A new governance code for UK business
Posted by Christie Malry on June 1, 2010 at 10:44 am
The UK's Financial Reporting Council has announced a set of revisions to the Combined Code. Now to be known as the "UK Governance Code", the main changes are:
- To improve risk management, the company‘s business model should be explained and the board should be responsible for determining the nature and extent of the significant risks it is willing to take.
- Performance-related pay should be aligned to the long-term interests of the company and its risk policy and systems.
- To increase accountability, all directors of FTSE 350 companies should be put forward for re-election every year.
- To promote proper debate in the boardroom, there are new principles on the leadership of the chairman, the responsibility of the non-executive directors to provide constructive challenge, and the time commitment expected of all directors.
- To encourage boards to be well balanced and avoid “group think” there are new principles on the composition and selection of the board, including the need to appoint members on merit, against objective criteria, and with due regard for the benefits of diversity, including gender diversity.
- To help enhance the board’s performance and awareness of its strengths and weaknesses, the chairman should hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.
Of all of these changes, it's the requirement for boards to have consideration to gender and other diversities that has got the press excited. So excited, in fact, that the new Code made the local BBC news on Friday night - quite an achievement! The requirement for annual elections was perhaps less interesting because many listed companies already require their directors to submit themselves to annual elections.
Like Holmes's dog that didn't bark, there's significance in a change that they didn't make: to the UK's system of "comply or explain". You see, most of the provisions of the Combined Code/UK Governance Code aren't actually mandatory at all - they're all optional. What's mandatory is for companies to either comply with each of the provisions or explain to their shareholders why they haven't complied.
In recent years, this has seen companies like Marks and Spencer breaking the provision that the role of Chief Executive and Chairman should be separate. They explained this as follows:
Throughout the year ended 28 March 2009 the Company complied with all Code provisions with the exception that from 1 June 2008 the role of Chairman and Chief Executive has been exercised by the same individual, Sir Stuart Rose (A.2.1). We plan to revert to recommended best practice no later than July 2011.
We recognise that our current Board structure is out of line with the Code and we understand the concerns of our shareholders but believe that we still can – and do – maintain robust governance while at the same time, benefiting from having Stuart at the helm. As long as we have robust governance and make sure that appropriate challenge to the executive is in place, we believe the right balance can be maintained.
Although it's inarguable that it should be the shareholders, as ultimate owners of the company, who get to decide whether this is appropriate, it has led to calls for a tightening of the system to address situations where owners aren't exercising their responsibilities properly. The FRC has decided not to address this problem through the UK Governance Code; instead it has been consulting on a separate Stewardship Code for investors.
[...] faith to go from the observation that boards are not diverse to the conclusion, rather like the new UK Corporate Governance Code, that what you need to do about it is stick more women on [...]