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August 15, 2018

New UK Corporate Governance Code and Other Governance Developments


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On 16 July 2018, the UK’s independent corporate governance, accounting and audit regulator, the Financial Reporting Council (the FRC), published a revised edition of the UK Corporate Governance Code (UKCGC) and supporting informal guidance on how boards might apply it. The new UKCGC will apply to all premium listed companies (whether or not UK incorporated) with accounting periods beginning on or after 1 January 2019. A number of other important corporate governance reforms have been introduced in the UK at the same time.

The new UKCGC—accessible here—includes some of the most significant revisions that have been made to the UKCGC in recent times and marks the completion of several reforms and updates that have taken place in 2018 in U.K. corporate governance following the Government’s proposed reforms in this area announced back in November 2016. In our briefing of 1 September 2017 accessible here, we discussed the package of reforms that the Government had finally decided to proceed with, most of which have now been implemented, though a few further reforms and consultations remain outstanding, as mentioned at the end of this briefing.

The New UKCGC and Board Effectiveness Guidance


The FRC consulted on a large number of changes to the UKCGC in December 2017, not all of which, as a result of feedback received, have been included in the UKCGC as finally issued. The most noticeable change in the UKCGC is that it is now much shorter and more concise, with many of its “comply or explain Provisions” (i.e. best practice illustrations of how its much more general “Principles” should be applied) having been removed and included in the FRC’s revised informal guidance to boards on how they should consider applying the UKCGC (Guidance on Board Effectiveness (“Board Effectiveness Guidance”)). As a consequence the UKCGC has been reduced from 32 pages to 15, while the Board Guidance has increased from 15 pages to 45.

Under the UK’s premium listing rules, a company has to state in its annual report: (i) how it has applied the Main Principles in the UKCGC—under the existing UKCGC, there are both “Main” and “Supporting Principles” as well as “Provisions” but under the new UKCGC there will only be “Principles” and “Provisions,” and (ii) whether it has complied with the UKCGC’s Provisions or, if it has not, its reasons for non-compliance. While under the new UKCGC there will be fewer Provisions in respect of which companies will have this “comply or explain” obligation, when reporting they will still need to consider the range of best practice suggestions contained in the Board Effectiveness Guidance as to how the UKCGC should be applied by them and therefore why, even though those suggestions are not prescriptive or mandatory, they may have decided not to follow them.

The key changes in the UKCGC from the last edition (April 2016) and from what the FRC originally proposed in its consultation on the new UKCGC, are summarised in the table below

New In The 2018 UKCGC

Changes From The December 2017 UKCGC Proposals

  • New or greater focus on board’s responsibility for:
  • company’s engagement with a range of stakeholders, esp. employees
  • corporate purpose and strategy aligned with healthy corporate culture
  • diversity and inclusion as well as gender balance at senior management level; oversight of development of a diverse pipeline of talent
  • avoiding “overboarding” and sufficiency of directors’ time commitments to their roles
  • fairness and proportionality in pay—e.g. the phased release of share awards, pension contribution rates for executive directors should be aligned with those available to the workforce, compensation should not reward poor performance or fail to take account of directors’ obligations to mitigate loss, remuneration should avoid reputational, behavioural and other risks arising from excessive or target-based rewards


  • Choice of three engagement mechanisms with the workforce:
  • Worker-director
  • Formal workforce advisory panel
  • Designated non-executive director

Alternatively, the board might choose a different mechanism but must say why it considers it effective

  • An alternative workforce engagement mechanism may be used as well as the three specific mechanisms set out in the UKCGC
  • Additional disclosures when there is a 20% vote received against any resolution—(i) when announcing the voting result, the company should say what it intends to do to understand the reasons for the vote against, (ii) six months later, an update should be provided on views received from shareholders, and (iii) the next annual report should include a summary of the impact of shareholder feedback received


  • Chair should not remain in post beyond nine years from appointment—exceptionally this may be extended for a limited period of time where required for effective succession planning, etc.
  • Chair does not have to continue to qualify as independent following appointment
  • Previous board independence requirements now retained (i.e. at least half of board, excluding chair, must be independent instead of, as was proposed, a majority, including chair, having to be independent)
  • RemComs:
  • Chair of RemCom must have served on a remcom for at least 12 months
  • More demanding consideration of and reporting on, remuneration policies and practices – e.g. reviewing and taking into account workforce pay, policies and incentives when setting executive director pay, and exercising discretion under remuneration schemes to override formulaic outcomes


  • Removal of “smaller company” (i.e. non-FTSE 350) exemptions from board independence and annual re-election Provisions


  • Retention of some “smaller company” UKCGC exemptions (as opposed to removal of all exemptions): i.e. or smaller companies: three-yearly externally facilitated board evaluation is not “mandatory” (but should be considered) and minimum audit and remuneration committee membership may be two instead of three

Board Effectiveness Guidance and Other FRC Guidance

The FRC’s revised, non-mandatory and non-prescriptive Board Effectiveness Guidance—a copy of which is accessible here—looks very different from the earlier 2011 version. This is not only because it is much longer and more detailed but also in its layout with each of its five sections (which mirror those of the UKCGC) now containing several questions for the board to consider when thinking about how best their company can apply the UKCGC. It also contains a useful summary of the overlap between governance disclosure requirements under the UKCGC and under the UK’s Listing and Disclosure Guidance and Transparency Rules (a similar summary appeared in the previous version of the UKCGC).

Taking account of the new governance reporting disclosures that will now be required under the Reporting Regulations discussed below, the FRC has also recently revised its Guidance on the Strategic Report. This provides a non-mandatory best practice statement of how a board might approach preparing its strategic report and a copy is available here. Other FRC guidance that boards will continue to find helpful with respect to their corporate governance application and reporting, includes Guidance on Audit Committees (2016) (a copy of which is available here) and guidance on Risk Management, Internal Control and Related Financial and Business Reporting (2014) (a copy of which is available here).

Other Corporate Governance Reform Developments

As discussed in our earlier corporate governance reform briefing (click here), the revision of the UKCGC formed only one part of the Government’s reform programme. Most of the other parts of that programme have also now been introduced and these are summarised below.

Companies (Miscellaneous Reporting) Regulations 2018[1] (the “Reporting Regulations”)

As with the new UKCGC, these Regulations will come into force on 1st January 2019 with different application criteria depending on the reporting requirement concerned. The Government has produced some helpful guidance on what the Reporting Regulations require (the “BEIS Guidance”) and this is available here. The Reporting Regulations cover:

CEO pay ratio reporting and impact of share price on directors’ remuneration

Companies caught

“quoted”[2] U.K. companies. NB CEO pay ratio reporting only applies to those companies with > 250 U.K. employees

Disclosure where?

The Directors’ Remuneration Report

CEO pay ratio reporting

  • Ratio of the CEO’s latest single total remuneration figure to:
  • the median (i.e. 50th percentile) full-time equivalent (FTE) remuneration of the company’s U.K. employees
  • the 25th percentile FTE remuneration of the company’s U.K. employees
  • the 75th percentile FTE remuneration of the company’s U.K. employees
  • Underneath the ratios table, supporting information and an explanation, including:
  • the methodology chosen for calculating the ratios
  • the reason(s) for any changes to the ratios compared to the previous year
  • in the case of the median ratio, whether, and if so why, the company believes this ratio is consistent with the company’s wider policies on employee pay, reward and progression
  • Appendix to BEIS Guidance gives examples of how the ratio methodology may be applied

Impact of share price on remuneration

Additional disclosures required of the impact of share price growth on directors’ remuneration awards and outcomes (under the directors’ remuneration policy), including how any discretion has been exercised to with respect to share price growth or decline

Section 172(1)
[3] statements

Companies caught

U.K. companies—quoted or unquoted—which are required to produce a Strategic Report (as part of their annual report) and do not qualify as “small” or “medium-sized” for accounting purposes; i.e. which meet two out of three of:

  • Turnover > £36m
  • Balance sheet total > £18m
  • > 250 employees (NB not limited to U.K. employees)

NB: (1) each “qualifying” company or subsidiary in a group must make its own statement; these statements may also have to appear in group strategic reports
        (2) in a group where each member fails to meet the above qualifying tests but where the parent company does in respect of its group accounts, a s. 172(1) statement will be required in the group strategic report

Disclosure where?

Strategic Report and on a website (including as part of the annual report)

Disclosure required

How the directors have had regard to stakeholder (including employee, customer and supplier) and other interests as required by s. 172(1) Companies Act 2006 when discharging their duty under that section to promote the success of their company for the benefit of its shareholders as a whole

BEIS Guidance suggests such statements may include:

  • Issues, factors and stakeholders that the board considers relevant
  • Main methods used to engage with stakeholders and understand issues
  • The effect this has had on company decisions and strategies

Employee engagement disclosures

Companies caught

U.K. companies with > 250 U.K. employees (which already have to make a statement about “employee involvement” in their directors’ report)

Disclosure where?

In the directors’ report but may be included in the strategic report where considered appropriate

Disclosure required

Summary of how directors have engaged with employees and taken account of their interests

Other stakeholder engagement disclosures

Companies caught

Same companies as must make s. 172(1) statements (see above)

Disclosure where?

As for employee engagement disclosures above

Disclosure required

Summary of how the directors have engaged with suppliers, customers and others in a business relationship with the company

Corporate governance arrangements

Companies caught

U.K. companies with either (or both):

  • 2,000 or more employees, or
  • Turnover of > £200m and balance sheet total of > £2bn

Exempted from this requirement:

  • U.K. listed companies (which must already make such disclosures under the Listing Rules (where premium listed) or the Disclosure Guidance and Transparency Rules (where standard listed)
  • NB: (1) subsidiaries of listed companies will be caught (though they may disclose how the listed group applies the UKCGC to them)
            (2) AIM companies are not exempted but the disclosures they make under the revised AIM Rules (see below) will likely satisfy this requirement
  • Charitable and community interest companies

Disclosure where?

The directors’ report (or, where appropriate, the strategic report) and on a website

Disclosure required

  • Which corporate governance code (if any) the company has applied
    NB this could be the new “Wates Principles” (see below), the QCA code or the UKCGC or another code
  • How the company has applied that code and details of and explanations for, any departures from it
  • Reasons for not applying any code and what corporate governance arrangements have been applied

The Wates Principles

In June 2018, the FRC published for consultation in draft form “The Wates Corporate Governance Principles for Large Private Companies” - so-called because they have been drawn up under the chairmanship of James Wates CBE, chairman of one of the UK’s largest private companies, the Wates Group, and are intended for use by private, as oppsed to publicly listed or traded, companies. A copy is available here. Comments are required by 7 September 2018.

The Wates Principles form a very short corporate governance code consisting of six broad principles that cover the purpose, composition and responsibilities of effective boards with a focus on opportunity and risk, “aligned” executive remuneration and meaningful engagement with stakeholders. The draft code includes guidance for consideration when applying each of the principles.

Investment Association and ICSA Work

Stakeholder engagement guidance

At the end of September 2017, the Investment Association and the Institute of Chartered Secretaries and Administrators (ICSA) published their joint guidance on stakeholder engagement entitled “The Stakeholder Voice in Board Decision Making,” a copy of which is available here. The guidance contains ten core principles relevant to a board’s engagement with stakeholders (whether shareholders, the workforce or customers, etc.) and offers non-prescriptive guidance and examples as to how relevant principles might be applied in the context of directors’ duties, stakeholder identification, board composition, induction and training of board members, board discussions, engagement mechanisms and reporting to shareholders and providing feedback to stakeholders.

Public register

In December 2017, the Investment Association set up its online public register of FTSE All-Share companies that have received a 20% vote against any resolution or have chosen to withdraw a proposed resolution. The register can be accessed here. Resolutions are divided into different types covering areas such as remuneration, director (re)election, share capital issues, requisitioned or withdrawn resolutions and other matters and for each resolution voting figures (including abstentions and the percentage of share capital voted) are given as well as a link to any statements made by the company in respect of the vote against the resolution when announcing the voting results and subsequently about actions taken, etc.

New QCA Code

In April 2018, the Quoted Companies Alliance (QCA) published a new edition of its corporate governance code. A copy can be bought from here. The code sets out ten principles which are amplified by explanations as to how they might be applied and the disclosures that should be made about such application. In addition, the company’s chairperson must provide a clear explanation of how the company applies the QCA code in a corporate governance statement and provide a well-reasoned explanation for any departures from the code.

The principles are focused on: (i) delivering growth—having a business model that promotes long-term value for shareholders, taking into account wider stakeholder issues, and embedding risk management throughout the organisation, (ii) maintaining a dynamic management framework—having a well-functioning and skilled board and promoting a corporate culture based on ethical values and behaviours, and (iii) building trust—through stakeholder communication and dialogue.

With companies now being required to disclose (and justify) any departures from the corporate governance codes they apply—see the Wates Principles above for large private companies and the new disclosure requirements below for AIM companies—it will be interesting to see whether companies that previously adopted the UKCGC “so far as appropriate to their size and position” will now be attracted to adopting a simpler code, such as the QCA code. The attraction will be that they can report full compliance with the simpler code instead of having to explain and justify and non-compliance with several aspects of a more detailed code.

AIM Companies’ Corporate Governance Disclosures

From 28 September 2018, AIM companies will be required to report on the “recognised corporate governance code” they have chosen to apply—there is no prescribed list, it can be any code that they think is appropriate—and on any departures from it with reasons for those. This reporting must be disclosed as part of their AIM Rule 26 website disclosures and reviewed annually.

Final Thoughts

This is not quite the end of the current wave of U.K. corporate governance reform since the Government has also recently consulted on further reforms of the governance of companies facing insolvency (a copy of the now closed consultation is available here) and has promised a review on the use of share buybacks and how they might be used to influence performance targets in relation to executive pay schemes. In addition, the FRC has promised a more detailed review and revision later this year of its Stewardship Code for investors, following an initial consultation carried out at the end of last year at the same time as its consultation on the revised UKCGC.

We will have to wait and see how much real improvement in the better functioning of boards and in the management and running of companies these corporate governance reforms actually bring about. In the meantime, the increased focus on employee and other stakeholder engagement, as well as the refreshing of the UKCGC so that it now provides a clearer focus on core principles, with much more helpful but separate and non-prescriptive guidance as to how those principles might best be applied, at least offers a promising and helpful update of the ever evolving U.K. corporate governance regime.


[1] A copy is available here.
[2] With equity share capital officially listed in the U.K. or another EEA state or traded on NYSE/NASDAQ.
[3] s. 172(1) Companies Act 2006 states: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.”

Authors and Contributors

Laurence Levy


Mergers & Acquisitions

+44 20 7655 5717

+44 20 7655 5717


Simon Burrows


Mergers & Acquisitions

+44 20 7655 5696

+44 20 7655 5696


Paul Strecker


Mergers & Acquisitions

+44 20 7655 5047

+44 20 7655 5047

+852 2978 8038

+852 2978 8038


Michael Scargill


Mergers & Acquisitions

+44 20 7655 5161

+44 20 7655 5161