A few items of interest to note from last month.

Terms of reference for board committees and matters reserved for the board

The Institute of Chartered Secretaries and Administrators (ICSA) has revised its guidance notes on the terms of reference for audit, nomination, remuneration, risk and executive committees and its guidance on matters reserved to the board. These guidance notes have been updated to reflect changes made by the Financial Reporting Council (FRC) to the UK Corporate Governance Code and to the FRC Guidance on Audit Committees which were published in September last year and apply to companies with a premium listing with reporting periods beginning on or after 1 October 2013.

ABI report on 'Improving Corporate Governance and Shareholder Engagement'

The Association of British Insurers (ABI) has published a report which considers how corporate governance and shareholder engagement can be improved. This report follows the ABI's reports on Board Effectiveness and Comply or Explain published in December last year which we covered in an earlier newsletter article.

The report looks at the different roles and responsibilities that make up the elements of corporate governance and shareholder engagement and looks in particular at:

  • the purpose of corporate governance and reporting
  • the participants in corporate governance: executive and non-executive directors, asset managers and shareholders
  • measures to improve the framework within which non-executive operate to improve their ability to provide constructive challenge
  • shareholder engagement, including a review of major institutional investors' current approaches to holding companies to account
  • shareholder rights and measures to encourage long-term investment
  • the relationship between, and different responsibilities of, asset managers and asset owners.

Recommendations are made in each area for improvement. The report can be viewed here and the press release here.

FRC advice on conducting effective audit tenders

Another change made to the UK Corporate Governance Code in September was the introduction of a provision that FTSE 350 companies should put their audit contract out to tender every ten years on a comply or explain basis. The FRC recently published a note of practical guidance to help companies when they go through the process of putting their audit contracts out to tender following requests for practical examples of good practice from audit committee chairmen and others, and after a series of roundtable discussions involving audit committee chairmen, investors, finance directors and auditors to hear experiences of the tender process.

This note is not official guidance; it is designed to offer practical help and to provide some real life examples of what companies have done in the past. Certain key steps are discussed in detail in the note:

  • establish clear objectives for the tender and why it has been initiated and consult with major shareholders early on
  • have clear criteria which are right for the business for deciding which audit firms to invite to tender, taking into account investor suggestions
  • have the process led by the audit committee chairman
  • provide the audit firms with adequate information for them to understand what is required
  • make the decision on audit quality, not just on price and do not rule out the incumbent auditor without good reason
  • if there is a change of audit firm, allow time for an orderly transition to ensure a seamless handover
  • ensure all regulatory requirements are met such as independence
  • make full use of inspection reports.

The note 'Audit Tenders: Notes on best practice' can be found here.