Yesterday, the Financial Reporting Council (FRC) published a revised version of the UK Corporate Governance Code (formerly the Combined Code). This new edition of “the Code” takes effect for financial years beginning on or after the 29th June 2010.

The Code applies to all companies with a Premium Listing on the London Stock Exchange including those registered outside of the UK. So, for example, an Isle of Man company must now report on how they have applied the Code (according to the “comply or explain” principle).

Broadly speaking the Code is well regarded and it is accepted that it has made an important contribution to good corporate governance in the UK over the last two decades. It has also been used a benchmark for corporate governance codes in a wide range of other countries.

These new revisions have been made in response to the financial crisis and in the main are to be welcomed.

In particular, the Code’s increased emphasis on the role of the chairman, the need for constructive challenge from non-executive directors and the central role of the board in risk oversight are long overdue additions to the Code as is the proposal that each company should undertake an externally-facilitated board evaluations at least every third year.

My only concern however is that these, and some other requirements in the Code, only apply to premium-listed companies. Many of them should, in my view, be extended to all public and many private companies.

There are however two changes to the Code which I feel unable to support:

1) Annual election of all directors

In my view, this will promote a short-term mentality amongst directors. It also opens the door to individual directors being targeted at AGMs, which is not consistent with the idea of the board as a collective decision-making body.

It should be remembered that shareholders are currently able to remove directors from boards at any time by means of passing an ordinary resolution of shareholders at a General Meeting.

2) Highlighting of gender as an important factor in making appointments to the board
By including gender in the Code, there is a risk that the Code will increasingly become seen as a tool of social policy rather than good governance. Diversity of boardroom composition in terms of personality, professional background and expertise is important in improving boardroom decision-making. But this means that directors should be judged on their individual qualities and their ability to fit into a team, not according to their gender.

As it happens some of the best directors I have ever worked with have been female and I’d welcome more of them on boards upon which I sit – but they need to be there on individual merit not just to satisfy this or any other Code.

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Category: Guide to City Jargon

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