Political and regulatory news

Issue 3 - 22 July 2010

Governance best practice updated

The Financial Reporting Council has updated its best practice recommendations for listed companies.

The Financial Reporting Council has published a new version of the Combined Code of Corporate Governance, now called the UK Corporate Governance Code.  The name change seeks to enhance the Code’s recognition, particularly for foreign investors.  It has been influenced by the Walker Review on corporate governance in the banking sector which was commissioned by the Government in the wake of the banking crisis.  The AIC was keen that the Walker recommendations should not be adopted wholesale outside the banking sector as they were not necessarily appropriate.  Although the FRC has adopted some of Walker’s recommendations, it has sought to ensure proportionality by restricting the two most significant changes to members of the FTSE 350.  These companies are now expected to replace their three-year rolling programme of director re-election with an annual re-election policy for the entire board.  Best practice also now suggests that they should use an external facilitator to evaluate the board every three years. 

These new recommendations, which, like the rest of the UK Code, operate on a ‘comply or explain’ basis.  They are expected to apply to about 45 investment companies who fall within the FTSE 350 but cannot be ignored by the rest of the sector.  The FRC is urging smaller companies to review their director re-election policies carefully.  It will consider extending the scope of the recommendation on external board evaluation when the UK Code is next reviewed in 2013 if the market for such services has developed sufficiently by that point.

Other changes to the UK Code are applicable to all investment companies.  These include the following:

• the chairman should agree and regularly review with each director their training and development needs;
• the board should have a balance of skills, experience, independence and knowledge of the company and should consider the benefits of diversity, including the number of female directors (currently about 30% of AIC Member boards have at least one female director); and
• the annual report should include details of the company’s business model (most investment companies already publish an investment policy).

The AIC’s own Code of Corporate Governance has, in the past, been endorsed by the FRC as an alternative for investment companies to following the UK Code.  To retain this endorsement, the AIC is updating the AIC Code to reflect the changes to the UK Code and will be approaching the FRC to renew its endorsement.

Corporate governance has also become an issue at a European level.  The European Commission is discussing a range of options for strengthening best practice in EU financial institutions and banks.  It is looking at the role, composition and functioning of boards, risk management, the role of the external auditors and supervisory authorities and the responsibilities of shareholders.  Although this initiative is not targeted on investment companies, it may, like the Walker Review, feed into a forthcoming review of corporate governance practice for all listed companies.  The AIC is engaged with this debate in an effort to ensure that the impact on our members is proportionate and recognises the obligations they are already subject to.

The UK Corporate Governance Code comes into effect for accounting periods beginning on or after 29 June 2010.  To view it, click here.

To view the European Commission’s green paper on corporate governance in financial institutions and remuneration policies, click here.

Next article: Expectations for investor engagement raised

Back to top

Back to Issue 3 - 22 July 2010