Board chairs have been offered flexibility to serve beyond a nine-year term in the UK’s new corporate governance code.
Released on Monday this week, an earlier draft had been notable for provisions that appeared to impose on chairs a nine-year limit, a period that would include time as a non-executive director. There had been concern when the draft code was released that this would affect a large number of existing chairs, including 19 in the FTSE 100.
However, as revealed by Board Agenda last week, the Financial Reporting Council, the UK watchdog for corporate governance, has changed the code to offer flexibility.
In a section on boardroom independence, the code nows says a chairman should not be in post beyond nine years, “but this period can be extended for a limited time, particularly in those cases where the chair was an existing non-executive director on appointment. A clear explanation should be provided.”
The change reflects the FRC’s belief that the appointment of chairs from among a company’s existing non-executive cadre is more likely to promote diversity.
It also nails down the FRC’s belief that a chair’s time on a board should be limited. The FRC head of corporate governance, David Styles, told a conference of ICSA: The Governance Institute last week that “refreshment” of chairs leads to a healthy refreshment of non-executive directors.
The new code has also stuck with provisions giving remuneration committees (remcos) a role in company-wide pay issues, saying it should be taken into account when setting executive pay arrangements.
The final draft says that the remco “…should review workforce remuneration and related policies and the alignment of incentives and rewards with culture, taking these into account when setting the policy for executive director remuneration.”
It adds that the remco should also detail in the annual report, “what engagement with the workforce has taken place to explain how executive remuneration aligns with wider company pay policy…”
The FRC has attempted to row back from any suggestion that remcos have executive responsibility over company-wide pay, but still include workforce pay in boardroom remuneration policy decisions.
Sir Win Bischoff, FRC chairman, 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.
“This new Code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.”
Theresa May made corporate governance a core part of her time in government when she became prime minister seeing it as a key element in improving social equality.
The final code includes a provision that asks boards to generally engage with the workforce. Boards must now describe how they have consulted with stakeholders when fulfilling their responsibilities under section 172 of the 2006 Companies Act.
For the first time, boards are also asked to create a corporate culture that fits with company values and “preserves” values over the long term.
The code also calls on boards for better succession planning.
Greg Clark, the business secretary, said: “These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run. They will help the UK remain the best place in the world to work, invest and do business.”
The Institute of Directors welcomed the new code but expressed concern that there were demands for continuing professional development for company directors.
Roger Barker, head of corporate governance at the IoD, said: “As we highlighted during the consultation period, the role of the modern director is increasingly complex and specialised, and there is an ongoing need for these individuals to take stock of their competencies.
“By removing reference to the professional development of directors from the code and only mentioning it peripherally in the guidance, the FRC risks indicating to directors that it is not important.
“Recent corporate failures have shown the danger of company boards not being aware of their responsibilities and duties, and as the primary governance document for many UK companies, the code should be playing a key role in raising the standards of UK directors.”
The CBI, the UK’s biggest body for business, focused on the new emphasis on employees. Matthew Fell, CBI UK chief policy director, said:
“Companies should define their most important stakeholders—which will often be employees—and then set out how they choose to engage with them to take their views into account. It is helpful to see this new emphasis by the FRC.”
Peter Swabey, policy and research director at ICSA, said the code gave a key role to company secretaries.
“The section in the Board Effectiveness guidance on the role of the company secretary recognises the value that the company secretary can add to the effectiveness of the board.”
Meanwhile, the trades unions expressed concern.
Frances O’Grady, general secretary of the Trades Union Congress (TUC), said: “These reforms are a step in the right direction. But they are not the shake-up of corporate Britain Theresa May promised and the country needs.
“While it’s good this new code recognises the importance of workforce engagement, the real test is whether companies give workers more of a say in how they are run.
“The government should have stuck to its commitment to make workers on boards mandatory.”