The revised code focuses on the crucial themes of stakeholder engagement, culture, diversity and remuneration.
Directors have had to have regard to stakeholders for over a decade. A positive obligation to engage with stakeholders, to encourage participation by them, and to report on this, is a natural evolution. The challenges will be how companies identify their key stakeholders, how they define stakeholders such as ‘environment’ and ‘community’, and what to do when stakeholder groups disagree.
It is difficult to think how a company could avoid engaging with its own workforce even if it wanted to, but the code gives helpful structure by setting out three possible mechanisms. It won’t be long before we know which companies have chosen a director from the workforce, set-up a workforce advisory panel, designated a NED as being responsible for giving the views of the workforce, or used their own mechanism.
The three options aren’t mutually exclusive so some companies may chose more than one, eg, an advisory panel could support either a designated NED or a workforce director. The choices made will provide an insight into companies’ culture. It’ll be very interesting to see how many companies are prepared to glance over the English Channel, learn lessons from Member States and appoint a director from the workforce. It’ll also be interesting to see how many companies are starting from scratch, or start as they mean to go on by asking their workforce which of the three options they prefer.
We already know the value of diversity, so the question is, why has progress been so slow? It makes sense to codify what Nominations Committees should already have in mind, and to focus on the related matters of succession planning, diversity and pipeline. It’s great to see diversity for board appointments being defined broadly to include gender, social and ethnic backgrounds, cognitive and personal strengths. It’s harder to understand why reporting about senior management and their direct reports has been limited to gender balance only. Sadly the removal of legal insurance, and the relegation of independent professional advice and training to non-mandatory guidance, may militate against diversity, including the willingness of any employee to sit on the board.
As always, remuneration is central, and the objectives are clear, no to formulaic calculations, yes to Remuneration Committees exercising discretion, and yes to setting executive remuneration in the context of the wider workforce. Remuneration Committees are required to explain why remuneration is appropriate, and in this context Committees should reference the new pay ratios (a comparison between CEO pay and workforce at three percentiles). In line with the Investment Association’s public register, the new code defines a negative shareholder vote as 20% or more, and boards are required to do more in response, eg, provide an update on what action they have taken after 6 months, and explain what impact the negative vote had in the annual report. Remuneration schemes will also be used to promote long-term shareholdings by executive directors and share awards will be subject to a total vesting and holding period of 5 years or more. This change may result in executives waiting or requiring larger golden handshakes to entice them to move, its purpose is to stop short-term thinking by executives.
Including the UN Sustainable Development Goals in the code, this would have helped prove the relevance of corporate governance to the public. In the recently launched UK Stakeholders for Sustainable Development (UKSSD) report Measuring Up it is clear that there is a huge role for business to play in the UK delivery of the SDGs. ICAEW is a steering group member and partner of the UKSSD.
Although code revisions are important, if the UK wants to maintain its position as the global leader for corporate governance then we may need to think beyond codes and reporting. New and disruptive business models, changes to the way in which companies operate, and the series of corporate governance scandals, mean that societal expectations have increased. The performance and accountability of individual directors is key. They need to demonstrate their credentials as fearless protagonists rather than yes men. The new code has addressed the issue of ‘overboarding’ by requiring more disclosure about individual directors’ time commitments in the annual report. The nine year maximum for board membership has also been strengthened, although exceptions are allowed if they can be explained.
To generate trust companies must find new ways to communicate in order to be more personal and authentic. Messages must not be wrapped up in jargon. Companies and their leaders need to stand up and be counted in areas of public concern, such as tax, the environment, and executive remuneration. Changes to the CG Code and the other reforms being made are significant for specialists, but they will not have any impact on the public unless companies embrace the spirit of the changes and go the extra mile.
ICAEW refers to this as ‘Connect and Reflect.’ We are collating views, anecdotes and examples in relation to: how employee directors add value; how companies thrive on social media; how whistleblowing helps companies; and how to mark governance out of 10.