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Last week, the Financial Reporting Council (FRC) published the revised UK Corporate Governance Code (the “UK Code”).

The UK Code was originally published in 1992, with the previous edition from 2016. In February 2017 the FRC announced plans for a review of the UK Code and conducted a consultation running from December 2017 to February 2018.

Some of the main changes in the new UK Code include:

  • Workforce and stakeholders: A new provision will enable greater board engagement with the workforce to understand their views. The UK Code asks boards to describe how they have considered the interests of stakeholders when performing their duty under Section 172 of the 2006 Companies Act.
  • Culture: Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.
  • Succession and diversity (1): To ensure that boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new UK Code emphasises the need to refresh boards and undertake succession planning. Boards should therefore consider the length of term that chairs remain in post beyond nine years. 
  • Succession and diversity (2): The new UK Code also strengthens the role of the nomination committee on succession planning and establishing a diverse board. It identifies the importance of external board evaluation for all companies. Nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.
  • Remuneration: To address public concern over executive remuneration, the new UK Code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration. Importantly formulaic calculations of performance-related pay should be rejected. Remuneration committees should apply discretion when the resulting outcome is not justified.


Exemptions for smaller companies

During the consultation for the new UK Code, the QCA urged the FRC to allow smaller companies outside of the FTSE 350 to be able to comply with less strict provisions in a number of areas.

This is in recognition of differences in size between the biggest and smallest companies that have to adopt the UK Code and a need for a proportional approach that minimises the burden on smaller companies.

This has been reflected in a number of areas, including:

  1. Board evaluations: Companies outside the FTSE 350 are encouraged, but not required, to consider the use of externally facilitated board evaluations. In the draft version of the new UK Code, the exemption for companies below the FTSE 350 to have an independent board evaluation every three years was removed. The QCA argued that this was overly burdensome for smaller companies.
  2. The role of the board: The principles underpinning board leadership and company purpose have been amended so that they are consistent with Section 172 of the Companies Act. A concern of the draft amended version of the UK Code which the QCA highlighted was that it proposed extending directors’ duties beyond the requirements of Section 172, which the QCA believes already strikes the right balance of having a duty to shareholders, whilst taking account of other stakeholders who have an interest in the success of the company.
  3. UN Sustainable Development Goals and other NGO principles: Any reference to these frameworks is now within the separate guidance, rather than within the UK Code itself. This should reduce the burden for smaller companies.
  4. Composition of audit and remuneration committees: Smaller companies are not be required to have more than two independent non-executive directors, whereas larger companies need at least three. This carve out for small companies was proposed to be removed in the draft version of the UK Code and the QCA requested that the exemption be maintained. This eliminates new potential costs for many smaller companies.

However, there are a number of areas where the QCA urged further exemptions for smaller companies that have not been included in the new UK Code, including:

  1. Annual re-elections: Previous, only directors of FTSE 350 companies were subject to annual election by shareholders, but this exemption has been removed for companies outside the FTSE 350.
  2. Tenure of the chair: The new UK Code states that the chair should not remain in post beyond nine years from the date of their first appointment to the board. This is a new provision with no exemption for smaller companies.
  3. Composition of the Board: Companies have to ensure that at least half of the board, excluding the chair, is composed of independent NEDs. The previous smaller company exemption of having just two NEDs has been removed, so that those with more than two members of the executive team on the board will need to hire an additional NED or reduce the number of executive directors. The minimum audit and remuneration committee membership for smaller companies remains as two NEDs, but the chair of the board can no longer sit on the audit committee.

AIM companies and the QCA Corporate Governance Code

Whilst all companies listed on the Main Market of the London Stock Exchange are required under the Listing Rules to follow the FRC's UK Corporate Governance Code, AIM companies can choose which corporate governance code they can use.

This requirement to state which corporate governance code AIM companies follow is new in 2018 and research indicates that most AIM companies are choosing to apply the QCA Corporate Governance Code, rather than the UK Code, as it is tailored for small and mid-size quoted companies in the UK.

The QCA Code is drafted by experts from the small cap community as part of the QCA’s Corporate Governance Expert Group. Some recent commentary of the QCA Code includes:

Many AIM quoted companies are taking the opportunity to change what code they are applying. In particular, many companies which previously adopted a qualified compliance statement in relation to the UK Corporate Governance Code are now choosing to adopt the QCA Code instead. They are attracted by the relative simplicity and perceived flexibility of the QCA Code compared to the UK Corporate Governance Code.
Osborne Clark, June 2018

This new QCA code has been presented clearly and succinctly. At only 22 pages it covers what we would regard as the essentials with enough explanation to give the reader a good understanding of how to apply it to their governance structures.
Lewis Silkin, June 2018

The QCA Code represents a proportionate and pragmatic approach to corporate governance for small and
medium-sized quoted companies and companies in the early stage of development and maturity and who are not required to apply the UK Corporate Governance Code under the Listing Rules.
Deloitte, May 2018

Further information

The new UK Code and further information from the FRC can be found using the links below:


Further information about the QCA Corporate Governance Code can be found here:

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