The 2018 Code - some early reactions

21 December 2017

A couple of weeks into the consultation period on the 2018 UK Corporate Governance Code, we’re well into the cold-towel phase of line-by-line review as we prepare our response to the FRC. This never feels quite right for a document that is inherently principles-based – and in normal circumstances I spend a lot of time advising companies not to get too hung up on the detail. But where there are ambiguities, inconsistencies or just opportunities to tidy up the drafting, now is the time to draw attention to them.

This revision of the Code was badged as a ‘fundamental review’ – something that left many of us wondering how the FRC would reconcile the perceived need for substantial changes with the 25 years of evolution that have led us to the current Code, with its world-wide recognition and high regard. Maybe it’s not surprising that what we now have in front of us arguably contains relatively few obvious headlines.

Independent chairmen

One change that has already created vigorous debate is the proposal that the chairman should be independent throughout their tenure, not just up to the time of their appointment. Most chairmen of commercial companies do not regard themselves as independent when they’re in office and we’ve already had a number asking us whether this effectively changes the scope of the role, which can hardly have been the intention. It seems likely that the issue the FRC is tackling here is the tenure of chairmen rather than their independence during their tenure, so in our response we’ll be looking at other ways to address this (where it really amounts to an issue).

Companies outside the FTSE 350

The proposal to withdraw the relaxations from various Code provisions (including the number of independent non-executive directors) for companies outside the FTSE 350 will also cause debate. The Green Paper on governance reform emphasised the need to improve the governance arrangements of larger private businesses and companies traded on AIM which are not currently required to apply any Code or guidance, but it’s not clear that the proposed changes to the Code are a necessary part of this overall direction of travel. Is it likely that large private or AIM companies will be asked to implement anything close to even the relaxed version of the UK Corporate Governance Code?

I’m sure the FRC would remind us at this point that all the provisions of the Code are subject to the comply-or-explain reporting mechanism, so these would all be encouragements of best practice rather than mandatory changes. But companies and boards may still want to consider responding to the FRC where they have strong views on them.

Reporting - the major challenge?

Moving on from the specific points, we see reporting as one of the major challenges of the proposed new Code. As has been widely discussed, the current main and supporting principles have gone and been merged into ‘principles’ which are now intended to be the major focus of the Code (rather than the comply-or-explain provisions). Although the new principles read quite well, they are not intended to be a checklist or a framework around which to base governance reports. So the question will be how to go about that reporting in a way that shows how the principles have been applied – including those relating to driving the commercial success of the company, culture and stakeholder engagement (see Mark O’Sullivan’s blog on reporting on stakeholders in the current reporting season).

In the Introduction to the 2018 Code the FRC urges companies to focus on “articulating what action has been taken and the resulting outcomes”. We’re really pleased with this because it echoes what we’ve been advocating for several years in connection with our Building Public Trust Award for corporate governance reporting. So those who are reporting well against the existing Code will be in a good position; but those with boilerplate, compliance-based reports will be faced with a much bigger challenge. For them this really might feel like a fundamental review.

We’ll come back to the practical implications of the 2018 Code in more detail as our work progresses.

John Patterson | Corporate Governance Consultant
Profile | +44 (0) 1223 55 2413

 

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