Are you ready for the new QCA Code?

Does your company apply the QCA Corporate Governance Code (QCA Code)? If so, are you aware it has been revised for accounting periods beginning on or after 1 April 2024?

What has changed?

According to the Quoted Companies Alliance (QCA), its new Code builds on the 2018 edition with a “greater emphasis on corporate purpose, environmental and social impacts, risk management, the function and make-up of the board and corporate communications”.

The essence of the Code hasn’t really changed – there are still ‘10 Principles of Corporate Governance’, although two of the principles have been merged together and there is a new principle in relation to remuneration. Companies who adopt the QCA Code should continue to apply the ten principles and provide an explanation of how these have been applied.

In addition to the new principle on remuneration there are also changes to the application of the principles and there are a number of new disclosures as a result.

Key changes to the application of the principles

The Board will need to consider the main changes to the principles and assess if any governance processes and procedures need to be amended or introduced as a result. The QCA has noted that there will be a 12-month transition period to allow companies the flexibility to adjust to applying the new principles. Disclosures during the transition period can therefore focus on explaining any changes that may need to be made.

The key changes are summarised below, grouped into key themes:

Purpose and culture
- Principle 1 now sets an expectation that the board establish the company’s purpose, its ‘essential reason for being’. The company’s business model, strategy and objectives should then flow from this core purpose.
- Principle 2 has also been amended to place a greater emphasis on the fact that the culture of the company should support the stated purpose.
- The new principle on remuneration (principle 9) states that the remuneration policy should align with the company’s purpose, strategy and culture.

New disclosures include – The board should explain the company’s purpose (principle 1) and how the culture supports that purpose (principle 2). There are more detailed disclosures around the corporate culture including the ‘tone from the top’ and explaining instances where actions were taken which deviated from the expected culture.

Environmental and social considerations
- Environmental responsibilities are now explicitly referred to in principle 4. The Code considers that Boards should have a responsibility to develop appropriate governance and oversight procedures towards environmental and social issues, including those related to climate change.
- Climate-related risk has been identified as a specific area that Boards should consider when developing and embedding their risk management system (principle 5).
- The revised Code places an emphasis on the need for Boards and governance structures to keep up-to-date with the necessary skills and experience required – this includes emerging issues such as sustainability and climate change (principle 7)
- The importance of communication with key stakeholder on sustainability matters has been highlighted in principle 10.

New disclosures include – These are also spread across a few principles. Principle 3 sets an overriding expectation that the reporting of environmental and social issues should meet investor expectations. Principle 4 requires the Board to identify ESG issues which are material to the company together with any relevant metrics and targets used to track performance. Principle 5 states that the annual report should contain disclosures to explain the governance of climate-related risks and opportunities – how these are identified, assessed and managed.

There are similarities here to frameworks such as TCFD but there is not a specific requirement to comply with any individual framework. However, the Board could look to them as a guide for relevant disclosures.

Workforce as a key stakeholder

Principle 4 also identifies the employees as key stakeholders. It is expected that practices towards the workforce are consistent with the values of the company and that arrangements are in place for whistleblowing and for employees to raise concerns.

Board composition, independence, diversity and evaluation
- Independent non-executives should represent at least half of the Board
- Key committees should comprise of at least a majority of independent non-executives
- Shareholders should be given the opportunity for an annual vote on the election of all directors to the Board
- The Board should consider its mix of diversity and skills. The QCA Code has not introduced specific diversity targets but has established that Boards should assess their diversity (for example in relation to age, gender, ethnicity, education) and whether there are sufficiently wide-ranging factors to enable the ‘best decision-making process’. This should be an on-going assessment when considering the Board’s succession plans.
- There should be an annual performance review of the Board
- Succession planning is a vital task and the nomination committee should ensure a diverse mix of skills, experience and capabilities are identified within the plan.

New disclosures include – Disclosures in relation to the Board’s mix of experience and skills should include a reference to diversity characteristics. The annual report should set out when the last externally facilitated Board performance review took place or an explanation of why one hasn’t taken place. Disclosures are also required to outline the succession planning process.

New principle on remuneration

The new principle on remuneration broadly echoes the guidance in the existing ‘QCA Remuneration Committee Guide’ but has now been brought into the QCA Code as a separate principle. This sets out that the Board should establish a remuneration policy that promotes long term growth in shareholder value and that policies should be simple and easy to understand. Appropriate incentive targets should be set and the annual remuneration report and remuneration policy should at least be put to an advisory shareholder vote. New share schemes or long-term incentive plans should also be put to a shareholder vote.

The annual accounts should then explain how the remuneration policy supports the stated company purpose, strategy and culture.

Where can I get more information?

Members of the QCA can download a free copy of the Code and the supporting information and FAQs from the QCA website. Non-members can also obtain a copy of the QCA Code for a fee of £450.