The New QCA Corporate Governance Code 2023 – what you need to know

The company’s purpose is given more prominence in this Principle and elsewhere, reflecting that it is the essential reason for the company’s being.

The company is expected to have specific long-term objectives against which it can determine if it is delivering on its purpose.

Principle 2^[3] - Promote a corporate culture that is based

on ethical values and behaviours.

Principle 3^[4] - Seek to understand and meet shareholder

needs and expectations.

If the company has a controlling shareholder (e.g. a holder of 30% or more of the voting rights), it should consider putting in place arrangements to protect minority shareholders, e.g. a relationship agreement.

The board should ensure proactive engagement with shareholders on governance matters, led by the chair. Other directors, including the chairs of the board committees, should make themselves available.

The 2023 Code now recommends describing shareholder engagement activities in the AR, rather than on the website.

There is a new requirement to provide appropriate quantitative and qualitative reporting of environmental and social matters to meet investor needs and expectations in the AR.

Principle 4^[5] - Take into account wider stakeholder interests,

including social and environmental responsibilities,

and their implications for long-term success.

There is a new focus on workforce engagement. The company should ensure its practices to employees are consistent with its values. Employees should be able to raise concerns in confidence, and processes should be in place to ensure such matters are considered and any appropriate action can be taken.

The board is responsible for the governance and oversight of its approach to relevant environmental and social issues. The company’s impact on these issues, including those relating to climate change, should be integrated into its strategy, risk management and business model.

The AR should describe environmental and social issues that the board has identified as material with reference to its purpose, strategy and business model.

The AR should also set out any relevant KPIs that are used for tracking performance on such matters, and any relevant key forward-looking targets.

The website should explain who is responsible for stakeholder engagement. It should also explain how feedback obtained from stakeholders is fed into board discussions.

Greater disclosure is also expected in the AR, covering:

• how the board has embedded effective risk management and internal controls to deliver on its purpose and strategy. This should include a clear articulation of the company’s risk appetite;
• how the board identifies, assesses and manages risk (both current and emerging);
• how risk governance and processes support the board’s assessment of future prospects and viability/resilience considerations;
• its governance around climate-related risks; and
• how the audit committee has monitored and considered auditor independence.

The 2023 Code includes a lot more detail on board effectiveness, although this mostly reflects information that was in the guidance section of the 2018 Code.

In particular:

• the board should not be dominated by one person or a group of people;
• all directors should be subject to (re-) election at the AGM;
• independent non-executive directors (NEDs) should comprise at least half of the board, however, as a minimum, there should be at least two independent NEDs;
• the chair can count as independent if they were independent upon appointment and are still considered to be so;
• key committees, in particular the audit and remuneration committees, should comprise at least a majority of independent NEDs and ideally aim for full independence; and
• the company should consider whether it is appropriate to have a senior independent director.

Previously the 2018 Code left independence to the determination of the board. The 2023 Code is now more prescriptive, requiring the board to consider factors which may impede independence, which include:

• the length of board tenure;
• size of shareholding;
• prior and/or current commercial or contractual relationships with the company or executive directors; and
• significant pay arrangements beyond a director’s fee.

NEDs should rarely participate in performance-related remuneration or have a significant interest in a company share option scheme, otherwise it risks compromising their independence. If it is deemed beneficial for them to participate, then shareholders should be consulted in advance.

There is an emphasis on board diversity to ensure the board has the necessary knowledge and skillset, while avoiding groupthink. Consideration should be given to factors such as the directors’ socio-economic backgrounds, nationality, educational attainment, gender, ethnicity and age. Boards should assess how their collective and individual perspective add to board discussions, and ensure there is sufficiently wide-ranging and business relevant input, to deliver the best decision-making process. This assessment should feed into ongoing succession planning for the board.

Greater disclosure is expected in the AR, including:

• describing the relevant experience, skills and capabilities that each director has brought to the board’s agenda (a simple list of current and past roles is insufficient);
• demonstrating how the board contains the necessary mix of experience and skills – including diversity characteristics – to oversee and execute the company’s strategy over the medium to long-term;
• identify those NEDs who are independent, and address any grounds to question their real or perceived independence; and
• if NEDs receive performance-related remuneration, disclosure of how shareholders were consulted and their support was obtained.

The AR should explain how the company provides the necessary resources for updating and developing each director’s knowledge and skills.

The website should now explain how the roles of the chair, CEO and board committees have evolved, if at all. It should also describe any actions taken and/or plans for evolution of the governance framework in line with the company’s plans for growth in the year ahead.

The 2023 Code expects that the board performance review should be carried out on an annual basis and include opportunities for improving the chair’s performance and the operation of the board and its committees.

There should be succession planning for both executive directors and NEDs, as well as contingency planning for the absence of key staff.

The AR should include an overview of the board performance review undertaken in the past year. Where an in-year event triggered a review, this should be disclosed.

The AR should also set out when the last externally facilitated review took place and when the next one is planned for.

The succession planning process should be described, including any indicative timelines for expected appointments.

The board should establish an effective remuneration policy which is aligned with the company’s purpose, strategy, culture and stage of development.

The annual remuneration report should be put to an advisory vote. The remuneration policy should be put to an advisory vote and larger companies should consider putting it to a binding vote.

New (or significant amendments to existing) share schemes should be put to a shareholder vote.

The 2023 Code reminds board members, in particular the chair, that they should be proactive in having a healthy dialogue with all key stakeholders.

There is a greater emphasis on the board having appropriate communication with all key stakeholders, and not just shareholders.

The corporate governance report in the AR should reflect on the challenges experienced in the year, how these were addressed by the board and whether any changes were made to board structure or process.

The website should include historical investor presentations.