The FRC updates the UK Corporate Governance Code

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Summary: The FRC has published a revised version of the UK Corporate Governance Code (the “Code”). The changes are “designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation” and impact on going concern, risk management and internal control; remuneration; and shareholder engagement.

The 20 second summary

The FRC has published a revised version of the UK Corporate Governance Code (the “Code”). The changes are “designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation” and impact on going concern, risk management and internal control; remuneration; and shareholder engagement.

The revised Code will apply to reporting periods beginning on or after 1 October 2014.  Companies with December year-end reporting periods will only be required to ‘comply or explain’ against the 2014 Code in their annual report and accounts published in 2016 (covering the 2015 financial year). The main changes to the Code are summarised below.

Further changes to the Code are likely in 2016 following the Government’s implementation of the EU Audit Directive and the Competition and Markets Authority’s report on the market for audit services in FTSE 350 companies.

The FRC has also published its guidance on risk management, internal control and related financial and business reporting.  This is an amalgamation of the previous Turnbull Guidance and the 2009 Going Concern guidance for directors.  This guidance is intended to assist directors in applying section C of the Code.

These changes reflect the Government’s continued aim of reversing the perceived culture of short-termism, promoting effective risk management and internal control systems and encouraging collective shareholder engagement, highlighted in the recommendations of the Kay Review of UK Equity Markets and Long-Term Decision Making and in the Sharman Panel of inquiry into Going Concerns and Liquidity Risks.

Section C - Accountability

Code Provision C.1.3 – this Provision has been amended to clarify that it refers to the assessment of going concern for accounting purposes.

Code Provision C.2.2 – this is a new Provision requiring companies to make an explicit statement on the board’s broader assessment of the company’s viability. The wording will need to cover the matters to be considered when making the assessment (ie. the company’s current position and principal risks), the time period that it covers and whether the directors have a “reasonable expectation” that the company will be able to continue in operation and meet its liabilities.

The FRC recommends that the viability statement is included in the strategic report so as to benefit from the safe harbour provisions in the Companies Act 2006 (section 463 - liability for false or misleading statements). There is an expectation that this statement will look forward significantly longer than 12 months.

Section D - Remuneration

Main Principle D.1 – this has been deleted and replaced with a requirement for executive directors’ remuneration to be designed with the long-term success of the company in mind. Performance-related elements should be transparent, stretching and rigorously applied.  The FRC expects companies to set and report on targets that do not encourage excessive risk-taking.

Code Provision D.1.1 – this introduces a “comply or explain” provision for companies to put in place arrangements that enable them to recover or withhold variable pay for deferred remuneration.

Section E - Relations with shareholders

Code Provision E.2.2 - in the future, companies will need to explain what action they intend to take when a significant proportion of votes have been cast against a resolution at any general meeting.

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