Companies’ corporate governance code shows way ahead for NHS

In July, the Financial Reporting Council (FRC) issued two publications which, although not directly applicable to NHS bodies, show the direction of travel in the corporate world in relation to engagement with and reporting to stakeholders.

The 2018 Corporate governance code – subsequently referred to as the code – is applicable to listed companies from 1 January 2019. NHS Improvement’s Code of governance for NHS foundation trusts is based on the previous versions of the code, so is also likely to be updated to reflect the new requirements. 

In any case, the code represents best practice, so NHS bodies should, at least, consider whether any of the changes are applicable to them.

The key changes to the code include new requirements for boards to:

• Engage with their workforce to understand their views.  The code suggests three ways of doing this: appointing a director from the workforce; establishing a workforce advisory panel; or designating a non-executive director to lead on workforce matters
• Describe how they have considered the interests of stakeholders when performing their duty under section 172 of the Companies Act to promote the success of their organisation. This duty is considered by the government and investors to be of increasing interest as it is important to a company’s long-term success and the contribution it makes to wider society. It is worth noting that this duty is applicable to all company directors and will therefore apply to the directors of any subsidiary companies established by NHS bodies 
• Create a culture that aligns organisational values and purpose with its strategy and
  assess how those values are maintained over the long term
• Ensure that boards have the right mix of skills and experience, provide constructive challenge and promote diversity. There is a new emphasis on the need to refresh boards and undertake succession planning
• Consider how workforce remuneration policies are taken into account when setting director remuneration.

The new code is supported by Guidance on board effectiveness, which is intended to stimulate boards’ thinking on how their carry out their role and how they can improve their effectiveness. 

It sets out questions that boards can ask themselves in relation to their leadership and the purpose of the organisation, division of responsibilities, the composition of the board, the audit committee and internal controls and the remuneration committee.

The FRC’s Guidance on the strategic report is aligned with the new requirements of the code and takes into account a new requirement for large companies to report on executive pay and how directors have regard to their section 172 responsibilities. The guidance is intended to enable companies to produce a clear and concise strategic report that is fair, balanced and understandable.

NHS bodies are not required to produce a strategic report in accordance with the Companies Act, but all of its requirements are included in the performance report that NHS bodies include in their annual report. 

So, this guidance is not immediately applicable, but is a useful source of best practice. The FRC guidance sets out the legal requirements (which are not directly applicable to NHS bodies but are the basis for the performance report contents), practical examples and linkage examples. The linkage examples illustrate how the relationships between different parts of the annual report can be presented to make it more understandable for the reader.

The revised guidance includes more guidance on non-financial information and how it can be used to better ‘tell an organisation’s story’. A company’s main stakeholders are its shareholders, but the new code requires companies to look at stakeholders more widely to include employees and other parties.

Debbie Paterson is HFMA policy and technical manager