The Financial Reporting Council (FRC) has updated the UK Corporate Governance Code so that companies will be required to publish a ‘viability statement’ and to link remuneration more closely to their long-term success. Investors naturally want directors to tell them more information about their company’s future. However, this poses tough challenges for them. In their viability statement, companies will need to state whether they believe the company would be viable beyond 12 months.
Companies will not only need to think about the current position of the company and principal risks it faces, but also determine how long their forecast period should be. This isn’t a case of picking a random period: on the contrary, it should be determined carefully by considering many factors, such as the nature of the business and its investment and planning periods.
The revised Code will apply to accounting periods beginning on or after 1 October 2014. This puts incredible pressure on companies that report around this date and they need to start preparing now. Good risk management and internal control systems are continuous, although they may only need to report on the effectiveness of such systems once a year. As these requirements for boards become more formalised, companies will need to work out what they need to do to their risk management and control as well as reporting to satisfy the new guidance – boards should not underestimate this.
Same sector benchmarks for forecasting
Companies working in the same sector will want to think about what their competitors are doing and what their shareholders will expect.
For example, if a construction company reports for the next two years and another construction company reports for the next four, investors will want to know why the former couldn’t do the same.
Linking pay to long-term success
Shareholder pay has been a hot topic recently. The FRC has made it very explicit in the Code that the pay should be chiefly linked to long-term performance of the company, not a tool to attract and incentivise senior managers. So the FRC has removed the wording on the need to ‘attract, retain and motivate” directors from the Code.
Along with other changes related to the recovery and withholding of variable pay, changes in the Code are largely in line with the Government’s recently introduced new regulations to address concerns around escalating executive pay levels.
The FRC consulted, but has it listened?
Since the consultation over this updated Code started, the FRC received nearly 80 responses with views and recommendations that varied widely. The finalised Code is largely unchanged from the consultation. However, related guidance on risk management and internal controls was unavailable at the time of consultation, so businesses will need to take time to digest the whole package.