Updates to the UK Corporate Governance Code

Updates to the UK Corporate Governance Code

November 22, 2023, Covington Alert

Following wide consultations, the Quoted Companies Alliance (QCA) has published a revised QCA Corporate Governance Code 2023 (2023 Code). The 2023 Code published on 13 November 2023 replaces the 2018 QCA Corporate Governance Code (2018 Code).

The purpose of the Code is to help growing companies to operate more effectively for their staff, investors, partners, and the wider stakeholder community. Almost 900 companies currently use the 2018 Code, including 93% of those whose shares are traded on AIM.

The overarching nature of the 2018 Code remains the same, and the 2023 Code is still based upon ten similar principles as were set out in the 2018 Code, although these have been expanded upon to reflect investor priorities and to consolidate current guidance. The key areas of revision in the 2023 Code are set out below.

• Key Stakeholders – Wider interests and social responsibilities
  
  Principle 4 (previously Principle 3) has been updated by the QCA to include a new principle which requires companies to pay particular attention to its workforce and ensure that its practices towards its employees are consistent with the company’s values. Companies should provide the necessary means for employees to raise concerns in confidence and set out on their website who is responsible for stakeholder engagement.
  
  The principle on social responsibilities has also been expanded to expressly reference matters relating to or stemming from climate change, and it makes clear that the board are responsible for the governance and appropriate oversight of a company’s approach to environmental and social issues (as before, with such matters to be integrated into the company’s strategy, risk management and business model). A relevant disclosure should now be included by companies in their annual report to describe the environmental and social issues that the board has identified as being material to the company.

• Risk Management
  
  Principle 5 (previously Principle 4) highlights the importance of embedding effective risk management, internal controls, and assurance activities. The language has been extended to include a focus on internal controls and assurance. Climate-related risks now need to be integrated into the company’s overall risk management framework.

• Board Composition – A focus on independence
  
  Principle 6 of the 2023 Code deals with the composition of the board and focuses on board independence, setting out certain expectations around the independence of the board. Although independence was referred to in the 2018 Code, this has now been expanded into a specific principle for companies to follow which notes the considerations to be given to those factors which may impede independence (e.g., length of board tenure, size of shareholding, significant incentive pay-arrangements). Company annual reports should identify which board members are independent. Key committees, such as the audit and remuneration committee should have at least a majority of independent NEDs and ideally aim for full independence.

• Succession and contingency planning
  
  The 2023 Code expands the scope of Principle 8 (previously Principle 7) by extending it to cover contingency planning for the absence of key staff.

• Remuneration – A new principle based on existing guidance
  
  Whilst the inclusion of remuneration at Principle 9 is new to the 2023 Code, companies should be familiar with these recommendations as they echo the guidance in the QCA’s Remuneration Committee Guide published in 2020. The new principle encourages companies to establish an effective remuneration policy that aligns with their purpose, strategy, and culture, as well as its stage of development. Shareholders should be provided a vote on both the remuneration report and policy.

• Environmental and Social Considerations
  
  A theme which crops up throughout the 2023 Code is environmental and social considerations (primarily relating to diversity and climate-related issues), which the board are now encouraged to specifically consider as they govern and must ensure there is adequate oversight and appropriate disclosures on such issues. Climate-related principles are now embedded in almost half of the principles and the board itself needs to be kept dynamic and diverse, with diversity characteristics such as ethnicity and age to be considered.

Application of the 2023 Code

Companies currently applying the 2018 Code are encouraged to migrate to the new 2023 Code. The QCA recommends that any company applying the Code in respect of accounting periods commencing on or after 1 April 2024 should apply the new 2023 Code. There will be a 12-month transition period from 1 April 2024 to allow companies time to adopt the revised principles and update their governance disclosures appropriately, after which the 2018 Code will become redundant.

To adopt the 2023 Code, companies must apply the ten principles and make the relevant disclosures (or provide an explanation for not doing so). Companies may choose to publish these disclosures in their annual report, and/or on their website. Recommended locations for each disclosure are specified in the 2023 Code, however, a company should decide for itself the best location for its disclosures.

In order to be an Official User of the 2023 Code, companies need to pay for a verified electronic version of the 2023 Code Document, and those who choose to do so will be given a trademarked code badge to display on their websites and in their reports – this is intended to become a recognisable mark for investors and wider stakeholders and to improve the integrity of the QCA Code.

The QCA also intends to update the related guidelines (i.e., Remuneration and Audit Committee Guides) but has not yet set any timelines for this.

Concluding remarks

The increased focus on diversity, environmental and social factors, and the expanded guidance on stakeholders, independence, succession planning, remuneration and risk management are included in the 2023 Code to fit with investor expectations and should not be new topics to companies. Instead, the 2023 Code should function as a helpful framework to focus the minds of the board, investors, and stakeholders.

It is important for companies to remember that appropriate application of Principles 1 to 9 will help ensure a company has good governance practices in place, however, good corporate governance will not be complete until it has been adequately communicated and reported to shareholders and other stakeholders under Principal 10.

If you have any questions regarding the revised QCA 2023 Code or would like to discuss the application of the revised principles, contact the members of our Corporate Governance practice.