LONDON (Reuters) - Companies in Britain must strive to rein in excessive executive pay, pay more heed to staff and make boards more diverse under a new “short and sharper” corporate code, published on Monday.
The Financial Reporting Council (FRC) has updated its non-binding 26-year old code of corporate standards for publicly listed companies, which must comply with it or explain in annual reports to shareholders if they do not.
The government has shown no appetite to force companies to implement the code.
The new 15-page code, about half the length of the current version, comes as the watchdog, which oversees company governance standards and accountants, faces a review to see if it can uphold high corporate standards to maintain Britain’s attractions as a place to invest after Brexit.
The code comes into effect for accounting purposes from next January.
“These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run,” said Greg Clark, Britain’s business minister.
British lawmakers have called for tougher corporate governance standards following a row between food retailer Tesco and its suppliers and the collapse of retailer BHS and outsourcer Carillion. And shareholders have become much more active in terms of rejecting some executive pay deals.
“This new code, in its short and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole,” FRC Chairman Win Bischoff said.
However, Frank Field, chair of parliament’s work and pensions committee, whose investigation of Carillion described the FRC as timid, said the new code won’t stop new corporate scandals.
“It is difficult to see what difference it would make. It falls far short of the ‘reset’ of corporate governance that our joint committees concluded is necessary,” Field said.
Royal London Asset Management said that, “Ultimately though, tangible results will come from institutional investors who have the potential to drive change through their power as the ultimate owners of companies.”
There is a new provision for greater board engagement with the workforce to understand their views - aimed at reinforcing an existing provision in law since 2006 which has had a patchy impact - but stopping short of calling for worker representation on boards.
“Whilst our inclination is for there to be an employee elected representative as a director on the board, the code is right to put the onus on company boards to determine what the optimal approach is in their specific context,” said Saker Nusseibeh, chief executive of Hermes Investment Management.
This, along with a requirement to have whistleblowing mechanisms that allow directors and staff to raise concerns for effective investigation, mark the biggest broadening of corporate standards in many years, the FRC said.
The code also emphasises the need for boards to refresh themselves, become diverse and plan properly for replacing top jobs. It introduces a requirement for companies to explain publicly if a board chair has remain unchanged for more than nine years.
“The FRC have backed down on their original proposal that chairs should be independent throughout their term of office, rather than simply on appointment as the current code states,” said Alex Beidas, a partner at Linklaters law firm.
Reporting by Huw Jones; Editing by Jane Merriman/Keith Weir