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  • UK governance code to target investor communication

UK - The existing Combined Code on Corporate governance remains "broadly fit for purpose" but additional proposals relating to communications and the role of the chairman and non-executive directors have been suggested by the Financial Reporting Council (FRC).

In the final report of its third review of the Combined Code, the FRC also highlighted the need to further improve the quality of communication by companies and engagement between companies and investors.

As part of this, the FRC agreed with a recommendation from last week's Walker Report that it should be responsible for the new Stewardship Code for institutional investors, subject to a consultation on how it can be operated effectively. (See earlier IPE article: Walker review calls for investors' stewardship code)

The organisation said it also intends to play a larger role in promoting better communication and more constructive shareholder engagement, so it is considering options "for producing practical guidance on good practice engagement between companies and investors".

The FRC's review, which worked closely with Walker's team, also plans to rename the code as the UK Corporate Governance Code to avoid confusion for overseas investors. This is partly because from April 2010 any company with a premium listing - no matter where they are incorporated - will be required to report how they have applied the Code on a 'comply or explain' basis.

Other reforms put forward for consultation include the annual re-election of either the chairman or the entirety of a board, in an effort to enhance accountability to shareholders. The FRC has also proposed new principles on the leadership of the chairman and the roles, skills, and independence of non-executive directors and their level of time commitment to ensure a board is "well-balanced and challenging".

The FRC has recommended external board evaluation reviews be implemented at least every three years, while new principles will be introduced in relation to the board's responsibility for risk management.

Sir Christopher Hogg, chairman of the FRC, suggested the principal lesson from the financial crisis is the need for board members to "think deeply" about their individual and collective roles and responsibilities.

But he added: "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 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."

David Paterson, head of corporate governance at the National Association of Pension Funds (NAPF), said the emphasis placed on effective communication between boards and their shareholders is a "welcome development in a key area where improvements are needed".

He added that as a member of the Institutional Shareholders' Committee (ISC) - which developed the principles underlying the new Stewardship Code - the NAPF "recognises the need for shareholders to further develop effective engagement processes to strengthen their role as owners".

The consultation on the proposed changes closes on 5 March 2010 and it is expected the new Code will come into force for companies with financial years beginning on or after 29 June 2010.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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