Changes Proposed to U.K. Corporate Governance Code Focus on Going Concern and Compensation

The U.K. Financial Reporting Council has proposed major change to the U.K. Corporate Governance Code around risk management, going concern and remuneration. The Code is on a comply or explain basis and is usually reviewed by the FRC every two years with a full consultation on all proposed changes. The Consultation would amend the Code to place greater emphasis on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee. Companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, noted the FRC, and should consider appropriate vesting and holding periods for deferred remuneration.

Companies would also be required to explain when publishing results how they intend to engage with shareholders when a significant percentage of them have voted against a shareholder resolution. In addition, companies would be required in their financial statements to disclose whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so. On the risk management front, companies would be required to robustly assess their principal risks and explain how they are being managed and mitigated.

Companies would also have to state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months. Also, companies would have to monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

Commenting on the consultation, FRC CEO Stephen Haddrill noted that the role of the board is to ensure the sustained success of their company and exercise responsible stewardship on behalf of their shareholders. To do this effectively they need to understand and manage the risks to the future health of the company. The remuneration of executives on the Board must also incentivise them to put the company’s well-being before their own. These proposals, which reflect the views of investors and others on earlier consultations, are intended to encourage boards to focus on the longer-term, and increase their accountability to shareholders.”