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Essential Corporate News – Week ending December 8, 2017

Publication December 8, 2017


Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

FRC: Proposals for a revised UK Corporate Governance Code and revised Guidance on Board Effectiveness

On December 5, 2017 the FRC published proposals for a revised UK Corporate Governance Code (Code) and updated Guidance on Board Effectiveness (Guidance). The proposals reflect the changing business environment and the revised Code aims to promote the long-term success of companies by achieving the highest standards of corporate governance.

The UK Corporate Governance Code

The revised Code is much shorter and sharper than the current April 2016 Code, reduced from 32 pages to 13 and from around 11000 words to 5000. The FRC has taken findings from its 2016 Culture Report, engaged with stakeholders and incorporated suggestions from the Government’s response to its Green Paper on Corporate Governance Reforms to produce a Code that is fit for purpose.

The FRC has included a revised version of the Code in Appendix A to the consultation document, while Appendix C summarises the changes that have been made to the April 2016 Code.

The revised Code strives to raise standards further and sets out good practice that ought to be adopted by the boards of UK companies. It is now made up of five sections: 1 Leadership and purpose; 2 Division of responsibilities; 3 Composition, succession and evaluation; 4 Audit, risk and internal control; and 5 Remuneration.

Section 1 – Leadership and purpose

Key points for boards to note from this section are:

  • Establish a company’s purpose, strategy and values: The revised Code recognises the importance of corporate culture and stresses that the board should satisfy itself that the company’s purpose, strategy, values and culture are aligned.
  • Engage with wider stakeholders: The revised Code includes references to the board’s responsibility for considering the needs and views of a wider range of stakeholders to improve trust and achieve mutual benefit, and generally to have regard to wider society.
  • Incorporate views of the workforce: To ensure that the workforce voice is heard in the boardroom, a new requirement is included in Provision 3. The revised Code states three ways in way this could be achieved: (i) appoint a director from the workforce; (ii) establish a formal workforce advisory council; (iii) or appoint a designated non-executive director.
  • Communicate with shareholders over significant votes against resolutions: The revised Code states that when more than 20 per cent of votes have been cast against a resolution, as under the current Code, the company should explain, when announcing the voting results, what actions it intends to take to consult with shareholders in order to understand the reasons behind the result. However, in addition, no later than six months after the vote, an update should be published before the final summary is provided in the next annual report.

Section 2 – Division of responsibilities

Key points for boards to note from this section are:

  • Clarity of roles: This Section considers the separation of duties within the board, with the chair required to demonstrate independent and objective judgement and the chief executive responsible for proposing and delivering the board’s agreed strategy.
  • Independent non-executives to constitute a majority: In all companies, including those below the FTSE 350, the independent non-executive directors, including the chair, should comprise a majority of the directors. All current exemptions for companies below the FTSE 350 (including the requirement to have an independent board evaluation every three years) have been removed from the revised Code as the FRC believes even smaller companies should strive for the highest corporate governance standards.

Section 3 – Composition, succession and evaluation

Key points for boards to note from this section are:

  • Increase diversity on boards: The revised Code asks boards to intensify their efforts to promote diversity to avoid group think. Diversity includes different gender, social and ethnic backgrounds, cognitive and personal strengths. The FRC reiterates that inclusive and diverse boards will understand their customers and stakeholders more, which in turn, leads to better decision-making.
  • Development of diverse pipeline for succession: Responsibility for this is placed on the nomination committee.
  • Enhance transparency in respect of progress on diversity: Under Provision 23 of the revised Code, the FRC encourages reporting on actions taken to increase diversity and inclusion, and the outcomes in terms of progress on diversity. This extends to reporting on the gender balance of the senior management (the company’s executive committee or the first layer of management below board level, including the company secretary) and their direct reports.

Section 4 – Audit, risk and internal control

This section remains mostly unchanged, though all companies, including those below the FTSE 350, will require an audit committee of at least three independent non-executive directors.

Section 5 – Remuneration

Key points for boards to note from this section are:

  • Give remuneration committees greater responsibility: The remuneration committee is given responsibility for determining the policy for director remuneration and setting remuneration for the board and senior management. The remuneration committee should also oversee remuneration and workforce policies and practices and ensure that these align with company’s strategic objectives.
  • Exercise independent judgement and discretion: The revised Code emphasises that the board should establish a remuneration committee of independent non-executive directors with a minimum membership of three. Provision 32 includes a requirement that the remuneration committee chair will have served for at least 12 months on a remuneration committee before taking on this role.
  • Further reporting requirements: The Code includes a reporting requirement for companies to explain what workforce engagement has taken place to explain how executive remuneration aligns with wider company pay policy.

Guidance on Board Effectiveness

The FRC has also published new proposed Guidance on Board Effectiveness (Guidance) which is set out in Appendix B to the consultation paper.

The Guidance has been amended to support the proposed changes to the revised Code and it follows the structure of the revised Code. Some of the more procedural aspects of the current April 2016 Code have been moved to the Guidance as these are still important but are now common place in many businesses.

The Guidance includes possible questions for boards, management and remuneration committees and the FRC proposes that boards should use the questions posed in the Guidance to consider how they report on their application of the Code’s Principles.

The proposed Guidance includes:

  • more information about how the views of a wider range of stakeholders might be heard in the boardroom; and
  • provisions supporting the remuneration committee with its new wider role and its new responsibility for wider workforce pay and policies.

The FRC notes that the Guidance will need further updating once the outcome of the consultation on the revised Code is known.

Proposed amendments to the UK Stewardship Code

The consultation also includes questions to help shape the future direction of the UK Stewardship Code, which will be published for consultation in mid-2018. The FRC consults on two ways in which the UK Stewardship Code could be improved:


  • Relevance to different signatory categories: Should the Stewardship Code be more explicit about the expectations of those investing directly or indirectly and those advising them? Would separate codes or enhanced separate guidance for different categories of the investment chain help drive best practice?
  • Whether to adopt a best practice format: Should the Stewardship Code focus on best practice expectations using a more traditional "comply or explain" format? If so, are there any areas in which this would not be appropriate? How might the FRC go about determining what best practice is?
  • Shareholder Rights Directive: Consider how the measures introduced in the 2017 amended Shareholder Rights Directive could be best transposed.


  • Consider the amendments to the UK Corporate Governance Code: Are there elements of the revised UK Corporate Governance Code that the FRC should mirror in the Stewardship Code?
  • Long-term factors and other issues relating to investment: How could an investor’s role in building a company’s long-term success be further encouraged through the Stewardship Code? Would it be appropriate to incorporate "wider stakeholders" into the areas of suggested focus for monitoring and engagement by investors? Should the Stewardship Code more explicitly refer to ESG factors and broader social impact? If so, how should these be integrated and are there any specific areas of focus that should be addressed?
  • Best practice content elements: How can the Stewardship Code encourage reporting on the way in which stewardship activities have been carried out? Are there ways in which the FRC or others could encourage this reporting, even if the encouragement falls outside of the Stewardship Code?
  • Asset classes: How could the Stewardship Code take account of some investors’ wider view of responsible investment?
  • Content elements of other codes: Are there elements of international stewardship codes that should be included in the Stewardship Code?
  • The role of independent assurance: What role should independent assurance play in revisions to the Stewardship Code? Are there ways in which independent assurance could be made more useful and effective?
  • Voting in pooled funds: Would it be appropriate for the Stewardship Code to support disclosure of the approach to directed voting in pooled funds?
  • Diversity: Should board and executive pipeline diversity be included as an explicit expectation of investor engagement?
  • UK committee on climate change: Should the Stewardship Code explicitly request that investors give consideration to company performance and reporting on adapting to climate change?
  • Purpose of stewardship: Should signatories to the Stewardship Code define the purpose of stewardship with respect to the role of their organisation and specific investment or other activities? Should the Stewardship Code require asset managers to disclose a fund’s purpose and its specific approach to stewardship, and report against these approaches at a fund level? How might this best be achieved?

Next steps

Responses to all the proposals should be submitted by February 28, 2018. The FRC plans to publish the final version of the Code by early summer of 2018 and it will apply to accounting periods beginning on or after January 1, 2019. Its detailed consultation on specific changes to the UK Stewardship Code will be published in mid-2018, once the review of the Code has been finalised.

(FRC, Proposed revisions to the UK Corporate Governance Code, 05.12.12)

(FRC, Appendix A - Revised UK Corporate Governance Code, 05.12.12)

(FRC, Appendix B - Revised Guidance on Board Effectiveness, 05.12.12)

(FRC, Appendix C - Summary of changes of the UK Corporate Governance Code, 05.12.12)

FRC: Strategic report guidance to follow Government legislation

The Financial Reporting Council (FRC) has announced it will delay publishing its updated Guidance on the Strategic Report which will incorporate the requirements of the Non-Financial Reporting Regulations.

In August 2017, the FRC published a consultation paper outlining amendments to its 2014 Guidance on the Strategic Report. The FRC intends to incorporate the requirements of the Non-Financial Reporting Regulations in an amended version of that Guidance and also strengthen the ties between the strategic report and the directors’ section 172 Companies Act 2006 duty to promote the success of the company.

Since then, the Government has announced plans to introduce legislative changes in respect of reporting on section 172, expected in March 2018. As a result, the FRC has decided to delay the publication of the updated Guidance until after the Government has published its legislative changes. However, the FRC encourages boards to continue developing their thinking about how to report better on their directors’ section 172 duty and it has published a set of Frequently Asked Questions on Non-Financial Reporting as a result of requests from preparers of reports and accounts for more clarification of the requirements that will apply to companies with December 31 year ends onwards.

(FRC, Press release on Strategic report guidance, 04.12.17)

FRC: Frequently Asked Questions on Non-Financial Reporting

On December 4, 2017 the FRC published a set of Frequently Asked Questions (FAQs) on the application of the Non-Financial Reporting Regulations. The FRC encourages companies to read these in conjunction with the 2014 Guidance on the Strategic Report. They are intended as a guide while the FRC finalises the updates to that 2014 Guidance and their content may change when that final updated guidance is published.

The FAQs cover the following questions:

  • Who is subject to the Non-Financial Reporting Regulations requirements?
  • What are the new requirements?
  • If I am a quoted company, what are the new additional disclosures?
  • Is this now a report for stakeholders?
  • Is the non-financial information statement required to be a separate statement headed up ‘Non-financial information statement’ either outside of or within the strategic report?
  • What is meant by the impact of a company’s activities?
  • What do I have to disclose in relation to policies and due diligence?
  • Are the principal risk disclosures referred to in s414CB different from the principal risks that I already disclose in my strategic report?
  • What do I need to disclose in relation to business relationships, products and services which are likely to cause adverse impacts?
  • If any of the non-financial reporting matters are not material to my business, do I still need to disclose them?
  • What will the auditor’s responsibilities be in respect of non-financial information?

(FRC, FAQs on the Non-Financial Reporting Regulations, 04.12.17)

FCA: Quarterly Consultation No 19 – Minor changes to Listing Rules and DTRs

On December 1, 2017 the Financial Conduct Authority (FCA) published its latest quarterly Consultation Paper – CP17/39. This proposes, among other things, some minor changes to the Listing Rules and the Disclosure Guidance and Transparency Rules (DTRs).

The FCA proposes to make the following changes:

  • Listing Rules: to clarify in the Listing Rules the meaning of Premium Listing Principle 6 in LR 7.2.1AR (which requires a listed company to ensure that it communicates information to holders and potential holders of its listed equity shares in such a way as to avoid the creation of a false market in those shares) by inserting the words “or continuation” after the word “creation”. This reflects the wording of former Listing Principle 4 and ensures that Premium Listing Principle 6 covers both the continuation and the creation of a false market in such listed securities.
  • DTRs: to clarify that a company’s diversity policy (as required under DTR 7.2.8AR) must be included in the corporate governance statement in its directors' report and that such statement can be set out in a separate report published together with the annual report or in a document published on the company's website.

Next steps

The FCA asks for comments on these changes by February 1, 2018 through an online response form.

(FCA, Quarterly consultation No 19, 01.12.17)

AIM Notice 48: Application for SME Growth Market Status and changes to AIM Rules

On December 5, 2017 the London Stock Exchange (LSE) published AIM Notice 48. The LSE has applied to the Financial Conduct Authority (FCA) for AIM to be registered as an SME Growth Market under the Markets in Financial Instrument Directive (MiFID II) and expects to receive confirmation of final approval to take effect from January, 3 2018.

The eligibility requirements for SME Growth Markets require that certain regulatory information remains available for five years once published. As a result, AIM Rule 26 (Company information disclosure) needs to be amended to reflect the requirement that certain regulatory information must remain available for five years once published under Article 78(2)(i) of Commission Delegated Regulation 2017/565/EU.

There will be minor consequential changes to the AIM Rules, making it clear that AIM Rule 26 will apply in respect of the five year period to:

  • Any prospectus an AIM company has published;
  • Annual financial reports and half yearly financial reports; and
  • Regulatory notifications made public containing inside information for the purposes of the Market Abuse Regulation (MAR).

A definition of SME Growth Market has also been included in the AIM Rules and the Introduction has been amended to reflect the fact that AIM will be an SME Growth Market.

These minor amendments to the AIM Rules for Companies will come into force on January 3, 2018 to coincide with the MiFID II implementation date and the expected approval of AIM as an SME Growth Market.

(AIM Notice 48, Application for SME Growth Market Status, 05.12.12)

Financial Reporting Lab: Calls for participants for new project on the reporting of performance metrics

On December 8, 2017 the Financial Reporting Lab (the Lab) invited investors, analysts and companies of all sizes to participate in a project on effective reporting on performance.

The project follows on from the Lab’s reports on business models (October 2016) and risk and viability (November 2017). The Lab will explore how companies measure performance against their strategic objectives, consider both financial and non-financial metrics, and highlight how these measures can be presented in a way that is most useful to investor decision-making.

The project will examine the following areas:

  • How companies measure business performance, including financial (sometimes referred to as non-GAAP or alternative performance measures) and non-financial metrics, and how these metrics are presented;
  • The extent to which the metrics used to measure performance against strategic objectives link to other sections of the annual report;
  • How investors use performance metrics in their decision-making process;
  • Whether investors’ needs are met by current practice in company reporting on performance; and
  • What lessons can be learnt from international reporting practice.

Next steps

Investors, analysts and companies are invited to indicate their interest by January 31, 2018 by emailing the Lab at

(FRC, Lab project call for participants, 08.12.17)

QCA and Hacker Young: Corporate Governance Behaviour Review 2017

On December 5, 2017 the Quoted Companies Alliance (QCA) and UHY Hacker Young published their annual review of corporate governance behaviour, which focuses on the disclosures made by 100 small and mid-size quoted companies taken from the Main List, AIM and ISDX and compares these disclosures against the minimum disclosures set out in the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies (the QCA Code).

The results were discussed with a group of institutional investors at a roundtable discussion and the QCA has used the feedback received to create five recommendations for companies to follow in order to improve the way they address corporate governance disclosures.

The recommendations for companies are as follows:

  • Describe the relationship between your company’s strategy and your governance arrangements effectively, and explain your board’s role in realising the company’s objectives: The generic language that is used in many disclosures is unhelpful to investors. They want to see a clear articulation of strategy (Disclosure 20 of the QCA Code) and an explanation of how the application of their chosen corporate governance code supports the company’s long-term success and strategy for growth (Disclosure 3 of the QCA Code). The review encourages companies to produce a clear depiction of the company’s business model and how their strategy relates to this. Companies should make it clear how the strategy and corporate governance arrangements benefit shareholders in the long term.
  • Articulate your company’s story in an engaging way and take the time to avoid ‘boilerplate’ disclosures: Companies should provide clear and concise information in their reports. The key performance indicators (KPIs), the description of the business model, together with the company’s strategy and its implementation, must be set out transparently.
  • Set out clearly how your board’s performance is evaluated and what is being done as a result: An effective board regularly evaluates its own performance and effective companies tell shareholders the outcome of such assessments. Disclosures on board evaluation provide a good opportunity to illustrate the culture within the business, and help to establish confidence and trust between the company and shareholders.
  • Provide a single total remuneration figure for each of your directors in a focused report: Clarity and transparency in matters of remuneration are vital in creating trust between companies and shareholders. Companies should establish well-structured remuneration arrangements as this indicates good governance and the arrangements ought to be articulated effectively to all shareholders.
  • Explain each director’s role to demonstrate how your board has the appropriate balance of skills and experience: Investors are particularly interested in the board structure and why each director is on the board, namely the specific skills he or she brings to the team (Disclosure 9 of the QCA Code). Companies should clearly distinguish between executive and non-executive directors and clarify whether the chair is executive or non-executive.

(QCA and UHY Hacker Young, Corporate Governance Behaviour Review 2017, 05.12.17)

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