UK: The 2018 UK Corporate Governance Code

Last Updated: 25 October 2018
Article by David Collins, Richard Barham and Candice Chapman

The Financial Reporting Council (FRC) has published the 2018 UK Corporate Governance Code.  The new Code is designed to set higher standards of governance to promote transparency and integrity and attract investment in the UK. The new Code will apply to premium-listed companies (and other companies that voluntarily choose to comply with it) for their financial years beginning on or after 1 January 2019.   

The new Code retains much of the current version of the Code (the 2016 Code) with an emphasis the importance of:

  • positive relationships between companies, shareholders and stakeholders;
  • a clear purpose and strategy aligned with healthy corporate culture;
  • high quality board composition and a focus on diversity;
  • remuneration which is proportionate and supports long-term success.

The new Code is a "shorter and sharper" document than the 2016 Code. It now consists of 18 Principles and 41 corresponding provisions. These are divided into five sections as follows:

  1. Board leadership and company purpose
  2. Division of responsibilities
  3. Composition, succession and evaluation
  4. Audit, risk and control
  5. Remuneration

The new Code refocuses on applying the Principles as well as the need to comply with the Provisions (or explain any failure to comply).  

Publication of the new Code follows the FRC's consultation in December 2017 (which we reported on here). Not all the changes proposed in the consultation have been incorporated in the final version of the new Code. In particular:

  • the proposal to remove all exemptions available to companies outside the FTSE 350 has been relaxed, in favour of more limited removal (as mentioned below);
  • the proposal to turn the factors which boards must consider when determining directors' independence into conditions which to be satisfied has not been taken forward; and
  • the proposal to require a company's chair to be independent throughout their tenure, rather than only on appointment, has not been taken forward (but see below).   

Significant changes which the final version new Code makes to the 2016 Code include the following:

Shareholder and stakeholder engagement

  • Shareholder resolutions: When 20 per cent or more of shareholder votes are against a resolution recommended by the board, the company should:
    • explain, when announcing voting results, what actions it intends to take to consult shareholders so it can understand the reasons behind the result;
    • publish an update within six months of the vote; and
    • provide a final summary in the annual report, or in the explanatory notes to resolutions at the next meeting, on what impact the feedback has had on the decisions the board has taken and any actions or resolutions now proposed.
  • Stakeholder engagement: The board should take steps to understand the views of the company's other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision making. The board should keep engagement mechanisms under review so that they remain effective.
  • Workforce engagement: Companies should choose one or a combination of the following methods for gathering the views of the workforce: a director appointed from the workforce, a formal workforce advisory panel or a chosen non-executive director. If a company does not choose one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective. Additionally, there should be a means for the workforce to raise concerns in confidence and, if they wish, anonymously.
  • Long term success: The principle of promoting the long-term sustainable success of the company is linked not only to generating value for shareholders but also contributing to wider society. This generated some criticism during the FRC consultation, on the basis that it reinterprets section 172 of the Companies Act 2006 which makes no reference to contributing to wider society. The new Code, therefore, now states explicitly that nothing in it overrides or is intended as an interpretation of the statutory statement of directors' duties in the Act.

Corporate culture and alignment with purpose and strategy 

  • The board should satisfy itself that the company's culture is aligned with its purpose, values and strategy and all directors must act to promote that culture. The board should assess and monitor culture.

Board composition and diversity

  • Chair independence: A company's chair should not remain in post beyond nine years from the date of their first appointment to the board, though that period can be extended for a limited time to facilitate effective succession planning and the development of a diverse board, particularly where the chair was an existing non-executive director on appointment. A clear explanation should be provided.
  • Director independence: Companies below the FTSE 350 will now need to ensure that at least half of their board, excluding the chair, is independent. This brings the requirement for these companies into line with the requirements for companies within the FTSE 350.
  • Annual re-appointment: Directors of companies below the FTSE 350 will be subject to annual re-election, bringing the requirement for these companies into line with the requirements for companies within the FTSE 350. 
  • Diversity: Appointments and successions plans for board and senior management positions should promote diversity not only of gender but also of social and ethnic backgrounds.  The nomination committee's role is expanded to ensure that plans are in place for orderly succession to both the board and senior management positions, and to oversee the development of a diverse pipeline for succession. To improve transparency, the annual report should, among other matters, describe the actions of the committee in these areas, and include information about the gender balance of those in the senior management and their direct reports.
  • Audit committees: The chair of a company outside the FTSE 350 may no longer sit on the company's audit committee, bringing the position for these companies into line with the requirements for companies within the FTSE 350.


  • Remuneration committee chair: Before appointment as chair of the remuneration committee, the appointee should have served on a remuneration committee for at least 12 months.
  • Remuneration committee remit: The remuneration committee will have a broader remit which includes reviewing workforce remuneration and related policies and the alignment of incentives and rewards with culture, taking these into account when setting the policy for director remuneration.  
  • Performance awards: The recommended minimum vesting and post-vesting holding period for executive shares awards is increased from three to five years to encourage longer-term outcomes. Remuneration schemes and policies should give boards discretion to override formulaic outcomes.
  • Pensions: Pension contribution rates for executive directors, or payments in lieu, should be aligned to those available to the workforce

Companies familiarising themselves with the new Code should be aware that some of the procedural aspects of governance which were in the 2016 Code have been moved to a separate "Guidance on Board Effectiveness". This also provides extensive guidance and suggestions and should, therefore, always be read in conjunction with the new Code. The FRC has also published a useful feedback statement which includes a detailed comparison between the 2016 Code and the new Code and a redline showing the changes between the consultation draft of the new Code and the final version of the new Code.   

UK Corporate Governance Code - July 2018; Guidance on Board Effectiveness - July 2018; Feedback statement: UK Corporate Governance Code; Feedback statement annex: UK Corporate Governance Code

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