On 1 December 2009, the Financial Reporting Council (FRC) published its final report following its review of the effectiveness of the Combined Code on Corporate Governance. In its report, the FRC stated that it would commission the Institute of Chartered Secretaries and Administrators (ICSA) to review and, where necessary, update the FRC’s ‘Good Practice Suggestions from the Higgs Report’ published in June 2006 (Higgs Guidance) which addresses, for example, the roles of the chairman and non-executive directors.
On 3 March 2010 ICSA published a consultation document entitled ‘Improving board effectiveness’ on its update of the Higgs Guidance. This document is the first of two consultation papers to be published by ICSA. Responses to this consultation paper are requested by 16 April 2010. ICSA then plans to issue a second consultation paper in June 2010, with responses requested by the end of August 2010, following which ICSA intends to submit completed guidance to the FRC in October 2010. The FRC has also asked ICSA to consider whether additional guidance should be given on a number of related issues raised in Section A (Leadership) and Section B (Effectiveness) of the UK Corporate Governance Code (the Code). A draft of the new Code is included in the FRC’s Final Report.
According to ICSA, the aims of the review are to “offer guidance which, without being prescriptive, assists boards in understanding and implementing the purpose of the Code and, in so doing, delivers practical advice to boards on how they can apply the Code to enhance their effectiveness”. ICSA recognises that there are compelling commercial reasons for pursuing good governance and that building an effective board is a key feature of such governance.
ICSA seeks comments on the following areas:
- Roles and responsibilities of the board and its members - the guidance will reiterate the purposes of the board as the key decision-making body of the company and define the purpose of board meetings. It will examine the roles of different directors on the board, board composition and boardroom behaviours.
- Skill levels in the boardroom - the guidance will cover director induction, development and evaluation.
- Board decision-making in relation to audit, nomination and remuneration committees - it is likely that the existing guidance relating to audit committees will be amended following the conclusion of the Auditing Practices Board’s work on the provision of non-audit services and audit partner rotation. The guidance will also update the description of principal duties contained in the Higgs Guidance to emphasise the significance of the nomination mechanism and will offer advice on how directors can become more effective in their roles by the “development and fine-tuning of the company’s information and support mechanisms”.
- The individual on the board - the guidance will include information on ensuring that the right directors are on the board and that directors make the right choice as to which board to join. It will also include guidance on directors’ liability.
- Accountability - the guidance will highlight the importance of transparency and the need for disclosure to investors on compliance with corporate governance principles.