Article – Investors come first in the new corporate governance code, byStephen Haddrill,chief executive of the Financial Reporting Council.
THE latest version of the UK Corporate Governance Code will be launched by the Financial Reporting Council (FRC) this month. Setting the standards for good governance, companies with a premium listing must report on their compliance with the Code, but many others adhere to it to demonstrate to investors their commitment to best practice.
The Code requires boards to take a long-term focus and to look at strategic risks that could affect the company and its long-term viability. For investors, knowing how the board is managing and mitigating risks is an important indicator when judging whether the company will be able to deliver the value that they seek. But it is difficult to talk about trust and communication between businesses and investors without tackling the tricky topic of executive remuneration.
During this year’s AGM season, shareholders were entitled to enhanced voting rights on remuneration, resulting in a few votes being lost and significant levels of dissent in many others. Firms should heed these signals and take care to ensure that they show a clear link between the performance of their directors and the pay they receive.
The level and structure of remuneration can also have an important effect on behaviour, and needs careful thought if it is to create the right incentives. Remuneration and incentives that encourage people to cut corners or prioritise short-term gains over long-term prosperity, or which leave some groups of employees feeling unfairly treated compared to others, can have a destructive effect.
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