Time for change - proposed revisions to the UK Corporate Governance Code

Transcription

1 Time for change - proposed revisions to the UK Corporate Governance Code What has changed and why? December 2017 Introduction On 5 December 2017, the Financial Reporting Council (FRC) published a consultation on proposed revisions to the UK Corporate Governance Code (the Code). In large part, these updates include a stakeholder focus in response to the Government s request of the FRC to improve the UK s corporate governance framework in an effort to restore trust in business. 1 At the same time, the FRC has taken this opportunity to do a comprehensive review of the Code and make wider changes, namely to make it shorter and sharper, increase the focus on how its principles are being applied, rather than a tick-box approach on all of the provisions, and emphasise the importance of a healthy corporate culture and diversity. In order to help you navigate through the FRC s proposals and understand what has changed and why, we have produced this summary. We hope you find it useful. It may also help you to develop your thoughts in case you plan to submit your own response to the consultation. Responses are due by 28 February 2018, and the FRC aims for the new Code to be in effect for accounting periods beginning on or after 1 January Proposed updates to the Guidance on Board Effectiveness (the Guidance) are also included in the consultation as Appendix B. Finally, the FRC has also included high level questions on the future direction of their mirror Code for investors, the UK Stewardship Code, which they will formally consult on in A summary of the UK Government s August 2017 proposals to reform corporate governance can be found in our document: The long and winding road to corporate governance reform. 1

2 Headlines The unitary board structure, emphasis on shareholder rights and the role of stewardship, have been preserved. The new Code encourages corporate governance policies and practices that generate value for shareholders and aim to benefit society. A new focus has been placed on how the company generates and preserves value over the longer term. Engagement with a range of stakeholders is now a key theme throughout, including a new Provision for boards to establish a method for gathering views of the workforce in line with the Government s reform proposals. Board monitoring of corporate culture and reporting of activities in these areas have also been brought to the fore. Corresponding with the recent Hampton-Alexander and Parker Reviews, there is an increased emphasis on diversity and inclusion, including disclosure of diversity of the executive pipeline. A requirement for disclosure of ethnic diversity levels in the executive pipeline has not been included but the FRC is seeking views on this. A number of changes affecting the role and remit of remuneration committees in line with the Government s reform proposals and the recommendations of the House of Commons Business, Energy and Industrial Strategy Select Committee inquiry on Corporate Governance have been included. Given that the most common Provision for non-compliance in recent years has been in relation to appropriate levels of independence on the board, the proposed Code emphasises the importance of non-executive directors retaining sufficient independence throughout their tenure. This includes changing the consideration of the Chairman s independence from on appointment only to on an ongoing basis. Companies outside of the FTSE 350 have more to consider as exemptions previously included in the 2016 Code in relation to independence (B.1.2), board evaluation (B.6.2), annual re-election (B.7.1), and the composition of audit and remuneration committees (C.3.1 and D.2.1) have been removed as the FRC believes that the Code sets good practice and even the smaller companies should strive for the highest standards of corporate governance. 2

3 Structure of the Code shorter and sharper Supporting Principles from the 2016 Code have been incorporated into Principles or Provisions, moved to the Guidance or, in some cases, removed altogether in an effort to simplify the Code and shift the focus to application of the main Principles, rather than prescriptive compliance with the Provisions. We describe below these key changes. The FRC emphasises that as per Listing Rule (5), companies must report how they have applied the Principles of Code in a manner that would enable shareholders to evaluate how these have been applied, rather than simply focusing on Listing Rule (6) which deals with comply or explain aspects of the Provisions. The FRC also states that, in order to assist shareholders in assessing the quality of a company s governance arrangements and the board s activities, the Corporate Governance statement should also relate coherently to other parts of the annual report particularly the strategic report. The revised Code has five sections: 2018 Corporate Governance Code (proposed) Section 1: Purpose and leadership Section 2: Division of responsibilities Section 3: Composition, succession and evaluation Section 4: Audit, risk and internal control Section 5: Remuneration This is a change from the previous structure used in the 2016 Code: A. Leadership B. Effectiveness C. Accountability D. Remuneration E. Relations with shareholders The majority of updates are in the first three sections (1-3, which broadly correspond with A and B of the 2016 Code). Section E Relations with shareholders has now been integrated throughout the new Code. 3

4 Key updates and additions New or updated Principle or Provision Section 1 Leadership and Purpose Principle A: 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. Principle C: In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. Principle D: All directors must act with integrity and lead by example in the best interests of the company. The workforce should be able to raise concerns in relation to management and colleagues where they consider that conduct is not consistent with the company s values and responsibilities. Provision 2: Directors should embody and promote the desired culture of the company. 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. Provision 3: The board should establish a method for gathering the views of the workforce. This would normally be a director appointed from the workforce, a formal workforce advisory panel or a designated non- Key differences from 2016 Code and other notes While the 2016 Code did state that the board was responsible for the long-term success of the company and that the board should set the values of the company, the key additions here are contribute to wider society and the board should establish the company s purpose. While the 2016 Code only mentioned the importance of stakeholder engagement in the Preface, the new Code elevates stakeholder consideration and engagement into a Principle. This stakeholder focus is woven throughout the new Code. The 2016 Code Provision C.3.5 stated: The audit committee should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. This new Principle makes the importance of workforce concerns more prominent by making it a Principle and a board level responsibility. It also expands the emphasis of the whistleblowing provision by removing the specific reference to improprieties in matters of financial reporting or other matters and makes a connection to consistency with values to allow the workforce to raise wider concerns The 2016 Code mentioned culture in the Preface only: One of the key roles for the board includes establishing the culture, values and ethics of the company. It is important that the board sets the correct tone from the top. The directors should lead by example and ensure that good standards of behaviour permeate throughout all levels of the organisation. This will help prevent misconduct, unethical practices and support the delivery of long-term success. (With the exception of the Supporting Principle A3: The chairman should also promote a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring constructive relations between executive and non-executive directors.) There is now a clear emphasis on the board s role to monitor and assess culture and report on it. This is new and implements one of the asks from the Government s reform package. The wording, this would normally be, allows other mechanisms to be used given that responses 4

5 New or updated Principle or Provision executive director. There should also be a means for the workforce to raise concerns in confidence and (if they wish) anonymously. The board should review this and ensure that arrangements are in place for the proportionate and independent investigation of such matters and for follow-up action. Provision 4: The board should explain in the annual report how it has engaged with the workforce and other stakeholders, and how their interests and the matters set out in section 172 of the Companies Act 2006 influenced the board s decision-making. o As a reminder, the matters set out in section 172 are: (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. Provision 6: When more than 20 per cent of votes have been cast against a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons behind the result. An update should be published no later than six months after the vote. The board should then provide a final summary in the annual report, or in the explanatory notes to resolutions at the next meeting, on what impact the feedback has had on the decisions the board has taken and any actions or resolutions now proposed. Key differences from 2016 Code and other notes to the Government Green Paper emphasised the importance of flexibility. The Guidance includes more information on how the views of stakeholders might best be heard and complements the FRC s proposed revisions to the Guidance on the Strategic Report relating to the reporting on how directors have discharged their section 172 duty (to promote the success of the company) in the Companies Act Also, the term workforce has been chosen, in an effort to encourage companies to think broadly and beyond just those with formal employment contracts, e.g., agency workers, self-employed, contractors etc. This is new. The FRC will keep the exact wording of this Provision under review, until the Government introduces its planned secondary legislation to require all companies of a significant size (private and public) to explain how their directors comply with the requirements of section 172 of the Companies Act The 2016 Code Provision E.2.2 stated: When, in the opinion of the board, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result. This is one of the proposals under the Government s reform agenda, but the FRC has broadened it beyond remuneration. The new Provision goes further than E2.2 of the 2016 Code to outline more specific follow-up steps in terms of reporting back on the engagement. It also specifies a 20 per cent threshold. 2 In September 2017, ICSA: The Governance Institute and the Investment Association also published guidance on bringing the stakeholder voice into the boardroom. 5

6 Section 2 Division of Responsibilities Provision 10: The chief executive is responsible for proposing strategy to the board, delivering it as agreed, and ensuring timely and balanced information is presented in order for the board to make decisions effectively. Provision 11: Independent non-executive directors, including the chair, should constitute the majority of the board. With reference to Provision 15, the board should identify in the annual report each director considered to be independent. The chair should hold meetings with the non-executive directors without the executives present. Provision 15: Individual non-executive directors, including the chair, should not be considered independent for the purposes of board and committee composition if any one of them: o is or has been an employee of the company or group within the last five years; o has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company; o has received or receives additional remuneration from the company apart from a director s fee, participates in the company s share option or a performance-related pay scheme, or is a member of the company s pension scheme; o has close family ties with any of the company s advisers, directors or senior employees; o holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; o o represents a significant shareholder; or has served on the board for more than nine years from the date of their first election. The 2016 Code Principle A.4 stated: As part of their role as members of a unitary board, nonexecutive directors should constructively challenge and help develop proposals on strategy. The new Code Provision suggests a more specific decision making process on strategy. The 2016 Code Provision B.1.2 stated: Except for smaller companies (one that is below the FTSE 350 throughout the year immediately prior to the reporting year), at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors. The key differences here are from excluding the chairman, to including the chairman and the removal of the smaller companies exemption. Similar smaller company exemptions previously included in the 2016 Code in relation to board evaluation (B.6.2), annual reelection (B.7.1), and the composition of audit and remuneration committees (C.3.1 and D.2.1) have also been removed. While the list of criteria are unchanged from the 2016 Code, there is a change in approach. The 2016 Code lists criteria that the board should take into account when considering whether NEDs and the chair are independent. The new Code says that directors should not be considered independent if they do not meet the specified criteria. However, given that this is a Provision, companies still have the option of offering an explanation if they believe that an individual is still independent. Provision B.2.3 which stated: Non-executive directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a director. Any term beyond six years for a non-executive director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board has been removed. While all aspects of this provision have been removed, the key change here is the six year limit which has been abandoned in favour of the nine year limit which has become the de facto tenure period used in practice. Directors must still be submitted for re-election annually (as per the new Provision 18). 6

7 Section 3 Composition, Succession and Evaluation Principle J: Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be in place for board and senior management (note 1). Both appointments and succession plans should be based on merit and objective criteria (note 2), and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. Note 1: senior management has been defined as the executive committee or the first layer of management below board level, including the company secretary. Note 2: Which protect against discrimination for those with protected characteristics within the meaning of the Equalities Act Provision 17: The board should establish a nomination committee that should lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession. Provision 21: There should be a formal and rigorous annual evaluation on the performance of the board, the chair and individual directors. Companies should have an externally facilitated board evaluation at least every three years. Provision 23: The annual report should describe the work of the nomination committee and should include: o a description of how the board evaluation has been conducted, detailing the outcomes, actions taken and how it has influenced board composition; o the process used in relation to appointments, its approach to succession planning and how both support building a diverse pipeline with reference to Principle J; o what other actions it has taken to oversee the development of a diverse pipeline for future succession to board and senior management appointments; The new Code asks boards to intensify their efforts in promoting and creating diversity in its broadest sense. The 2016 Code Supporting Principle B.2 stated: The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender. The board should satisfy itself that plans are in place for orderly succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board and to ensure progressive refreshing of the board. The key difference here is the breadth of considerations on diversity. The 2016 Code Supporting Principle B.2 stated: The board should satisfy itself that plans are in place for orderly succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board and to ensure progressive refreshing of the board. Also Provision B.2.1 stated: There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. There is now an emphasis on building diversity throughout the workforce and a key change is that the role of the nomination committee is expanded beyond board succession and appointments to providing oversight of talent development in the executive pipeline. The 2016 Code Provision B.6.2 stated: Evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. The new Provision now applies to all companies applying the Code, not just FTSE 350 companies. The 2016 Code Provision B.2.4 stated: A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. This section should include a description of the board s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives. An explanation should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non-executive director. Where an external search consultancy has been used, it should be identified in the annual report and a 7

8 o o an explanation of how diversity supports the company in meeting its strategic objectives; and the gender balance of those in the senior management (note 1) and their direct reports. Note 1: senior management has been defined as the executive committee or the first layer of management below board level, including the company secretary. Section 4 Audit, risk and internal control Given that this section was updated recently in relation to regulatory changes regarding audit and the audit committee, this section is unchanged except for the removal of one provision which has been moved to the Guidance. Section 5 Remuneration Principle O: The board should satisfy itself that company remuneration and workforce policies and practices promote its long-term success and are aligned with its strategy and values. Principle P: A formal and transparent procedure for determining director and senior management (note 1) remuneration should be established. Performancerelated elements should be clear, stretching, rigorously applied and aligned to the successful delivery of the strategy. statement made as to whether it has any other connection with the company. The new Provision shifts the focus from the nomination committee reporting on processes and policies to actions and outcomes. For example: reporting on actions taken to increase diversity and inclusion and their outcomes; reporting on outcomes of the board evaluation and actions to be taken, etc. It also implements the Hampton-Alexander Review recommendation that the FRC should amend the UK Corporate Governance Code so that all FTSE 350 companies disclose in their Annual Reports the gender balance on the Executive Committee and Direct Reports to the Executive Committee and even goes further by not limiting to the FTSE 350. A requirement for disclosure of ethnic diversity or other types of diversity in the pipeline has not been included but the FRC is welcoming views on this. This is a particularly key question given Sir John Parker noted in his report that the lack of publicly available data may present an unnecessary hurdle in tracking progress and being fully transparent to all stakeholders. The 2016 Code Provision C.3.3 stated: The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. The requirement to make the information available would be met by including the information on a website that is maintained by or on behalf of the company. This has been moved to the Guidance which also makes it clear that terms of reference for all board committees should be set out clearly and made publically available. The 2016 Code Principle D.1 stated: Executive directors remuneration should be designed to promote the long-term success of the company. Additionally, the Supporting Principle D.1 stated: [The remuneration committee] should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases. Commensurate with the Government s reform proposals, the new Principle brings the consideration of wider workforce policies and practices into the spotlight. The 2016 Code Provision D.2.2 stated: The remuneration committee should have delegated responsibility for setting remuneration for all executive directors and the chairman, including pension rights and any compensation payments. The committee should also recommend and monitor the 8

9 Provision 33. The remuneration committee should have delegated responsibility for determining the policy for director remuneration and setting remuneration for the board and senior management (also note 1). It should oversee remuneration and workforce policies and practices, taking these into account when setting the policy for director remuneration. Note 1: senior management has been defined as the executive committee or the first layer of management below board level, including the company secretary. Principle Q: The board should exercise independent judgement and discretion when approving remuneration outcomes, taking account of company and individual performance, and wider circumstances. Provision 37: Remuneration schemes and policies should provide boards with discretion to override formulaic outcomes. Provision 32: Before appointment as chair of the remuneration committee, the appointee should have served on a remuneration committee for at least 12 months. Provision 36: Remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interests. In normal circumstances, shares granted or other forms of long-term incentives should be subject to a vesting and holding period of at least five years. Longer periods, including post-employment periods, may be appropriate. Provision 38: The pension consequences and associated costs of basic salary increases and any other changes in pensionable remuneration, or contribution rates, particularly for directors close to retirement, should be carefully considered and be aligned to the pension arrangements for the workforce as a whole. Provision 41: There should be a description of the work of the remuneration committee in the annual report. Other additions to Section 5 - The design of performance-related remuneration for executive directors level and structure of remuneration for senior management. The definition of senior management for this purpose should be determined by the board but should normally include the first layer of management below board level. There is a change here from making recommendations on level and structure for senior management to setting senior management remuneration and overseeing workforce policies and practices in line with the Government s reform proposals as well as the recommendations of the BEIS Select Committee. The consultation document notes that this may have time commitment implications for remuneration committees who may wish to consider whether these new responsibilities are best dealt with by another board committee. New information will be included in the Guidance on the role of the committee and its new responsibility for wider workforce pay and policies. The term discretion was not used in the 2016 Code and this part of Provision 37 is new. The FRC is keen for directors to be empowered to override remuneration outcomes, for example, when the link to performance is missing. The stipulations on malus and clawback provisions remain. This is new and was one of the asks from the Government s reform proposals. Recommended minimum vesting and postvesting holding periods for executive share awards have been extended from three to five years. The inclusion of post-employment periods is also new. The requirement to align pension arrangements to those of the wider workforce is new. It has already received support from the investor community and further strengthens the focus on the alignment of executive pay with reward arrangements for the wider workforce. There are expanded disclosure requirements as compared to the 2016 Code including on the company s approach to investing in, developing and rewarding the workforce as well as the Remuneration Committee s engagement with the workforce, among other items.. Schedule A: The design of performancerelated remuneration for executive directors of the 2016 Code has been integrated into 9

10 The consultation also notes that the Government plans to introduce secondary legislation on disclosure of CEO to average worker pay ratios. The FRC will be monitoring these changes and may make further updates to this section of the Code thereafter. Section 5, which now includes a range of consideration for the Committee (Provision 40). What has been moved to the Guidance on Board Effectiveness? In line with the FRC s objective to make the Code shorter and sharper, the following Principles or Provisions (in the 2016 Code) have been moved into the Guidance: 2016 Code Principle or Provision that have been moved into the Guidance Provision A.1.1: The board should meet sufficiently regularly to discharge its duties effectively. There should be a formal schedule of matters specifically reserved for its decision. Supporting Principle A.3: The chairman is responsible for setting the board s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. Supporting Principles B.1: The value of ensuring that committee membership is refreshed and that undue reliance is not placed on particular individuals should be taken into account in deciding chairmanship and membership of committees. No one other than the committee chairman and members is entitled to be present at a meeting of the nomination, audit or remuneration committee, but others may attend at the invitation of the committee. Provision B.2.1: The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. Provision B.2.2: The nomination committee should evaluate the balance of skills, experience, independence and knowledge on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment. Provision B.3.1: For the appointment of a chairman, the nomination committee should prepare a job specification, including an assessment of the time commitment expected, recognising the need for availability in the event of crises. A chairman s other significant commitments should be disclosed to the board before appointment and included in the annual report. Changes to such commitments should be reported to the board as they arise, and their impact explained in the next annual report. Provision B.3.2: The terms and conditions of appointment of non-executive directors should be made available for inspection. The letter of appointment should set out the expected time commitment. Nonexecutive directors should undertake that they will have sufficient time to meet what is expected of them. Their other significant commitments should be disclosed to the board before appointment, with a broad indication of the time involved and the board should be informed of subsequent changes. Main Principle B.4: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. Supporting Principles B.4: The chairman should ensure that the directors continually update their skills and the knowledge and familiarity with the company required to fulfil their role both on the board and on board committees. The company should provide the necessary resources for developing and updating its directors knowledge and capabilities. To function effectively all directors need appropriate knowledge of the company and access to its operations and staff. Provision B.4.2: The chairman should regularly review and agree with each director their training and development needs. Please note that these have been partly incorporated into the new Provision 22: The chair should act on the results of the evaluation by recognising the strengths and addressing any weaknesses of the board. Each director should engage with the process and take appropriate action when development needs have been identified. Provision B.4.1: The chairman should ensure that new directors receive a full, formal and tailored induction on joining the board. As part of this, directors should avail themselves of opportunities to meet major shareholders. 10

11 2016 Code Principle or Provision that have been moved into the Guidance Main Principle B.5: The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. Supporting Principles B.5: The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. Management has an obligation to provide such information but directors should seek clarification or amplification where necessary. Under the direction of the chairman, the company secretary s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating induction and assisting with professional development as required. The company secretary should be responsible for advising the board through the chairman on all governance matters. Please note these have been partly incorporated into the new Principle H: The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently. Provision B.5.1: The board should ensure that directors, especially non-executive directors, have access to independent professional advice at the company s expense where they judge it necessary to discharge their responsibilities as directors. Committees should be provided with sufficient resources to undertake their duties. Provision B.5.2: All directors should have access to the advice and services of the company secretary, who is responsible to the board for ensuring that board procedures are complied with. Both the appointment and removal of the company secretary should be a matter for the board as a whole. Please note this has been partly incorporated into the new Provision 16: All directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters. Both the appointment and removal of the company secretary should be a matter for the board as a whole. Main Principle B.6: The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Please note that this has been incorporated into Principle K and Provision 21 with the exception of the explicit mention of the committees. Provision 21 now says: There should be a formal and rigorous annual evaluation on the performance of the board, the chair and individual directors. However the proposed updated Guidance includes reference to committee evaluations as an option. Supporting Principle C.1: The board should establish arrangements that will enable it to ensure that the information presented is fair, balanced and understandable. Please note that the responsibility for the board to state that they consider the annual report and accounts to be fair, balanced and understandable remains in Provision 27 as well as Principle M: The board should present a fair, balanced and understandable assessment of the company s position and prospects, and satisfy itself on the integrity of financial information. Provision C.3.3: The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. Provision D.1.4: The remuneration committee should carefully consider what compensation commitments (including pension contributions and all other elements) their directors terms of appointment would entail in the event of early termination. The aim should be to avoid rewarding poor performance. They should take a robust line on reducing compensation to reflect departing directors obligations to mitigate loss. Supporting Principles E.1: Whilst recognising that most shareholder contact is with the chief executive and finance director, the chairman should ensure that all directors are made aware of their major shareholders issues and concerns. Provision E.2.3: The chairman should arrange for the chairmen of the audit, remuneration and nomination committees to be available to answer questions at the AGM and for all directors to attend. 11

12 What has been removed? In line with the FRC s objective to make the Code shorter and sharper, the following Principles or Provisions (in the 2016 Code) have been removed completely: Deleted 2016 Code Principle or Provision Provision A.1.3: The company should arrange appropriate insurance cover in respect of legal action against its directors. Supporting Principle B.1: The board should be of sufficient size that the requirements of the business can be met and that changes to the board s composition and that of its committees can be managed without undue disruption, and should not be so large as to be unwieldy. Provision B.2.3: Non-executive directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a director. Any term beyond six years for a non-executive director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board. Please note: a nine year limit for independence still remains. Please refer to Provision 15 in the key updates and additions table above. Supporting Principle D.1: The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in corporate and individual performance, and should avoid paying more than is necessary. Provision D.1.2: Where a company releases an executive director to serve as a non-executive director elsewhere, the remuneration report should include a statement as to whether or not the director will retain such earnings and, if so, what the remuneration is. Latter part of Provision D.1.3: If, exceptionally, options are granted [for non-executive directors], shareholder approval should be sought in advance and any shares acquired by exercise of the options should be held until at least one year after the non-executive director leaves the board. Holding of share options could be relevant to the determination of a non-executive director s independence (as set out in Provision B.1.1). Please note that Provision D.1.3 still remains: Levels of remuneration for non-executive directors should reflect the time commitment and responsibilities of the role. Remuneration for non-executive directors should not include share options or other performance-related elements. Provision D.2.3: The board itself or, where required by the Articles of Association, the shareholders should determine the remuneration of the non-executive directors within the limits set in the Articles of Association. Where permitted by the Articles, the board may however delegate his responsibility to a committee, which might include the chief executive. Provision D.2.4: Shareholders should be invited specifically to approve all new long-term incentive schemes (as defined in the Listing Rules) and significant changes to existing schemes, save in the circumstances permitted by the Listing Rules. Provision E.2.1: At any general meeting, the company should propose a separate resolution on each substantially separate issue, and should in particular propose a resolution at the AGM relating to the report and accounts. For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote should make it clear that a vote withheld is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution. Provision E.2.2: The company should ensure that all valid proxy appointments received for general meetings are properly recorded and counted. For each resolution, where a vote has been taken on a show of hands, the company should ensure that the following information is given at the meeting and made available as soon as reasonably practicable on a website which is maintained by or on behalf of the company: the number of shares in respect of which proxy appointments have been validly made; the number of votes for the resolution; the number of votes against the resolution; and the number of shares in respect of which the vote was directed to be withheld. Provision E.2.4: The company should arrange for the Notice of the AGM and related papers to be sent to shareholders at least 20 working days before the meeting. For other general meetings this should be at least 14 working days in advance. 12

13 Next steps Responses are due by 28 February 2018, and the FRC aims to publish a final version of the Code by early summer 2018, to apply to accounting periods beginning on or after 1 January It seems that the FRC will also aim to finalise the updated Guidance on Board Effectiveness at the same time, as it works hand in hand with the proposed changes to the revised Code. The FRC anticipates further changes will be required to the Guidance as a result of the responses from this consultation. They will also consider appropriate amendments to other Code guidance. Separately it is worth noting that proposed updates to the Strategic Report Guidance were also consulted on in August 2017 and the FRC intends to finalise this Guidance after the Government publishes its legislative changes in relation to Corporate Governance Reform in The Government has previously stated an intention to bring all of their reforms into effect by June 2018 to apply to company reporting years commencing on or after that date. This will include: A disclosure requirement against section 172 of the Companies Act A disclosure requirement for the pay ratio between the CEO and average of UK employees We encourage companies to respond to this consultation as it is important that views of those subject to the Code are heard and considered so that the UK s Corporate Governance framework remains relevant and proportionate. EY will also be submitting its own response. Please do get in touch with us if you have any questions you would like to discuss, either about the consultation or how the changes might impact you. 13

14 For further information, please contact one of the following: Corporate Governance Ken Williamson Mala Shah-Coulon Regulatory & Public Policy Eamonn McGrath EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. Loree Gourley lgourley@uk.ey.com John Jarrett john.jarrett@uk.ey.com Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk Executive Compensation & Reward Advisory David Ellis dellis@uk.ey.com Nora Markova nmarkova@uk.ey.com