Re-vamping the Corporate Governance Code

This week the investment team has been discussing the future of corporate governance: we’ve been putting together our response to a consultation on the Corporate Governance Code.

The Code is fundamental to how listed companies are run. It’s voluntary but most large, listed companies adhere to its guidance. It sets out important principles that give us, as investors, confidence that directors are adequately challenging (and supporting) the chief executive and others responsible for running the company day-to-day.

For example, the Code states that directors should be independent and not too cosy with the management team. It recommends regularly changing auditors so that fresh eyes can see the accounts. It frowns on the roles of chair and chief executive being held by the same person as it concentrates authority in one pair of hands.

The UK Corporate Governance Code is already seen as the governance gold standard globally. Nevertheless, the Financial Reporting Council (the body that oversees the Code) has decided the time is right for a re-vamp. This is partly due to increased scrutiny of corporate governance in recent years (not least around executive pay) and because of calls for greater workforce representation and greater diversity on the boards of UK plc.

In responding to the consultation, we:

  • Agreed that the employee voice needs to be heard at board level, irrespective of the methods companies choose – be it employee councils or appointing an existing director to have responsibility for workforce issues. We stated that, as an employee owned business, we know direct representation on the board can work, provided that the selected employee is given appropriate training and support.

  • Put forward the case for the revised Code to include more detailed recommendations on “overboarded” directors, i.e. directors that hold multiple appointments. This concerns us as it risks directors not having sufficient time to discharge their duties properly.

  • Agreed that companies should be required to address publicly any AGM resolution where 20 per cent of shareholders vote against. We would like to see companies reporting back on their intentions to address shareholder concerns within three months, rather than the six months outlined in the draft Code.

  • Supported the idea that all listed companies should aim to adhere to the full UK Corporate Governance Code, rather than just FTSE350 constituents which is the current recommendation. If certain aspects are not feasible for smaller firms, we suggest that they use the “comply or explain” mechanism to outline their reasons for non-compliance.

  • Advocated greater reporting on diversity in the workforce, not just on gender but on ethnicity too. We believe that diversity and the benefits it offers to business and society extend to companies of all sizes.

  • Stated that there is a real need for simplification of executive remuneration packages and a strong desire from a shareholder perspective to see simple, clear and stretching pay plans rather than the opaque and complex ones we often see.

Our full response is set out in this document, and is best read in conjunction with the FRC’s own consultation documents which are available here.

We look forward to seeing how the final Code shapes up.


Ita McMahon and Kate Hewitt

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