Power to the people!

Greater involvement of the workforce and other likely effects of the imminent FRC reforms to the UK Corporate Governance Code

How did we get to this point?

Company directors are already legally required to consider the interests of their company’s employees and the need to foster the company’s business relationships with suppliers, customers and others when considering how to promote the success of the company[1].

An increasing awareness of the need for strong and effective corporate governance, not just from our largest companies but also across the wider business community, led to the publication by the Government of a Green Paper in 2016 looking at corporate governance.

Following the consultation period for the Green Paper, a response was issued which outlined proposals for reform to corporate governance in the UK. The responses received highlighted the need for a greater awareness to be raised of directors’ duties under the Companies Act. The government’s response set out nine proposals for reform, across three specific aspects of corporate governance;

1. executive pay;
2. strengthening the employee/customer/supplier voice; and
3. corporate governance in large private companies

The FRC was invited to consider various proposals following this consultation and, as a result, has in turn been consulting on proposed changes to the UK Corporate Governance Code.

When does the revised code come into force?

The revised UK Corporate Governance Code, which is applicable to all premium listed companies, is due to be published on 16 July 2018 and applies to accounting periods beginning on or after 1 January 2019.

How is the workforce/stakeholder voice being strengthened?

Premium listed companies will need to adopt, on a ‘comply or explain’ basis, one of three mechanisms for engaging their workforce:

• designate a non-executive director;
• introduce a formal employee advisory council; or
• appoint a director from the workforce.

This is likely to be seen by staff and wider stakeholders in principle as a positive step towards greater engagement. However, companies will need to ensure that (particularly with the appointment of a director from the workforce and the appointment of a non-executive director), the wider workforce is represented and not just one part. Also, there is a risk of a charge of tokenism and it remains to be seen whether the statutory and fiduciary duties of a director may conflict with the individual’s views as an employee, and may limit the employee/director’s ability to communicate back to the workforce he/she represents.

Employee advisory councils are already used elsewhere in the EU. UK companies will need to ensure that views communicated by these councils are actually noted and taken heed of.

Compliance with the spirit of good governance

The drive to require large companies to engage with their workforces is aimed at encouraging good practice in the wider business community and marks a noticeable shift towards involving and listening to the voice of the employees and wider stakeholders. It will no doubt take time to see how this plays out in practice. However, care will need to be taken by companies in implementing the principles of the revised UK Corporate Governance Code, to ensure that the whole concept of employee/stakeholder engagement is understood and embraced by those at a senior level, and practical steps taken now to ensure that it is not just seen as a box-ticking exercise.

Is this backed up by any legislation?

In addition to the proposed reforms to the UK Corporate Governance Code, draft secondary legislation[2] has introduced the following:

1. Larger companies to publish a statement regarding compliance with their directors’ duties (known as a ‘section 172 statement’)

All large (private and public) companies will need to include in their Strategic Report a section 172(1) statement to explain how their directors have had regard to the matters in section 172(1)(a) to (f) Companies Act 2006 when performing their directors’ duties.  Unquoted companies must publish this statement on a website (quoted companies are already required to make their annual accounts and reports available on their websites).

2. Statement of employee engagement to be included in Directors’ Report (or Strategic Report)

All companies with an average number of more than 250 employees (regardless of whether the company is listed) must include in their Directors’ Report (or, if they so choose, their Strategic Report) a statement describing the company’s actions taken during the financial year to introduce, maintain or develop arrangements aimed at:

• Informing – providing employees with information of concern to them as employees;
• Consulting – consulting employees or their representatives regularly to take account of their view in making decisions likely to affect their interests;
• Involvement in company performance – encouraging employee involvement in the company’s performance through employee share schemes or other means;
• Educating – achieving a common awareness of all employees of financial and economic factors affecting the company’s performance.

Do AIM companies need to think about anything else?

New AIM applicants are required to state in their Admission Document and on their websites details of the recognised corporate governance code that the board of directors has decided to apply[3].

In addition, from 28 September 2018, all AIM companies must give details on their websites of the corporate governance code their directors have decided to apply, how the company complies with that code and, if it departs from the chosen code, an explanation of reasons for departing from the chosen code.

This is a new consideration for both new and existing AIM companies, who should now start to:

1. Identify an appropriate corporate governance code (e.g. the QCA Corporate Governance Code or the UK Corporate Governance Code);
2. Carefully consider how the AIM company complies with the relevant code; and
3. Prepare a ‘meaningful explanation’ of any departure from the relevant code (as required by AIM Notice 50).

How can we help?

Michelmores’ Corporate team in Exeter, London and Bristol can provide assistance and advice on this topic. Please contact Ian Binnie on ian.binnie@michelmores.com.