The UK's Corporate Governance Code
In July 2018, a new edition of the UK Corporate Governance Code was released by the Financial Reporting Council, whose mission is to promote transparency and integrity in business. The Code is applicable to all companies with a premium listing in the UK or elsewhere. Companies listed on stock exchanges will be required to adapt and implement a range of different Principles which will be applied to those companies with accounting periods beginning on or after January 1st 2019; although, companies can choose to adopt the new Code earlier.
The listing rules require companies to make a statement of how they have applied all 18 Principles, articulating what Provisions (there are 41 Provisions in total) have been taken and the resulting outcomes. Accurate and transparent reporting will help investors with their evaluation of company practices. There are several Principles and accompanying Provisions that have been amended, which companies will need to adopt. We have summarised these below:
Board leadership and company purpose
The Board should implement long-term sustainability by establishing the company’s purpose, values and strategy. These should be well resourced, controlled and measured to meet its responsibilities to the company’s shareholders, stakeholders and workforce.
Division of responsibilities
The Chairperson is responsible for the overall effectiveness of the Board and ensures that the appropriate executive and non-executive directors receive accurate, timely and clear information. The roles of each Board Director should be well defined with a clear division of responsibilities between the Board and the management of the company.
Composition, succession and evaluation
Appointments to the Board and their succession plan should be subject to formal and transparent procedures based on an individual’s skills, experience and knowledge. The Board and its committees should promote individuals with a diversity of gender, social and ethnic backgrounds as well as personal strengths.
Audit, risk and internal control
The Board is required to implement formal and transparent policies and procedures, to ensure independence and satisfy the effectiveness of its internal and external accounting obligations. The policy and procedure framework must also include the nature and extent of the principal risks the company faces and how it intends to mitigate these risks to achieve its long-term sustainability.
A formal and transparent procedure for determining executive remuneration should be implemented. Executive and non-executive remuneration should be aligned with the company’s purpose and be clearly linked to the successful delivery of the company’s long-term objectives. No director should be involved in deciding their own remuneration.
The 2018 Code and its Principles are supported by a revised Guidance on Board Effectiveness, which Board Directors are encouraged to read in conjunction with the Code.
The full UK Corporate Governance Code is available for free from the Financial Reporting Council website www.frc.org.uk
Due diligence is a very complex and challenging undertaking. A thorough background check into senior executives and new hires should entail rigorous interrogation and analysis of information gathered from a range of open sources, such as: subscribed databases; press articles; company registries; court searches; public records and documents; reference checks; employment and education verifications, as well as social media platforms. It is critical to identify all the possible risks, as the additional cost for the supplementary phases is minimal compared to the possible losses incurred from a bad business decision.
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