The UK Corporate Governance Code (formerly the Combined Code)

22-Jul-2010  |  Banking & Finance, Corporate, Financial Institutions & Services


Following the Financial Reporting Council's (the "FRC") 2009 review of, and consultation on, the Combined Code, the Combined Code has been revised and is now the UK Corporate Governance Code (the "Code"). The Code applies to reporting periods beginning on or after 29 June 2010.

In performing the revision, the FRC focused on the Code's main principles (which take precedence over the Code's more detailed provisions). The changes made to the Code aim to enhance the board's performance, increase accountability to shareholders, improve risk management and align performance-related pay to the long-term interests of the company.

The principal revisions to the Code are in summary as follows:

  • Annual re-election of all directors of FTSE 350 companies - the new Code applies to accounting periods beginning on or after 29 June 2010, and so directors of FTSE 350 companies with a post-June year end will be subject to the annual re-election requirement at the 2011 AGM;
  • New board appointments - the Code expressly provides that due regard must be had to the benefits of diversity on the board, including its gender mix;
  • Board evaluation - for FTSE 350 companies, the performance of the board will need to be externally facilitated at least every three years;
  • Shareholder engagement - the FRC continues to emphasise its strong belief that engagement between investors and boards is crucial to the health of the corporate governance regime. Section E in the old Combined Code has been been completely removed and replaced by the new Stewardship Code for institutional investors;
  • Remuneration - performance-related elements now need to be aligned to the long term success of the company. The provisions on remuneration for non-executive directors have been amended to clarify that all forms of performance-related remuneration are discouraged for those directors and not just share options;
  • Risk - the Code now states that it is the board's responsibility to consider the nature and extent of the significant risks it is willing to take to achieve the company's strategic objectives; and
  • Business Model - the Code now includes a requirement that the annual report should include an explanation of the company's business model and strategy.

 Forward Thinking

All new provisions of the Code will be subject to the existing "comply or explain" approach. It will therefore be interesting to see the approach taken with regards to compliance, specifically where the changes are limited to FTSE 350 companies on the basis that they would be too onerous, and therefore not proportional, for smaller companies.

The obligation to hold external reviews of the board of directors was limited to FTSE 350 companies as "in the short to medium term there will continue to be concerns about the availability of board evaluation services". Whilst this suggests that, in time, it will be a requirement for all listed companies, the acknowledgement that the market for external board evaluation services is in its initial stages of development both in terms of numbers and standards may lead companies to carefully consider whether to comply or explain.

Similarly, with regards to the annual re-election of all directors, the FRC acknowledged as legitimate the concern that "smaller companies with a more concentrated shareholder base might be exposed to disagreements between their major shareholders" and for this reason limited the annual re-election requirement to FTSE 350 companies.

Already we are beginning to see companies alter their articles or practices in advance of them being required to do so. Whilst anecdotal evidence of companies already operating an annual re-election system suggests no adverse change in voting patterns, whether this will lead to increased shareholder engagement remains to be seen.

Contacts William Belcher, Robert Fenner, Tim Stocks