Corporate Governance: a growing agenda

Post-Lehman there has been a growing focus on the UK's corporate governance regime which has widespread implications for companies. Company Directors are increasingly placing best practice corporate governance at the top of their agenda and businesses are heavily resourcing their corporate governance teams.

The most recent set of amendments to the UK Corporate Governance Code (2014 Code) and recent media attention surrounding banking practices will continue to put pressure on companies.

What significant changes are set out in the 2014 Code?

  • Executive Remuneration
    Post 2008 the focus has been on ensuring that remuneration structures do not reward excessive risk-taking or short-term behaviour at the expense of longer term interests. Under the 2014 Code, pay should now be designed to promote the long-term success of the business. The 2014 Code also includes a specific requirement to include provisions that would enable performance adjustment or post-vesting claw back in performance-related pay schemes. The impact of such provisions could be significant.
  • Risk and Going Concern
    Historically companies have been required to adopt the 'going concern' basis of accounting. This means that company Directors must form the view that the business will be able to continue as a going concern for at least the next 12 months. During the financial crisis, one point which was repeatedly raised was how could a company that had not reported any issues in their last set of financial results suddenly find itself in severe financial difficulties?

What does the 2014 Code say?

  • Directors must confirm in their annual report that they have carried out a robust assessment of the principal risks affecting the company's business model, future performance, solvency or liquidity.
  • Directors should monitor the company's risk management and internal control systems on a continuing basis in addition to the existing requirement to review their effectiveness at least annually and report on that review in the annual report.
  • Directors should make a longer term viability statement in the annual report. This should state whether the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due, drawing attention to any qualifications or assumptions as necessary.

Which companies are affected?

Only companies with a premium listing of shares on the London Stock Exchange are required to comply with the 2014 Code but many smaller quoted companies, including those listed on AIM, may choose to comply in order to attract greater investment. There is nothing to stop smaller, private companies from adopting the key principles outlined in the 2014 Code and many may well benefit from doing so. Such advantages would, however, need to be carefully balanced against any associated increase in administration or cost.

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