On 3 March 2011, the Financial Reporting Council (FRC) published new guidance to encourage the boards of listed companies to consider how they can lead their companies most effectively. The new 'Guidance on Board Effectiveness' aims to assist companies in applying the principles of the UK Corporate Governance Code and replaces the 'Good Practice Suggestions from the Higgs Report'.
The new guidance (the Guidance) was developed by the Institute of Chartered Secretaries and Administrators (ICSA) on behalf of the FRC. It relates primarily to Sections A (Leadership) and B (Effectiveness) of the UK Corporate Governance Code (the Code). The Code sets out standards of good practice on, among others, board composition and development, remuneration, accountability, audit and relations with shareholders. All companies with a premium listing of equity shares must report on how they have applied the Code in their annual report and accounts by either confirming that they have complied with the Code's provisions or - where they have not - provide an explanation.
The Guidance addresses issues such as:-
- the roles of the chairman, senior independent director, executive and non-executive directors, and the company secretary;
- decision-making policies and processes;
- board composition and succession planning; and
- evaluating the performance of the board and directors.
The Guidance is not prescriptive but is instead intended to "stimulate boards' thinking on how they carry out their role most effectively". Which corporate governance arrangements are most appropriate under any given circumstances must be determined by the individual boards.
The structure of the Guidance largely follows the structure of the draft guidance published by ICSA in July 2010 in the second stage of its consultation (the draft guidance). It consists of seven parts:-
- the role of the board and directors
- board support and the role of the company secretary
- decision making
- board composition and succession planning
- evaluating the performance of the board and directors
- audit, risk and remuneration (this is new)
- relations with shareholders
Not all issues covered in Sections A and B of the Code are covered in the Guidance, only those where the FRC in its December 2009 final report on the review of the Combined Code identified that further guidance would be helpful.
What makes an effective board?
The Guidance sets out the roles and functions which contribute to making boards effective. These include the following:-
- providing entrepreneurial leadership of the company;
- developing and promoting the board's collective visions of the company's purpose, its culture and values, in particular:-
- providing direction for management;
- demonstrating ethical leadership;
- creating a 'performance culture that drives value creation without exposing the company to excessive risk of value destruction';
- making well-informed and high-quality decisions;
- creating the right framework for helping directors meet their statutory duties;
- being accountable, especially to shareholders; and
- not being a comfortable place, embracing both challenge and teamwork and promoting board diversity.
The role of individual board members
- Chairman. The role of the chairman as ethical leader of the board and the company obtained greater importance and the Guidance contains a long catalogue of functions that should be included in the chairman's role.
- Senior independent director. The Guidance contains a fairly strong statement as to the role of the senior independent director emphasising, in particular, the senior independent director's role as a sounding board for the chairman and that his/her role becomes 'critically important' when the board is undergoing a period of stress.
- Executive directors. The Guidance emphasises that the duties of executive directors extend to the whole of the company's business and not just the part covered by their individual executive role. Executive directors are also explicitly encouraged to take up a non-executive director position on another board to broaden their understanding of their board responsibilities.
- Non-executive directors. The Guidance emphasises the importance of induction of newly appointed non-executive directors and encourages initiatives such as partnering a non-executive director with an executive director to speed up the process of bringing the non-executive up do date on his/her understanding of the company's business activities. Non-executive directors should further insist on receiving high-quality information in good time before board meetings.
The role of the company secretary
The Guidance highlights the importance of the leading role of the company secretary in the good governance of the company and in helping the board and its committees to function efficiently.