The Financial Reporting Council has previously announced that it will carry out a formal assessment of how the Combined Code is being implemented. This will take place in the second half of 2005. In preparation for this review the FRC has carried out an informal assessment of the impact of the revised Combined Code and concluded that encouraging progress had been made since the Code took effect in November 2003.
Between September and November 2004, the FRC held discussions with business and investors and analysed annual reports and publicly available survey data. The FRC found that:
- investors and companies alike considered the corporate governance climate has improved over the last twelve months;
- investors reported an increased dialogue with companies and greater chairman involvement on corporate governance issues during that period;
- some companies have already reported in their 2004 annual reports, a year in advance of the need for compliance, how they stand in relation to the revised Combined Code;
- companies may need time to implement some provisions, for example where they need to rebalance board membership to meet the provision that at least 50% of the board should be independent NEDs. This needs careful planning if it is to result in a balanced board with both sufficient executives and non-executives and an appropriate mix of skills and experience; and
- other issues, leading to greater professionalism, such as performance evaluation and professional development, are being taken seriously, with significant debate about the best approaches
Commenting on the conclusions to be drawn from this exercise, Sir Bryan Nicholson, Chairman of the FRC, said:
“There are encouraging and positive signs, but it is still early days and we must not rush to judgment. Experience tells us that new corporate governance codes need to be allowed to bed down, especially when they require companies to make changes that take time to plan and put into place. Even when we carry out a formal assessment next autumn, there will only have been one year’s full reporting cycle.
“Nonetheless, we will have a much clearer picture of progress by next autumn. We will expect to see evidence of increased compliance by companies, and that investors are considering cases on their merits when companies choose to explain not comply, rather than applying rigid rules. But the most important measures of progress will be the spirit in which companies and investors are applying the Code, and the level of constructive engagement.”
