UK: Consultation On The UK Corporate Governance Code

Following consultations towards the end of last year on directors' remuneration and on risk management, internal control and the going concern basis of accounting, the Financial Reporting Council (FRC) is now consulting on its regular two-yearly review of the UK Corporate Governance Code. The consultation closes on 27 June 2014 and the amended Code will apply to financial years beginning on or after 1 October 2014.

The principal proposed changes to the Code deal with directors' remuneration; engagement with shareholders when there are significant votes against a resolution at a general meeting; and risk management and going concern statements.

Directors' remuneration

The FRC proposes to redraft Principle D1 as follows: "Executive directors' remuneration should be designed to promote the long-term success of the company. Performance-related elements should be stretching and rigorously applied."

Principle D2, regarding a formal and transparent procedure for developing the company's remuneration policy and fixing individual pay packages would not be changed, but the supporting principle would be redrafted to emphasise the need to recognise and manage conflicts of interest when receiving views from executives and senior management.

Code Provision D.1.1 would be extended to include a presumption that companies should establish claw back arrangements for performance-related remuneration. Wording in the Schedule on the design of performance related remuneration for executive directors, indicating that claw back would only apply in exceptional circumstances of misstatement or misconduct, would be deleted.

Other changes are proposed to that schedule, including a proposal that companies should consider requiring directors to continue to hold at least some shares for a period after leaving the company.

The FRC is not taking forward a previous proposal to prohibit executive directors serving as non-executive members of a remuneration committee of another listed company.

Significant votes against a resolution

A new Code Provision would be introduced, that the company should set out how it intends to engage with shareholders to address their concerns when a significant proportion of shareholders have voted against any resolution at a general meeting.

Risk management and going concern

New Code Provisions would be introduced in relation to risk management. The first is that directors should confirm in the annual report that they have carried out a robust assessment of the principal risks facing the company, describe those risks and explain how they are being managed or mitigated.

The second is that companies should state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months.

The existing Code Provision, that the board should conduct an annual review of the effectiveness of the company's risk management and internal control systems, would be extended to provide that the board should monitor these systems on an ongoing basis.

The FRC intends to amend Code Provision C.1.3, relating to the directors' going concern statement in the annual and half-yearly financial statements, to clarify that it refers to the assessment of going concern for accounting purposes.

A new Code Provision is proposed, to introduce a requirement to make an explicit statement on the board's broader assessment of the company's ongoing viability.

The FRC also proposes to integrate its separate guidance notes on going concern and on risk management and internal control into a single piece of guidance, and to expand the scope of the current guidance on risk to cover the board's full range of responsibilities, not just those relating to the design and oversight of the internal control system. The revised guidance would be published at the same time as the revised Code.

Future changes

The FRC is seeking views on whether there would be benefits in allowing companies to publish some or all of the information currently contained in the corporate governance report on a website rather than in the annual report and accounts. If it is felt that this would be beneficial, any resulting proposals would be considered as part of the FRC's review of the Code scheduled for 2016.

Changes to the Code dealing with the audit committee and appointment of the external auditor will also be considered as part of the 2016 review, following the decision of the Competition and Markets Authority to delay the implementation of the findings of its review of competition in the market for audit services in FTSE 350 companies.

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