A proposed new UK corporate governance code will stress the need for boards to consider their “contribution to wider society” and place new responsibilities on directors to manage company culture.
The draft code, published today by the Financial Reporting Council (FRC), also calls for companies to consult with employees, and widens the approach to diversity to include not just gender, but also ethnicity and social class.
The new code also proposes empowering remuneration committees to “override” remuneration outcomes, in a bid to counter unjustified levels of executive pay.
The FRC also takes decisive steps towards embedding the idea that companies should be run for the “long-term”.
FRC chairman Sir Win Bischoff said that as the country approaches Brexit, a new code for the UK “will be essential to restoring trust in business, attracting investment and ensuring the long-term success of companies for members and wider society”.
He said: “A principle promoting the importance of the intrinsic value of corporate culture is a new addition to the code.
“Building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company.
“Engaging with and contributing to wider society must not been seen as a tick-box exercise but imperative to building confidence among stakeholders and in turn the long-term success of a company.”
Business minister Margot James played up the new code’s provisions on consultation with workers, though the government has already shied away from an early proposal to place workers on boards.
“Firms that are alive to the concerns of their workers and shareholders see the benefits on their bottom line and the Financial Reporting Council’s proposals will ensure our largest companies benefit more from the experience of their workforce, suppliers and customers,” said James.
Culture as a core principle
Culture has been woven into the code’s core principles, including the alignment of culture with strategy, values and purpose, following the FRC’s own study of corporate culture last year.
In October, Board Agenda published a survey which showed that almost two-thirds of European company directors work on boards that either fall short of giving corporate culture significant attention, or fail to include it in their formal risk-management systems.
The survey revealed that 63% of the boardroom members polled either work on boards that exclude culture from formal risk considerations, or fail to routinely assess the risks associated with their own corporate cultures.
Principle A of the code now features culture as well as referencing “wider society”.
It reads: “A successful company is led by an effective and entrepreneurial board, whose function is to promote the long-term sustainable success of the company, generate value for shareholders and contribute to wider society. The board should establish the company’s purpose, strategy and values, and satisfy itself that these and its culture are aligned.”
However, the new code also calls on boards to take direct action where they find culture is not aligned. Annual reports should now disclose how boards are addressing culture.
Provision 2 of the revised code says: “The board should monitor and assess the culture to satisfy itself that behaviour throughout the business is aligned with the company’s values. Where it finds misalignment it should take corrective action. The annual report should explain the board’s activities and any action taken.”
Though the code already includes many references to companies being run for the “long-term” the new iteration underlines its importance and ask boards to report on the role governance has to play.
Provision 1 now says: “The board should assess the basis on which the company generates and preserves value over the long term.
“It should describe in the annual report how opportunities and risks to the future success of the business have been considered and addressed, the sustainability of the company’s business model and how its governance contributes to the delivery of its strategy.”
The importance of workers is recognised in the code, which has a new provision calling on companies to “establish a method for gathering the views of the workforce”. This could be a director, a workforce advisory panel or a designated non-executive director.
Engaging the workforce
The code also asks companies to report on how they have engaged with the workforce.
The new code proposes a provision that “encourages” reporting on “actions taken to increase diversity and inclusion.” The code aims to have companies see diversity as a broader issue that extends beyond gender to ethnicity and social class.
Principle J of the proposed code says: “Both appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.”
Provision 23 of the code makes it clear that gender diversity is an issue that goes beyond the confines of the boardroom. The measure calls on all FTSE 350 companies to disclose in annual reports the gender balance on their executive committee and direct reports to the executive committee.
Meanwhile, the “override” power written into the code will enable pay calculations to be ignored if they are unsupported by the actual performance outcomes of their companies. The code calls for pay arrangements that enables companies to withhold or claw back pay.
Provision 37 of the draft code says: “Remuneration schemes and policies should provide boards with discretion to override formulaic outcomes. They should also include provisions that would enable the company to recover and/or withhold sums or share awards, and specify the circumstances in which it would be appropriate to do so.”