The FRC includes a crucial word in the new UK Corporate Governance Code

The Financial Reporting Council (FRC) today published the new UK Corporate Governance Code to predictably mixed reviews. However, one overwhelmingly positive aspect of the new Code is that it includes the most critical word in corporate governance: behaviour.

For this reason, all companies with a board, not just those with a premium listing, would benefit from voluntarily adopting its Principles and Provisions.

  • “The board should assess and monitor culture. Where it is not satisfied that policy, practices or behaviour throughout the business are not aligned with the company’s purpose, values and strategy it should seek reassurance that management has taken corrective action” (Section 1, Provision 2).

The link between behaviour and the role of the board is set out explicitly in Section 1, Principles, A & B:

  • “A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.

  • B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture."

In this, the FRC is calling for a move away from a "tick-box approach". It includes a specific reference (Section 3, L) to individual behaviour, not just collective board effectiveness box ticking behind which many boards hide: "Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively."

If the individual evaluation of board members is to be meaningful and not to create yet another set of boxes to tick, then the emphasis must be on support in behavioural change and not on a finger-pointing exercises.

To this end, there is a useful section in the accompanying guidance note Guidance on Board Effectiveness July 2018, headed: EVALUATING THE PERFORMANCE OF THE BOARD AND DIRECTORS which includes helpful suggestions. I have selected some of these below:

  • "...induction and board development, evaluation should be bespoke in its formulation and delivery... facilitation can add value by introducing a fresh perspective and new ways of thinking, and a critical eye to board composition, dynamics and effectiveness...