Ahead of the Curve – Early Adoption of the 2018 UK Corporate Governance Code

20th February 2020 Corporate

Only two years after issuing its 2016 code the Financial Reporting Council introduced the 2018 UK Corporate Governance Code. This was as a result of continuing concerns about corporate governance such as a lack of trust in business, high profile corporate failures, a sense that companies don’t really give much thought to long-term sustainability and worries about the general impact of companies on wider society.

The 2018 Code applies to premium listed companies for their accounting years beginning on or after 2019, and is sometimes also adopted by other companies such as those which are standard listed on the Main Market or AIM. The FRC has carried out a review, which it published as part of its January 2020 Annual Review of Corporate Governance, of the annual reports of 82 FTSE 100 companies with year ends in December 2018 and March 2019 in order to assess early adoption of reporting under the 2018 Code.

Overall the quality of the reporting was assessed as “mixed”, with corporate culture and workforce engagement the areas addressed by most companies and statements that compliant remuneration codes would be adopted also common.

Particular concerns the FRC had in relation to compliance with the new rules included:

  • The use of marketing lines or slogans, or mere statements that the objective of the company was to achieve shareholder returns and profits, in demonstrating compliance with the principle that the companies purpose, values, strategy and culture should be aligned. 

The FRC expects to see a clear articulation of the purpose of the business (not being just to make money) and how that lines up with its strategy and culture. This should take into account the views of stakeholders, not just senior management.

  • The failure by many boards to obtain reports on their company’s culture as an aid to discussions, and indeed a general lack of discussion on company culture generally.

Companies should ensure that they use a wide range of measures to assess their culture and that the issue of culture is properly discussed at board level. While employee engagement surveys can be useful they only provide a snapshot; Codes of Conduct can be useful but there is a danger they can be seen by employees as a rulebook rather than attempts to foster a healthy culture and also that they may not clearly set out the company’s values; and while linking culture to diversity is popular diversity alone should not be seen as being sufficient to ensure a proper culture. The FRC considers that more than three methods should be used to assess culture, the information gathered should be linked together and that culture should be regularly monitored internally.

  • A lack of focus on genuine succession planning. 

Most companies simply noted that the role of the nominations committee was to keep appointments under considerations. Much of the reporting on succession planning lacked detail and focussed on appointment process rather than what succession needs the business might have and the FRC wishes to see succession considered more holistically. 

  • Whether there were appropriate diversity targets at board and senior management level, and limited reporting on diversity beyond gender.

Unsurprisingly this is a hot button issue for the FRC, who have flagged that they will be looking at diversity issues more closely. In particular they are keen to see clear diversity targets, covering not just gender but also for example ethnic, age and LGBT+ diversity and the steps being taken to meet them included in annual reports.

Corporate governance is an increasingly important issue for all listed companies, and also for many large private companies. The FRC sets the gold standard for corporate governance and while its requirements are clearly not appropriate for all companies they often indicate the direction of travel in the area. 

JMW’s corporate team provide advice on appropriate corporate governance regimes for companies of all sizes. Please contact us if you would like advice on this fast-moving and increasingly complex area.

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Martin John is a Partner located in Londonin our Corporate and Commercial department

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