The UK Corporate Governance Code and associated guidance

NEW: The FRC is currently consulting on changes to the UK Corporate Governance Code and the Guidance on Audit Committees. The consultation document can be found at: http://www.frc.org.uk/press/pub2764.html.

The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.

All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. The relevant section of the Listing Rules can be found at: http://fsahandbook.info/FSA/html/handbook/LR/9/8.

The Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation.

The current edition of the Code was published in May 2010 and applies to financial years beginning on or after 29 June 2010.

 The UK Corporate Governance Code (145 kb)

Printed copies of the Code can be obtained free of charge from FRC publications, tel: 020 8247 1264, email: customer.services@cch.co.uk and online at: www.frcpublications.com

In December 2011 the FRC published a report on the impact and implementation of the UK Corporate Governance and Stewardship Codes. The report can be found at: http://www.frc.org.uk/publications/pub2672.html.

Future changes to the Code

In May 2011 the FRC began consulting on possible amendments to the Code that would require companies to publish their policy on boardroom diversity and report against it annually, as recommended by Lord Davies in his ‘Women on Boards’ report published in February 2011, and to consider the board's diversity amongst other factors, when assessing its effectiveness.

 Consultation Document: Gender Diversity on Boards (128kb)

In October 2011 the FRC announced that these changes would be implemented in a revised version of the Code which will be issued in 2012 and will apply to financial years beginning on or after 1 October 2012. Details of these changes, and the rationale for the FRC’s decision, are set out in this feedback statement.

 Feedback Statement: Gender Diversity on Boards (255kb)

Click here to view the responses to the consultation exercise received to date.

In September 2011 the FRC announced that it intended to consult on proposed further changes to the Code in relation to audit committees and audit retendering. This consultation will begin in early 2012, and should any changes be agreed as a result they would also be incorporated into the revised Code that will apply from 1 October 2012. Details of these proposed changes are set out in this feedback statement.

 Effective Company Stewardship: Next Steps (523kb)

Applying the 2010 Code

Some of the provisions of the Code require disclosures to be made in order to comply with them. These are summarised in Schedule B. They include, of the changes introduced in 2010, the provisions on the description of the company’s business model (C.1.2) and that when an external facilitator was involved in evaluating the board a statement should be made about whether they have any other connection to the company (B.6.2).

These disclosures should first be made in the company’s report on the first full financial year after the relevant version of the Code takes effect. So for the two new disclosure requirements, for example, a company with a financial year beginning 1 January 2011 will be expected to disclose them in the report published in 2012.

All other provisions are of a continuing nature. The Listing Rules require companies either to state that they have complied throughout the accounting period on which they are reporting or explain why not. These changes therefore apply from the beginning of the first financial year beginning after June 2010 – in the example given, from 1 January 2011.

The FRC recognises that companies may need time to adopt new requirements. In relation to the new provision on annual re-election of directors of FTSE 350 companies, the Preface to the Code states that “as with all other provisions of the Code, companies are free to explain if they believe that their existing arrangements ensure proper accountability and underpin board effectiveness, or that a transitional period is needed before they introduce annual re-election”.

Recommendations to institutional investors

When the Code was published in May 2010 it included in Schedule C some engagement principles for institutional investors. This Schedule has now been superseded by the UK Stewardship Code and has therefore been deleted from the Code with effect from 1 August 2010.

Associated guidance

The FRC publishes a series of guidance notes to assist companies in applying the principles of the UK Corporate Governance Code.

In March 2010 the FRC published new guidance entitled ‘Guidance on Board Effectiveness’, which relates primarily to Sections A and B of the Code on the leadership and effectiveness of the Board. The guidance was developed by the Institute of Chartered Secretaries and Administrators on the FRC’s behalf, and replaces ‘Suggestions for Good Practice from the Higgs Report’ (known as the Higgs guidance), which has been withdrawn.

Guidance on Board Effectiveness (560kb)

‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies’, which provides guidance on the requirement in Section C.1.3 of the Code to report whether the business is a going concern, and other related regulatory requirements, can be found at: http://www.frc.org.uk/corporate/goingconcern.cfm. 

‘Internal Control: Revised Guidance for Directors’ (known as the Turnbull guidance), which provides guidance to companies on how to apply the section of the Code dealing with risk management and internal control (Section C.2), can be found at: www.frc.org.uk/corporate/internalcontrol.cfm.

Guidance on Audit Committees (formerly known as the Smith Guidance), which provides guidance on Section C.3 of the Code which deals with the audit committee and the engagement of th external auditor, can be found at: http://www.frc.org.uk/corporate/auditcommittees.cfm.