period after vesting or exercise.
Shareholder engagement
The FRC has amended the Code to give guidance as to how companies should engage with shareholders when a significant percentage of them have voted against any resolution. The change requires companies to explain when announcing the results of votes what actions it intends to take to understand the reasons behind the result when a significant proportion of votes have been cast against a resolution.
For more information, please contact Andy Moseby.
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Andy Moseby is a corporate partner
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