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Corporate governance codes

There are a number of recent and impending developments in corporate governance codes, with the revised QCA Corporate Governance Code having been published at the end of April, the FRC’s UK Corporate Governance Code in the midst of a fundamental review and (though not covered in this briefing) a BEIS sponsored group working on a new code for larger private companies.

The purpose and value of corporate governance codes

As the newly published QCA Corporate Governance Codes states, “good corporate governance is fundamentally about culture, rather than procedure, demonstrating the quality of a company’s corporate governance is a challenge to communicate in writing”. That challenge extends across both authors of codes and those using and reporting against them. That said, as many have argued, good governance and transparency in its application can build trust and value in companies.

To make the exercise of complying against a code valuable, it must be tailored to the particular company and avoid a ‘tick box’, compliance-led, approach. Both the FRC’s UK Corporate Governance Code and the newly revised QCA Corporate Governance Code require companies to state how they have applied the principles of the code, while retaining the ‘comply or explain’ rule fundamental to UK corporate governance codes, and which allows companies to adopt practices that apply to their particular circumstances and explain why other practices are not appropriate. It is the quality of engagement with, and explanation where there are departures from, the relevant code that are particularly crucial.

An increasing number of companies are being required to report against such codes, including from September all companies traded on AIM, as we note below and explain further in our briefing on Key changes to the AIM Rules by Paul Arathoon.

The new QCA Corporate Governance Code

Application of the QCA Code

The new QCA Corporate Governance Code is to be applied on a ‘comply or explain’ basis. As with the FRC’s focus in respect of its UK Corporate Governance Code, emphasis is placed on the importance on providing a well-reasoned explanation for any departures from the Code. The Code also emphasises the importance of disclosures against the Principles (see below) being tailored to the company’s circumstances.

With effect from 28 September it will be mandatory for AIM companies to adopt a ‘recognised corporate governance code’ and to explain how they comply (or where they do not do so, to explain why) against that code. The key codes for this purpose will be the QCA Corporate Governance Code and, typically for larger companies, the FRC’s UK Corporate Governance Code, both of which will be ‘recognised corporate governance codes’. We would expect a majority of companies admitted to trading on AIM to adopt the QCA Corporate Governance Code (though AIM investing companies might adopt the AIC Code, described below), but the change to the AIM Rules, and to the Code itself, will require consideration even for those companies already applying the Code.

Principles and disclosures under the new QCA Code

The Code has been slimmed down and re-focussed around ten Principles, into which the necessary disclosure sections have been merged, so that it is clear for each Principle what disclosure is expected. Disclosures may be contained with the Annual Report and Accounts, the website or both, and suggested locations are included. Where disclosures are across different locations, the Code states that there should be an index clearly showing where the relevant disclosures can be found.

The ten Principles are grouped under three broad headings:


  • Establish a strategy and business model which promote long-term value for shareholders.
  • Seek to understand and meet shareholder needs and expectations.
  • Take into account wider stakeholder and social responsibilities and their implications for long-term success.
  • Embed effective risk management, considering both opportunities and threats, throughout the organisation.


  • Maintain the board as a well-functioning, balanced team led by the chair.
  • Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities.
  • Evaluate board performance based on clear and relevant objectives, seeking continuous improvement.
  • Promote a corporate culture that is based on ethical values and behaviours.
  • Maintain governance structures and processes that are fit for purpose and support good decision-making by the board.


  • Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders.

To reinforce the importance of applying the Code in practice, the section on effective application of the Code has been fully revised and become the first section of the Code.

Corporate Governance Statement

The Code requires the chair to provide a clear explanation of how the company applies the Code in a corporate governance statement. It is recommended that the corporate governance statement is included both within the company’s annual report and on its website. It is intended that the statement:

  1. Clearly articulates the chair’s role and demonstrates his/her responsibility for corporate governance;
  2. Explains, at a high level, how the QCA Code is applied by the company and how its application supports the company’s medium to long-term success;
  3. Explains, in a clear and well-reasoned way, any areas in which the company’s governance structures and practices differ from the expectations set by the QCA Code; and
  4. Identifies any key governance related matters that have occurred during the year, including any significant changes in governance arrangements.

The section on roles and responsibilities has also been revised, and a new separate ‘Corporate Governance Files’ document provided, which sets out further guidance and deals with board effectiveness (previously within the Code itself), including advice on conducting board evaluations.

The FRC’s UK Corporate Governance Code

The FRC launched a consultation on its plan to fundamentally revise the UK Corporate Governance Code (against which Premium Listed companies are required to ‘comply or explain’) at the beginning of December 2017, which closed to responses at the end of February this year. The FRC’s intention was to publish a final version of the Code by early summer, to apply to accounting periods commencing on or after 1 January 2019.

This follows on from the various BEIS initiatives, in particular the focus on other ‘stakeholders’. BEIS asked the FRC to develop the UK Corporate Governance Code to emphasise the importance of employee and other non-shareholder interests, as well as directors’ remuneration and shareholder opposition.

As with the QCA Corporate Governance Code, the FRC’s proposed new UK Corporate Governance Code is shorter than the current version. The supporting principles have been removed and either incorporated into the new Principles or moved into the separate guidance and the focus placed on the application of the Principles, as supported by the various Provisions (though not every Principle has a supporting Provision). The majority of the changes have been made to sections A (Leadership) and B (Effectiveness) of the current Code. The previous Section E (relations with shareholders) has been integrated into other sections.

There has been significant debate around the proposed changes, supported by the responses to the consultation (in which we were involved in various capacities). The proposed changes include:

  • The removal of the previous exemptions for companies outside of the FTSE 350: Currently, such smaller companies are exempted from certain provisions of the Code in relation to: (i) annual re-election of all directors; (ii) the requirement for half the board (excluding the chairman) to be independent non-executive directors (NEDs), which is reduced to a requirement for at least two independent NEDs; (iii) an accordingly reduced requirement for two, rather than three, independent NEDs on the audit and remuneration committees; and (iv) external evaluation of the board at least every three years.
  • Changes to the requirements for independence of directors: The proposed new Code, whilst still ‘comply or explain’, sets out a stricter approach to the independence of directors. The current Code lists non-exhaustive criteria to take into account when considering a director’s independence (Provision B.1.1). The proposed new Code states that where these criteria are not met the relevant director should not be considered independent, so that companies would have to state and explain non-compliance if they believed such a director to be independent. The proposals also extend the independence criteria to the chairman on an on-going basis, rather than just requiring the chairman to be independent on appointment as is currently the position. This may cause issues where chairmen are appointed having already served a term as a member of the board.
  • Non-shareholder stakeholders: As requested by BEIS, the proposed new Code includes changes to provide for employees and other non-shareholder stakeholders, including a specific provision to adopt one of three employee engagement mechanisms: (i) designated non-executive director; (ii) a formal employee advisory council; or (iii) a director from the workforce. However, there may need to be changes to the proposals to reflect issues raised in the consultation phase before the final Code is published.
  • Shareholder opposition: Again as requested by BEIS, the proposed new Code goes into more detail in respect of what companies should do if there is a significant vote against a resolution, as well as specifically setting a level of 20 per cent to trigger the obligation (there is currently no specific threshold within the Code, but industry practice followed the suggestion of 20 per cent made by the GC100 and Investor Group). The new proposals include a requirement to provide an interim update on actions taken to consult and understand the opposition to the resolution within 6 months, ahead of a summary to be provided in the next annual report.
  • Other matters: The proposals represent a fundamental revision of the Code and there are various other areas of change, including strengthening the language around culture and how governance contributes to long-term success, increasing the focus on diversity and succession planning more widely and further building on the role of the remuneration committee.

Given the extensive feedback received in the consultation, it may be that there is some delay in publishing the final version of the Code, though we understand the intention is still that it should apply to accounting periods commencing on or after 1 January 2019.

The AIC Code and Corporate Governance Guide for investment companies

The Association of Investment Companies publish the AIC Code of Corporate Governance and the AIC Corporate Governance Guide for investment companies, which modifies the FRC’s UK Corporate Governance Code for investment companies and is endorsed by the FRC. The AIC are working on a revised AIC Code to take effect when the FRC’s new UK Corporate Governance Code does. Charles Russell Speechlys are represented on the AIC working group that is updating the Code.

Other changes

BEIS has also focussed on reporting against section 172 of the Companies Act 2006 (duty to promote the success of the company), which requires directors to have regard to a non-exhaustive list of factors including the interests of the company's employees and the need to foster the company's business relationships with suppliers, customers and others.

All companies (other than those entitled to the small companies’ exemption) are already required to prepare a stand-alone strategic report in addition to their directors’ report, the purpose of which is “to inform members of the company and help them assess how the directors have performed their duty under section 172” (section 414C, Companies Act 2006). However, BEIS feel that more needs to be done in relation to companies’ relations with other stakeholders and is proposing to introduce new secondary legislation requiring explanation of how directors have had regard to employee and other non-shareholder interests.

This article was written by David Hicks, Partner at Charles Russell Speechlys LLP, who you can contact for more information here.

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