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Changes to the UK Corporate Governance Code


Earlier this week the FRC published the final version of the revised UK Corporate Governance Code, which will take effect for financial years beginning on or after 1 January 2019. It also published a Feedback Statement outlining the responses to its December 2017 consultation on the proposed changes, together with a "Key Highlights" document.

As expected, much of the final version of the Code is the same as the version published for consultation; however, in response to feedback, there have been some key amendments to the proposed provisions. We set out below a summary of the key changes.

Unless companies decide to adopt all or part of the new Code earlier than required, the first reporting will not be seen until 2020. However, the FRC suggests that companies report on the new provisions relating to significant votes at shareholder meetings (see below) from 2019.

Directors and board composition

Independence and tenure

  • Under the new Code, the chair should be independent on appointment and have objective judgement throughout his/her tenure.
  • The FRC has reinstated the ability of the board to determine the independence of directors. The new Code retains the list of circumstances which should be taken into account, and states that where any of the listed (or other relevant) circumstances apply, and the board nevertheless considers a director to be independent, a clear explanation should be provided in the annual report.
  • For the first time, the Code introduces a provision on tenure. The FRC had stated in its consultation that it would not expect a chair to be on a board for more than nine years, and this is now an express provision of the new Code. This will be particularly controversial for those chairs who have previously held non-executive positions which would bring them within the nine year rule, although a limited extension will be permitted if they are already a board member and the appointment supports the company’s succession plan and diversity policy. We expect that some companies may therefore choose to explain their non-compliance in relation to this.

Change to FTSE 350 exemptions

  • It had originally been proposed that the current exemptions for companies below the FTSE 350 (in relation to board composition, board evaluation, annual re-election of directors, and audit and remuneration committee composition) would be removed. However, in response to feedback that the proposed removal of these exemptions would have been unduly onerous for smaller companies, the revised Code retains the FTSE 350 exemptions in respect of the remuneration committee composition and board evaluation. In relation to board evaluation, the revised Code states that the chair of all companies should consider having a regular externally facilitated board evaluation, but only FTSE 350 companies are required to have an external evaluation every three years. In relation to audit committee composition, smaller companies are still permitted to have two, rather than three, members. However, in order to reinforce the independence of the audit committee, the chair can no longer be a member of the audit committee, regardless of the company's size.
  • As proposed, the new Code removes the exemption in relation to annual re-election of directors. Therefore, all directors will be subject to annual re-election. Companies' articles should be changed at the next suitable opportunity to reflect this, although companies will be expected to follow the new provision even if their articles have not yet been amended.
  • In relation to board composition, the new Code retains the current criterion that at least half of the board (excluding the chair) should be independent non-executive directors (as opposed to the proposed "majority"), but removes the exemption for smaller companies. All companies will, therefore, have to comply with this, regardless of size.


In response to feedback, the new Code includes a provision to cater for "overboarding" and requires:

  • boards to take into account other demands on directors' time when making new appointments; and
  • significant commitments to be disclosed.

Although this was not a change that was envisaged under the proposals, it is not surprising given the recent emphasis by institutional investors on directors' time commitments.

Shareholder dissent

Where 20% or more of votes are cast against the board recommendation for a resolution, the company should:

  • explain, when announcing voting results, what actions it intends to take to consult with shareholders to understand the reasons behind the result;
  • publish an update no later than six months after the shareholder meeting; and
  • provide a final summary in the annual report and, if applicable, in the explanatory notes to resolutions at the next shareholder meeting, on the impact of the feedback on the decisions of the board, and any proposed actions or resolutions.

These actions are aimed at ensuring that the company fully understands the reasons for its shareholders voting against a resolution, and discusses these matters further with them. These changes to the Code complement the existing Investment Association Public Register which contains details of significant votes against resolutions and related company updates.

Employees and remuneration

Long term incentivisation

  • There is an emphasis in the new Code on promoting longer term shareholdings by executive directors: awards should be released for sale on a phased basis and the total vesting and holding period requirement is extended from three years to five years or more. Although many companies already impose a combined vesting/holding period of five years as a matter of practice, the fact that this is now required will affect directors who receive shares as part of their bonus.
  • The remuneration committee should develop a formal policy for post-employment shareholding requirements which encompasses both unvested and vested shares.
  • The new Code states that remuneration schemes and policies should enable the use of discretion to override formulaic outcomes i.e. remuneration committees should have the power to cap the value of the incentives after they have been awarded. The Guidance on Board Effectiveness specifically notes taking account of share price growth and currency fluctuations as instances where it would be appropriate to use discretion.

These changes do not call for the amendment of existing schemes (and a company cannot unilaterally amend a scheme) but they are the direction of travel for new schemes.

Employee interaction

For engagement with the workforce, the Code recommends one of three employee engagement mechanisms: (i) a director appointment from the workforce; (ii) a formal workforce advisory panel; or (iii) a designated non-executive director. The FRC leaves it up to individual companies to choose the right mechanism or combination of mechanisms, or to choose an alternative arrangement (although it must explain how such arrangement is effective).

Employee remuneration

In a change from the proposals, the board (rather than the remuneration committee) will now have the responsibility of overseeing workforce policies and practices. The remuneration committee will have responsibility only for remuneration-related matters and will be responsible for reviewing workforce remuneration and related policies.

Experience of remuneration committee chairs 

Before appointment, remuneration committee chairs should have served on a remuneration committee for at least 12 months. The chair of the board cannot chair the remuneration committee.

Other changes

Format of the code

The new Code is shorter and "sharper" than before, and has a renewed focus on the application of the Principles. It is divided into five sections, with slightly different headings from the current sections: (i) Board leadership and company purpose; (ii) Division of responsibilities; (iii) Composition, success and evaluation; (iv) Audit, risk and internal control; and (v) Remuneration.

Guidance on board effectiveness

The FRC has also published the final version of the 2018 Guidance on Board Effectiveness, which follows the structure of the new Code. It is more detailed than the previous version and includes sets of questions for the board to help directors comply with the new Code.

Corporate governance and reporting for private companies

There are also changes on the horizon in relation to corporate governance and reporting of large private companies, including subsidiaries of listed companies, following the publication of the draft Wates Principles and the draft Companies (Miscellaneous Reporting) Regulations 2018. Please click here for further details.


We have a dedicated Listed Company Advisory Team who would be pleased to assist you with any enquiries you have in relation to the above changes. This team, led by Laura Summerfield, sits within our Corporate Department and focuses on advising listed companies on day-to-day matters including, corporate law and governance. The team also draws on the expertise of the Travers Smith specialist practice areas, such as employment, tax and employee incentives, to provide clients with a co-ordinated and seamless service.


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