Political and regulatory news

Issue 2 - 19 May 09

Director obligations under scrutiny in governance review

The Financial Reporting Council is reviewing its Combined Code of Corporate Governance.

The Financial Reporting Council has brought forward its regular review of the Combined Code of Corporate Governance.  With governance practices high on the political agenda following recent failures in the banking sector, the review presents a timely opportunity to reconsider the impact and effectiveness of existing best practice guidelines.

The FRC is asking listed companies, directors, investors and other interested parties for their views on “the content of the Combined Code and the way that it has been applied by companies and enforced by investors using the ‘comply or explain’ mechanism”.  It has highlighted four key questions designed to identify:

• which parts of the Combined Code work well and which need further adjustment
• whether any parts have inadvertently reduced board effectiveness
• whether there are any aspects of good governance not currently covered, and 
• whether any improvements could be made to the ‘comply or explain’ mechanism.

The FRC is also keen to hear views on the usefulness of company disclosures and the quantity and quality of shareholder engagement.

Previous reviews in 2005 and 2007 found that the Combined Code was generally working effectively.  However, it is now being tested under very different and difficult market conditions.  This review is likely to focus on areas which have come under scrutiny during the current economic crisis, in particular the composition and effectiveness of the board, the role of the chairman and the non-executive directors, risk management, the role of the remuneration committee and shareholder engagement.  The relationship between the board and the company’s shareholders will be a key area for debate.

Consideration will be given to improving best practice recommendations on how effective relationships can be established and maintained, so that directors are better encouraged to communicate their thinking to shareholders in an open and constructive manner, and shareholders are more prepared to voice their concerns to the board, listen to their explanations, and take action if unsatisfactory progress is made.  These moves would be welcomed by the AIC.  As investors, investment companies would benefit from any developments designed to increase shareholder value and prevent corporate failures.  Over time, any cultural change achieved amongst the larger corporations should filter through to the wider market, enabling investment companies to take advantage of improved communication channels to explain their unique issues, such as outsourcing and discounts, to investors.

The FRC is expected to publish its conclusions later this year.  It will also take into account existing and new research, including analysing a sample of published corporate governance statements and considering the outcome of Sir David Walker’s review into corporate governance in the banking sector.  Any proposed changes to the Combined Code or to the ‘comply or explain’ regime will be subject to a separate consultation.

The FRC’s consultation closes on 29 May 2009.  A copy of the consultation paper can be found here.

 

Next article: Investors challenged over their stewardship responsibilities

Back to top

Back to Issue 2 - 19 May 09