Independent regulator the Financial Reporting Council has today launched a revised Corporate Governance Code which includes a recommendation that directors of FTSE350 companies be re-elected annually.
Directors will also be obliged to promote the benefits of diversity in new appointments to the board, in order to avoid “group think”.
The changes to the Code, which must be adhered to by all listed companies, will become effective for tax years that begin on or after June 29 this year.
Introducing the new Code, FRC chairman Baroness Hogg said: “Under my predecessor’s wise leadership, the FRC responded to the financial crisis by examining the questions it raised about corporate governance and thoroughly reviewing the Code. We have now reconfirmed its core principles and the flexibility provided by the ‘comply or explain’ approach.
“The changes we have made are designed to reinforce board quality, focus on risk and accountability to shareholders. In return, we look to see a step up in responsible engagement by shareholders under the Stewardship Code, on which we have consulted and aim to publish by the end of June.”
Government has tipped its hat to the updates. The City, meanwhile, appears positive but has expressed reservations.
“Corporate accountability and transparency is integral to rebuilding public trust in the corporate sector and today’s new Corporate Governance Code marks an important step towards rebuilding that trust,” said Business Minister Edward Davey. “These new measures will help to encourage companies to play their part in working towards the creation of a more responsible, fair and transparent corporate society.”
However, Howard Wheeldon, senior strategist at BCG Brokers, said the new rules could mean directors are forced to take action that heightens their chance of retaining their place on a board rather than that which is in the best interests of the firm.
“We have concerns that annual reelection might encourage individuals to perform in a way that could overall be detrimental to the company, so, in other words, too much action for short term gains as opposed to long term strategies,” he said. “Apart from that though, any shakeup as long as the principle is agreed by the majority of the companies that are affected by it, is probably acceptable.”
Applauding an FRC urge to get more women into the boardroom, Equalities Minister Lynne Featherstone pointed out only 12 per cent of FTSE 100 directors are female.
“A more equal workplace is a more successful workplace and the stronger provision on gender diversity in the new Code is an important step towards building a fair and equal society by tackling discrimination at work,” she said.
Howard Wheeldon warned against an overly heavy regulatory hand in guiding who gets on the board.
“It’s a free and open market and it’s up to the individuals to climb the ladder,” he said. “I don’t think there are undue pressures that prevent one section of the community, be they male or female, from climbing the ladder. I’m afraid it’s survival of the fittest out there.”
Other changes and additions to the code include:
• To improve risk management, the company‘s business model should be explained and the board should be responsible for determining the nature and extent of the significant risks it is willing to take.
• Performance-related pay should be aligned to the long-term interests of the company and its risk policy and systems.
• To promote proper debate in the boardroom, there are new principles on the leadership of the chairman, the responsibility of the non-executive directors to provide constructive challenge, and the time commitment expected of all directors.
• To help enhance the board’s performance and awareness of its strengths and weaknesses, the chairman should hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.
The revised Corporate Governance Code is available to view at frc.org.uk.