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UK issues new corporate governance code

UK – The final redraft of the Combined Code on corporate governance, following the Higgs Review into non-executive directors, has received the thumbs up from institutional investor bodies.

One feature that has made it to the final cut is a call for greater dialogue between institutional shareholders and corporate management.

Sir Bryan Nicholson, chairman of the Financial Reporting Council which produced the code, said: “The Code agreed today represents a positive and sensible advance in corporate governance in the UK and gives us a leading position internationally. It will foster far-reaching changes in British boardroom practice and help to develop further the professionalism of non-executive directors.”

He added: “The Code encourages open dialogue between company boards and institutional shareholders. All have to play their part in ensuring that the dialogue is productive."

The original proposals by Derek Higgs, the former investment banker commissioned to carry out a review into boardroom corporate governance, received a mixed reception. The suggestions made were considered too prescriptive and threatening.

Back at the National Association of Pension Funds’ conference in Glasgow in March, however, Higgs already seemed to have softened and had made concessions in some areas. He assured the financial community that the report is “not a rulebook” but a statement of best practice, and support increased immediately.

Today’s final draft, to be approved by the FRC, is agreed as being more forgiving in its proposals. Says Ken Ayers, investment council chairman at the NAPF: “The NAPF was among the first to welcome the Higgs review when it was originally published, although we were concerned that some of the proposals, when translated in the revised Combined Code appeared too prescribed.

“I believe that with the publication of the final version of the Code, this has now been rectified. I believe that the result will significantly improve corporate governance without being too prescriptive.”

Mary Francis, head of the Association of British Insurers, agrees: “The new code contains the essence of the Higgs report, while avoiding the strait-jacket of excessive prescription.”

As suggested by Higgs back in March, the new code stresses that “departures from the code should not be automatically treated as breaches” – a point also praised by Daniel Godfrey, of the Association of Investment Trust Companies.

The Code’s main features are:

- new definitions of the role of the board, the chairman and the non-executive directors;
- more open and rigorous procedures for the appointment of directors;
- formal evaluation of the performance of boards, committees and individual directors, enhanced induction and more professional development of non-executive directors;
- at least half the board in larger listed companies to be independent non-executive directors, with a definition of independence of non-executive directors;
- the separation of the roles of the chairman and the chief executive to be reinforced;
- closer relationships between the chairman, the senior independent director, non-executive directors and major shareholders; and
- a strengthened role for the audit committee in monitoring the integrity of the company’s financial reporting, reinforcing the independence of the external auditor and reviewing the management of financial and other risks.

The new code will come into effect for reporting years beginning on or after November 1 2003. Its stated aim is to “enhance board effectiveness and to improve investor confidence by raising standards of corporate governance”.

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