Corporate governance code encourages board-level diversity and transparency

A new corporate governance code, which aims to improve public trust in business, has urged employers to establish a culture that promotes integrity and values diversity at board-level.

The 2018 UK Corporate Governance Code, published today by the Financial Reporting Council (FRC), encourages boards to engage with their workforce to understand employees’ views and prepare to justify how they have considered these interests when making business decisions.

It also places emphasis on succession and diversity, encouraging organisations to refresh their boards to ensure they have the right mix of skills and experience.

Boards should be evaluated externally to ensure they are suitable, and no one individual or small group of people should dominate the board’s decision-making. At least half of a company’s board should be made up of independent non-executive directors.

The code has not made any recommendations for specific targets for ethnic minority representation on boards, or required there to be an employee representative – both of which have been suggested previously.

The code does ask that:

  • all directors are subject to annual re-election and must undergo formal and rigorous annual evaluation of their performance;
  • a formal and transparent procedure for developing policy on executive, director and senior management remuneration is established, with no director involved in determining their own remuneration outcome; and,
  • remuneration is aligned with the organisation’s purpose and values to support the business’s long-term success.

Sir Win Bischoff, chairman of the FRC, hoped the shorter and sharper code would promote transparency and integrity for business and society as a whole.

“Corporate governance in the UK is globally respected and is a framework trusted by investors when deciding where to allocate capital. To make sure the UK moves with the times, the new code considers economic and social issues and will help to guide the long-term success of UK businesses,” he said.

Business secretary Greg Clark commented: “These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run. They will help the UK remain the best place in the world to work, invest and do business.”

The new code will take effect next year. While it is not mandatory, listed firms may have to explain to investors why they had opted out.

The FRC is also consulting on a set of six principles which aim to address the need for improved transparency and accountability at large private companies.

Ben Willmott, head of public policy at the CIPD, said that the new code was to be welcomed for its sharper focus on the relationship between a business and its employees.

He said: “The workforce is fundamental to any business’ success but all too often, its voice is not heard at the top levels of organisations. The updated code is a step in the right direction for ensuring that employee opinions are taken into account on the issues that matter most.

“It’s also encouraging to see the updated code place increased emphasis on organisations’ culture and how they preserve value over the long-term.

“We welcome the fact that in future, companies will be required to set out much more clearly in the annual report how they assess and monitor their culture and the actions they are taking to address problems where practices or behaviours don’t align to their stated values.”

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