Faculty of law blogs / UNIVERSITY OF OXFORD

Revision of the UK Corporate Governance Code: Some Observations from Continental Europe


Hélène Vletter-van Dort
Titiaan Keijzer


Time to read

5 Minutes

According to the classic Cadbury definition, ‘corporate governance is the system by which companies are directed and controlled’. On 5 December 2017, the Financial Reporting Council (FRC) published a Consultation Document for reviewing the UK Corporate Governance Code (UK Code), lastly amended in 2016. Additionally, a review of the UK Stewardship Code was announced.

We discuss the background and implications of the proposed changes from a Continental perspective. Procedural matters aside, we focus on three topics: diversity, shareholder opposition at the Annual General Meeting, and employee co-determination. As is analysed in more detail below, the Consultation Document contains highly innovative ideas in respect of diversity, which are likely to find their way to Continental corporate governance codes in the coming years. Conversely, while the proposal for dealing with investor opposition befits the shareholder-centric nature of UK company law, it is probably less suitable for more board-oriented Continental governance models. Finally, we consider the impact of the employee co-determination proposals to be limited, not necessarily because of their non-mandatory nature but given the alternative options that are offered.

Procedural observations

The original aim of publishing the revised UK Code in the early summer of 2018 has proved to be ambitious. Despite the large amount of research that has already taken place (in a sense giving rise to the question what value a formal review still has), it is our understanding that the Consultation Document has led to over 250 responses and that the revised UK Code will therefore not be published before the end of July. Additionally, a review of the UK Stewardship Code will start later in 2018. The ‘high level questions’ that have already been posed with regard to this Code prove to be quite fundamental and create the impression that currently a clear-cut vision on the purpose of the UK Stewardship Code is lacking. Although it is therefore not entirely clear when the revised UK Stewardship Code is supposed to enter into force, 1 January 2020 seems a likely target date. By then, the UK Code should already be in place for one and a half years, meaning that another review is likely to start quite soon thereafter. Since the interaction between companies and their shareholders (which is the subject of the UK Stewardship Code) directly affects internal governance (the UK Code), the current schedule of revising these codes raises the question whether companies are allowed sufficient time not only to implement the exact principles and best practices of the UK Code but also to integrate fully its underlying ideas into their way of working, before having to start implementing yet another revised code.

Diversity: a more inclusive approach

Diversity has become a major focus point of corporate governance in recent years. So far, however, the concept has been mainly applied to gender. The Consultation Document calls for next steps in two areas. First, the concept of diversity, which should be stimulated through appointments and succession planning instead of just being accounted for, is broadened to more explicitly include ethnicity (Principle J). Moreover, ethnic diversity should be addressed in the annual board evaluation (Principle K). The Consultation Document builds on the Parker Review, which stressed the implications of ethnic diversity for a company’s performance. As FTSE 100 companies currently already achieve 75% of their sales overseas, the Parker Committee has recommended that companies identify and actively mentor persons of colour to prepare them for leadership positions.

Second, the Nomination Committee, which should consist of a majority of independent non-executive directors, shall be required (according to Provision 23, relating to Principles J and K) to consider management layers directly below the board and (if in place) the Executive Committee (the pipeline). Here, the Consultation Document draws on the Hampton-Alexander Review, while also extending the scope of the pipeline requirement from FTSE 100 to FTSE 350 companies. The Standard Voluntary Code of Conduct, as established by the executive search industry, equally serves the purpose of promoting board diversity.

These developments confirm the status of the UK as a global governance leader. In short, we expect the proposed changes to make their way soon to EU Member States where such provisions are not yet common.

Significant shareholder opposition

UK company law is predominantly shareholder-centric, as opposed to more board-centric, like in Delaware and the Netherlands. In this light, Provision 6 of the Consultation Document requires that, when 20% of the votes are cast against a certain proposal at the Annual General Meeting (AGM), the company explains how it will seek to engage with the dissenting group. Subsequent action is required within 6 months, and the board has to make a final statement about its efforts at the following AGM. Clearly, Provision 6 is more strictly worded than Provision E.2.2 of the UK Code 2016, as both the threshold of 20% and the term of 6 months are new additions. The threshold is derived from guidance, drafted by the General Counsels of FTSE100-companies (GC100) and the Investor Working Group (IWG). Originally, Provision E.2.2 was introduced as part of the UK Code 2014 review with the specific aim to deal with issues around board remuneration. To prevent a contrario arguments however, it was worded more generally. A recent example of shareholder opposition is given by Unilever’s AGM, where more than one third of the shareholders voted against a proposal to substantially increase the board’s remuneration.

This proposed change raises several questions. Firstly, it is based on the assumption that dissatisfied stakeholders will not exit the company (empirical research shows increasing share turnover). Secondly, it could be argued that the obligation of Provision 6 may in practice also be applied to minorities of less than 20%, given most companies’ desire not to be accused of a check-the-box mentality (the GC100 and IWG guidance gave companies some discretion to communicate a different threshold). Taken to the extreme, this might put the British AGM at risk of becoming a Polish Parliament. Thirdly, it is at odds with current developments around the globe which push for greater board discretion. One example is the Dutch legislative proposal to introduce a so-called ‘reflection time’ (bedenktijd) which allows the board to unilaterally invoke a pause of 250 days to revise corporate strategy (see Provisions 4.1.6 and 4.1.7 of the Dutch Code). During this period, a shareholder may not put forward any voting item at the AGM. In conclusion, Provision 6 should primarily be considered as a reflection of shareholder-friendly British company law, but seems unsuitable for other, more board-centric jurisdictions.

Employee Co-determination

In several Continental European countries, employees are entitled to nominate non-executive directors. The most prominent example is Germany, where half of the members of the Aufsichtsrat of larger companies are employee appointees. In the Netherlands, employees of a ‘large company’ have a similar right to nominate a third of the non-executive board members. Employees in the UK have no such representation. In her inaugural speech, Prime Minister Theresa May, announced that this was about to change.

Provision 3 of the Consultation Document includes three choices of embedding the views of the workforce in the company’s governance: workers can be given a right (i) to appoint a director, (ii) to designate a non-executive director, or (iii) to establish an advisory committee. Interestingly, the Consultation Document’s broad definition of the term workforce also includes independent contractors. Moreover, the wording of the Consultation Document suggests that its proposal to introduce workforce representation should be applied by both larger and smaller companies and without prejudice to the location of employment. Thus, the UK Code, as part of the Listing Rules, might also apply to UK Premium listed foreign companies whose national laws do not or already provide for co-determination. The silence on these potential complications is noteworthy because in earlier reports, such as the Green Paper of the Department for Business, Energy & Industrial Strategy and its response, exceptions for smaller and/or foreign companies received more attention.

It is interesting (if unexpected) to see the UK moving in the direction of employee representation which is traditionally more of a theme in Continental Europe. While UK companies may refrain from introducing any form of employee representation, thanks to the comply-or-explain principle, a deviation from the Code’s recommendations is likely to meet internal and external resistance. Hence, if the final UK Code does indeed include the three choices currently proposed, we expect most companies to create an advisory committee. This would mean that the impact of the new provision would be rather limited.

Hélène Vletter-van Dort is a Professor of Financial Law & Governance at Erasmus School of Law (NL) and a guest contributor to the Oxford Business Law Blog.

Titiaan Keijzer is a PhD Candidate in Corporate Law at Erasmus School of Law (NL) and a guest contributor to the Oxford Business Law Blog.


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