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Home | News & events | Legal updates | The new UK Corporate Governance Code: What does it mean for the board?
The new UK Corporate Governance Code: What does it mean for the board?
15 June 2010
The new UK Corporate Governance Code was published on 28 May by the Financial Reporting Council (FRC)
The FRC is the UK's independent regulator responsible for promoting confidence in corporate reporting and governance, and keeps the Code under review.
The Code replaces the existing Combined Code on Corporate Governance for reporting years starting on or after 29 June 2010, and applies to all companies with a premium listing on the London Stock Exchange regardless of where the company is incorporated.
What is the Code for?
The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.
The Combined Code has been the key source of corporate governance recommendations for UK listed companies for nearly two decades. In the new Code, the FRC has focused on a change of ‘tone’ to encourage a greater focus on board behaviour.
Does the new Code apply to us?
The Code is not a rigid set of rules, but instead comprises a set of principles and provisions.
The Listing Rules require companies to apply the main principles and to report to shareholders on how they have done so on a ‘comply or explain’ basis.
Smaller listed companies, in particular those new to listing, may decide that some of the provisions are disproportionate or less relevant in their own case. In any event, some provisions do not apply to companies below the FTSE 350. Such companies may decide nonetheless that it would be appropriate for them to adopt the approach set out in the Code, and the Code encourages them to do so.
What are the main changes?
- A new section at the start of the Code setting out the revised main principles, designed to guide board behaviours. These are grouped under the headings of Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders
- A new introduction focusing on what a board does and how it sets the values of the company (‘corporate governance’), being distinct from day to day operational management
- Appointment of directors - the nomination committee of the board must 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; and new directors to receive a full, formal and tailored induction on joining the board
- 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; NEDs to play the prime role in appointing and terminating executive directors and setting remuneration
- 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
- All directors of FTSE 350 companies should be subject to annual election by shareholders
- A requirement, designed to ‘enhance the board's performance’, that evaluation of the boards of FTSE 350 companies be externally facilitated every three years - this is a change from the requirement to review the board’s performance annually. One may wonder whether or not there are adequate numbers of external evaluation experts available for this task
- A provision, to improve ‘risk management’, requiring that the board should be responsible for determining the nature and extent of the significant risks it is willing to take to achieve its strategic objectives. Risk management has always been the province of the board - this change of emphasis makes it more explicit
- A provision that the directors include and explain the company's business model in the annual report
- A variety of other provisions concerning employment and remuneration issues relating to directors - to read an article on the employment and remuneration related aspects of the Code and what they mean for directors click here
Is that all?
The Code is not the end of review of corporate governance – it is only the beginning.
The FRC will publish a new Stewardship Code by the end of June, dealing with relations between companies and their institutional investors; while the Higgs Guidance on non-executive directors is being revised by the Institute of Chartered Secretaries and Administrators. Both will lead to further changes to the Code.
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