Spotlight on the new Corporate Governance Code
Luminous recently had the pleasure of attending the Financial Reporting Council‘s (FRC) event, ‘Corporate Governance: Fit for the future?’. This event was created to accompany the arrival of the new UK Corporate Governance Code. The new Code is a highly significant milestone and should offer companies the tools they need to meet investor and public expectations for the foreseeable future and will also facilitate transparency and long-term value creation.
Here are some of the key takeaways from the event.
The new code emphasises four key areas of governance
– Building a positive relationship between companies, their shareholders and stakeholders, particularly its workforce.
– Aligning the company’s purpose and strategy with a healthy corporate culture.
– Ensuring board membership is of a high quality and focussed on diversity.
– Remuneration that supports a company’s long-term aims.
Less is more
Allowing companies greater flexibility to report on what is important to them, will lead to trimming of fat and removal of superfluous information. This is likely to lead to annual reports that are clear, concise and compelling.
Comply or explain continues to operate effectively
Code disclosures will continue to exist on a comply or explain basis. However, to ensure companies get the most out of it, explanations must be detailed, open and transparent. Business leaderships must ensure they gain the value that arises from transparency and offer authentic, well thought-out disclosures.
Diverse boards avoid the danger of groupthink
The requirement for nomination committees to have more effective succession planning and diversity pipelines in place will lead to individuals from a wider range of backgrounds. This will add a freshness to boards and ensure that there is increased diversity of thought, a greater variation of skills when tackling business challenges of the future and improved resilience.
Remuneration changes will remove the perception that boards are being rewarded for failure
Changes to the Code will mean remuneration outcomes will be a more accurate representation of business successes and failures. Remuneration will require:
– More demanding criteria.
– A description of how it delivers success and facilitates strategy.
– A more detailed description of how it delivers fairness throughout the company.
– Discretion to be built in i.e. overriding formulaic outcomes.
Stakeholders and shareholders are not enemies and their aims are not mutually exclusive
Section 172 of the Companies Act 2006 traditionally stated that the board was required to promote the success of companies with regard to shareholders. This section has been expanded on in favour of stakeholder value. The new Code supports this responsibility by requiring boards to engage more fully with stakeholder groups. As Sir Win Bischoff, Chairman of the FRC stated, the new Code will concentrate on “the company’s health and not shareholders’ wealth”; this, however, does not mean shareholder value will fall by the wayside. Companies that consider stakeholders in decision making will experience increased success and greater long-term viability.
The Luminous view
It is our hope that the sharper and simpler Code will lend itself to significant improvements in the annual report. Though the previous incarnation of the Code led to strong disclosures and facilitated huge improvement in the governance landscape, it is unequipped to deal with the variety of modern challenges and business types.
At Luminous, we are optimistic that the updated Code will go some way towards correcting ills that have developed over the years, such as the insufficient integration of culture and purpose within businesses, the lack of diversity at board level and lack of trust in corporate entities.
Download the new Corporate Governance Code.
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