Trust Associates' newsletter
June 2010
The new UK Corporate Governance Code
We have looked at the new UK Corporate Governance Code and identified some of the principal changes that affect the non-executive directors of investment companies. Most of the changes are of tone and emphasis and are designed to encourage boards to think more deeply about their role and duties.
The new Code, which replaces the current Combined Code on Corporate Governance, applies to accounting periods beginning on or after 29th June 2010. As before, the “comply or explain” principle is fundamental to its implementation. Boards are obliged to do one or the other: to do neither is to break the requirements of the FSA Listing Rules. The Code points out that boards “have a lot of room within the framework of the Code to decide for themselves how to act.”
There is greater emphasis on the need to engage with shareholders with particular reference to “the personal reporting on governance by chairmen as the leaders of boards”, which “might be a turning point in attacking the fungus of ‘boiler-plate’ ... so often the preferred and easy option in sensitive areas but which is dead communication.”
The changes are relatively limited but are designed to “signal the importance of the general principles which should guide board behaviours.” The main changes (in bold) of relevance to investment companies include:
B.2. The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.
B.6.2 Evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years.
B.7.1 All directors of FTSE 350 companies should be subject to annual election by shareholders.
C.2 Risk Management and Internal Control
Main Principle
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 board should maintain sound risk management and internal control systems.
C.2.1 The board should, at least annually, conduct a review of the effectiveness of the company’s risk management and internal control systems and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls.
This section on risk management is significantly less draconian than the anticipated creation of a risk committee.
There are also some existing provisions which may be worth reiterating:
C.3.1 In smaller companies the company chairman may be a member of, but not chair, the [Audit] committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman.
D.2 There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.
There is some ambiguity in this provision in that it is unclear whether the second sentence applies to all directors or only executive directors. We understand from the FRC that it does only apply to executive directors, so it is only of relevance to self-managed investment companies. This is made marginally clearer by the statement:
D.2.3 The board itself or, where required by the Articles of Association, the shareholders should determine the remuneration of the non-executive directors within the limits set in the Articles of Association.
And our favourite Code provision is still there!
B.2.4 An explanation should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non-executive director.
In an environment of considerable public and media comment on the need for transparency and independent scrutiny on financial affairs, it might be that there is greater pressure to adhere to some of these existing provisions.
To see an online copy of the new UK Corporate Governance Code, click here.