On 28 May 2010, the Financial Reporting Council published the final text of the new UK Corporate Governance Code. The new Code will replace the Combined Code on Corporate Governance and will apply to accounting periods beginning on or after 29 June 2010.

The publication of the new Code follows the consultation process announced by the FRC in December 2009 (see our January 2010 E-Bulletin article: Combined Code - FRC publishes consultation paper).

The new Code re-emphasises the role and responsibilities of the board. The provisions of the Code will continue to be subject to the existing 'comply or explain' approach.

Changes introduced by the new Code include:

Annual re-election of directors - To enhance board accountability, the new Code includes a provision for all directors of FTSE 350 companies to be subject to annual re-election by shareholders. All other directors will continue to be subject to re-election at intervals of no more than three years.

Board diversity - The Code has been amended to encourage diversity in the boardroom in order to improve the quality of decision-making and to reduce the risk of "group think". The new Code states that appointments should be made on merit against objective criteria and with due regard for the benefits of diversity on the board, including gender.

Board performance - The Combined Code stated that the board should review its own performance annually. The new Code states that, in addition, the evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years (and any connections with external facilitators should be disclosed).

Board's responsibility for risk - There is a new principle setting out the board's responsibilities in relation to risk. The new Code states that the board should, at least annually, conduct a review of the effectiveness of the company's risk management and internal control systems and should report to shareholders that they have done so.

Proper debate - There are new provisions relating to the chairman's responsibilities for leading the board, the role of non-executives in challenging and developing strategy, and the need for all directors to have time to discharge their duties sufficiently.

Remuneration - The provisions of the new Code state that the performance related element of executive directors' remuneration should be stretching and designed to promote the long-term success of the company and that the remuneration of non-executive directors should not include share options or other performance-related elements. In addition, the remuneration committee should consider the use of provisions permitting the company to reclaim performance-related remuneration in the event of misstatement or misconduct. The new Code also includes a recommendation that incentive arrangements should include non-financial performance metrics (where applicable) and generally be compatible with risk policies and systems.

In addition there are various structural changes to the layout of the Code. Notably Section E of the Combined Code, which is addressed to institutional shareholders, has been moved to Schedule C of the new Code and will be removed entirely when the new Stewardship Code for institutional investors comes into effect.

View the new UK Corporate Governance Code (43 page pdf).

View the FRC's revisions to the UK Corporate Governance Code (24 page pdf).

30 June 2010

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