Stakeholders should have greater say, urges new code

Companies’ stakeholders will have to engage more with the board and help influence its governance following the introduction of new corporate governance guidelines.

A stewardship code, suggested as part of the Walker Review of banking governance, will be implemented by The Financial Reporting Council across all business.

The code will encourage institutional investors to become more proactive in companies’ governance, while the FRC will also look to increase dialogue between a board and other investors.

Advisers welcomed the plan as important in helping boards put together a strong governance strategy.

“After all, the principle of comply or explain depends in large measure on shareholders taking notice of the extent to which their companies account for themselves if/when their governance differs from the code,” said Richard Wilson, Ernst & Young audit partner and leader of its independent director programme.

The recommendations were a highlight of its reform for the Combined Code on Corporate Governance, and comes as a direct response to issues that emerged during the credit crunch.

It is proposing much greater accountability to shareholders through the annual re-election of company chairman or the whole board.

Boards should also be externally evaluated at least every three years, according to the watchdog.

FRC chairman Sir Christopher Hogg said that the FRC had failed to find widespread failing in corporate governance outside the banking sector but believes the changes would benefit all businesses.

“The principal lesson of the financial crisis is that those on boards must think deeply about their individual and collective roles and responsibilities. The chairman has a vital role to play in ensuring that the executives have appropriate freedom to manage the business but also accept the importance of opening themselves to challenge and earning the trust of the whole board. For their part, the non-executives must have the skills, experience and courage to provide such challenge.”

Sir Christopher also stressed the need for shareholders to consider the actions of company boards “seriously”. The FRC will take on the management of the new code for shareholders on the invitation of government.

The code’s name will also change to the UK Corporate Governance Code.