Corporate governance reform

A number of changes to the UK corporate governance regime have been proposed, principally driven by a perception that corporate governance failures in UK banks and other financial institutions (BOFI) contributed to the current financial crisis.

The Walker Report

On 26 November 2009, Sir David Walker’s final review of corporate governance in BOFI was published (the Walker Report). Some of the key final recommendations are that:
l non-executive directors (NEDs) of BOFI should have financial industry awareness and increased training and support to help them to contribute effectively at board level;
l the time commitment of the NEDs on the boards of FTSE 100-listed banks or life assurance companies should increase;
l BOFI chairmen should be proposed for election on an annual basis and the annual election of all directors;
l BOFI boards should be kept under review and committees should be externally evaluated every second or third year;
l institutional investors should more actively engage with their investee BOFI and adhere to best practice as set out in a Stewardship Code;
l separate board risk committees should be created to oversee the activities of FTSE 100-listed banks and life assurance companies;
l BOFI boards should be served by a chief risk officer who participates in risk management across the business; and
l the remuneration committee report of FTSE 100-listed banks and “comparable unlisted entities such as the largest building societies” should anonymously disclose the number of “high end” employees, (those perform a significant influence function for the entity or whose activities have, or could have, a material impact on its risk profile) whose total expected annual remuneration falls into specific bands and the main elements of that remuneration, for example, salary, cash bonuses and deferred shares.

The Walker Report also proposes that: most of its recommendations are included in the Combined Code on Corporate Governance (Combined Code) or in a Stewardship Code for institutional investors; the Financial Services Authority considers how to progress those recommendations that specifically apply to BOFI; and its final recommendations on disclosing remuneration should be set out in legislation (see the Financial Services Bill).

The Combined Code

On 1 December 2009, the Financial Reporting Council (FRC) published for consultation a draft revised Combined Code and its final report following a review of the Combined Code. Some of the key proposed changes are that:
l it should be re-named “The UK Corporate Governance Code” to emphasise that it is the UK’s recognised corporate governance standard;
l chairmen should agree and regularly review a training and development plan with each director;
l boards should be externally evaluated at least every three years;
l boards should satisfy themselves that appropriate systems are in place to identify, evaluate and manage significant risks;
l a company’s annual report should explain its business model and overall financial strategy; and
l the importance of aligning remuneration with a company’s long-term interests and risk policy is emphasised.

The FRC is seeking views on whether the revised Combined Code should provide for the annual election of chairmen or for the annual election of all directors; and whether it should allow companies to choose between putting their full corporate governance statement in their annual report and putting it on their website, with only the key information then being reproduced in its annual report.

Although the FRC considered the Walker Report’s final recommendations, it has chosen not to include some of them in the draft revised Combined Code.

Any comments on the draft revised Combined Code should be made by 5 March 2010.

The FRC intends that the revised Combined Code should apply to accounting periods beginning on or after 29 June 2010. It also intends to consult on a Stewardship Code in 2010 and review other corporate governance guidance.
 

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