New director code to put HR in spotlight

The
new corporate governance code, which is designed to improve the performance of
company boards and the directors that serve on them, presents a huge
opportunity for HR to increase its influence.

This
is the view of Geoff Armstrong, director general of the Chartered Institute of
Personnel and Development, on the final version of the long-awaited code just
published by the Financial Reporting Council.

The
new code is based on the draft revision of the existing code that Derek Higgs
suggested in his government-commissioned report on non-executive directors, published
in January, and recommendations made in Sir Richard Smith’s report on audit committees.

The
code, which will come into effect for reporting years beginning on or after 1
November 2003, requires there to be a more open and rigorous procedure for appointment
of directors and a wider pool of candidates.

It
calls for formal evaluation of the performance of boards, committees and
individual directors, and enhanced induction and professional development of
non-executive directors.

Armstrong
welcomes changes to the draft code that allow companies more flexibility in how
they implement the code, which he believes will improve corporate governance
without undermining entrepreneurial behaviour at board level. "This code
clarifies the roles and responsibilities of executive directors and
non-executive directors in a way that does not set them up in opposing
camps," he said.

However,
Armstrong is confident the code will still have a significant impact and ensure
HR expertise is needed at the highest level. "I believe it will promote
diversity and it needs to do so," he said.

"Selection,
induction and training of directors will be a much more rigorous process
compared to the traditional ‘old boys’ network’. There will be a more prominent
role for HR in identifying the necessary skills and competencies."

Armstrong
hopes the call for directors to be selected from a wider pool of candidates
will present opportunities for senior HR professionals to take up roles as
non-executive directors. He is also optimistic that the increased emphasis on
continuous development and performance review for directors will promote a
closer link between executive pay and performance.

"In
the past, director pay was linked to simple measures of shareholder value and
share price. There needs to be a balanced scorecard of short and long-term
measures that drive the rewards of top managers," he commented.

Armstrong
believes HR has a key role to play here in advising remuneration committees to
ensure executive rewards are tied to performance-based targets linked to an
organisation’s business and HR strategies. He hopes this approach will mean
director pay will become more transparent and help improve trust within
organisations.

"Effective
leaders and senior managers create a huge amount of value and they should be
well rewarded. It is those instances where rewards are not related to results
that undermine the legitimacy of high rewards," he said.

By
Ben Willmott

www.frc.org.uk

HR
factfile

The
Combined Code of Corporate Governance stipulates:


New definitions of the role of the board, chairman and non-executive directors


More open and rigorous procedures for the appointment of directors and from a
wider pool of candidates


Formal evaluation of the performance of boards, committees and individual
directors, enhanced induction and more professional development of
non-executive directors


At least half the board in larger listed companies to be independent,
non-executive directors, with a definition of independence of non-executive
directors


Separation of the roles of the chairman and chief executive to be reinforced


That a chief executive should not go on to become chairman of the same company


Closer relationships between the chairman, the senior independent director,
non-executive directors and major shareholders


A strengthened role for the audit committee in monitoring the integrity of the
company’s financial reporting, reinforcing the independence of the external
auditor and reviewing the management of financial and other risks


As with the existing code, to meet their obligations under the Listing Rules.
Listed companies will have to describe how they apply the code’s main and
supporting principles, and either confirm they comply with the code’s
provisions or provide an explanation to shareholders


Companies and institutional investors should enter into a dialogue based on
trust and mutual understanding


Companies to give helpful and informative explanations, and institutional
investors should take a considered approach when evaluating them

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