UK Corporate Governance Code
Published: 5 October 2023
12 minute read
The current UK Corporate Governance Code (the Code) was published in July 2018, following an extensive outreach and consultation. The Code is accompanied by the supporting Guidance, which was published alongside, to assist companies address specific aspects of governance and accountability.
UK Corporate Governance Code 2018 (Current edition)
| Name | UK Corporate Governance Code 2018 |
|---|---|
| Publication date | 16 July 2018 |
| Type | Code |
| Format | PDF, 268.5 KB |
The Code is separated into five sections: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration, and it operates on a ‘comply or explain’ basis. Compared to previous editions of the Code the current edition gives the relationships and engagement between companies, shareholders and stakeholders more prominence, emphasises the need for the alignment between a corporate culture, purpose, values and business strategy, and promotes integrity and more far-reaching diversity.
Consultation
Following the consultation on Restoring Trust in Audit and Corporate Governance, last year, the government invited the FRC to strengthen the UK Corporate Governance Code in specific areas.
We have now launched a public consultation on our proposed revision to Code. This limited revision aims to enhance the Code's effectiveness in promoting good corporate governance.
Who does the UK Corporate Governance Code apply to?
The Code is applicable to companies with a premium listing on the London Stock Exchange, regardless of where they are incorporated. To comply with elements of the UK Listing Rules these companies must apply the Principles of the Code and comply with, or explain against the Provisions.
Corporate Governance is not only important for the largest companies, all companies should have appropriate systems, policies and practices in place, therefore many companies that are not required to follow the UK Corporate Code choose to do so.
In 2018 the UK Government introduced new legislation to require the largest Private Companies to report on their governance. Entities (including subsidiaries that meet the size, turnover and balance sheet thresholds are required to report on their governance. To support this new requirement the Wates Principles of Corporate Governance were published.
When does the Corporate Governance Code apply to a company?
The Code applies from the date when a company becomes premium listed. Prior to Listing companies should consider the Code requirements and where possible prepare in advance. Companies must disclose any areas of non-compliance and explain reasons for and offer a timeframe when the company will be compliant with the Code.
How does the ‘Comply or Explain’ regime work?
The Code operates on a ‘Comply or Explain’ basis. recognising that one approach does not necessarily suit all companies. It takes into account that an alternative to complying with a Provision may be beneficial or necessary for the company in particular circumstances based on a range of factors, including the size, complexity, geography, and ownership structure of a company.
The ‘Comply or Explain’ regime offers flexibility, and it encourages companies to choose bespoke governance arrangements most suitable to their particular circumstances in both the short and long-term. When departing from the Code companies should explain how their chosen alternative arrangement is more appropriate and beneficial in upholding high standards of governance.
Carefully considered corporate governance policies and practices along with high levels of transparency can lead to improved levels of trust. This will allow investors and other stakeholders to take a more measured view of the governance and reporting of the company.
Does the FRC provide any guidance for boards and board committees?
The FRC issues guidance and other publications to assist boards and board committees in considering how to apply the Code to their particular circumstances. These publications cover: The Guidance on Board Effectiveness; The Guidance on Audit Committees; and The Guidance on Risk Management, Internal Controls and Related Financial Business.
Guidance on Board Effectiveness
Guidance on Risk Management Internal Controls and Related Financial Business
Is reporting against the Code monitored?
Since the publication of the revised Code in 2018, the FRC have been monitoring reporting against the Code by selecting a random sample of 100 FTSE350 and Small Cap companies, and assessing the quality of reporting. Assessments cover reporting against both the Principles and Provisions, but the emphasis may change year on year.
The 2022 Review of Corporate Governance Reporting (the 2022 Report) considered the following areas: Audit, Risk and Internal Controls; Code Compliance; Culture, Purpose and Values; Diversity; Environment; Modern Slavery; Remuneration; and Shareholder and other Stakeholders Engagement. Some of the key findings include:
- The lack of disclosure in relation to the outcomes and impacts of governance policies and practices
- Clearer disclosure of the areas within the Code that companies have not followed, however, explanations as to why a departure from a provision was necessary lacked clarity and transparency
- Good standard of reporting in relation to wider stakeholder engagement
- Engaging with the workforce continues to be a priority on companies’ agendas although most disclosures are limited to flexible working matters
- Most companies across the same sample have met or are on track to meet external diversity targets
- Half of the companies in the sample provided a statement to confirm that their risk management and internal controls systems are effective
- Minimal disclosure on board engagement with major shareholders; some only stating that there had been meetings with shareholders without providing further detail on their engagement and its outcome and impacts
- Divide between the statements in the annual report and voting at AGM’s on both the policy and the outcomes of the remuneration policy
Why is the FRC reviewing the Corporate Governance Code?
The publication of the Government Response to the consultation on strengthening the UK’s Corporate Governance, Corporate Reporting and Audit systems sets out the Government’s policy positions responding to the three independent reviews on the audit product (Brydon Review), statutory audit services market (Competition and Markets Authority Review), and the Regulation of that market (Kingman Review). The Government Response sets out the reforms the Government proposes to legislate for and covers the respective responsibilities of directors and their responsibilities for governance, internal control, and corporate reporting; preparers of financial and non-financial information (usually professional accountants); auditors and providers of assurance services, and actuaries.
For more details please see the FRC’s Position Paper issued in July 2022.
What will be the focus of revisions to the Corporate Governance Code?
The focus of revisions to the Code will be as follows:
- Providing additional support in the existing Code Provisions, where reporting is currently weaker, taking account of issues raised in our recent research and reports. These areas are outlined in our most recent annual report on the use of the Code and Culture report;
- Revising those parts of the Code which deal with the need for a framework of prudent and effective controls to provide a stronger basis for reporting on and evidencing the effectiveness of internal control around the year end reporting process;
- Making necessary revisions to reflect the wider responsibilities of the Board and Audit Committee for expanded Sustainability and ESG reporting and, where commissioned by the company, appropriate assurance in accordance with a company’s audit and assurance policy;
- Including a Provision for boards to consider how audit tendering undertaken by the company takes account of the need to expand market diversity; and
- Updating the Code to ensure that it covers proposed changes to legal and regulatory requirements as set out in the Government Response, including strengthening reporting on malus and clawback arrangements.
The revised Code will be supported by updated guidance – we will revise the Guidance on Audit Committees and Guidance on Board Effectiveness to align with the revised Code and to support the reforms in the Government Response. We will also revise the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting specifically to take account of changes to Principles and Provisions on internal control and its effectiveness
FRC Guidance
The Guidance on Board Effectiveness (the Guidance) was published in 2018. The purpose of the Guidance is to support reporting against the Principles and Provisions set out in the Code in a non-prescriptive way. It encourages consideration of how boards carry out their role and improve their effectiveness and contains suggestions of good practice to support directors and their advisors in applying the Code.
We would advise those preparing their governance reports and statement to refer to this guidance.
| Name | Guidance on Board Effectiveness |
|---|---|
| Publication date | 16 July 2018 |
| Type | Guidance |
| Format | PDF, 412.3 KB |
The FRC Guidance on Audit Committees was first published in 2003 and most recently updated in April 2016. It is intended to assist company boards when implementing Section 4 of the UK Corporate Governance Code dealing with audit committees, and to assist directors serving on audit committees in carrying out their role.
To assist audit committees looking to put their external audit out to tender the FRC has provided in 2017 a Best Practice guide to Audit Tendering.
| Name | Guidance on Audit Committees April 2016 |
|---|---|
| Publication date | 17 June 2016 |
| Type | Guidance |
| Format | PDF, 447.1 KB |
| Name | Best practice guide to audit tendering (updated February 2017) |
| Publication date | 7 February 2017 |
| Type | Guidance |
| Format | PDF, 312.0 KB |
This guidance - Risk Management, Internal Control and Related Financial and Business Reporting - sets out board responsibilities for establishing, monitoring and reviewing the risk management and internal control systems. It also provides guidance on how to report principal risks, the going concern basis, the viability statement and the review of risk management and internal control systems.
Following the proposals on the Government’s Response to the Consultation to strengthen the reporting requirements on internal control systems, the FRC will work with stakeholders to develop new appropriate guidance.
| Name | Guidance on Risk Management, Internal Control and Related Financial and Business Reporting September |
|---|---|
| Publication date | 17 September 2014 |
| Type | Guidance |
| Format | PDF, 496.0 KB |
In July 2022, the FRC published company meetings guidance in the form of principles and actions that listed companies should consider adopting in order to enhance effective shareholder participation when planning and conducting AGMs and other general meetings. The guidance draws on the work of the FRCs AGM Working Group. Key aspects include board engagement with shareholders, communication of meeting arrangements, using proxies, and voting processes.
In October 2020 the FRC issued a best practice review of Annual General Meetings. The report considers how companies can embrace new technologies which became more prevalent following the Covid 19 pandemic. It highlights the importance of engagement with all shareholders and considers ways to mitigate the risk of disenfranchisement of retail shareholders.
| Name | Good Practice Guidance for Company Meetings |
|---|---|
| Publication date | 21 July 2022 |
| Format | PDF, 582.2 KB |
| Name | Corporate Governance AGMs: An Opportunity for Change - Best Practice Review |
| Publication date | 6 October 2020 |
| Format | PDF, 328.1 KB |
Technical Q&A
What constitutes an explanation for the purpose of the Corporate Governance Code?
Explanations are key to the ‘comply or explain’ nature of the Code. While a departure from the Code could achieve effective corporate governance, an explanation is necessary for effective transparency.
Companies should provide full and meaningful explanations so that shareholders and other stakeholders understand why a departure is necessary and how it achieves effective governance for the company even though is a departure from the Code. It is an opportunity to communicate and demonstrate confidence that the company is taking governance and reporting seriously.
A meaningful explanation should set out the background, provide a clear rationale for the action the company is taking, describe any risks and mitigating actions to address them, and set out when the company intends to comply (timescales). Most importantly, it must be understandable and persuasive for those reading the annual report.
It should give enough detail so that investors and other stakeholders can understand and evaluate why the company has departed from a Provision, and what the chosen alternative entails.
Additional information on what constitutes a good explanation is included in the FRC's paper Improving the Quality of 'Comply or Explain' Reporting published in February 2021.
What does ‘comply or explain’ mean in practice?
The Code recognises that there is no single path to achieving effective corporate governance for all companies and therefore a single approach does not suit all companies. Companies can choose to depart from the Code, in which case they should provide an explanation for this non-compliance.
Companies should provide a statement in their annual report showing whether they: a) fully complied with all elements of the Provisions of the Code throughout the whole financial year; or b) has departed from any of the Provisions of the Code (whether throughout the whole financial year or part of it), citing any Provisions that they have not complied with and state where in the report the explanation can be found.
The Code is not a rulebook – it sets out good practice, made up of flexible requirements. Where a company has explained non-compliance with a Provision, investors should determine whether this explanation is satisfactory and demonstrates how departure from the Code benefits the company. Where explanations are weak, investors should engage with companies and hold directors to account in order to improve governance practices and reporting.
Does Provision 4 capture both board proposed resolutions and shareholder requisitioned resolutions?
Provision 4 applies to all resolutions at general meetings, whether proposed by the board or shareholders. The ‘board recommendation’ reference is to how the board recommended shareholders vote on a resolution, i.e. a vote “for” a board resolution, or a vote “for” or “against” a shareholder resolution.
Who does ‘workforce’ refer to when used in the Code?
The term ‘workforce’ is broader than ‘employees’, as used in Section 172, i.e. those with a direct contract of employment with the company. Instead it might include agency workers, contractors and people with ‘zero hours’ contracts. This will depend of course on the particular circumstances of the company which should decide who is included within the definition and explain why it has reached its conclusions. We explain this further in Paragraph 50 of the Guidance (PDF), but this is not a legally defined term. [For the Remuneration section please see Paragraph 131 for a description of workforce in this context.]
Given UK companies already need to comply with conflicts of interest requirements in the Companies Act 2006 and the Listing Rules is Provision 7 intended for non-UK incorporated entities?
Provision 7 is designed to emphasise the board’s collective responsibility for dealing with conflicts of interest in a transparent way in order to enable it to be an effective decision-making body. It is associated with Principles B and E and linked to Provision 8. The aim is to ensure that the board has an agreed process in place for identifying and dealing with conflicts rather than addressing them on an ad hoc basis. Further guidance is given in the decision-making section on pages 9-10 of the Guidance on Board Effectiveness. As such, this Provision is not primarily intended for non-UK incorporated entities only, but we acknowledge that UK companies are subject to the requirements of the Companies Act 2006 and Listing Rules.
Do chairs who have been on the board for over 9 years have to resign?
No – the Code is ‘comply or explain’. There may be reasons to keep a chair in post, but boards must think very carefully about their composition, refreshment and succession planning, and offer an explanation.
Why have you set a tenure period for chairs but not non-executive directors?
The independence criteria in Provision 10 have and will continue to act as a recommended tenure period for non-executive directors. The new period for chairs ensures that there is careful consideration after 9 years. Where there is an extension this should be supported by comprehensive explanations which will help investors and other stakeholders better understand the long-term succession planning strategy of companies.
Is the clock reset when a non-executive director is appointed chair or does the nine-year test of independence start when they first join the board?
In respect of board chairs, the recommended nine-year tenure period starts when the person first joins the board. Nevertheless, the 2018 Code offers flexibility on this issue. Principle K refers to the combination of skills, experience and knowledge needed on a successful board and that consideration should be given to the overall length of service of the board. This recognises that an effective board will benefit from a mix of lengths of service.
In addition, Provision 19 says that the nine-year period “can be extended for a limited time, particularly in those cases where the chair was an existing non-executive director on appointment”. The provision explains that this is “to facilitate effective succession planning and the development of a diverse board”.
The Code is of course based on setting a high standard of good practice and the principle of ‘comply or explain’ and we expect high quality explanations in cases where companies depart from the Code Provisions.
How does the Code’s definition of ‘senior management’ (including for Hampton Alexander reporting) fit with the Companies Act (s.414c) definition of ‘senior managers’?
In terms of Code reporting, we would not expect companies to list all their senior management by name. Nevertheless, good practice would be to indicate the size and scope of senior management, for example – an Exco/Executive Board of XX (with XX direct reports – for the purposes Hampton Alexander reporting). This could be done by use of a footnote.
The definition of ‘senior manager’ in s414c (see below) is based more on function rather than seniority, so some companies may have different disclosures under the legislation than for the Code. Where this is the case companies can explain why the two disclosures are different, but some may wish to use the definition which covers both requirements.
(8) In the case of a quoted company the strategic report must include—
a. a description of the company’s strategy,
b. a description of the company’s business model,
c. a breakdown showing at the end of the financial year—
(i) the number of persons of each sex who were directors of the company;
(ii) the number of persons of each sex who were senior managers of the company (other than persons falling within sub-paragraph (i)); and
(iii) the number of persons of each sex who were employees of the company.
(9) In subsection (8), “senior manager” means a person who—
a. has responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company, and
b. is an employee of the company.
Why does the Code not specifically refer to cyber risks?
Both the Code and the Strategic Report asks directors to consider the situation of the company and identify its emerging and principal risks (and their materiality to shareholders), and how they are managed and mitigated.
For many companies cyber/IT security will be amongst these risks, but the Code does not provide a list of risks for directors to consider as this is a matter for their judgement and particular to the company’s activities. Of course, having expertise on the board in this area will be one way of mitigating this type of risk.
The purpose of the Code disclosures is to give investors an understanding of the directors' consideration of risks and the actions that have taken. Investors can then engage with the company as appropriate.
What does Provision 36 mean in terms of how long shares should be held before they can be sold?
The intention of Provision 36 is to encourage a phased approach so that not all shares vest at the same time. Phased awards should encourage a continuous focus on performance over the long-term. This sets out well-established market practice, enforced by clear and robust institutional investor expectations. Provision 36 is intended simply to indicate that LTIP award shares should be granted on a phased basis and should vest in grant order.