The FRC published a new UK Corporate Governance Code on 28 May. The role of corporate governance in the wake of the financial crisis has been under examination for over a year. With the publication of a new Code, the new corporate governance regime has begun to crystallise.
The new Code, renamed and published by the FRC, replaces the Combined Code for financial years beginning on or after 29 June 2010. All companies with a Premium Listing of equity securities, whether UK incorporated or not, will need to state in their annual report first, how they apply the ”Main Principles” of the Code and, secondly, whether they comply with its “Provisions” or provide a reasoned explanation where they do not. As a result, the new rules are set to affect over 1,000 UK and over 300 non-UK companies.
As expected, the new Code re-emphasises the role and responsibilities of the board. The most discussed aspect of increased board accountability is a new requirement for all directors of FTSE 350 companies to be put forward for re-election by shareholders every year. Other key features of the new Code include:
- Accountability – Chairmen to report personally on role and effectiveness of board.
- Risk - Board explicitly made responsible for determining significant risks. New requirement to explain the business model.
- Performance - External board evaluation reviews to be conducted every 3 years by FTSE 350 companies. Chairman to hold regular development meetings with all directors.
- Balance - Board to include an appropriate mix of skills, experience and independence. Search for board candidates should have regard to diversity, including gender diversity.
- Proper debate - New emphasis on chairman’s leadership role and constructive challenge from non-executive directors. More stress on time commitment required.
- Performance-related pay - Clear statement that this is to be aligned with the long-term success of the company.
Yet to come is a new Stewardship Code, described by Baroness Hogg, Chairman of the FRC as “the other side of the hinge”. The Stewardship Code aims to balance the focus on the responsibilities of the board by encouraging institutional investors to engage constructively with companies. Based on a code published by the Institutional Shareholders Committee, this was the subject of a consultation by the FRC in January and is due to be published by the end of this month. In the meantime the provisions on institutional investors from the Combined Code have been moved to the back of the UK Corporate Governance Code, but will be deleted when the Stewardship Code takes effect.
We have published a client briefing note on the new Code which is available here.
Click here to access a 30 minute webcast discussion about the new Code between Lucy Fergusson, Carol Shutkever of Herbert Smith and Frances Le Grys of Hogan Lovells.
