Merit, diversity & transparency to transform boardrooms
FTSE 350 directors will need to be re-elected annually by shareholders under new best practice guidelines issued by the Financial Reporting Council (FRC) last week.
Changes to the Combined Code, now rebranded the UK Corporate Governance Code, include a recommendation that boards take gender diversity into account when appointing members. Companies will also have to demonstrate that recruitment to the board is based on merit against objective criteria and encouraged to improve risk management by making the board responsible for determining the extent of risk that the company is willing to take. Additionally, board chairmen will be expected to hold regular development reviews with each director and will need to pencil in external board effectiveness reviews every three years.
Speaking at NLJ’s corporate governance newscast last week, Frances Le Grys, a partner at Hogan Lovells, said the new regime reflected a general move, advocated by Sir David Walker, who is leading the inquiry into the corporate governance of banks and other financial institutions, towards “skilling up” the board and ensuring the tools for better stewardship are in place.
“In effect this means getting the right blend of people on the board, briefing and training them properly and then appraising them rigorously. The voice and confidence of non executive directors in particular should be strengthened by the new regime,” she said.
While the code is not binding, companies are required either to follow it or explain how else they are acting to promote good governance. Lucy Fergusson, a partner at Linklaters, said during the newscast that the pressure shareholders have shown so far in supporting annual re-election rules out non compliance for the top firms: “It may be quite difficult for companies in the FTSE 350 to justify why they won’t opt for annual re-election. Some companies do this voluntarily already, and they haven’t seemed to have suffered because of it.”
Carol Shutkever, partner at Herbert Smith, who chaired the newscast, commented: “A lot of the changes in the code are just ones of tone and emphasis, but together they do amount to a significant shift in the behaviour expected of boards”.
The code applies to listed companies for financial years beginning on or after 29 June 2010.
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