United Kingdom Corporate Governance Code
The UK Corporate Governance Code 2018 applies to accounting periods beginning on or after 1 January 2019. It places greater emphasis on relationships between companies, shareholders and stakeholders.
It also promotes the importance of establishing a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.
All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report in their annual report and accounts on how they have applied the Code.
The Code focusses on the application of the Principles and reporting on outcomes achieved. See the relevant section of the Listing Rules. The UK Corporate Governance Code 2016 remains in place for those companies whose year ends occured before 1 January 2019.
Comply or Explain: The Code operates on a ‘Comply or Explain’ basis. Under the Financial Conduct Authority (FCA) Listing Rules, listed companies are expected to align their business with the Principles of the Code but may choose whether or not to comply with its Provisions.
Carefully considered corporate governance policies and practices along with high levels of transparency can lead to improved levels of trust. This will allow investors to take a more considered view of the governance of the company, particularly where explanations have been provided.
This approach recognises that one type of approach does not necessarily fit all companies, while allowing shareholders to consider the explanation and discuss this with the company where necessary. If shareholders are not content, or they consider that the explanation is unsatisfactory, they can use their rights – including the power to appoint and remove directors – to hold the company to account. In addition, the comply or explain approach means that it is possible to expect more demanding standards than can be achieved through legislation.
Requiring companies to report to shareholders rather than regulators means that the decision on whether a company’s governance is adequate is taken by those in whose interest the board is meant to act. What constitutes an Explanation? Explanations are key to the ‘comply or explain’ nature of the Code. While a departure from the Code could achieve effective corporate governance, an explanation is necessary for effective transparency.
Companies should provide full and meaningful explanations so that shareholders and other stakeholders understand why a departure is necessary and how it achieves effective governance for the company. An explaination should clearly define the period for which it did not comply and discuss the rationale for the departure, any potential risks associated with it.
Most importantly, it must be understandable and persuasive for those reading the annual report. Additional information on what constitutes a good explanation is included in the FRC’s paper Improving the Quality of ‘Comply or Explain’ Reporting published in February 2021.