Combined Code’s an their ability to improve the Governance of Listed PLC’s
The large size of the 2003 Code represents a positive starting point for any analysis into the likelihood for improving corporate governance. There are 43 Principles and 48 Provisions and this starkly contrasts with the meagre combination of 17 Principles and 47 Provisions within the 1998 Code. Further to this, schedule B also lists the seven provisions that provide guidance on the content requirements of Remuneration Reports.
The result of this analysis is that, without embarking on any substantive investigation, there are many additional provisions within the 2003 Code, which means that the regulative scope of the 2003 Code is far greater than that of the 1998 Code, thereby creating a positive sign for likely improvement of corporate governance.
Supporting principles were not present in the 1998 Code but it is equally important to note that they carry the same status as the main principles and are present for the presentational purpose of facilitating a bite-size code. This therefore shows a desire to create a more user friendly document, which again aids in the quest for improving corporate governance.
Another aspect of this structure is that the additions to the 2003 code are themselves found within the supporting principles, which are stricter than provisions. The conclusion therefore is that the embodiment of additions to the 2003 Code over the 1998 Code as supporting principles is a way of relieving the pressure from institutional investors on company boards.
Inclusion of the guidance reports within the body of the 2003 Combined Code
As well as there being the 2003 Combined Code itself, the publication also includes the guidance reports, which provide aids for implementation of the code. These entail the Turnbull and Smith reports, as well annexes to Higgs . This revised guidance report has therefore replaced the original 1999 version and, since its publication, is now present within pp 27-42 of the Combined Code. Further to this, it is clear that inclusion of Turnbull is wholly essential given that compliance with its provisions is the only way for listed companies to fall in line with the corresponding principles and provisions of the 2003 Combined Code. Further to this, useful Annexes to the Smith report have also been excluded.
With regard to the structure of the 2003 Combined Code, the size of the Code shows that there is clear indication of the far wider scope for corporate governance and, in addition, there have been specific manoeuvres to facilitate greater clarity through the use of supporting principles and inclusion of guidance reports.
In order to fully appreciate the contribution of the 2003 Code to the improvement of corporate governance of listed companies, the specific substantive changes over those of the 1998 Code must be addressed.
Within the body of the supporting principle under A.1 it is stated that all directors have a duty to objectively make decisions in the interests of the company . The chairman should hold meetings with the non-executive directors without the executives present. Led by the senior non-executive director, the non-executive directors should meet without the chairman being present at least annually to appraise the chairman’s performance (as described in A.6.1) and on such other occasions as are deemed appropriate.
Provision A.7.2. This heightened transparency is a clear benefit to corporate governance.
Provision A.2.2 states that in the event that the board of directors decides that a chief executive is to be given the role of chairman, the chairman must meet the independence criteria that were originally set out by Higgs in his report. The following rule for small listed companies, which are defined in the 2003 Code as being below the FTSE 350, has been relaxed. The number of NEDS on the board of directors need only constitute a minimum of two persons under provision B.2.1 as opposed to ‘at least 50% excluding the chairman’ under the 1998 Code. Further to this, in accordance with a supporting principle to A.3, committee members alone may attend board committee meetings and others may attend exclusively upon invitation by the committee.
In accordance with main principle A.6, the entire board, committees and individual directors must be subjected to a performance evaluation. The criteria for the evaluation are set out in the supporting principle, which states that directors should be assessed for individual contribution and commitment to their role. The chairman’s powers will also extend to the reshuffling of roles and the forced resignation of directors. The chairman is himself assessed by the NEDS, with considered opinions from the executive directors. The results of all performance evaluations are to be set out in the annual report.
Firstly, the audit committee must review the company’s internal financial control system. Secondly, it must be composed of independent directors and thirdly, it must also supervise and review the effectiveness of the company’s internal audit function. A fourth responsibility is that the audit committee must create recommendations to the board of directors relating to the appointment of an external auditor. Fifthly, this external auditor’s independence must be assessed and finally, the audit committee must create policies for the provision of non-audit services by this external auditor.
Tags: corporate governance, embodiment, guidance report, implementation, institutional investors, remuneration
