Finance directors reading the recently published new UK Corporate Governance Code, effective for financial years beginning on or after 1 January 2019, may be tempted to focus on the amount of time and other resource that will be needed to implement it, especially as it has been fully re-written this time. For successful implementation, however, they should ask how enhanced board effectiveness can lead to value generation in the business and to achieve this how implementation can best be tailored to the specific circumstances of the board and the business.
‘Less is more’ could sum up the new code, which is commendably more concise with the elimination of supporting principles so that there are now just principles and provisions. Whilst cutting the number of words, the new code also strengthens expected board practice, especially with regards to focusing on long-term sustainable success, purpose, culture, workforce engagement, diversity and, the old perennial, remuneration.
Boards will need to spend more time on purpose and culture
The new code emphasises that successful companies contribute to wider society as well as generating value for shareholders and that their boards should set the corporate purpose, values and strategy and ensure these are aligned with the culture. The board is called on to assess and monitor culture and, where it is not satisfied that they are aligned, should seek assurance that management has taken corrective action. As a result, boards will generally need both to invest more time on corporate culture and to obtain more detailed and higher quality information on the nature of the culture across the business, which may come from culture audits, employee engagement surveys which ask the right searching questions, customer feedback or regulatory reports.
On purpose, the board’s challenge is to express it in an inspiring way which may relate to doing the everyday extraordinarily well, just as much as to being at the frontiers of innovation. A clear purpose will both motivate team members and help keep the business focused on its central mission rather than getting distracted by peripheral interests.
Meanwhile, a genuine focus on long-term sustainable earnings is likely to lead to a review of KPIs to ensure they are a balanced mix of shorter term and longer-term measures covering financial and non-financial issues and leading as well as lag indicators.
Major new focus on workforce engagement
The new code also stresses the importance of ‘workforce’ engagement, which may be achieved by appointing a director from the workforce, a formal workforce advisory panel, a designated non-executive director or a combination of them. Careful implementation will be critical, particularly in global businesses where the workforce, a broader term than employees, will generally be spread across many different businesses, geographies and levels of seniority. How it is segmented for consultation purposes and the means used, eg surveys, focus groups or an elected or appointed advisory panel, will significantly influence the quality of information the board obtains and the views it hears.
Board size and composition-diversity, chair’s tenure and smaller listed boards
Diversity has also moved up the board agenda with appointments and succession planning now expected to promote diversity of gender, social and ethnic backgrounds. Very importantly, the board should oversee the development of a diverse pipeline for succession with regards to board and senior management appointments. Much remains to be done on gender diversity, with most of the gains to date being at NED rather than executive level, with even more progress required when it comes to addressing ethnic diversity in the boardroom.
Until now chairs of boards have been expected to be independent on appointment. For other board members there has been a presumption (albeit one that was open to rebuttal) that after nine years, their independence would have eroded. This also applied to Non-Executive Directors (NEDs). The new code indicates a chair should not be in post for more than nine years from the date of their first appointment to the board but, as a pragmatic concession, adds that this can be extended for a limited time particularly where the chair was on the board before assuming that role.
Smaller listed companies, those outside the FTSE350, have only been expected to have a minimum of two NEDs. However, they may now need to consider an increase in this number as all companies will be expected to have half of the board, excluding the chair, made up of independent directors.
A fresh look at remuneration
And the last word as always goes on remuneration, with the new code highlighting six areas for consideration when determining executive director remuneration policy and practices- clarity, simplicity, risk, predictability, proportionality and alignment to culture- and as will come as little surprise there are additional disclosures! As with previous initiatives in this area these changes are unlikely to stop remuneration being the main item for discussion between boards and their investors.