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Developments in the London listing markets: new directors’ code of conduct and QCA update27 January 2025

Given the continuing drive for better corporate governance and accountability, in this second article, we focus on the new voluntary Code of Conduct for directors published by the Institute of Directors (the “IoD”) and an update from the Quoted Companies Alliance (the “QCA”) in relation to its Corporate Governance Code (the “QCA Code”) as well as flagging the growing B Corporation (“B Corp”) movement.

Our previous articles in relation to developments in the London listing markets can be found here.

"This is meant to be a practical tool to help directors make better decisions and is applicable to directors of a broad spectrum of organisations within the UK."

IoD’s new Code of Conduct

In October 2024, following a public consultation, the IoD published its voluntary Code of Conduct for directors (the “Code). This is meant to be a practical tool to help directors make better decisions and is applicable to directors of a broad spectrum of organisations within the UK, from the smallest operators in the private, public and not-for profit sectors, to the largest listed companies and publicly owned entities.

The IoD

The IoD is the UK’s longest running organisation for professional leaders, counting directors, senior business leaders and entrepreneurs amongst its membership. It aims to promote free enterprise, lobby government and set standards for corporate governance.

The Code

The IoD developed the Code in fulfilment of its Royal Charter obligation to promote high levels of integrity amongst directors and to fulfil a demand from its own members for such an ethical code. This follows a series of recent corporate scandals (including at Carillion, P&O Ferries and BHS) which have given rise to an understandable demand for business to be held more accountable to wider society. Indeed, Dr Roger Barker, the Director of Policy and Governance at the IoD, acknowledged that each controversy increases the pressure on government to impose prescriptive regulatory obligations on directorship but said that a heavily regulated regime would risk a counterproductive focus on compliance at the expense of strategy and innovation.

As such, the Code provides an alternative middle ground, offering flexibility whilst placing an emphasis on individual responsibility.

The Code itself is a behavioural framework designed to assist directors in optimising their decision-making, in turn helping to build and maintain the trust of the wider public in their business activities. Whilst the IoD recognises that many directors may already be subject to codes of conduct arising from their organisations or professional bodies, its view is that the Code is an individual commitment designed to complement such mechanisms.

"It is an entirely voluntary commitment that is not intended to create a new burden of compliance on directors."

Crucially, there is no formal enforcement mechanism; rather, it is an entirely voluntary commitment that is not intended to create a new burden of compliance on directors. The Code seeks to set the bar for the conduct of directors above the legal baseline. However, it recognises that where its recommendations may be perceived to conflict with mandatory requirements (such as those arising from legislation, regulation, contractual obligations, professional standards or organisation rules), then the requirements of the latter should prevail. Directors should apply their judgement in the application of the Code and seek professional advice where necessary in respect of fulfilling their legal obligations.

Although the Code is directed at individual directors (i.e. anyone fulfilling a director or director-equivalent role, whether executive or non-executive), boards are also encouraged to publicly commit to the Code. This could be through disclosure in annual reports and on websites; communication to employees and other stakeholders; and through social media. The IoD has developed a kitemark that can be used to publicly signify commitment to the Code.

The six principles

The Code is centred around six foundational principles of director conduct and each principle is underpinned by a number of specific undertakings.

  1. Leading by Example – demonstrating exemplary standards of behaviour in personal conduct and decision-making

Directors undertake to exhibit high standards of personal conduct and professionalism, consider the impact of their behaviour on stakeholders, avoid behaviour that may adversely affect the reputation of their organisation or contradicts its values and treat everyone with respect, dignity and consideration. This style of leadership requires devoting sufficient time and attention to the role of director, complemented by a continuous cycle of professional development.

This will allow directors to acquire respect, loyalty and trust as authentic leaders whose words are reflected in their actions, thereby inspiring others to emulate such behaviour. In turn, this will enable an organisation to build strong external relationships, placing it in an optimal position to achieve sustainable business success.

"Although the Code is directed at individual directors...boards are also encouraged to publicly commit to the Code."

  1. Integrity – acting with honesty, adhering to strong ethical values and doing the right thing

Directors undertake to comply with both the letter and the spirit of the law, safeguard confidential information and be willing to cooperate fully with regulatory authorities. They will also act honestly, placing the interests of the organisation and broader society above their own interests whilst being alive to perceived conflicts of interest. Moreover, directors should constructively challenge or disagree on matters of concern, whilst being willing to challenge words, behaviour and attitudes that fall short of expectations. Crucially, directors will adhere to collective responsibility for agreed decisions, whilst being prepared to resign on matters of conscience, judgement, or good governance.

This will promote a climate of honest and open communication and an ethical organisational culture whilst strengthening the collective commitment to achieving shared goals and objectives. This helps build strong stakeholder relationships thereby enhancing organisational performance and reputation.

  1. Transparency – communicating, acting and making decisions openly, honestly and clearly

Directors undertake to be open and transparent to the rest of the board and with stakeholders regarding any issue that may be perceived as affecting their objectivity (such as a conflict of interest). They will promote an open culture which does not cover up wrong-doing or mistakes and enables employees and stakeholders to speak up about concerns, and will ensure communications with stakeholders are given in a straightforward manner, providing accurate, relevant and timely information, as well as engaging candidly with stakeholders about the limits on transparency.

This transparent culture will build trust, credibility, and confidence, promoting clarity and understanding as part of building positive relationships and effective collaboration with key stakeholders.

  1. Accountability – taking personal responsibility for actions and their consequences

Directors undertake to oversee and hold their own organisation to account in respect of performance and values and seek independent advice on matters of concern at an early stage. They must understand the legitimate expectations of stakeholders and engage with them appropriately. This principle also encompasses sharing collective responsibility for decisions of the board, as well as taking personal responsibility for their own actions (including complying with legal duties). As such, directors will be open to feedback, seek to make improvements and reflect on whether they possess the requisite knowledge and skills to fulfil their role.

This will improve the quality of decision-making whilst maintaining the trust and confidence of stakeholders, enhancing the reputation of both the director and the organisation.

"The Code is centred around six foundational principles of director conduct and each principle is underpinned by a number of specific undertakings."

  1. Fairness – treating people equitably, without discrimination or bias

Directors undertake to engender an inclusive culture, allowing employee concerns to be raised without fear of victimisation and promoting equality of opportunity, whilst prioritising objectivity in decision-marking and diversity of thought to tackle ‘groupthink’. In such an environment, credit should be shared for success, constructive feedback provided where performance falls short of expected standards and fair reward and recognition structures should be advocated. External stakeholders should also be treated fairly, with their legitimate interests recognised and respected.

This will build confidence in the decision-making abilities of directors whilst fostering a sense of loyalty amongst stakeholders.

  1. Responsible Business – integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts

Directors undertake to manage risk in a responsible manner, prioritising long-term strategic objectives over short-term financial interests of shareholders whilst considering the consequences of any decision on broader society and the environment. As part of this, they will work to promote high business standards across the supply chain (particularly in relation to employment conditions and environmental impact), advocate for a diverse and inclusive organisational culture, ensure that technological innovations are used in a responsible manner and reject corrupt business practices.

This will contribute to a more sustainable and equitable future, which will resonate with stakeholders and thus enhance trust and confidence in directors and their relationships with stakeholders.

What will be the impact of the Code?

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"The Code could provide useful guiderails for directors to avert missteps while actively building trust with the wider public."

The role of a modern director involves more than simply complying with the law and applying sector-specific or specialist expertise. Directors are expected to embody the values of their organisation whilst upholding high ethical standards, as well as engaging with wider issues, such as impact on the community and the environment.

Increasingly, the conduct of directors has become a source of business and reputational risk in recent years. In this regard, the Code could provide useful guiderails for directors to avert missteps while actively building trust with the wider public. Moreover, the introduction of the Code may act to alleviate pressure on a more interventionist approach by government, dissuading it from imposing stronger regulations on directorship, instead working with directors to help create a resurgent UK economy.

However, the lack of any enforcement mechanism for the Code may serve to undermine its effectiveness in practice. The Institute of Chartered Accountants in England and Wales has expressed concern over the voluntary nature of the Code, warning that it needs teeth to avoid amounting to little more than virtue signalling.

Any discussion on directors’ duties cannot be separated from the prevailing legal regime, specifically section 172 of the Companies Act 2006, which requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, directors must have regard to (among other relevant matters) a specified range of factors, including the interests of their employees, the need to foster relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment and the desirability to maintain a reputation for high standards. This obligation, however, is secondary to the overarching duty to promote the success of the company and therefore risks a culture of shareholder primacy, in which maximising value for shareholders takes precedence over other considerations. Whilst the Code may encourage a more holistic approach which considers a broader range of stakeholders’ concerns, it will ultimately be a balancing act against directors’ statutory obligations – or else leave directors vulnerable to derivative action claims on behalf of the company.

Commentary

The Code is a positive step forward, providing a flexible framework to support directors operating in the current commercial climate. This should bolster the reputation of directorship, while allowing directors to retain individual responsibility for their conduct. Although framed with UK directors in mind, those operating in non-UK jurisdictions may also find value in the Code.

Given the voluntary nature of the Code, and considering directors’ statutory obligations, there is concern, however, that this positive effect will not be as great as intended.

"The Code is a positive step forward, providing a flexible framework to support directors operating in the current commercial climate."

QCA Code

The latest version of the QCA Code, a voluntary corporate governance code for small and mid-size quoted companies, was published in November 2023 and applies to companies with accounting periods commencing on or after 1 April 2024, with the option of a 12-month transition period if more flexibility is required. Research by the QCA from summer 2023 indicates that 93% of AIM quoted companies and 76% of Aquis quoted companies opt to follow the QCA Code.

The QCA has made it clear that to be able to understand and apply the principles of the QCA Code and show a commitment to good governance, it expects each company to invest in its own copy of the QCA Code. It is not sufficient to simply refer to an adviser’s copy. QCA membership provides access to additional related resources. The QCA has indicated that, from early 2025, it will begin compiling a list of companies that claim to apply the new QCA Code but have not purchased a copy or obtained one through QCA membership. QCA members and Code purchasers can display a copy of the trademarked QCA Code Badge on their website or in their annual report. The QCA intends for this to become a recognisable mark for investors, governance experts, the media and wider stakeholders. Further information on the QCA can be found here.

For further detail on the key changes made to the revised QCA Code (and the UK Corporate Governance Code (“UK CGC”) published by the Financial Reporting Council (“FRC”)), see our February 2024 article here.

Conclusion

"The QCA...expects each company to invest in its own copy of the QCA Code."

Good corporate governance, and the ever-increasing requirement for companies and their directors to be accountable for their decisions and actions, has been a constant theme of the last few years. Corporate governance codes for companies, such as the UK CGC (which is mandatory for companies listed on the commercial companies category under the UK Listing Rules) and the QCA Code, have existed for a long time. More recently, in 2018, the Wates Principles, voluntary corporate governance principles for large private companies, were introduced.

With environmental, social and governance (ESG) performance now also on the agenda, more businesses are contemplating obtaining certified B Corp status, reflecting that they voluntarily meet a certain standard of social and environmental accountability, performance and transparency. Certification is a rigorous process and requires achieving the requisite score in the B impact assessment and making changes to a company’s constitution. These commit a company to use business as a force for good by (i) creating a material positive impact on society and the environment through its business and operations; and (ii) considering stakeholder interests – including shareholders, employees, suppliers, society and the environment. Once a business has received B Corp certification, it must produce an impact report to accompany the annual accounts each year and re-certify every three years. There are now over 2300 B Corps in the UK.

With publication of the Code, the focus is now being extended beyond companies to directors themselves. It will be interesting to see how this develops in practice and the extent to which companies will publicly commit to the Code.

London Trainee Daniel Grondin also contributed to this article.

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