New UK Corporate Governance Code

The new UK Corporate Governance Code, previously known as the Combined Code, came into effect just over a week ago. This iteration of the Code was drafted following Sir David Walker’s recent review of the previous version.

According to the new Code’s preface, ‘Two principal conclusions were drawn by the FRC from its review. First, that much more attention needed to be paid to following the spirit of the Code as well as its letter. Secondly, that the impact of shareholders in monitoring the Code could and should be enhanced by better interaction between the boards of listed companies and their shareholders.’ As a result of the second point, the UK Stewardship Code has also been published, and we’ll be recording some of our thoughts on that soon.

CO3 has prepared a summary of the major changes that appear in the new Corporate Governance Code. This can be downloaded here.

Some of the more interesting points found in the new Code deserve a little discussion, and we’d also be interested in hearing your thoughts on it.

Board review
The Code calls for an external evaluation of Board performance at least once every three years for all FTSE350 companies. This raises the question of who would provide this service, and how would they go about ensuring a high-quality, truly independent evaluation?

Diversity
The new Code states that ‘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.’ This is not highly prescriptive language, but we believe that some companies will need to look at, and potentially adjust the terms of reference for their nominations committees. It will be interesting to see how companies go about creating robust processes to ensure that diversity is taken into account, and what effects these may have.

Risk
From the Code’s main principles: ‘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.’ We sometimes find that the discussion of risk within annual reporting can be lacking depth. A greater focus on risk in the new Code could result in a more thorough discussion of this area, enhancing the transparency of certain organisations and the way they do business.

Chairman’s role
The new Code puts additional responsibility and emphasis on this role. We think that companies with combined CEO/Chairmen may find this brings greater pressure to separate the roles, especially given that the Chairman’s responsibilities include fostering constructive relations between executive and non-executive directors.

In case you missed it the first time, our guide to the changes found in the new UK Corporate Governance Code can be found here. The Code itself can be found on the FRC’s website, here.