FRC opts for writing new code

Link: Higgs special report

Sir Bryan Nicholson, chairman of the Financial Reporting Council, announced yesterday in a long expected statement that elements of the Higgs report and the Smith Report on audit committees, would not be automatically adopted into the combined code following heavy criticism from many sources.

Significantly the FRC has decided to water down the requirement of the Higgs report that half of all boards should be made up of non-executive directors. The FRC has concluded that this would be difficult to implement for companies below the FTSE-350 who will be required to have just two non-execs with a proviso that they should be working towards full compliance with the requirement.

This water down is, however, unlikely to please many big company leaders who had complained it risked undermining the unitary board.

Sir Bryan said yesterday: ‘Responses included a great deal of thoughtful comment and many good suggestions, but also identified some strong criticism about certain aspects of the proposed Code changes.

‘The FRC will now work to produce a draft taking account of the consultation, with the intention of reaching a final draft of the Code that will build on Higgs’ approach and command general support. I believe the new Code will make a substantial contribution to strengthening corporate governance in the UK.’

The FRC hopes to have a draft of the new combined code finished ‘by July’ and said it plans to bring it into effect as soon as possibly.

The full conclusions of the FRC are:

  • the chairman should be allowed to chair the nomination committee (though the chairman should stand down when the committee was discussing recruitment of a new chairman);
  • the chairman should chair regular meetings of the non-executive directors; but the senior independent director should chair at least annual meetings of the non-executive directors without the chairman present to appraise the chairman?s performance;
  • the chairman should ensure that shareholders’ views are communicated to the board as a whole; the senior independent director should attend as an observer sufficient meetings of management with a range of major shareholders to help develop a balanced understanding of their concerns;
  • re-election of non-executive directors beyond six years should not require special explanation but should be subject to rigorous review, with no automatic re-appointment;
  • the provision that at least half the board, excluding the chairman, should comprise independent non-executive directors could be difficult for many smaller listed companies (below FTSE 350); for them, the Code should provide for boards of such companies to include at least two independent non-executive directors but should encourage them to move towards meeting the full provision;
  • some of the ‘provisions’ in the draft (with which companies must ‘comply or explain’) were more akin to ‘principles’ (where companies must report how they are applying those principles); a new draft should take this into account.

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