A new Code of Practice for the Governance of State Bodies takes effect on 1st September 2016. This is the fourth version of the Code, coming 25 years after it was first introduced. We outline the key components of the new Code and examine how they interact with the existing “soft law”, advisory and best practice framework which currently applies to the governance of companies and other bodies.
The new Code of Practice for the Governance of State bodies (the “State Code”) is effective from 1st September 2016 and is drafted as a corporate governance framework to accommodate both commercial and non-commercial State bodies. The Code is stated to provide guidelines only and is not intended to be mandatory. This is to balance accountability with autonomy of State bodies under their legal frameworks. However, in practice there has been a noticeable trend for codes like these to be treated as mandatory, with only exceptional deviations being considered acceptable.
Interaction with other codes and bodies
The State Code has been influenced by the UK Corporate Governance Code, the OECD Principles of Corporate Governance (2015) and the Companies Act 2014.
There are several other governance codes in operation with varying degrees of official recognition – eg for charitable bodies, for universities and for recycling compliance schemes. To a certain extent, the State Code may cross into sectors to which those other codes apply.
In addition to State bodies and agencies, the State Code will apply to non-State bodies such as the voluntary hospital sector, where compliance with the State Code is written into the annual compliance statement that these bodies deliver to the Health Service Executive.
Terms of office for State board members
The State Code recommends that the first appointment of a director to a State board should be for a period of five years, which can be renewed for up to five years, to a maximum of ten years in total. Any extension beyond that time requires approval by the relevant government minister. Also, no member should hold appointments to more than two State boards at the same time.
Other codes are less prescriptive. The UK Governance Code provides for re-election at least once every three years but has no restrictions on continuous re-election with the exception of non-executive directors, who should not be re-elected after a six year period unless there is a “particularly rigorous review”. Non-executive directors are presumed under the UK Code to be non-independent after nine years but are not barred from continuing in office. The Irish Stock Exchange, under its Irish Corporate Governance Annex, shadows the UK Code and does not explicitly set out a limit on the terms. Similarly, the OECD guidelines do not provide a limit but do stress the importance of independence.
Audit and Risk Committee
The State Code requires that State bodies must have Audit and Risk Committees which comprise at least three independent non-executive Board members, or two in the case of smaller State bodies with fewer than 20 employees. Each Audit and Risk Committee is required to have written terms of reference setting out clearly its authority and duties.
The State Code deviates from the UK Governance Code by recommending recruitment of non-Board members to the Audit and Risk Committee. This brings into play important issues of delegation of responsibility by the Board. Specifically, directors can delegate, but cannot abdicate their powers to a committee.
Unlike the UK Governance Code, the State Code does not prescribe a remuneration Committee or Nominations Committee. This reflects the manner in which remuneration and appointments in the State sector are regulated – eg competence in this respect is reserved to the Oireachtas and/or relevant ministers.
Those on boards of State bodies already know that they are under enhanced public scrutiny and frequently for remuneration that falls short of what is payable outside the State sector. The State Code introduces more rigour and, by extension, more exacting standards by which board members will be judged.
Those considering joining the board of a body to which the State Code will apply will therefore wish to establish whether the body has the infrastructure to comply with the State Code and take into account the requirements of the State Code in accepting appointments.