New FRC Corporate Governance Code focuses on culture and diversity

New FRC Corporate Governance Code focuses on culture and diversity

The FRC's new Corporate Governance Code promotes trust, transparency and integrity in business in the face of the recent call for audit reforms

The Financial Reporting Council has today released the 2018 UK Corporate Governance Code producing a shorter, sharper set of principles.

The Code’s aim is to achieve long-term sustainable growth in the UK through strong relationships between companies, shareholders, and stakeholders.

Corporate culture is placed at the epicentre of this effort. The Code ensures it is aligned with company purpose and business strategy as well as that it promotes integrity and diversity in the workplace.

The FRC is determined to see clear, meaningful reporting from everyone and have implemented a series of changes to move closer to this aim.

One of the main changes relates to the relationship between stakeholders and the workforce. The new provision asks for greater board engagement with the workforce to better understand their views.

Boards are also asked to show how they have considered stakeholder interests when performing their duty under Section 172[1] of the 2006 Companies Act.

Culture was another focus of change. The Code now specifically asks company boards to align their values with strategy and to assess how they preserve this value in the long term.

With much discussion around the gender pay gap and topics such as the experiences of LGBTQ+ people in the workplace, the FRC have chosen to put a lot of effort into succession and diversity in the latest Code.

The new Code emphasises that boards need to be refreshed regularly and undertake succession planning so they have the right mix of different skills and constructive challenge, and so they are representative of diversity.

Specific elements ask Boards to consider the length of time a chair remains in post, especially if it is beyond nine years as well as identifying the importance of external board evaluations.

The Code also increases responsibility of the nomination committee on succession planning and ensuring boards are diverse.

To address recent public concern over executive pay, the new Code asks remuneration committees to take workforce salaries into account when setting director remuneration. It says there should be no formulaic calculations of performance-related pay.

Sir Win Bischoff, FRC Chairman, said: “To make sure the UK moves with the times, the new Code considers economic and social issues and will help to guide the long-term success of UK businesses.

“This new Code, in its new 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.”

Environmental lawyers, ClientEarth, on the other hand, said that the new Code has not gone far enough to address climate issues by not taking the Taskforce on Climate related Financial Disclosure (TCFD) recommendations into account.

ClientEarth lawyer, Dave Cooke, said: “The FRC has misunderstood the critical importance of the TCFD recommendations. The minimal reference to the recommendations appears in the section of the FRC guidance on relations with stakeholders.

“This completely misses the point that the TCFD recommendations focus on the financial implications to the business from climate change and consequently fails to recognise the central importance of climate risk information for shareholders.”

While the FRC has come under intense scrutiny following Carillion’s collapse, chief executive of the Chartered Institute of Internal Auditors, Dr Ian Peters is supportive of the new Code.

Peters said: “The prominence of internal audit in the revised Code is testament to the growing recognition of the essential role of internal audit in effective corporate governance.

“We are pleased that the new Code recognised for the first time the need for formal and transparent policies and procedures to ensure the independence and effectiveness of internal audit.”

 

[1] Section 172 states that a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

 

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