Governance
UK Corporate Governance Code: Changes due |
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| Governance | |
| Written by Gavin Foggo and Emma Roake at City law firm Fox Williams LLP | |
| Friday, 08 January 2010 | |
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"The emphasis of the new code is on encouraging changes in the behaviour of boards."
The Financial Reporting Council (FRC) has recently published its Final Report following its review of the Combined Code (the current code), which started in March this year. The review was originally intended to take place in 2010, but was brought forward following the economic crisis and in light of the review by Sir David Walker of corporate governance in UK banks and other financial industry entities. Alongside its Final Report, the FRC has published a new draft revised code and is consulting on the proposed changes until 5 March 2010. Following this consultation, the revised code (to be called “the UK Corporate Governance Code” rather than “the Combined Code”) will apply to accounting periods beginning on or after 29 June 2010 for all companies with a Premium Listing on the London Stock Exchange, regardless of whether they are incorporated in the UK or abroad. The emphasis of the new code is on encouraging changes in the behaviour of boards, rather than increasing regulation and legislation. The flexible “comply or explain” approach is maintained. The FRC stresses that it is crucial that companies engage with the spirit of the code, commenting that over the last few years boards have often adopted a “box-ticking” approach, and failed to adhere to the over-arching principles. The FRC is trying to change this, in the hope that companies will use the code to foster greater transparency, accountability and communication with shareholders. The main changes which the FRC is proposing are: • Annual director re-election – one of the more controversial proposals of the FRC is that either chairmen or all directors would be subject to annual election. The FRC has invited views on these two alternatives – so far the reaction has been mixed. • The chairman and non-executive directors (NEDs) – the responsibility of the chairman for leadership of the board and ensuring its effectiveness has been brought centre stage in the new code, and the importance of NEDs challenging the executives is stressed. Directors must allocate sufficient time to the company to be able to perform their responsibilities effectively, but no minimum number of days is set, in recognition that different companies will require different levels of commitment. • Board balance and composition – under the old code boards may have viewed director independence as the holy grail when assessing the composition of a board. The new code emphasises that it is the balance of the board which is key: the board must have the appropriate blend of skills, experience, independence and knowledge of the business. • Board information, development and support – the new code proposes that the chairman should agree a tailored approach to training and development with each director who joins the board, and this should be reviewed regularly. • External board evaluation – the new code proposes that the evaluation of the board should be facilitated by external consultants at least every three years. Chairmen are encouraged to report personally in their annual statements as to how the principles relating to leadership and effectiveness of the board have been applied. • Risk management and internal control – the new code shifts the responsibility for defining the company’s risk appetite squarely onto the shoulders of the board, stressing that the board should satisfy itself that the appropriate systems are in place to identify, evaluate and manage risk. • Remuneration – for executives, performance-related remuneration should be aligned with the interests of the shareholders and the long term success of the company, and be compatible with the company’s risk-management policy. The use of clawback of variable elements of remuneration in exceptional circumstances such as misconduct should be considered. For NEDs, the new code discourages all forms of performance-related remuneration, not just share options. • Communication with shareholders – the FRC is taking responsibility for a separate new “Stewardship Code” for institutional investors, in addition to preparing guidance on good practice engagement between investors and companies. The new code stresses the importance of there being more meaningful communication between boards and shareholders, and notes that both groups must take responsibility for ensuring this. It remains to be seen what form the new code will take following consultation. Some investors have complained that the FRC has not explored the issue of succession planning of top executives. In general, however, the proposed reforms have been welcomed, and can be expected to form part of the Corporate Governance Code when it is finalised in the spring. Gavin Foggo is a partner and Emma Roake is an associate solicitor in City law firm Fox Williams LLP. Both specialise in corporate governance. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ; This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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