The FRC has today launched a consultation on its proposals to reform the UK’s Corporate Governance Code (formerly the Combined Code). The Code has been revised regularly to ensure it reflects changing governance concerns and practices and economic circumstances. The latest proposals take into account those lessons of the recent financial crisis that are relevant to all companies.

Sir Christopher Hogg, Chairman of the FRC, has led the latest review. He said:

“The principal lesson of the financial crisis is that those on boards must think deeply about their individual and collective roles and responsibilities. The chairman has a vital role to play in ensuring that the executives have appropriate freedom to manage the business but also accept the importance of opening themselves to challenge and earning the trust of the whole board. For their part, the non-executives must have the skills, experience and courage to provide such challenge.

“We have also seen that, in order for UK corporate governance to be strong, boards must embrace the spirit of the code and shareholders must play their part. The Code is made up of strong principles that require careful thought and application to the circumstances of each company. The Code is not a set of rules to be applied unthinkingly. It demands that boards seriously and self-critically assess their performance and openly explain themselves to shareholders. And their assessments must be considered equally seriously by major shareholders if the board’s efforts are to be sustained. The FRC therefore welcomes the Government’s request that it takes on the stewardship of the new code on the responsibilities of institutional shareholders.

“The FRC has not found evidence of serious failings in the governance of British business outside the banking sector. However, the proposed changes to the Code are in our view sensible improvements that would benefit governance in all major businesses. They are therefore commended for widespread adoption through the Code.”

The main proposals are as follows.

• To enhance accountability to shareholders, the FRC proposes either the annual re-election of the chairman or of the whole board.
• To ensure the board is well balanced and challenging, new principles are put forward on the leadership of the chairman, the roles, skills and independence of the non-executive directors and their level of time commitment.
• To enhance the board’s performance and awareness of its strengths and weaknesses, board evaluation reviews should be externally facilitated at least every three years and the chairman should hold regular development reviews with each director.
• To improve risk management, new principles are proposed on the board’s responsibility for and handling of risk.
• Proposals are also made to emphasise that performance-related pay should be aligned to the long-term interests of the company and its policy on risk.

The Code, which was formerly known as the Combined Code, will be renamed The UK Corporate Governance Code to avoid confusion among overseas investors.

Consultation on the draft revised Code ends on 5 March 2010. Subject to the outcome of consultation, and the necessary changes to the Listing Rules, the FRC intends that the revised Code should apply to all listed companies with a Premium Listing for financial years beginning on or after 29 June 2010.

In response to the Government’s request that the FRC take responsibility for a stewardship code for institutional investors recommended as by Sir David Walker, the FRC will carry out a separate consultation designed to ensure it can be operated effectively.

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate governance, including through excellent corporate reporting.
2. The Combined Code on Corporate Governance sets out standards of good practice including on board composition and development, remuneration, accountability and audit and relations with shareholders. All UK incorporated companies with a primary listing are required under the Listing Rules to report on how they have applied the Code in their annual report and accounts, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation (known as “comply or explain”). From April 2010 this requirement will apply to all companies with a Premium Listing, regardless of their country of incorporation.
3. The main actions being taken as result of the review are summarised in the executive summary of the FRC’s report, “2009 Review of the Combined Code: Final Report”. Copies of the FRC’s report, the consultation document containing the draft revised Code, and other documents relating to the review are available at: http://www.frc.org.uk/corporate/reviewCombined.cfm.
4. Responses to the consultation on the draft revised Code are requested by 5 March 2010 and should be sent to codereview@frc.org.uk.
5. Media enquiries should be directed to Chris Hodge, Corporate Governance Unit, telephone 020 7492 2381, email: c.hodge@frc.org.uk.