Revised Combined Code on Corporate Governance

The revised Combined Code on Corporate Governance was issued by the Financial Reporting Council yesterday. It comes into force for reporting years beginning on or after 1st November 2003.

The Code’s overall aim is to enhance board effectiveness and to improve investor confidence by raising standards of corporate governance. Its main features are:

• new definitions of the role of the board, the chairman and the non-executive directors;
• more open and rigorous procedures for the appointment of directors and from a wider pool of candidates;
• formal evaluation of the performance of boards, committees and individual directors, enhanced induction and more professional development of non-executive directors;
• at least half the board in larger listed companies to be independent non-executive directors, with a definition of independence of non-executive directors;
• the separation of the roles of the chairman and the chief executive to be reinforced;
• a chief executive should not go on to become chairman of the same company;
• closer relationships between the chairman, the senior independent director, non-executive directors and major shareholders; and
• a strengthened role for the audit committee in monitoring the integrity of the company’s financial reporting, reinforcing the independence of the external auditor and reviewing the management of financial and other risks.

As with the existing Code, in order to meet their obligations under the Listing Rules, listed companies will have to describe how they apply the Code’s main and supporting principles and either confirm that they comply with the Code’s provisions or provide an explanation to shareholders. The new Code emphasises that companies and institutional investors should enter into dialogue based on trust and mutual understanding. Companies should give helpful and informative explanations, and institutional investors should take a considered approach when evaluating them.