Revised UK Corporate Governance Code

The UK Financial Reporting Council (FRC) released an updated version of the UK Corporate Governance Code (the Code) on 17 September 2014, to operate for accounting periods beginning on or after 1 October 2014.  Like the ASX Corporate Governance Council Principles and Guidelines (for which the forerunner of the Code formed the model), the Code operates on the ‘comply or explain’ principle. The prospect of the changes to the UK Code being followed in Australia suggests ASX listed companies would be well advised to understand them and consider how they would respond to similar changes.


The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and sustainability of value.  The FRC has also highlighted the importance of the board’s role in establishing the ‘tone from the top’ of the company in terms of its culture and values. The Code urges directors to lead by example in order to encourage good behaviours throughout organisations.


The main principle in relation to remuneration now requires that “executive directors’ remuneration should be designed to promote the long-term success of the company.  Performance-related elements should be transparent, stretching and rigorously applied.”  This contrasts with the previous principle requiring that remuneration should be structured to  “attract, retain and motivate directors of the quality required to run the company successfully”. 


The implications of this change are significant. It would further encourage the lengthening of long-term incentive plan performance and vesting periods and, at the extreme, the demise of short-term incentives. This trend is already in evidence in the UK, and there are ASX 300 companies that have adopted similar pay frameworks in Australia.


Supporting principles adopt views that have been promoted in the UK for some years, especially by pension funds. They include that the remuneration committee should judge where to position their company relative to other companies with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in corporate and individual performance, and should avoid paying more than is necessary. For example, even if all companies adopted a “conservative” stance to pay at the median, the median would move upwards as companies paying below try to match it. Also, in accord with growing Northern hemisphere concerns with equity, UK companies should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.


While the ASX Governance Council guidelines state that companies should disclose whether they have malus or clawback policies (see HERE), the UK Code provisions now stipulate that performance-related remuneration schemes for executive directors should provide for clawback. This is a specific provision to enable the company to recover remuneration already paid. The revisions to the Code follow the news in July that the Bank of England will require that banks be able to clawback pay up to seven years after an award.


On shareholder engagement, the Code now states that when publishing general meeting results companies should explain how they intend to engage with shareholders when there has been a significant vote against any resolution.


In addition, the FRC has emphasised that the effective functioning of any board requires a dialogue that is both constructive and challenging, suggesting that one of the ways in which such debate can be encouraged is through having sufficient diversity on the board, including gender and race. However, the FRC acknowledges that diverse board composition in these respects is not on its own a guarantee, and that diversity can be just as much about difference of approach and experience. The FRC will consider these issues as part of a review of board succession planning, and will also consider the need to consult on these issues for the next update to the Code in 2016.


The 2014 revised Code can be viewed HERE.

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