Financial Reporting Council

Sir Bryan Nicholson welcomes Higgs and Smith Reports

FRC PN 71

20 January 2003

Sir Bryan Nicholson, Chairman of the FRC, commented today on the publication of the Higgs and Smith reports*. Both reports propose changes to the Combined Code on Corporate Governance, which the FRC keeps under review. Sir Bryan said:

“On behalf of the FRC, I warmly welcome these two reports. They are both firmly grounded in common sense, with sound, pragmatic and practical recommendations. Their implementation will represent a step change for the better in British corporate governance. They incorporate existing best practice and extend that to deal fully with today’s issues and concerns.”

On the Smith review, which the FRC set in motion, Sir Bryan added:

“I am especially grateful to Robert and to the members of his group for the excellent job they have done, to a demanding timetable.”

The two reports require significant changes to the Combined Code. Derek Higgs and Sir Robert Smith have proposed a consolidated revised Code incorporating the relevant changes. The FRC supports these changes. Recognising that both reports already reflect wide consultation, the FRC will adopt the following procedure:

for a twelve-week period, until Monday 14 April, we invite commentators to bring to our attention any fatal flaws in the proposals and any specific drafting matters (but the FRC does not intend to re-open the substance of the recommendations);
thereafter the FRC will issue the definitive version of the revised Code, whether as currently drafted or as amended in the light of comments received;
the new Code will come into effect on 1 July 2003 (a date suggested in both reports)

The same procedure will be followed with regard to the detailed guidance on audit committees in Sir Robert Smith’s report.

* “Review of the role and effectiveness of non-executive directors”, Derek Higgs
“Audit committees: Combined Code guidance”, FRC-appointed group chaired by Sir Robert Smith

Notes to Editors

The Combined Code (“The Combined Code: Principles of Good Governance and Code of Best Practice”) is the product of the Cadbury, Greenbury and Hampel reviews of the 1990s. It is supplemented by guidance on internal control produced by the Turnbull review. Listed companies are required by the Listing Rules to comply with the Code or to explain in their annual reports why they have not done so.

Since the Hampel report in 1998, the Financial Reporting Council has acted as a focus for considering whether any developments in corporate governance call for further work. As part of this it has kept the Code under review, and it is now for the Council to decide on changes to the Code in the light of the Higgs and Smith reports. The FSA's Listing Rules underpin the Code by requiring listed companies to comply with it or to explain in their annual report why they have not done so. The FSA will apply the same requirement to the new Code when it comes into effect.

The FRC set up the group on audit committees at the request of the Co-ordinating Group on Audit and Accounting Issues (CGAA), the body established by the Government to oversee and co-ordinate the response in the UK to the issues raised by recent major corporate failures in the US. FRC Press Notice 67 of 12 September announced the establishment of the Smith group.

As a matter separate from the Higgs and Smith reports, the FRC will take the opportunity of the Code’s revision to take account of the Directors’ Remuneration Report Regulations, which came into effect on 1 August 2002. The Regulations make some provisions of the Code redundant and the FRC’s intention is to delete the Code provisions directly affected.

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