ICSA seeks greater alignment between Governance Code and Companies Act

London, 8 March 2018 – In its response to the Financial Reporting Council’s consultation on proposed revisions to the UK Corporate Governance Code, ICSA: The Governance Institute has called for greater alignment between the Code and Section 172 of the Companies Act 2006.

Peter Swabey, Policy and Research Director at ICSA: The Governance Institute commented:

“We strongly support the FRC’s aim of using the Code’s principles to underpin the long-term health of UK companies, but there are some areas where the Code would benefit from greater alignment with the Companies Act. Principle A, for example, appears to extend directors’ duties beyond those set out in section 172 of the Act and we are concerned that the proposal that the function of the board is ‘to promote the long-term sustainable success of the company, generate value for shareholders and contribute to wider society’ is not an accurate reflection of those duties and might give rise to confusion. We are not opposed to further consideration of the balance of directors’ duties between shareholders and other stakeholders, but we do believe that the Code should be aligned with the statutory requirement.”

Swabey also highlights the following points from ICSA’s consultation response:

  • Stakeholder engagement: while the consultation complies with the government’s request that the Code require companies to establish a method for gathering the views of the workforce, employees, although important, are not the only stakeholders and the Code might better refer to ‘stakeholders’. 
  • Independence: The change to the Code that explicitly includes the chair as an independent director disregards the unique role of the chair and the importance of the role to both the company and the individual holding the position. The fact that the chair spends a great deal more time in a company than other non-executive directors (NEDs), has a unique relationship with the chief executive and finance director and receives substantially higher fees than any other NED means the a chair’s independence is compromised from a practical perspective. The removal of the board’s judgement on the matters considered to determine a NED’s independence suggests that directors should not be considered independent if they do not meet certain criteria. This has particular implications for the chair as they will cease to be independent after nine years and, subject to comply or explain, must then cease to be chair. A chair’s time as a NED prior to appointment as chair should not be included when tenure is assessed as the roles are very different and it could result in chairs being regarded as having served their time at a point when they are at their most effective. 
  • Smaller companies: the removal of exemptions for smaller companies, including from the requirement for an independent board evaluation every three years is overly burdensome. We remain to be convinced that there is an adequate pool of organisations providing good quality board evaluation services to support this widening of the market. We also think that the type and depth of evaluation required should be for the board to decide. 
  • Role of the remuneration committee: it is important that there are clear boundaries between the oversight role of the board, delegated to the remuneration committee, and legitimate day to day management activities. 
  • Stewardship Code: A greater focus on company expectations of investors would make the Stewardship Code more effective, but the critical gap is the lack of effective enforcement mechanisms. The Financial Conduct Authority should take responsibility for this as part of their oversight of regulated businesses. We see much merit in a revised UK Corporate Governance Code that combines both the existing Code and the Stewardship Code. A combined code would provide a joined up approach to governance for all parties and be more effective.

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Notes to Editors:

  1. ICSA: The Governance Institute is the professional body for governance. We have members in all sectors and are required by our Royal Charter to lead ‘effective governance and efficient administration of commerce, industry and public affairs’. With over 125 years’ experience, we work with regulators and policy makers to champion high standards of governance and provide qualifications, training and guidance.
    Website: www.icsa.org.uk

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