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FRC updates Corporate Governance Code

18 September 2014

FRC updates Corporate Governance Code - Read more

The FRC has updated the UK Corporate Governance Code, which will apply to accounting periods beginning on or after 1 October 2014.

The FRC expects the Code to enhance the quality of information investors receive about the long-term health and strategy of listed companies and raise the bar for risk management.

The Code also includes requirements for boards to include a viability statement in the strategic report to investors, which the FRC says, will proved an improved and broader assessment of long-term solvency and liquidity. The statement will be expected to look forward significantly longer than 12 months. The FRC has also made changes to the Code with regards to remuneration; boards of listed companies will now need to ensure that executive remuneration is designed to promote the long-term success of the company and demonstrate how clearly this is being achieved to shareholders.

ICSA Policy Director Peter Swabey called the viability statement ‘interesting’, adding that ‘it could be a more effective approach to the issue of 'going concern', where the strict accounting use of the term does not always provide a sufficiently qualitative assessment of the ongoing health of a company, and will provide additional flexibility for companies in reporting on their own specific issues’.

However, Swabey also expressed concern over how realistic it is to expect directors to report on a company's prospects 12-18 months in advance, as they ‘can only report on the information that they have … [without it] degenerating into meaningless boilerplate disclosure’.

Linklaters employee incentives lawyer Alexandra Beidas also commented on the changes to remuneration: ‘companies will need to make some difficult decisions relating to issues such as trigger events for clawback, how long will the clawback risk last, how to structure variable deferred pay to ensure ability to withhold or recover sums in practice, and managing shareholder expectations’.

Key changes

The key changes to the Code include:

Going concern, risk management and internal control

Companies should state whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so;

Companies should robustly assess their principal risks and explain how they are being managed or mitigated;

Companies should state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months; and

Companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

In addition, companies can choose where to put the risk and viability disclosures. If placed in the Strategic Report, directors will be covered by the “safe harbour” provisions in the Companies Act 2006.


Greater emphasis be placed on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee; and

Companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, and should consider appropriate vesting and holding periods for deferred remuneration.

Shareholder engagement

Companies should explain when publishing general meeting results how they intend to engage with shareholders when a significant percentage of them have voted against any resolution.


Other issues

The FRC has also highlighted the importance of the board’s role in establishing the ‘tone from the top’ of the company in terms of its culture and values. The directors should lead by example in order to encourage good behaviours throughout the organisation.

For further comment from Policy Director Peter Swabey, read his post on the ICSA blog.

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