New combined code still presents a challenge

The sudden focus comes after the Financial Reporting Council finally published its revised combined code on corporate governance last week, which includes measures proposed by Derek Higgs on the role of non-executive directors.

We’ve been here before. When the Higgs report was first released at the beginning of this year, the City generally accepted it. Then they read it.

Howls of protest emerged and the FRC was forced to rethink what they should adopt for the combined code.

Last week, the Higgs proposals were generally accepted to be softened.

Board chairmen will be allowed to chair a company’s nomination committee.

FTSE-350 companies must no longer have at least half of their boards made up of non-executives – they can opt for a minimum of just two. And there is more clarification on the roles of chairmen and the new position of senior independent director.

Despite the softening, many feel the revised code will be tough on companies.

‘It’s a clear tightening of the belt for companies and the institutions, while maintaining the same comply or explain regime,’ says Nigel Jones, Ernst & Young’s national head of audit services.

But within the reactions to the code, warnings and misgivings persist.

ACCA turned on the code as soon as it was made public. The institute’s complaint was that it virtually ignored the interests of small investors, while narrowly focusing on the relationship between management and big institutional investors.

‘It is a pity that the needs of real shareholders have largely been ignored,’ says Paul Moxey, head of corporate governance at ACCA.

He was also concerned that the opportunity had been lost to do something about a broad framework of corporate responsibility.

The focus on the responsibility of directors to institutional shareholders is, of course, where many wanted the Higgs review to go in the wake of the Enron and WorldCom scandals.

There were key reasons for this, not least a resistance to the US approach in Sarbanes-Oxley, which developed prescriptive measures on financial reporting and the role of auditors.

Nigel Jones identifies, as a key characteristic of the Higgs review, that ‘what really matters is a strong board of independently-minded people with the right blend of skills and experience’.

‘And that in Ernst & Young’s view, has clearly been recognised by the Financial Reporting Council in developing the new combined code,’ he adds.

But as favourable as the reaction to the code has been, it still remains just a code. ‘Its value lies in how it is implemented,’ says Anthony Carey, technical partner at RSM Robson Rhodes.

The key, Carey points out, is that companies actually respond ‘positively and actively’ to the code as an ‘aid to business performance’.

The code’s future success, therefore, lies not in its provisions, but in the willingness of companies to apply it. Given that some of the provisions are quite demanding, it still presents them with an important test. Investors will be keen to see they pass.

Email: [email protected] KEY POINTS – Combined code modified to include main principles, provisions and supporting principles to offer greater flexibility – Board chairmen able to chair nomination committee – Roles of chairmen and senior independent directors clarified – FTSE-350 members need just two non-executive directors – ‘Rigorous review’ replaces ‘special explanation’ to shareholders in the event of a non-executive serving more than six years.