The Financial Reporting Council (FRC) has launched a consultation on its proposals to reform the UK’s Corporate Governance Code (formerly the Combined Code). The Code has been revised regularly to ensure it reflects changing governance concerns and practices and economic circumstances. The latest proposals take into account those lessons of the recent financial crisis that are relevant to all companies.
Sir Christopher Hogg, chairman of the FRC, has led the latest review. He said: “The principal lesson of the financial crisis is that those on boards must think deeply about their individual and collective roles and responsibilities. The chairman has a vital role to play in ensuring that the executives have appropriate freedom to manage the business but also accept the importance of opening themselves to challenge and earning the trust of the whole board. For their part, the non-executives must have the skills, experience and courage to provide such challenge.
“We have also seen that, in order for UK corporate governance to be strong, boards must embrace the spirit of the code and shareholders must play their part. The Code is made up of strong principles that require careful thought and application to the circumstances of each company. The Code is not a set of rules to be applied unthinkingly. It demands that boards seriously and self-critically assess their performance and openly explain themselves to shareholders. And their assessments must be considered equally seriously by major shareholders if the board’s efforts are to be sustained. The FRC therefore welcomes the Government’s request that it takes on the stewardship of the new code on the responsibilities of institutional shareholders,” he said.
The main proposals are:
- To enhance accountability to shareholders, the FRC proposes either the annual re-election of the chairman or of the whole board.
- To ensure the board is well balanced and challenging, new principles are put forward on the leadership of the chairman, the roles, skills and independence of the non-executive directors and their level of time commitment.
- To enhance the board’s performance and awareness of its strengths and weaknesses, board evaluation reviews should be externally facilitated at least every three years and the chairman should hold regular development reviews with each director.
- To improve risk management, new principles are proposed on the board’s responsibility for and handling of risk.
- Proposals are also made to emphasise that performance-related pay should be aligned to the long-term interests of the company and its policy on risk.
- The Code will be renamed The UK Corporate Governance Code to avoid confusion among overseas investors.
Consultation on the draft revised Code ends on 5 March 2010. Subject to the outcome of consultation, and the necessary changes to the Listing Rules, the FRC intends that the revised Code should apply to all listed companies with a Premium Listing for financial years beginning on or after 29 June 2010.
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