The Financial Reporting Council (FRC) has proposed changes to the UK Corporate Governance Code, giving more prominence to company purpose and stakeholder engagement. According to the FRC, the 2018 UK Corporate Governance Code is a “shorter, sharper” code that puts the relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy.

This code, which is the result of extensive consultation, places emphasis on businesses building trust by forging strong relationships with key stakeholders. It calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy, promoting integrity and valuing diversity.

In its statement, the FRC said that it wishes to see clear, meaningful reporting and that “investors and proxy advisors must assess explanations carefully and not take a tick-box approach.” The main changes are:

Workforce and stakeholders

There is a new provision to enable greater board engagement with the workforce to understand their views. The code asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act.

Culture

Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.

Succession and diversity

To ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new code emphasises the need to refresh boards and undertake succession planning. Boards should consider the length of term that chairs remain in post beyond nine years. The new code strengthens the role of the nomination committee on succession planning and establishing a diverse board. It identifies the importance of external board evaluation for all companies. Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.

Remuneration

To address public concern over executive remuneration, the new code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. Importantly formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.

Code for economic and social issues

The FRC's chairman, Sir Win Bischoff, said: “Corporate governance in the UK is globally respected and is a framework trusted by investors when deciding where to allocate capital. To make sure the UK moves with the times, the new code considers economic and social issues and will help to guide the long-term success of UK businesses.”

Deloitte issued a statement saying it supports the changes, which it says fit well with other parts of the government’s governance reform package and the new reporting legislation issued in June. The statement continued: “Company purpose and stakeholder engagement take more central roles in the revised code and companies will need to ensure they address these areas with integrity, as they will be quickly exposed if their statements do not ring true to stakeholders.”