Updates on UK Corporate Governance Code
editor: Ms. Lucy Mai - Risk Consultant
The Financial Reporting Council (“FRC”) has issued an updated version of the UK Corporate Governance Code (the “Code”), as announced in the press release of FRC updates UK Corporate Governance Code dated 17 September 2014. This revised Code strengthens the quality of information issued to investors relating to long term sustainability and strategy of listed companies. In addition, it also emphasizes the importance of risk management. The revised Code is applicable to accounting periods commencing on or after 1 October 2014.
The key changes to the Code are summarized as follows:
- Going concern;
- Risk management and internal control;
- Remuneration; and
- Shareholder engagement.
Companies will be required to make two separate statements in accordance with the changes to the Code provisions on going concern:
- Going Concern Statement: In the annual and interim financial statements, the directors should state whether it is appropriate to adopt the going concern basis of accounting, and should identify any material uncertainties to the company to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
- Viability Statement: Taking account of the company’s current position and principal risks, the directors should state whether they have a reasonable expectation that the company will be able to continue operating, meeting its liabilities within the period of their assessment, and consider any qualifications or assumptions as necessary. The FRC states that the viability statement should look forward significantly beyond 12 months.
Risk management and internal control
In addition to reviewing the effectiveness of risk management and internal control systems on an annual basis, directors are required to constantly monitor the systems. It is also the responsibility of the directors to identify those risks and explain how they are being managed or mitigated. The amended Code emphasizes that all material controls which include financial, operational and compliance controls should be taken into consideration when doing review and monitoring.
In relation to remuneration policy, the revised Code emphasizes the long-term success of the company. The Remuneration Committee should take the lead in ensuring that the remuneration policies achieve the aim without paying more than necessary. The committee should also consider appropriate vesting and holding periods for deferred remuneration. Furthermore, the Committee should draw comparisons with other companies, in order to avoid an upward ratchet of remuneration levels with no corresponding improvement in performance.
The updated Code also addresses shareholder engagement and the board's internal communication. On one hand, companies are required to explain the actions they intend to take when publishing the results of general meeting where a significant percentage of shareholders have voted against any resolution.
On the other hand, companies' boards are advised to lead by example in order to encourage good behavior throughout the organization. According to the FRC, the board should engage in a dialogue which is both constructive and appropriate.
The Code is similar to the Hong Kong Corporate Governance Code. We believe the change in the Code will impact Hong Kong significantly in the near future. Hong Kong listed companies should be alert to the change in the Code and be ready for any amendment.
(1) FRC’s press release
(2) Guidance on Risk Management, Internal Control and Related Financial and Business Reporting
If there are any aspects which we may assist, please do not hesitate to contact our partner in charge Mr. Roy Lo at 3583 8048 (firstname.lastname@example.org) or our Risk Manager Ms. Gloria So at 3583 8517 (email@example.com).
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