Brought to account

On 1 December 2009, the Financial Reporting Council (the FRC) published for consultation a revised version of the Combined Code on Corporate Governance, one of the proposed revisions being to rename it the “UK Corporate Governance Code”. The consultation was launched at a time when a number of changes to the UK corporate governance environment were being considered (see NLJ, 15 January 2010, p 64). 

On 28 May 2010, the FRC published the final version of the UK Corporate Governance Code (the Code). It will apply to accounting periods beginning on or after 29 June 2010, for all companies that have a premium listing of equity securities. The Code continues to operate on a “comply or explain” basis.

The final version of the Code differs from the consultation version. Among other things, there have been changes to the language of the provisions dealing with remuneration policy, the publication of a business model and the board’s responsibility in relation to risk. There have also been some more substantive changes. 

Re-election of directors

In its consultation, the FRC sought views on whether the final version of the Code should provide for:
l the chairman of the board to be subject to annual re-election;
l all directors on the board to be subject to annual re-election; or
l all directors on the board to be subject to re-election at intervals of no more than three years (being the provision in place at the time of the consultation). 

The final version of the Code provides for all directors on the board to be subject to annual re-election, but limits this to the boards of FTSE 350 companies (all directors of other companies should be subject to re-election at intervals of no more than three years). The provision for annual re-election has been controversial. Its opponents believe that it will lead to short-term views being taken and board instability. However, its supporters believe that it will promote more robust engagement between boards and investors and that investors will behave responsibly.

Corporate governance statement

The FRC’s consultation also sought views on whether it should allow companies to choose between:
l putting their full corporate governance statement in their annual report; and
l putting their full corporate governance statement on their website, with only the key information in it then being reproduced in its annual report.

However, the final version of the Code does not provide companies with the website option because the consultation raised concerns that the quality of information in a company’s annual report would be reduced if it took advantage of the website option.

External performance review

The consultation version of the Code provided that boards should be externally evaluated at least every three years. However, the final version of the Code limits this recommendation to the boards of FTSE 350 companies, due to the possibility that there might be an insufficient number of qualified external evaluators to carry out this service in the short to medium term.

Board diversity

An addition to the final version of the Code, which was not in the consultation version, is an express reference to the need for those considering new board appointments to have regard to the benefits of gender diversity. This was added as the consultation highlighted that women are under-represented on boards.

Other FRC action

Other FRC action in relation to corporate governance includes a consultation on a Stewardship Code for institutional investors, which is intended to promote more effective engagement between those investors and UK listed companies (its conclusions are expected at the end of June 2010) and a consultation on the Turnbull Guidance on risk management and internal control (to begin in the second half of 2010).

The FRC has also asked the Institute of Chartered Secretaries and Administrators (ICSA) to consult on the good practice guidance in the Higgs Report, which focuses on the role of a listed company’s chairman and non-executive directors (the second stage of this will begin in June 2010).

Tara Hogg, solicitor, LexisPSL

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