26 February 2020
Premium Listed Companies are required to report against the 2018 UK Corporate Governance Code (2018 Code) for periods commencing on or after 1 January 2019. Companies are advised to consider the points raised in the Financial Reporting Council’s (FRC) Annual Review of the UK Corporate Governance Code which assesses the quality of reporting against the 2016 UK Corporate Governance Code (2016 Code) and early-adoption of the 2018 Code.
"(The FRC) wish to see a much greater focus on the activities and outcomes of implementing the Principles of the 2018 Code, particularly on the board’s effectiveness and decision-making, and how this has led to sustainable benefits for shareholders and wider stakeholders.”
Key FRC recommendations
The company purpose should be clearly communicated including:
- what the company does and why it does it; and
- describing purpose by considering it alongside culture and strategy.
Companies should include details of how they assess and monitor culture, including:
- metrics used and actions taken (eg to address concerns raised in employee surveys);
- consideration of the importance of culture and strategy (including board-level discussions); and
- how it aligns culture with values and strategies.
Detailing the methods used to engage with the workforce (such as staff surveys, site visits, employee AGMs and employees attending board meetings) is important but companies should also give real examples to demonstrate:
- the effectiveness of the chosen method;
- how information obtained has been fed into board discussions;
- what responses and actions were taken by the board; and
- the impact of feedback on future strategy, culture and risk.
Section 172 reporting
Section 172 reporting should cover:
- strategic issues on which the board obtains stakeholder input and feedback;
- concerns raised by stakeholders; and
- how companies have understood the issues and concerns and considered the impact on long-term success.
Companies should include:
- explanations if the chairs tenure exceeds the 9-year maximum (with limited extension) and proposals for future board composition;
- details of succession planning rather than the appointment process; and
- board papers which give reasons for a director’s re-election including their contribution to strategy and risks.
Companies need to be aware that diversity goes beyond gender. There should be clear disclosure of any diversity targets and details of actions being taken to achieve those targets.
Remuneration should be linked to long-term success and non-financial metrics.
This year’s reports should cover:
- how remuneration committees have engaged with the workforce;
- the effect of workforce engagement on pay policy;
- full details for policies to recover or withhold remuneration; and
- pension contribution rates for directors and the workforce and how they will be aligned.
In their review, the FRC highlighted as good practice examples that included:
- strategic and individual non-financial KPIs (such as diversity, culture, health and safety) based on long-term horizons with vesting periods; and
- explanations of how discretion was used (such as good leaver status, modification of performance measures, loss of office payments, salary reductions and bonus clawback).
Risk management should include explanations of:
- the reasons for changes in the risks identified;
- how risks were mitigated;
- the impact of risks on future strategy;
- operational and financial risks; and
- risks in the broader environment, such as cyber security, climate change, Brexit.
Companies should explain why they have a reasonable expectation that they will be able to continue in operation and meet any liabilities as they fall due by:
- setting out their longer-term prospects;
- taking into account current position and principal risks; and
- providing scenario analysis.
Comply or explain
Explanations of departures from the Code should provide:
- company-specific background to the non-compliance;
- the period of non-compliance (where applicable);
- rationale for actions and how the alternative approach is consistent with the Code Provision; and
- mitigating activities to address any additional risk.
Explanations (and how any issues will be addressed) are particularly required in circumstances where:
- the Chair is not independent on appointment and/or is also acting as the CEO;
- independent non-executive directors make up less than half the board; and
- a significant percentage of shareholders vote against an AGM resolution (ie 20 per cent or more).
How RSM can help
For further information and for any assistance with corporate governance please speak to Lee Marshall.