FRC launches proposed reforms to the UK Corporate Governance Code – updating the role of the board
01 December 2009
The consultation includes enhancing accountability to shareholders by proposing either the annual re-election of the chairman or of the whole board. It also proposes ensuring the board is well-balanced and challenging.
The FRC today launched a consultation on its proposals to reform the UK’s Corporate Governance Code (formerly the Combined Code). The Code is revised regularly to ensure it reflects changing governance concerns, practices and economic circumstances. The latest proposals take into account the lessons of the recent financial crisis that are relevant to all companies.
Sir Christopher Hogg, Chairman of the FRC, leading the latest review, 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’.
‘The FRC has not found evidence of serious failings in the governance of British business outside the banking sector. However, the proposed changes to the Code are in our view sensible improvements that would benefit governance in all major businesses. They are therefore commended for widespread adoption through the Code’.
The main proposals are as follows.
- 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, which was formerly known as the Combined Code, will be renamed The UK Corporate Governance Code to avoid confusion among overseas investors.
Consultation on the draft revised Code ends 5 March 2010.