Background

Today, the Financial Reporting Council (FRC) published its new UK Corporate Governance Code. This follows a year long review triggered by the financial crisis. The new code largely re-states the old Combined Code on Corporate Governance but with a new tone and emphasis and some re-ordering. It incorporates many but not all of the recommendations of the Walker Review of corporate governance in financial institutions.

The new code will apply to financial years beginning on or after 20 June 2010. Here are the highlights:

Annual re-election of directors

  • All directors of FTSE 350 companies should be re-elected annually. Companies will need to consider the practical implications ready for the next annual general meeting including possible amendments to articles of association. Board balance and composition
  • Boards should have an appropriate balance of skills, experience, independence and knowledge of the company. Independence is still important but other skills have been given more emphasis.
  • Diversity should be considered when appointing board members. Gender diversity is specifically mentioned.
  • The role of the senior independent director has been enhanced to provide that they should provide a sounding board for the chairman and act as an intermediary for the other directors when necessary.
  • Directors must allocate sufficient time to discharge their responsibilities effectively. The FRC did not adopt the proposals mooted during the Walker Review that non-executive directors should have a defined minimum time commitment.

Board evaluation

  • Evaluation of the performance of the boards of FTSE 350 companies should be externally facilitated at least every three years. The FRC recognises that the market for evaluation services is not fully-fledged, so practice will have to develop over time.

Risk management and internal control

  • The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The FRC may provide further direction in its review of the Turnbull Guidance later this year.
  • The annual report must explain the company’s business model and strategy for delivering the company’s objectives. The FRC encourages companies to include this description in the same part of the annual report as the mandatory business review.

Shareholder engagement

  • The chairman should ensure that all directors are made aware of major shareholders’ issues and concerns.
  • Compliance is still on a “comply or explain” basis despite some suggestions that it should be changed to “apply or explain”. There is a new statement of what “comply or explain” really means. In deviating from the code, companies will need to show how they are achieving good corporate governance by other means.

Remuneration

  • The performance-related elements of executive directors’ remuneration should be stretching and designed to promote the company’s long term success.
  • Non-executive directors should not receive any performance-related remuneration (including share options).

Other corporate governance developments are in the pipeline. The FRC is separately developing a new Stewardship Code setting out standards of good governance for institutional investors, which it hopes to publish by the end of June. The Institute of Chartered Secretaries and Administrators is in the process of updating the Higgs guidance. The new guide will provide assistance to boards in implementing and understanding the purpose of the code and is due to be published this autumn.