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FRC updates UK Corporate Governance Code

26/09/2014
In April 2014, The Financial Reporting Council (FRC) issued a consultation document setting out a series of proposals to update the UK Corporate Governance Code. Following the consultation period, the In April 2014, The Financial Reporting Council (FRC) issued a consultation document setting out a series of proposals to update the UK Corporate Governance Code. Following the consultation period, the FRC has now published a revised Code.

FRC Chief Executive, Stephen Haddrill, explains that the rationale behind the revised Code is to "strengthen focus of companies and investors on the longer term and the sustainability of value creation" meaning that investors and shareholders should now receive better quality, more transparent information on the long-term health and strategy of companies.

In the revised Code, much greater emphasis is placed on ensuring that executive remuneration packages are designed with the long-term success of the company in mind, rather than simply short-term reward for high-performing executives.

The 2012 Code stated that "levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully ….". The 2014 Code states that "Executive directors' remuneration should be designed to promote the long-term success of the company …..".

This shift in emphasis is perhaps unsurprising given that investors are now demanding greater transparency around areas of risk management, following the banking crisis. It is also part of a greater push to get companies to take a long-term rather than short-term approach to instill confidence in investors and shareholders. This increased link between executive performance and pay is designed to implement the FRC's rationale on this point.

Specifically on the issue of executive pay, the FRC has said that companies should put in place plans to re-coup or hold back variable pay, and place greater emphasis on designing pay plans with the long-term health of the company in mind. One way of doing this is for companies to devise specific claw back provisions, which the FRC intend companies to self-regulate. As things stand, although it is common for companies to have provisions in place to withhold monies in certain circumstances, few companies have specific provisions in place to claw back monies already paid out.

As well as the practical considerations associated with implementing a claw back scheme, companies are understandably nervous about the impact this will have on the motivation of their executives. Critics argue that what will happen in practice is that companies will simply devise new non-cash bonus schemes in order to bypass these new provisions. Whether this happens or not, remains to be seen but certainly these new challenges will force companies to think more creatively when devising remuneration packages for their executives in the future.

The revised Code will apply to accounting periods beginning on or after 1 October 2014.

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