Code will have far-reaching effect on boardrooms

The
final version of a new Combined Code on Corporate Governance for UK company
boardrooms has been published.

The
code’s overall aim is to enhance board effectiveness and accountability and to
improve investor confidence by raising standards of corporate governance.

The
code, which was agreed during a meeting of the Financial Reporting Council
(FRC), will come into effect for reporting years beginning on or after 1
November 2003.

It
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, which also incorporated the recommendations of Sir Robert Smith’s
report on audit committees.

The
agreed final text reflects extensive consultation by the FRC since January. Its
main features are:


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.


The 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.

The
new code emphasises that companies and institutional investors should enter
into a dialogue based on trust and mutual understanding. Companies should give
helpful and informative explanations, and institutional investors should take a
considered approach when evaluating them.

The
code, which is published today, incorporates the substance of Derek Higgs’ and Sir
Robert Smith’s proposals.

The
detailed drafting reflects the consultation process. The main areas of
difference are:


Modification of the code’s structure to include not only main ‘principles’ and
‘provisions’ but also ‘supporting principles’, allowing companies greater
flexibilityin how they implement the code.


The board chairman to be able to chair the nomination committee.


Clarification of the roles of the chairman and the senior independent director
(SID), emphasising the chairman’s role in providing leadership to the
non-executive directors and in the communication of shareholders’ views to the
board.


For smaller listed companies below the FTSE 350, relaxation of the rule on the
number of independent non-executives to ‘at least two’ instead of ‘at least 50    per cent'; and particularly rigorous review
rather than special explanation when non-executive directors are re-elected
beyond six years.

The
FRC said the intention was that provisions should be as clearly defined and
verifiable as possible, so that companies can report unambiguously whether or
not they have followed them.

Companies
will be required, as at present, to make a statement on how they have applied
the main principles, and this requirement will extend to the supporting
principles as well.

Announcing
the new code, FRC chairman Sir Bryan Nicholson said: “The code agreed today
represents a positive and sensible advance in corporate governance in the UK
and gives us a leading position internationally.

It
will foster far-reaching changes in British boardroom practice and help to
develop further the professionalism of non-executive directors."

The
code is available in full at www.frc.org.uk

By Ben Willmott

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