The UK’s corporate governance regulator, the Financial Reporting Council (FRC) has today published a progress report on its review of the Combined Code on Corporate Governance, which it kicked off in March 2009.
The report summarises the results of the consultations and research that the FRC has carried out to date and invites views on various aspects of the Combined Code and its application. These are:
- The responsibilities of the chairman and non-executive directors;
- The composition of the board, including finding the right balance of independence and expertise;
- The frequency of directors’ re-election;
- Board information, development and support;
- Evaluation of the board’s effectiveness;
- The effectiveness of existing risk management systems;
- Remuneration policy and process;
- The usefulness of companies’ reporting on corporate governance; and
- Engagement between boards and shareholders.
There has been a lot of support for the Combined Code and the “comply or explain” mechanism rather than greater prescription. It is seen as better able to react to developments in best practice, and because it can take account of the different circumstances in which companies operate it can set higher standards to which they should aspire.
We share this view. But to remain credible the Code must continue to represent best practice, and companies and investors must adhere to the spirit of “comply or explain”. The FRC will strengthen the Code where it is necessary to do so, but will do so in a proportionate way and will aim to avoid an increase in the overall level of prescription.”
The FRC is also considering the implications of the consultation paper on the governance of banks and other financial institutions issued by Sir David Walker on 16 July. That report contains recommendations that could be taken forward through amendments to the Combined Code. It also recommends extending the responsibilities of the FRC and the FSA in relation to engagement between company boards and investors. The FRC is considering to what extent Sir David’s recommendations are also applicable for some or all listed companies in other sectors and, with the FSA, how best to implement them.
The FRC will issue a final report before the end of the year. Any proposed changes to the Combined Code will be subject to a separate consultation.
It’s interesting that the FRC review comments one of the strongest themes to emerge was the need for boards to take responsibility for assessing the major risks facing the company, agreeing the company’s risk profile and tolerance of risk, and overseeing the risk management systems, with the view that not all boards had carried out this role adequately. Many will hear the sound of the stable door being belatedly bolted.