• home
• about us
  • About Shoosmiths
  • Awards we've won
  • Corporate responsibility
  • Diversity
  • Facts & Figures
  • Legal and regulatory
  • Office Information
  • Our culture
  • Way we work with clients
• services
  • In-house legal services
  • Services for business
  • Services for you
  • Services A to Z
  • Services for your industry
• news & events
  • Press releases
  • Legal updates
  • Events
  • RSS feeds / twitter
  • Media contact information
• careers
  • Professional recruitment
  • Graduate recruitment
• contact us
  • People search
  • Office information
  • Contact us

Home | News & events | Legal updates | The new UK Corporate Governance Code: What does it mean for directors?

The new UK Corporate Governance Code: What does it mean for directors?

03 June 2010

The final version of the new UK Corporate Governance Code (the Code) was published on 28 May by The Financial Reporting Council (FRC).

The Code replaces the existing Combined Code on Corporate Governance (the Combined Code) for reporting years starting on or after 29 June 2010 and will apply to all companies with a premium listing on the London Stock Exchange regardless of where the company is incorporated.

Following the financial crisis of 2008/2009 Sir David Walker was commissioned by the Government to undertake a review of the corporate governance of UK banks and other financial institutions. The FRC has adopted, for the Code, some of the Walker recommendations which it considered are appropriate for all listed companies.

There are some new additions to the Code but much of the content of the old Combined Code is still recognisable. Companies will be expected to follow the spirit of the Code; it will not be enough simply to observe the letter of the Code.

The ‘comply or explain’ approach remains so that, where circumstances justify an alternative approach to that set out in the Code companies will have the flexibility to follow that alternative, as long as this is fully explained to shareholders.  

Some of the provisions in the Code do not apply to companies below the FTSE 350. However, it is suggested that companies may nevertheless consider it would be appropriate to adopt the approach set out in the Code and are encouraged to do so.

In this article we highlight some of the employment related aspects of the Code and what they mean for directors and companies.

Appointment of directors

• The nomination committee of the board of directors should prepare a role description and capabilities required for a particular appointment.
• Appointments to the board should be made on merit judged against objective criteria.
• Due regard must be had for the benefits of diversity on the board, including gender.
• New directors should receive a full, formal and tailored induction on joining the board.

Drafting service agreements

• Notice/contract periods for directors should be set at one year or less.
• When appointing a director the remuneration committee should consider the financial consequences of any early termination and avoid rewarding poor performance. 
• Contractual provisions that permit the company to reclaim variable remuneration in exceptional circumstances of misstatement or misconduct should be considered.

Non-executive directors (NEDs)

• NED appointment letters should set out time commitment expected for their role. 
• NEDs should give an undertaking that they will have sufficient time to meet what is expected of them.
• Remuneration for NEDs should not include share options or other performance related elements.
• It is NEDs who will play prime role in appointing and terminating executive directors and setting remuneration.
• It is also worth noting that the Institute of Chartered Secretaries and Administrators (ICSA) is currently reviewing the good practice guidance for non-executive directors in the Higgs Report. This is expected to be in final form by the end of the year.

Remuneration

• In general only basic salary should be pensionable.
• The remuneration committee should consider if directors are eligible for annual bonuses. Performance conditions should be relevant, stretching and designed to promote the long-term success of the company.
• Grants under executive share option schemes should normally be phased rather than awarded in one block.
• Shares or other forms of deferred remuneration should not vest or be exercisable in less than three years.
• Payouts or grants under all incentive schemes should be subject to challenging performance criteria including non-financial performance criteria where appropriate.

Continuing duties

• All directors of FTSE 350 companies should be subject to annual election by shareholders.
• The chairman of the board should ensure that directors continually update their skills and knowledge in order to fulfil their board and committee roles. 
• The company should provide sufficient resources for updating directors’ knowledge and capabilities. 
• Boards of FTSE 350 companies should be externally evaluated at least every three years.
• Companies should provide appropriate insurance cover for legal action against directors.
• Directors (especially NEDs) should be given access to independent professional advice at the company’s expense where this is felt necessary to discharge their responsibilities.

Termination

• A ‘robust line’ should be taken on departing directors’ duty to mitigate.

Next steps

Companies should take this opportunity to review their board policies, directors’ service contracts and share option and incentive scheme documentation to ensure that they are compliant with the new good practice.

Where the company is not compliant with the Code the board needs to prepare to explain why to their shareholders.

Companies might also review their induction programme for new directors and consider their on-going programme of training and development for existing directors to ensure they have the appropriate skills and knowledge to carry out their role.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

Search the site

Enter the keywords below to search:

Get in touch

Kevin McCavish

Partner
T: 03700 86 8802
I: +44 (0)118 965 8802
E: kevin.mccavish@shoosmiths.co.uk