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.

Company law and a new Prime Minister.

Today, Andrea Leadsom MP dropped out of the Conservative leadership contest, and Theresa May MP was shortly thereafter confirmed as the Conservative Party leader. David Cameron has stated that he will resign as Prime Minister on Wednesday the 13th July, meaning that Theresa MP will likely become Prime Minister later that day.

From  a company law point of view, the significance of this is that, on the 11th July 2016, Theresa May gave a speech launching her campaign to be party leader and Prime Minister. That speech contained a number of company law-related pledges – below are the relevant quotes:

  • ‘And I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders. In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m Prime Minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but employees as well.’
  • ‘The fourth way in which I want to make our economy work for everyone is by getting tough on irresponsible behaviour in big business…. The FTSE, for example, is trading at about the same level as it was eighteen years ago and it is nearly ten per cent below its high peak. Yet in the same time period executive pay has more than trebled and there is an irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses.’
  • ‘So as part of the changes I want to make to corporate governance, I want to make shareholder votes on corporate pay not just advisory but binding. I want to see more transparency, including the full disclosure of bonus targets and the publication of “pay multiple” data: that is, the ratio between the CEO’s pay and the average company worker’s pay. And I want to simplify the way bonuses are paid so that the bosses’ incentives are better aligned with the long-term interests of the company and its shareholders.’

Here are a few initial thoughts on some of the reforms proposed by Theresa May:

  • The most radical reform proposed is to have employees represented on company boards. Of course, there is currently nothing to stop companies having board-level employee representatives, but hardly any companies do so. The UK is in a minority amongst EU states in that it does not provide for a legislative system of employee representation. 18 of the 28 EU Member States provide for some form of employee representation on the board, with the vast majority mandating employee representation for certain companies. Employee representation has been advanced on multiple occasions in the UK, with the most notable attempt being the publication of the Bullock Report in 1977. That report recommended a system of board representation in companies with over 2,000 employees. That central recommendation of the report received very little support and the election of a Conservative government in 1979 meant that employee representation fell firmly by the wayside. Attempts to resurrect the issue since have not met with success. It will be interesting to see how Theresa May’s proposal will be received.
  • I suspect that binding shareholder votes on remuneration will have little effect. A binding vote was introduced by the Enterprise and Regulatory Reform Act 2013, which introduced a new s 439A into the Companies Act 2006 which provides members of quoted companies with a binding vote on the company’s remuneration policy. This reform has had little impact. It will be interesting to see if Theresa May proposes extending the binding vote to other remuneration issues (e.g. payments for loss of office, golden hellos).
  • Oddly enough, the reforms relating to remuneration disclosure right be more useful. Disclosure of pay ratios has been argued for for a long time (see, for example, this report from the High Pay Centre) and it could be argued that media pressure has been a better regulator of remuneration than the general meeting (see, for example, the foregoing of bonuses by Bob Diamond and Stephen Hester following intense media pressure). Moves that place more pay information in the public arena may allow further public pressure to be placed upon excessively paid directors. However, there is a downside. Remuneration disclosures are already significant and the details of a director’s remuneration package can be very complex. Increasing disclosure obligations will, accordingly increase the length and complexity of annual reports (anyone who has read the annual reports of a FTSE company will attest that such reports are already way too long) and will, of course, impose additional costs. Theresa May’s proposals to simplify bonus structures could help this, but we will need to see the details.

Perhaps the most surprising thing about the above proposed reforms is that they are being advanced by a Conservative MP. If one did not know that these proposals were being advanced by Theresa May, one would be forgiven for assuming that they were the proposals of a Labour MP – a number of these proposals have been advanced by Labour MPs or those on the left left of the political spectrum, and were opposed by the Conservatives at the time. Indeed, in some notable respects, Theresa May’s proposals go further. Labour’s 2015 manifesto only pledged to provide for employee representation on remuneration committees, whereas Theresa May appears to favour employee board representation.

The devil will, of course, be in the detail and only time will tell the extent to which these proposals are actually implemented. The extent to which company law reform will be a priority to a Prime Minister who has to negotiate the UK’s exit from the EU remains to be seen. But it is an interesting development to see a Tory Prime Minister designate speaking in such terms.