The intent to enhance public trust manifested itself in the new UK corporate governance Code that took effect in January 2019.

he revised Code aims to improve governance and promote the long-term effectiveness of the capital markets. It seeks to establish higher public trust in organisations and level up transparency and greater accountability. The Companies Regulations 2018 requires a business to disclose in the annual report arrangements for engaging stakeholders. The Wates principles that align with the Code is set to provide a framework to report.

Setting the culture

A Board should promote the purpose of the company and the value it creates to the broader society that should align with the strategy and the vision.

A Board’s composition should have the right skills and knowledge to make a valuable contribution. There should be a clear understanding of the accountabilities and policies that should support decision making.

The remuneration should be aligned with the company’s long-term success. The Board has the responsibility to oversee stakeholder relationships based on the company’s purpose.

Aiming at building up strong shareholder relationships Boards should consider the interest of shareholders when they are performing their duty, including engaging the workforce by having an employee representative at the Board. The Code also promotes more effective communication with shareholders. For example, when 20% of votes are cast against a resolution, the Board should take action to consult shareholders and provide updates.

The Code promotes a system of authenticity – Succession and Diversity &Remuneration

The nomination committee should make sure that the succession plan is in place underpinned by diversity and the chairman’s tenure in post beyond nine years. The Board has to have the right skills, knowledge and background to support effective decision making and the viability of the company.

Provision 40 also establishes guidelines for executive director remuneration policy. The remuneration committee should exercise judgment on whether remuneration in relation to the performance is justified.

Workforce and stakeholders: There is a new Provision to enable greater board engagement with the workforce to understand their views. The 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: To ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new Code emphasises the need to refresh boards and undertake succession planning. Boards should consider the length of term that chairs remain in post beyond nine years. The new Code 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 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.

Audit, Risk and Internal Controls: The Board should establish internal policies and procedures to ensure effectiveness of the audit functions, establish procedures to manage risks and determine the extent of the principal risks the company is willing to take in order to achieve its long-term objectives. This entails the establishment of an audit committee that will monitor the integrity of the financial statements, provide advice and review internal procedures, policies and risk management systems.

The Wates Principles offer companies, even those not subject to the regulation, an opportunity to demonstrate good practice and how they achieve long-term success of the company.

Six principles provide a framework to report:

  1. Purpose
  2. Composition
  3. Responsibilities
  4. Opportunity and Risk
  5. Remuneration
  6. Stakeholders

Read more: Wates Corporate Governance Principles

What is next?

The Green Finance strategy launched in October 2019 is a key driver towards the UK’s 2050 Net Zero target. To help drive this, the Government is now expecting all listed companies to disclose in line with the recommendations of Task Force on Climate-related Financial Disclosures by 2020. The TCFD recommendations, published in June 2017, is structured around four key components:

1. Governance
2. Strategy
3. Risk Management
4. Metrics and targets

It provides a framework for disclosing climate-related risks and opportunities and reinforces the Board’s oversight around the assessment and response to these matters. It asks organisations to describe the potential impact that climate change will have on their prospects by performing a scenario analysis. These types of disclosures promote informed investments and transparency, leading to higher public trust towards organisations and the broader social good.

The challenge now remains for corporates to establish this in their boardroom agenda and communicate what it means for the long-term value creation to their investors clearly and concisely.

Read more: Task Force for Climate-Related Financial Reporting