New UK corporate governance guidance is urging the boards of some of the world’s largest companies to do more to promote an ethical corporate culture.
The Financial Reporting Council, which regulates auditors, accountants, and actuaries in the UK, on 16 July released an updated corporate governance code that will take effect for accounting periods beginning on or after 1 January 2019.
The updates, which apply to companies with a premium listing on the London Stock Exchange, aim to improve corporate governance standards in the wake of financial crises and high-profile examples of inadequate board oversight as well as attract investment to the UK.
“This new code, in its shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole,” Sir Win Bischoff, the FRC chairman, said in a statement.
The code is nonbinding, meaning companies are not necessarily required to follow it. But there are some reporting requirements, called “comply or explain”. If a company chooses not to follow the code, it must report why. And if it does follow it, the company must explain to stakeholders how the code is being applied.
The code updates, which are principles, provisions, and supporting guidance on board effectiveness rather than rigid rules, are focused on four key areas:
- Broaden board’s engagement with the workforce. To reinforce a healthy corporate culture, the board should appoint one director from the workforce, establish a formal workforce advisory panel, designate a nonexecutive director, or establish another combination of arrangements that allows the board and the workforce to raise concerns and effectively address them.
- Raise emphasis on strategy. To promote long-term, sustainable success, the board should ensure that the company’s purpose, values, and strategy are aligned with its culture. Also, board members should act with integrity, lead by example, and promote the desired culture.
- Promote board diversity and succession planning. The board should establish a nomination committee to lead the process for appointments and ensure plans are in place for an orderly succession. Succession plans for directors and senior management should be based on merit and objective criteria that promote diversity of gender and social and ethnic backgrounds, as well as cognitive and personal strengths. If a board chairman serves longer than nine years, a clear explanation should be provided.
- Focus board’s oversight on executive pay. To address public concern about executive pay, the board should establish a remuneration committee of at least two independent nonexecutive directors, who are tasked with a broader remit of setting pay for the board chair, executive directors, and senior management. Executive remuneration should take into consideration workforce pay and be clearly linked to the successful delivery of the company’s long-term strategy.
An FRC statement on the code, which includes links to detailed updates, is available on the FRC website.
— Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is an FM magazine senior editor.