FRC Publishes Final Review on UK Combined Code on Corporate Governance and Issues Consultation Draft for Revised Code

by Karl Hindle - London, UK

On December 1^st, the Financial Reporting Council (FRC) published its final report on the review of the Combined Code dealing with Corporate Governance and has issued a new consultation draft in respect of the UK Corporate Governance Code (the Revised Code).

A copy of the Final Review is available here.

A copy of the Consulation draft for the Revised Code is here.

Banks and regulated companies may let out a sigh of relief however; as the opening paragraph of the Executive Summary states:

“The purpose of the Code is to promote good governance in the belief that this will support the long-term success of the company. It should not be viewed as a compliance exercise by companies or investors. A prime objective of this review has been to refocus attention on the underlying principles.”

Broadly, the FRC continues to promote a management-by-exception approach to corporate governance compliance, i.e. comply with the Code or explain why there is a departure from it. As the report states:

“While the Combined Code and its related guidance require some updating, it remains broadly fit for purpose.”

Brave words in the wake of the recent global crisis.

In essence, there are very few changes to the underlying Code and certainly nothing that can be viewed as radical.

 The final report does incorporate the results of the Final Review consultation process as well as the Walker Report recommendations, but many of the Walker Report recommendations have not been adopted by the FRC as they believe they only impact upon banks specifically.  As the review states:

“It is important to maintain the integrity of a single Code for companies, so no sector-specific provisions should be added to address the issues that have arisen with respect to the governance of banks and other financial institutions.”

In any event, the FRC Combined Code still applies to banks and regulated entities if they are listed but it cannot be regarded as an onerous regulatory burden.

The key aspects of the review relevant to banks and regulated entities are: 

• New principles are adopted which cover the board’s responsibility for risk management; 
• External assessment of board performance on a three-year basis; 
• Performance-related pay is “emphasised” by the Code – it should be in keeping with the long-term interests of the business (however, nothing is mandated); and
• New rules relating to the leadership function of the Chairman and the role and qualifications of non-executive directors.

Broadly, this is a very “generic” report; there is nothing of major substance which impinges on banking activities or within the boardroom which a well-managed company has not already implemented.

Further work which is envisioned by the FRC includes the promulgation of a Stewardship Code handling how institutional investors and companies communicate.  Consultation can expect to commence in 2010 and is likely to have some impact the regulated sector, but not in any significantly material manner.

The FRC has called for submissions in respect of the final Revised Code by March 5^th, 2010 and intends to publish the Revised Code in April/May 2010.  Any company with a Premium Listing is eligible to make submissions irrespective of whether they are a UK company or not.

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