The Combined Code is likely to remain largely un-altered, with the exception
of two changes which will only be made following further consultatation.
The Financial Reporting Council announced the completion of its
today, along with proposals to continue consulting on removing restrictions on
individuals chairing more than one FTSE 100 company, and allowing chairman of
companies outside the FTSE 350 to sit on the audit committee if he or she was
considered independent on appointment.
Response to the review – from the profession, companies and investors –
indicated that although the ‘comply or explain’ approach is working fairly well,
there is also a good deal of frustration with its day-to-day operation. In
particular, the FRC found that investors are concerned by what they consider to
be the poor-quality explanations provided by some companies. Meanwhile, the
companies consider some investors and voting advisory services to be guilty of
‘box-ticking’ and failing to give sufficient weight to explanations.
The FRC said that while there is currently a critical mass of institutional
investors who devote the necessary time and resource to constructive engagement
needed to make ‘comply or explain’ work, it will be necessary to keep the health
of the engagement process under review in the light of changes in ownership
patterns and increased outsourcing of voting and engagement activities.
The FRC said that action may be necessary to address structural barriers to
The regulator also found little support for widespread derogations from the
full Code to apply to smaller companies while there has been a ‘discernible
improvement’ in the overall quality of disclosure. However, the general
perception among investors and other observers is that there remains scope for
considerable further improvement.
The FRC is to focus its efforts on improving the practical application of
the Code as this will be of greater benefit than a major overhaul of the content
of the Code, which enjoys broad support.
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