Monday, March 07, 2011

UK Regulator Replaces Higgs Report with Corporate Governance Guidance Focusing on Roles of Corporate Secretary and Senior Independent Director

The Financial Reporting Council has issued new guidance under the UK Corporate Governance Code to replace the best practices suggested by the 2006 Higgs Report. This new guidance relates primarily to Code sections on the corporate secretary and the senior independent director and the effectiveness of the board of directors.

The guidance states that the duties of the corporate secretary outlined in the Companies Act of 2006 necessitate him or her playing a leading role in the good governance of the company by supporting the chair and helping the board and its committees function efficiently. The corporate secretary should report to the board chair on all governance matters, noted the guidance, but this does not preclude the corporate secretary from also reporting to the CEO in relation to his or her other executive management responsibilities.

The FRC guidance also posits that the appointment and removal of the corporate secretary should be a matter for the board as a whole, while the secretary’s compensation can be determined by the compensation committee. Under the guidance, the corporate secretary should ensure the presentation of high‐quality information to the board and its committees. In addition, the board chair and the corporate secretary should periodically review whether the company’s governance processes are working and consider any improvements or initiatives that could strengthen the governance of the company. More broadly, corporate secretaries should enhance their ability to build relationships of mutual trust with the chair, the senior independent director and the non‐executive directors, while maintaining the confidence of the executive directors.

The guidance also posits that the role of the senior independent director is crucial in both normal and stressful times. In normal times, the senior independent director should act as a sounding board for the chair and also be responsible for an orderly succession process for the chairman. In times of stress, the role of the senior independent director becomes critically important in working with the other directors and shareholders to resolve significant issues.

Boards should ensure that they have a clear understanding of when the senior independent director might intervene in order to maintain board and company stability. The guidance provides some examples of when such intervention would be appropriate, such as when succession planning is being ignored or when there is a dispute between the board chair and the CEO. Another example of when intervention would be proper is when the strategy being followed by the chairman and CEO is not supported by the entire board.

Well‐informed and high‐quality decision making is a critical component of a board’s effectiveness and for sound corporate governance, noted the FRC, and does not happen by accident. Flawed decisions can be made with the best of intentions, with competent individuals believing passionately that they are making a sound judgment when they are not.

The guidance states that good decision making can be facilitated by, among other things, high‐quality board documentation, expert opinions, and timely closure. A sound practice in decision making is paying sufficient attention to risk, and treating risk as part of the decision making process, not just a compliance issue, especially in cases where the level of risk involved in a project could endanger the sustainability of the company.

Company boards must also continually monitor and evaluate their performance. The Code recommends that FTSE 350 companies have externally‐facilitated board evaluations at least every three years. The guidance notes that external facilitation can add value by introducing a fresh perspective and new ways of thinking. It may also be useful in particular circumstances, such as when there has been a change of chairman, there is a known problem requiring tactful handling, or there is an external perception that the board is ineffective.

The evaluation should explore the effectiveness of the board of a unit, as well as the effectiveness of individual directors. The guidance provides a list of non-exclusive factors that should be considered in the evaluation process, including the mix of skills, experience and diversity on the board, key board relationships, the clarity of the senior independent director’s role, the effectiveness of board committees, and the process for identifying risk.

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