Reporting Council’s UK Corporate Governance Code (“the Code”) sets out
principles of good practice for companies listed on the London Stock Exchange.
The Code operates on a ‘comply or explain’ basis, meaning listed companies are
required to comply with the provisions of the Code or explain to shareholders,
in the annual report, why they have deviated from it.
The Code has
been updated and the revised Code will apply to accounting periods on or after
1 October 2014.
Reporting Council (“the FRC”) has introduced new requirements into the Code and
in particular it has specified that boards of listed companies should ensure
“executive remuneration is aligned to the long-term success of the company and
demonstrate this more clearly to shareholders”. Specifically companies should
be able to claw back bonuses or withhold them if trading goes sour. The code no
longer includes the rationalisation that remuneration should be enough to
“attract, retain and motivate directors of the quality required”. This means
companies will not be able to use the justification of “retaining talent” to
pay large remuneration packages.
to these changes, the FRC has confirmed that companies will need to publish a
“viability statement” in the strategic report, which will set out the risks to
the company and will state what the company will do to mitigate these risks.
The FRC Chief
Executive, Stephen Haddrill, has commented on the changes saying "The
changes to the Code are designed to strengthen the focus of companies and
investors on the longer term and the sustainability of value creation…The
changes on remuneration also focus companies on aligning reward with the
sustained creation of value rather than, as before, simply on retention – a
focus that has tended to promote pay escalating and leap-frogging”.
review of the Code will tackle boardroom diversity.