Changes to UK Listing Rules: 10 Things Listed Company Directors Need to Know About Their Own Position and Workforce Obligations

In this news alert, Partner Merrill April outlines the key points for Listed Company Directors to be aware of in relation to forthcoming changes to UK Listing Rules.

1. The UK corporate Governance Code 2018 is being replaced from 1 January 2025 by the 2024 UK Corporate Governance Code (“the Code”), which was published in January 2024. Guidance to the Code was also published in January 2024 but is neither mandatory nor prescriptive.
    
2. The focus of the Code is on corporate governance and the management of risk through internal controls, but principles and provisions of the Code contain several concepts which are relevant to the employment of listed company directors, including on leadership and purpose, division of responsibilities, board composition, succession & evaluation, and remuneration.
    
3. From 29 July 2024 under the UK Listing Rules, the single listing for Equity Shares (Commercial Companies) (ESCC) has in effect replaced the premium and standard listings, with the effect that the Code applies to all Companies with an ESCC listing, whether  incorporated in the UK or elsewhere.
    
4. Leadership & Purpose (Section 1) – Provision 2 has been amended so that Boards will be required to report on how effectively the desired culture has been embedded, not just on the assessment and monitoring of culture, so that specific examples and measurable results will be expected.
    
5. Composition, Succession, and Evaluation (Section 3) – On composition, the focus is on the diversity piece. The idea is that language drives change, so that the list of diverse characteristics has been removed- not as a backwards step but to indicate that diversity policies can be wide-ranging. For example, there is currently no protected characteristic that offers protection to directors from a lower socio-economic background, but it is well recognised that a best-in-class diversity programme will be seeking to draw board candidates from a wide range of backgrounds.
    
6. Remuneration (Section 5) – The key change is to malus and clawback, with an aim to provide investors with more visibility on when this has been exercised. Provision 37 has been amended to provide that directors’ contracts AND other agreements which cover remuneration, should include malus and clawback provisions. More significantly, a new Provision 38 asks Companies to include in their annual report a description of their malus and clawback provisions, including the circumstances in which these provisions could be triggered, a description of the period for malus and clawback and a rationale for why that period has been selected and whether the provisions were in fact triggered in the last reporting period, together with a clear explanation why. Consequently, where no such statement appears in a period where directors have been removed for poor performance, this may lead to greater investor scrutiny and pressure on the Board and its remuneration committee.
    
7. Leadership & Purpose – It is a useful reminder that part of each director’s duty is the duty in good faith to promote the success of the Company for all its members and other stakeholders including the workforce. As such there should be a director appointed from the workforce, or a workforce advisory panel or a designated NED and where none of these is in place, there is a need to explain alternative arrangements and why these are still considered effective. Furthermore, the Board must keep under review its arrangements for employees (including directors) to raise concerns, the starting point being a confidential and anonymous whistleblowing procedure, with proportionate and independent investigation and follow up. Investigations are becoming a part of daily corporate life and play a key role in driving the desired culture. However, they can be disruptive, expensive and time-consuming if not well managed. Provision 8 is also a useful one for a director who feels their concerns are not being heeded or dealt with quickly enough. It provides that unresolved concerns on board management or operation should be minuted and a non-executive director who resigns with unresolved concerns should provide the Chair with a written statement of those concerns addressed to the Board.
    
8. Division of Responsibilities – The Code is also a timely reminder to non-execs of their role and responsibilities, chief of which is to appoint and remove executive directors. The Chair is reminded to hold meetings with the non-executive directors without the executives and non-executive directors must ensure they have both the time and the access to knowledge within the company, to enable them to scrutinise the performance of the executives and hold them to account against agreed performance objectives.
    
9. Remuneration – The treatment of post-employment shareholdings, often causes disappointment and a sense of unfair treatment on exit. In addition to the necessary malus and clawback provisions, it is the responsibility of the Remuneration Committee to develop a cohesive and consistent policy on post-employment shareholdings, both vested and unvested, dealing with entitlement and discretion in a clear way. An often overlooked provision is that there is a small amount of flexibility on hiring in directors recruited externally, to include notice periods of more than 1 year. If it is necessary to do so, the contract must contain a binding provision to reduce the notice period down to 1 year or less after the initial period. This may be helpful, when recruiting a director stepping up to a listed company position for the first time from a private company setting.
    
10. In summary, the emphasis of the Code is outcomes based, within the context of driving the longer-term strategy for value creation which is sustainable. With growth at the heart of this Government’s legislative agenda, the Code, slimmed down from the FRC’s original intentions, seems to achieve a balance between measures designed to restore trust in Governance whilst allowing flexibility for growth, with the ongoing ability for boards to comply or explain divergences,  whilst encouraging an outcomes-based approach, in which the focus in the annual report will be on how the provisions have been implemented and what has actually been done.