Revising the UK Corporate Governance Code


Following the 2016 update to the UK Corporate Governance Code, the FRC stated that it would avoid further updates to the Code until at least 2019. However, several months later, the Government published a Green Paper on Corporate Governance Reform (discussed here) and, in August 2017, the government published its response to the Green Paper (discussed here). In light of the reforms recommended in these reports, and the fact that the FRC had undertaken work in a number of related fields (notably succession planning and corporate culture), it has come as no surprise that the FRC has brought forward its plans to update the Code. In December 2017, the FRC published a consultation document in which it proposed to issue a revised Code in the Summer of 2018, which will then apply to accounting periods beginning on of after the 1 January 2019. This blog post looks at the principal proposed revisions contained in the consultation document. The consultation document also looked at revisions to the UK Stewardship Code – these proposed revisions will be covered in a separate blog post.

Length, structure and scope

The consultation document states that, in order for the Code to encourage companies to achieve high standards, it needs to ‘clear and concise’ and so the FRC has looked to ‘shorten and sharpen’ the revised Code. The revised Code is only 13 pages in length, compared to the 2016 Code, which stands at 23 pages (excluding the two schedules and appendix).

The structure of the revised Code (which has hardly changed since the 2010 version) has also been significantly amended, with some parts being removed entirely (some of these deletions have been moved to the accompanying Guidance on Board Effectiveness). The revised Code follows a five-part structure, namely:

  1. Leadership and purpose
  2. Division of responsibilities
  3. Composition, succession and evaluation
  4. Audit, risk and internal control
  5. Remuneration.

The scope of the revised Code has also received a notable amendment. Both the 2016 Code and the revised Code apply to companies with a Premium listing, but the 2016 Code provides that ‘smaller companies’ (i.e. those below the FTSE 350) are exempt from certain recommendations in the Code. The revised Code abolishes these exemptions on the ground that ‘even smaller companies should strive for the highest standards of corporate governance.’

Leadership and purpose

Section 1 of the revised Code covers board leadership and purpose. Notable revisions here include:

  • The FRC’s report on Corporate Culture and the Role of Boards stressed the importance of establishing the correct corporate culture, and so the revised Code frequently refers to the culture of the company and how this can be best promoted (see the Introduction, Principle A, Provision 2, and Principle E).
  • The revised Code contains a new Principle C which states that, in order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. There is no corresponding provision in the 2016 Code.
  • Provision 3 of the revised Code contains notable new provisions regarding workforce engagement. It provides that the board should establish a method for gathering the views of the workforce (not that, given the current litigation concerning the ‘gig economy’, the Code specifically does not refer to ’employees’ but covers the entire workforce). It goes on to provide that this would normally involve appointing a director from the workforce, setting up a formal workforce advisory panel, or by having a designated NED. Provision 4 goes on to state that the annual report should explain how the board has engaged with its workforce and other stakeholders, and how the interests set out in s 172 of the CA 2006 have influenced the board’s decision-making.
  • Provision 6 contains a new provision which provides that, when more than 20% of votes have been cast against a resolution, then the company should explain what actions it intends to take to consult shareholders in order to understand the reasons behind the result. The Investment Association maintains a Public Register of FTSE companies that have encountered such levels of of shareholder opposition.
  • Section E of the 2016 Code covered relations with shareholders. The revised Code contains no such section, but some of Section E’s content has been moved into Section 1.

Division of responsibilities

Section 2 of the revised Code covers the division of responsibilities amongst the board. Notable revisions here include:

  • Code Provision A.3.1 of the 2016 Code provides that the chairman should be independent on appointment. Principle E of the revised Code and Provision 11 now provide that the chairman should be independent at all times.
  • Code Provision B.1.2 of the 2016 Code provides that at least half the board, excluding the Chairman, should comprise independent non-executive directors. Provision 11 of the revised Code now provides that independent non-executive directors, including the chair, should constitute the majority of the board.
  • Code Provision B.1.1 of the 2016 Code establishes a number of relationships or circumstances that could affect the independence of a NED. If any of these apply to a NED that the board has identified as independent, then the board should explain why it regards that NED as independent. Provision 15 of the revised Code amends this by simply stating that if any of the specified relationships or circumstances apply to a NED, then that NED will not be considered independent. Given that one of the circumstances listed is that the NED has served on the board for more than nine years, this effectively limits a NED’s term to nine years.

Composition, succession and evaluation

Section 3 of the revised Code covers board composition, succession and evaluation. Notable revisions here include:

  • The Supporting Principle to B.2 of the 2016 Code states that board appointments should be made with due regard for the benefits of diversity on the board, including gender. Principle J of the revised Code broadens this by providing that both appointments and succession planning should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
  • Provision 17 expands the role of the nomination committee by providing that it should have an oversight role in relation to the development of a diverse pipeline for succession. The 2016 Code does not provide such a role for the nomination committee. Provision 17 is reinforced by Provision 23 which states, inter alia, that the annual report should describe the nomination committee’s work in relation to building a diverse pipeline
  • Provision 18 provides that, when a director is seeking re-election, the board should set out, in the papers accompanying the resolution, specific reasons why the director’s contribution is and continues to be important for the company’s long-term success. The 2016 Code does not provide for such disclosure.

Audit, risk and internal control

Section 4 of the revised Code covers audit, risk and internal control. This section remains broadly the same as Section C of the 2016 Code.


Section 5 of the revised Code covers board remuneration. Notable revisions here include:

  • A new Principle O which provides that the board should satisfy itself that company remuneration and workforce policies and practices promote its long-term success and are aligned with its strategy and values.
  • Provision 32 is new and provides that a person should not chair the remuneration committee unless he has served on a remuneration committee for at least 12 months.
  • The role of the remuneration committee has been expanded, with Provision 33 stating that the remuneration committee should oversee remuneration and workforce policies and practices, taking these into account when setting the policy for director remuneration.
  • Schedule A of the 2016 Code provides that share-based remuneration should not be payable or exercisable within three years. Provision 36 of the revised Code extends this by providing that share-based remuneration and other long-term incentives should be subject to a vesting and holding period of at least five years.


This is the most significant update to the Code in a long time, with the shortening of the Code being especially noteworthy. The result is a more concise principles-based Code, but also one which provides less guidance than its predecessor. The revised Code contains some noteworthy reforms (notably Provision 15 which relates to the independence of NEDs). However, it should be noted that this is a proposed revised Code only and a the FRC is seeking views on a number of the above amendments. Accordingly, it is possible that some of the above amendments may not make it into the final Code, or may be modified.

Reviewing the UK Corporate Governance Code

2017 marks the 25th anniversary of the Cadbury Report. Since 1998, the Combined Code and the UK Corporate Governance Code have been pioneering in improving governance standards and have acquired worldwide respect. However, in a recent speech, Sir Win Bischoff, Chairman of the FRC, noted that trust in business continues to decline. It is therefore fitting that 2017 will also see what the FRC has labelled as a ‘fundamental review‘ of the UK Corporate Governance Code. Details of the review are currently sparse, but the FRC’s announcement does reveal that the FRC will issue a public consultation on its proposals later this year. Following the 2016 update to the Code, the FRC committed to not updating the Code further until 2019. It would now seem that this commitment has been abandoned, but there are several good reasons for this abandonment:

  • The outcome of the government’s Green Paper on corporate governance reform (discussed here) will likely necessitate amendments to the Code.
  • The FRC has undertaken work in relation to succession planning and corporate culture that it will wish to incorporate into the amended Code.
  • The FRC recently set up a Stakeholder Advisory Panel and this panel will undoubtedly have a notable role to play in amending the Code.
  • Since the BHS scandal, there has been increasing pressure for the UK corporate governance system to be broadened to cover private companies (currently the Code expressly states that it applies only to companies with a Premium listing). Last week, the House of Commons Work and Pensions Committee recommended that large private companies or those that have over 5,000 defined benefit pension scheme members should be made subject to the UK Corporate Governance Code on a comply or explain basis (ICSA has made a similar suggestion). It will be interesting to see to what extent to amended Code caters for the governance of private companies.

One notable omission is any reference to the UK Stewardship Code. Sir Win Bischoff did state that the review of the UK Corporate Governance Code will cover ‘the role of stewardship’, but it is disappointing that an update to the Stewardship Code was not announced, as it is probably in greater need of an update than the UK Corporate Governance Code. It was last updated in 2012 and, whilst the FRC’s latest Developments in Corporate Governance and Stewardship Report (discussed here) does state that an update to the Stewardship Code is possible in 2018, confirmation of an update would have been welcome.

The Corporate Governance Review

Today, the Department for Business, Energy & Industrial Strategy launched a corporate governance review, accompanied by a Green Paper on corporate governance reform. The need for a review was set out by the Prime Minister in the Green Paper’s introduction:

‘for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. Where this social contract breaks down and individual businesses decide to play by their own rules, faith in the business community as a whole diminishes – to the detriment of all. It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change.’

Although the title of the Green Paper (‘Corporate Governance Reform’) indicates a broad, wide-ranging discussion, the Paper does not provide a review of corporate governance in general, and instead focuses on three specific issues, with a very brief ‘other issues’ category at the end of the Paper. The Paper does stress that the Paper is designed to ‘stimulate a debate on a range of options for strengthening the UK’s corporate governance framework’ and that ‘[t]he Government does not have preferred options at this stage.’ Accordingly, this Paper is merely the first step on what may prove to be a lengthy reform process (especially as large parts of the government and civil service will be preoccupied with Brexit). These areas and the suggested potential reforms will be set out.

Executive pay

The first governance issue discussed is one of the more controversial, namely executive remuneration. The Paper notes that ‘there is a widespread perception that executive pay has become increasingly disconnected from both the pay of ordinary working people and the underlying long-term performance of companies.’ The Paper discusses five areas where the regulation of executive remuneration in quoted companies could be reformed:

  1. Shareholder voting and other rights: The Paper puts forward a number of possible options for reform, namely (i) increasing the scope of the binding vote; (ii) introduce stronger consequences for a company losing the advisory vote; (iii) requiring or encouraging quoted companies to set an upper threshold for annual pay and requiring a binding vote if pay exceeds that threshold; (iv) requiring the binding vote to be held more frequently than the current three-year period, and; (v) strengthening the UK Corporate Governance Code to provide greater specificity on how companies should engage with shareholders on pay.
  2. Shareholder engagement on pay: The Paper discusses several reforms aimed at improving shareholder engagement on pay issues, namely (i) mandatory disclosure of fund managers’ voting records at AGMs and the extent to which they made use of proxy voting; (ii) establishing a senior shareholder committee to engage with executive remuneration arrangements, and; (iii) considering ways to facilitate or encourage individual retail shareholders to exercise their rights to vote on pay and other corporate decisions.
  3. The remuneration committee: The Paper notes the existence of concerns that ‘remuneration committees are not sufficiently or visibly pro-active in consulting formally with shareholders and with the company’s workforce. There are concerns too, that some lack the authority or inclination to take positions that may not align with the CEO or wider executive team’s expectations.’ Accordingly, the Paper suggests potential reforms, namely (i) requiring the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy, and; (ii) requiring the chairs of remuneration committees to have served for at least 12 months on the remuneration committee before taking up the role.
  4. Transparency: The Paper states that ‘[t]he Government wants to explore whether there is additional information which companies could provide which would make shareholders more effective in holding boards to account on their executive pay arrangements.’ The suggested potential reforms are (i) requiring companies to publish ratios comparing CEO pay to that of the wider workforce, and; (ii) whether existing requirements regarding the disclosure of performance targets that trigger bonuses need to be strengthened.
  5. Long-term executive pay incentives: The Paper looks at possible reforms either replacing or amending practice regarding long-term incentive plans.

Strengthening stakeholder voice

The second major issue the Paper focuses on is strengthening the employee, customer, and wider stakeholder voice. The Paper notes that ‘[m]any companies and their boards recognise clearly the wider societal responsibilities they have and the enormous benefit they gain through wider engagement around their business activities.’ However, it then goes on to state that ‘some have said that companies need to do more to reassure the public that they are being run, not just with an eye to the interests of the board and the shareholders, but with a recognition of their responsibilities to employees, customers, suppliers and wider society.’ To that end, suggested potential reforms include (i) creating stakeholder advisory panels; (ii) designating existing non-executive directors to ensure that the voices of key interested groups, especially that of employees, is being heard at board level; (iii) appointing individual stakeholder representatives to company boards, and; (iv) strengthening the reporting requirements relating to stakeholder engagement.

Corporate governance in private companies

The recent BHS scandal has focused attention on corporate governance and private companies (see blog post here on this). The Paper notes that private companies ‘are not expected or required to meet the same formal corporate governance and reporting standards as publicly listed companies, yet the consequences when things go wrong can be equally severe for other stakeholders.’ Accordingly, several suggested reforms include (i) extending the UK Corporate Governance Code to private companies, or developing a new Code aimed at such companies, and; (ii) extending the scope of certain reporting requirements to cover certain private companies.

Other issues

The final major section of the Paper is entitled ‘other issues’, but it only really focuses on one issue, namely whether the UK’s comply or explain system remains effective in providing the right combination of high standards and low burdens.


The Green Paper is a welcome development and it contains a raft of reforms that deserve wider discussion. However, it does only focus on a few specific areas of corporate governance (admittedly those that have drawn most ire in recent years). Governments and businesses will regularly talk of the importance of having strong governance standards, but reforms in this areas have tended to be rather tepid. It will be interesting to see how committed the government is to governance reform, especially if Brexit does cause the UK to become a more unattractive place to do business.

A corporate governance code for unlisted companies?

The recent scandal involving Sir Philip Green and BHS Ltd has once again brought into focus the value of good corporate governance, but what is unusual about this case is that BHS is a private company. When corporate governance is discussed, it is usually discussed in relation to large listed companies–indeed, the UK Corporate Governance Code ‘applies to all companies with a Premium listing of equity shares’ and it is widely acknowledged that many of the recommendations contained in the Code would not be appropriate for smaller companies. But the BHS incident demonstrates that governance is also important for unquoted companies (who generate the bulk of a country’s GDP). When Sir Philip Green purchased British Home Stores plc in 2000 for £200 million, one of the first things he did was to convert it into a private company. Over the next few years, BHS Ltd paid out hundreds of millions in dividend payments (most of which went to Monaco-based companies controlled by Green’s wife) which were often in excess of the company’s profits. A parliamentary inquiry concluded that ‘the Green family became incredibly wealthy … but in doing so reduced the capacity of the company to invest and succeed.’ This resulted in BHS being unable to compete and it started sustaining losses. Desperate to offload the company, Green sold it to Retail Acquisitions Ltd (‘RAL’) in 2015 for £1. However, Dominic Chappell, the owner of RAL, was described as a ‘manifestly unsuitable purchaser’ who had a record of corporate failure. Unsurprisingly, he was unable to rescue BHS and in April 2016, it was placed into administration. It was revealed that BHS’s pension fund deficit stood at £571 million. 11,000 BHS jobs, the majority of which are low paid, are now at risk.

A parliamentary inquiry into BHS called into question the governance of the various companies involved. The inquiry noted that, whilst most of BHS’s competitors were subject to the Code, BHS was not as it was a private company. The inquiry concluded:

Sir Philip chose to run these companies as his own personal empire, with boards taking decisions with reference to a shared understanding of his wishes rather than the interests of each individual company. Boards had overlapping memberships and independent non-executive directors did not participate in key decisions. We saw meagre evidence of the type of constructive challenge that a good board should provide. These weak governance arrangements allowed the overarching interests of the Green family to prevail and facilitated the flow of money off shore to the ultimate beneficial owner of the parent company, Lady Green…. These weaknesses in corporate governance contributed substantially to the ultimate demise of BHS.

The co-chair of the Parliamentary inquiry, Frank Field MP, subsequently stated that ‘[s]afeguards for important private companies may need to be reviewed’, leading us to ask whether some sort of governance Code might be suitable for companies not generally subject to the UK Corporate Governance Code. Unlisted companies constitute the vast majority of companies. Of the 3.508 million companies on the register in the UK, only 6,240 are public (and the majority of those are not listed). The 3.5 million unlisted companies are incredibly diverse, ranging from single person private companies with low turnovers to massive companies that rival listed companies in scale. Any Code designed for such companies would need to take this breadth into account and be suitably broad.

One approach is to encourage unlisted companies to comply with existing Codes, but recognise that such Codes will have limited applicability. This is the view taken by the Institute of Chartered Secretaries and Administrators, who do not feel that a new Code is necessary and have stated that ‘[p]rivate companies should simply be expected to have more areas where they depart from the existing UK Corporate Governance Code.’ A similar approach is taken by the G20/OECD Principles of Corporate Governance. These Principles focus on listed companies, but they also state that ‘they might also be a useful tool to improve corporate governance in companies whose shares are not publicly traded. While some of the Principles may be more appropriate for larger than for smaller companies, policymakers may wish to raise awareness of good corporate governance for all companies, including smaller and unlisted companies.’

However, the above Codes were not designed with unlisted companies in mind and many are of the view that a specific Code needs to be established that caters for unlisted companies. In fact, such a Code already exists.

The Corporate Governance Guidance and Principles for Unlisted Companies in Europe were established by the European Confederation of Directors’ Associations in March 2010. In November 2010, this guidance was amended by the Institute of Directors to apply more specifically to UK companies and released as the Corporate Governance Guidance and Principles for Unlisted Companies in the UK (a copy can be obtained by contacting the Institute of Directors). The Guidance sets out nine Principles that apply to all unlisted companies, and a further five Principles that apply to large and more complex unlisted companies. The Guidance provides an extremely useful discussion of why governance is so important for unlisted companies, and goes into considerably more detail than the UK Corporate Governance Code. Unfortunately, it has never gained the foothold that the UK Corporate Governance Code has (likely because it has no formal backing from any regulators) and it is in need of an update. There are indications that the IoD is considering updating the Guidance and, if it does, it is to be hoped that use of the Guidance will become more widespread.


Featured image: Image used under Creative Commons Attribution Share-Alike International 4.0 licence. Image created by MStott4 and was obtained from Wikimedia Commons.